ACCT 543 Midterm: Audit exam 1 - Notes.docx

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30 Oct 2014

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Attest- a service when a practitioner is engaged to issue or does issue a report on subject matter, or an assertion about subject matter, that is the responsibility of another party. Audit evidence- all the information used by the auditor in arriving at the conclusions on which the audit opinion is based; includes the information contained in the accounting records underlying the financial statements and other information. Audit risk-t he risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated. Auditing- a systematic process of (1) objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and (2) communicating the results to interested users. Financial statement assertions- expressed or implied representations by management that are reflected in the financial statement components.

Related Questions

1â33. Match the following defi nitions (or partial defi nitions) of the various types of services to the
appropriate service. Each service may be used once or not at all.
LO 1-1, 2, 6
Defi nition (or Partial Defi nition) Service
a. An attest engagement in which the CPAs agree to perform
procedures for a specifi ed party and issue a report that is
restricted to use by that party.
b. An engagement designed to express limited assurance
relating to subject matter or an assertion.
c. An engagement in which the CPAs issue an examination,
a review, or an agreed-upon procedures report on subject
matter or an assertion about subject matter that is the
responsibility of another party (e.g., management).
d. An examination designed to provide an opinion that is the
CPAâs highest level of assurance that the fi nancial statements
follow generally accepted accounting principles, or
another acceptable basis of accounting.
e. As required by the Sarbanes-Oxley Act and the Public Company
Accounting Oversight Board, an audit that includes
providing assurance on both the fi nancial statements and
internal control over fi nancial reporting.
f. Professional services that enhance the quality of information,
or its context, for decision makers.
g. An attest engagement designed to provide the highest
level of assurance that CPAs provide on an assertion.

1. Agreed-upon
procedures engagement
2. Assurance services
3. Attest engagement
4. Audit of fi nancial
statements
5. Compliance audit
6. Examination
7. Integrated audit
8. Operational audit
9. Review

magentahorse115

14. (1) In violation of company policy, Lowell Company erroneouslycapitalized the cost of painting its warehouse. The auditorsexamining Lowell's financial statements would most likely detectthis when:

A) Discussing capitalization policies with Lowell'scontroller.

B) Examining maintenance expense accounts.

C) Observing, during the physical inventory observation, that thewarehouse had been painted.

D) Examining the construction work orders supporting itemscapitalized during the year.

15. Which of the following is not one of the auditors' objectivesin auditing depreciation?

A) Establishing the reasonableness of the client's replacementpolicy.

B) Establishing that the methods used are appropriate.

C) Establishing that the methods are consistently applied.

D) Establishing the reasonableness of depreciationcomputations.

16. The scope of an internal audit is initially defined bythe:

A) Audit objectives.

B) Scheduling and time estimates.

C) Preliminary survey.

D) Audit program.

17. For audit purposes, a corporation's articles of incorporationare normally:

A) Copied and placed on the owners' equity lead schedule.

B) Copied and placed in the permanent file.

C) Confirmed with the transfer agent.

D) Ignored since they are not normally considered to be related tothe internal control structure.

18. Arel, CPA, was engaged by a group of royalty recipients toapply agreed-upon procedures to financial data supplied by ModitCo. regarding Modit's written assertion about its compliance withcontractual requirements to pay royalties. Arel's report on theseagreed-upon procedures should contain a(n):

A) Disclaimer of opinion about the fair presentation of Modit'sfinancial statements.

B) List of the procedures performed (or reference thereto) andArel's findings.

C) Opinion about the effectiveness of Modit's internal controlactivities concerning royalty payments.

D) Acknowledgment that the sufficiency of the procedures is solelyArel's responsibility

19. The auditor's primary means of obtaining corroboration ofmanagement's information concerning litigation is a:

A) Letter of audit inquiry to the client's lawyer.

B) Letter of corroboration from the auditor's lawyer upon review ofthe legal documentation.

C) Confirmation of claims and assessments from the other parties tothe litigation.

D) Confirmation of claims and assessments from an officer of thecourt presiding over the litigation.

20. An auditor identified a material weakness in internal controlin August. The client was informed and the client corrected thematerial weakness prior to year-end (December 31); the auditoragrees that the correction eliminates the material weakness priorto year-end. The appropriate audit report on internal control underPCAOB standards on reporting on internal control is:

A) Adverse.

B) Unqualified.

C) Disclaimer.

D) Qualified.

21. Which of the following auditing procedures is ordinarilyperformed last?

A) Reading of the minutes of the directors' meetings.

B) Confirming accounts payable.

C) Obtaining a management representation letter.

D) Testing of the purchasing function

22. When an auditor has concluded there is substantial doubt aboutan entity's ability to continue as a going concern for a reasonableperiod of time beyond the current financial statement date(9/30/X1), the auditor's responsibility includes:

A) Preparing prospective financial information to verify whethermanagement's plans can be effectively implemented.

B) Projecting conditions and events from one year prior to thisyear's date (9/30/X0) to 9/30/X1.

C) Issuing an adverse or negative assurance opinion, depending uponmateriality, due to the possible effects on the financialstatements.

D) Considering the adequacy of disclosure about the entity'spossible inability to continue as a going concern.

23. Which of the following manipulations would understate accountspayable on the financial statements?

A) Overstatement of purchases.

B) Closing the cash disbursements journal prior to year-end.

C) Leaving the cash receipts journal open after year-end.

D) Overstating purchase returns

24. An example of an internal control weakness is to assign thepayroll department the responsibility for:

A) Preparing the payroll expense distribution.

B) Preparing the payroll checks.

C) Authorizing increases in pay.

D) Preparing journal entries for payroll expense

25. In governmental accounting, emphasis is placed on:

A) Total assets owned by the governmental entity.

B) Generating income form funds employed.

C) Expenditures of funds.

D) The flow of funds through the income statement.

26. In auditing long-term debt, an auditor would be most likelyto:

A) Perform analytical procedures on the bond prenumbered discountaccounts.

B) Examine documentation of assets purchased with bond proceeds forliens.

C) Compare interest expense with the long-term debt amount forreasonableness.

D) Confirm the existence of individual long-term debt holders atyear-end.

27. Which of the following tests of controls most likely would helpassure an auditor that goods shipped are properly billed?

A) Scan the sales journal for sequential and unusual entries.

B) Examine shipping documents for matching sales invoices.

C) Compare the accounts receivable ledger to daily salessummaries.

D) Inspect unused sales invoices for consecutivepre-numbering.

28. Which of the following audit procedures is best for identifyingunrecorded trade accounts payable?

A) Reviewing cash disbursements recorded subsequent to the balancesheet date to determine whether the related payable applies to theprior period.

B) Investigating payables recorded just prior to and justsubsequent to the balance sheet date to determine whether they aresupported by receiving reports.

C) Examining unusual relationships between monthly accounts payablebalances and recorded cash payments.

D) Reconciling vendors' statements to the file of receiving reportsto identify items received just prior to the balance sheetdate.

29. Which of the following is true about the auditors' observationof the client's physical inventory?

A) The count must be made at year-end.

B) The auditors should supervise the client's personnel.

C) The auditors' observation addresses the existenceassertion.

D) The auditors should justify any omission of the observation inthe audit report.

30. Which of the following is not a reason for the specialsignificance attached by the auditors to the verification ofinventories?

A) The determination of inventory valuation directly affects netincome.

B) The existence of inventories is inherently difficult tosubstantiate.

C) Special valuation problems often exist for inventories.

D) Inventories are often the largest current asset of anenterprise.

31. (1) When the auditors obtain an understanding of internalcontrol for the financing cycle documentation will frequentlyinclude a written description as well as a(n):

A) List of audit objectives.

B) Decision table.

C) Summary of tests of controls.

D) Internal control questionnaire.

ivorygnu246

Paul and Elder (2009) have defined critical thinking as: the art of analyzing and evaluating thinking with a view to improving it. The authors describe eight Elements of Thought involved in critical thinking:

Purpose (all reasoning has a purpose â goals, objectives)

Question at issue

Assumptions (presuppositions, axioms, line of reasoning, information taken for granted)

Point of View

Information (data, evidence)

Concepts and Theories

Interpretation and Inference (conclusions, solutions)

Implications and Consequences

When defining a subject, Nosich (2012) believes it starts with a âfundamental and powerful conceptâ.

The fundamental and powerful concept of Auditing is âInvestigationâ.

Auditing involves an analysis (or an âinvestigationâ) of the financial statements in order to issue an opinion of whether they are presented fairly in accordance with appropriate standards.

Required: In several paragraphs, answer the following questions.

âInternal Controlsâ are discussed throughout the Auditing course. We will examine various methods of âinvestigatingâ internal controls in order to understand the important role that they play in the Auditing process. Even though it is the very beginning of the course, it is important that you start to form your own definition of internal control. Answer the questions in the prompts below to help you define and describe internal control:

The assumptions of internal control are that in order for a business process to be effective, there must be separation of duties among authorization, custody and recording of transactions. How are those controls put in place in the Sales / Accounts receivable process? To answer this question, discuss how each of those components occurs in each of the following areas (rely on your own experience as a customer and/or the rules of accounting that you already know about how a sales / accounts receivable transaction is supposed to work):

The sale

Shipping

Billing

Collection

As the auditor, how would you determine whether the process is working correctly?

What actions or events would occur if you assume the process is working correctly when it is not?

What actions or events would occur if you assume the process is not working correctly when it is actually doing so?

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ACCT 543 Midterm: Audit exam 1 - Notes.docx

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