ACCT 323 Chapter Notes - Chapter 16: Contingent Liability, Audit Evidence, Financial Statement

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6 Sep 2018

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6:05 pm: audit procedures completed near the end of field work. Search for unrecorded liabilities (look at cash disbursements) Obtain the representation letter from the client: loss contingencies. Loss contingencies should be reflected in the financial statement amounts when: It is probably that a loss had been sustained before the balance sheet date. The amount of the loss can be reasonably estimated. Loss contingencies should be disclosed in the notes to the financial statements when possible that a loss has been sustained. Loss contingencies need not be disclosed when the possibility of loss is remote: litigation. Most common loss contingency - pending or threatened litigation. Unasserted claims - need to be disclosed if probably and reasonably pos. Auditors should obtain from management a list describing and evaluatin: other contingencies litigation. Accommodation endorsements and other guarantees of indebtedness. Accounts receivable sold or assigned with recourse. General risk contingencies: audit procedures for loss contingencies.

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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.

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1. A CPA firm has carried out an audit of the GillespieCorporation. The CPA has uncovered a material misstatement in theinventory balance. However, the CPA does not feel that this problemis so serious as to eliminate the credibility of the financialstatements taken as a whole. What wording will be used to begin theopinion paragraph of the audit report?

A. In our opinion, except for adjustments, if any, that mighthave been foundâ¦

B. The scope of our work was not sufficientâ¦

C. In our opinion, except for the effects ofâ¦

D. Because of the effects ofâ¦

2. When an auditor issues a standard unmodified audit report,the implication is that the auditor:

A. Believes the financial statements are presented fairly inconformity with U.S. GAAP.

B. Does not know if the financial statements are presentedfairly in conformity with U.S. GAAP.

C. Believes the financial statements are presented fairly inconformity with U.S. GAAP except for a specific aspect of them.

D. Does not believe the financial statements are presentedfairly in conformity with U.S. GAAP.

3. A CPA's standard report on audited financial statements wouldbe inappropriate if it referred to

A. Management's responsibilities for the financialstatements.

B. An assessment of the entity's accounting principles.

C. The significant estimates made by management.

D. The CPA's assessment of sampling risk factors.

4. The introductory paragraph of the standard audit reportstates that the financial statements and the opinion expressedabout those statements are:

A. The responsibility of management.

B. The responsibility of the auditor.

C. The joint responsibility of the auditor and management.

4. None of the above.

5. Which of the following procedures would an auditor mostlikely perform to obtain evidence about the occurrence ofsubsequent events?

A. Comparing the financial statements being reported on withthose of the prior period.

B. Confirming a sample of material accounts receivableestablished after year end.

C. Inquiring as to whether any unusual adjustments were madeafter year end.

D. Investigating personnel changes in the accounting departmentoccurring after year end.

6. The date of the management representation letter shouldbe

A. The same date as the latest interim financialinformation.

B. The same date as the latest bank reconciliation.

C. No earlier than the auditor's report.

D. No earlier than the balance sheet.

7. The audit step most likely to reveal the existence ofcontingent liabilities is

A. A review of vouchers paid during the month following theyear-end

B. Mortgage-note confirmation

C. Accounts payable confirmations

D. An inquiry directed to legal counsel

8. The Form 10-K filed by management of a public companyincludes a section on managementâs discussion and analysis(MD&A) in addition to the annual financial statements. Which ofthe following best describes the auditorâs responsibility for theMD&A information?

A. The auditor must perform sufficient appropriate auditprocedures to opine on the MD&A information.

B. The auditor has no responsibilities related to the MD&Adisclosures.

C. The auditor must read the MD&A information to determineif there is any material inconsistency with the audited financialstatements.

D. The auditor must provide a disclaimer of opinion related tothe MD&A information.

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ACCT 323 Chapter Notes - Chapter 16: Contingent Liability, Audit Evidence, Financial Statement

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