Auditing test #1- chapter 6 homework questions Flashcards Table View

     

?The following questions concern the reasons auditors do audits. Which one of the following best describes the reason why an independent auditor reports on financial statements?

1. A misappropriation of assets may exist, and it is more likely to be detected by independent auditors.

2. Different interests may exist between the company preparing the statements and the persons using the statements.

3. A misstatement of account balances may exist and is generally corrected as the result of the independent auditor's work.

4. Poorly designed internal controls may be in existence.
Answer: #2 different interest may exist between the company preparing the statements and the persons using the statements.
?The following questions concern the reasons auditors do audits. An independent audit aids in the communication of economic data because the audit?

1. Confirms the accuracy of management's financial representations.

2. Lends credibility to the financial statements.

3. Guarantees that financial data are fairly presented.

4. Assures the readers of financial statements that any fraudulent activity has been corrected.
Answer: #2 Lends credibility to the financial statements
?The following questions concern the reasons auditors do audits. The major reason an independent auditor gathers audit evidence to?

1. Form an opinion on the financial statements.

2. Detect fraud

3. Evaluate management

4. Assess control risk
Answer: #1 Form an opinion on the financial statements
?An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the FS. Which of the following, if material, is fraud as defined in auditing standards?

1. Misappropriation of an asset or groups of assets.

2. Clerical mistakes in the accounting data underlying the FS

3. Mistakes in the application of accounting principles

4. Misinterpretation of facts that existed when the FS were prepared.
Answer: Misappropriation of an assets or group of assets.
?What assurance does the auditor provide that errors, fraud, and direct effect illegal acts that are material to the FS will be detected?
Answer: Reasonable errors, Reasonable fraud, Reasonable direct-effect illegal acts
?Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the FS resulting from fraud?

1. Audit procedures that are effective from detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.

2. An audit is designed to provide reasonable assurance of detecting material errors,, but there is no similar responsibility concerning fraud.

3. The factor considered in assessing control risk indicated an increased risk of intentional misstatement, but only a low risk of unintentional misstatements.

4. The auditor did not consider factor influencing audit risk for account balances that have effects pervasive to the FS taken as a whole.
Answer: Audit procedures that are effective fro detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.
Assertions
?All sales transactions have been recorded?
Classes of transactions-Completeness
Assertions
?Receivables are approximately classified as to trade and other receivables in the financial statements and are clearly described?
Presentation & disclosure- classification
Assertions
?Accounts receivables are recorded at the correct amounts?
Account Balance- Valuation and allocation
Assertions
?Sales transactions have been recorded in the proper period?
Classes of transactions- cutoff
Assertions
?Sales transactions have been recorded in the appropriate accounts?
Classes of transactions- classifications

Assertions
?All required disclosures about sales and receivables have been made?
Presentation and disclosure- completeness
Assertions
?All accounts receivable have been recorded?
Account Balances- completeness
Assertions
?There are no liens or other restrictions on accounts receivable?
Presentation and disclosure- completeness
Assertions
?Disclosure related to receivable are at the correct amounts?
Presentation and disclosure- accuracy and valuation
Assertions
?Recorded sales transactions have occurred?
Classes of transactions- occurrence
Assertions
?Recorded accounts receivable exist?
Account balances- existence
Assertions
?Sales transactions have been recorded at the correct amounts?
Classes of transactions- accuracy
Assertions
?Disclosure related to sales and receivables relate to the entity?
Presentation and disclosure- occurrence
Management Assertions
?There are no unrecorded receivables?
Completeness
Management Assertions
?Receivables have not been sold or discounted?
Rights and obligations
Management Assertions
?Uncollectible accounts have been provided for?
Valuation and allocation
Management assertions
?Recievables that have become uncollectible have been written off?
Valuation and allocation
Management assertions
?All accounts on the list are expected to be collected within 1 year?
Valuation and allocation
Management assertions
?The total of the amounts on the accounts receivable listing agrees with the general ledger balance for accounts receivable?
Valuation and allocation
Management assertions
?All accounts on the list arose from the normal course of business and are not due from related parties?
Existence
Management assertions
?Sales cutoff at year-end is proper?
Valuation and allocation
Transaction Cycle
?Sales and collection?
Accounts generating operating cash inflows
Transaction Cycle
?Acquisition and payment?
-Accounts generating operating cash outflows

-Under income statement a lot of accounts have the capital S which means that they are functionally selling related expenses but since they involve operating cash outflows they are going to be handled by Acquisition and Payment cycle.
-Examples: Advertising, Travel and entertainment, Sales meetings and training, Sales and promotional literature, Miscellaneous sales expense (Test 1 question)
Transaction Cycle
?Capital acquisition and repayment?
(Financing activities of cash inflows and outflows- any financing longer than 31 days A/P)