audit exam 3

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PPE requires a control for the maintenance of subsidiary ledgers consisting of a

separate record for each unit of property

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PPE requires a control for the system of authorization requiring

executive approval for all plant and equipment acquisitions. Serially numbered capital work orders can be used to accomplish this

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PPE requires a control for the authoritative written statement of company policy distinguishing between

capital and revenue expenditures

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all purchases of plant and equipment should be made through

the purchasing department and subjected to standard routines for receiving inspection and payment

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Periodic physical inventory should be taken and compared to

PPE accounts

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PPE requires a control for the system of retirement procedures, including prenumbered retirement work orders be

properly approved

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Important objective of PPE

valuation-additions during the year have proper capital charges, costs relating to allowance of depreciation applicable to retirements or sales have been removed from the accounts and that gains or losses from sales have been properly computed

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elements of strong internal control of PPE

budget to forecast and control acquisitions and retirements of plant assets, subsidiary ledger consisting of separate records for each unit of property, authorization requiring advance executive approval of all plant and equip acquisitions

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What verification should be made to the balances of ledger accounts for PPE as of the beginning of the period under audit?

if it's been audited by another auditor before then limit the work to a general review of past transactions. If it has never been audited, make a complete historical analysis of the PPE account.

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An examination of the minutes of the meetings of the BOD and the executive committee may provide

information as to the retirement of plant assets

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observing the physical existence of property and equipment, such tests may disclose

unrecorded retirements

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Examination of invoices for the acquisition of equipment may provide

an indication of unrecorded trade ins

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Examination of scrap proceeds or miscellaneous revenue entries may lead to

information regarding the sale or scrapping of retired assets

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Consideration of changes in products and production methods may offer clues as to the

abandonment of plant assets formerly needed but now not used or useful

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analysis of maintenance expense may indicate changes in

assets in use, particularly certain maintenance expenses cease abruptly

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Examination of tax bills may indicate the

abandonment or possible sale of plant assets

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Abandonment, sale, or partial abandonment of major items of plant assets may be indicated by

changes made in insurance policies covering the assets

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Scrutiny of the cash receipts journals, especially for unusual items, may reveal

sale of assets, which have not been recorded as retirements

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Requesting representations from responsible officials of the client covering the existence and usefulness of the assets shown in the accounting records may result in

the disclosure of unrecorded abandonment of plant assets

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The audit of financial statements valued at fair value may be difficult because

values are often determined using assumptions that are subjective

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If auditors decide to use the work of a valuation specialist they should

evaluate the professional qualifications of the specialist and obtain an understanding of the nature of the work and the conclusions

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To assure accountability for fixed asset retirements, management should implement an internal control that includes:

utilization of serially numbered retirement work orders

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The auditors may conclude that depreciation charges are insufficient by noting

excessive recurring losses on assets retired

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What is an internal control weakness related to factory equipment?

All purchases of factory equipment are required to be made by the department in need of the equipment. (the purchasing department should be in charge)

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What should be reviewed by the auditors to gain reasonable assurance that additions to PPE are not understated?

repairs

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The auditors are most likely to seek information from the plant manager with respect to the:

existence of obsolete machinery

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To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic:

inspection of equipment and reconciliation with accounting records

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What is not typical of PPE as compared to most current assets?

a PPE cutoff error near year end has a more significant effect on net income. (it has less of an impact than current assets)

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For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on:

transactions that occurred during the year

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Audit of which account is most likely to reveal evidence relating to recorded retirements of equipment?

accumulated depreciation

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An effective procedure for identifying unrecorded retirements of equipment is to:

select items of equipment in the accounting records and then locate them in the plant

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What is not an overall test of the annual provision for depreciation expense?

test deductions from accumulated depreciation for assets purchased during the year

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The audit of intangible assets typically involves:

vouching the cost of assets and testing allocation methods

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Analysis of what account is least likely to reveal evidence relating to recorded retirement of equipment?

purchase returns and allowances

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What explanation most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

plant assets were retired during the year

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Verification of a related mortgage acquisition cost would be least likely to include an examination of the related:

deed

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In testing plant and equipment balances, an auditor may select recorded additions in the analysis of plant and equipment and inspect the actual assets involved. Which management assertion is this most procedure most directly related to?

existence

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A search for overstated PPE purchases would most likely include:

PPE

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In a financial statement audit, the primary overall audit approach to audit plant assets and equipment of a continuing client is ordinarily what?

tests of transactions during the year

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What is not correct concerning plant assets?

plant assets need to be tightly controlled to prevent defalcation

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auditor has found many new assets on the plant floor, which coincides with an inc in the equipment subsidiary ledger. the auditor has noticed that lease pymt are being made to an equipment leasing company. The auditor should primarily be concerned with:

rights and obligations

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A major piece of land that the company has recently purchased for expansion has been found to contain toxic levels of pollutants. The auditor should be concerned with which financial statement assertion?

valuation

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In analyzing the the plant assets account, which assertion is the examination of repairs and maintenance records most directly related to?

valuation

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In examining the miscellaneous revenue account, an auditor discovers income from plant assets. What should be a primary audit concern?

That such assets have been removed from the ledger of property owned

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What is least likely to be correct concerning intangible assets?

proper presentation as current assets

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When comparing an initial financial statement audit with a subsequent year audit for a particular client, the scope of audit procedures for what account would be expected to decrease the most?

PPE

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When performing an audit of PPE accounts, an auditor should expect which of the following to be most likely to indicate a departure from GAAP?

a gain was recognized on the sale of a fixed asset in which the book value exceeded the proceeds received for the sale

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The auditors are least likely to learn of retirements of equipment through what?

Review of the purchase returns and allowances account

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What organizational controls related to the processing of scrap would you recommend?

separate the responsibility for processing scrap materials from the operational activities that produce the scrap materials.

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Equipment acquisitions that are misclassified as maintenance expense most likely will be detected by a control that provides for:

investigation of variances within a formal budgeting system

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What is an internal control weakness related to factory equipment?

All purchases of factory equipment are required to be made by the department in need of the equipment. (needs to be made by purchasing department)

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What control most likely would justify a reduced assessed risk of material misstatement concerning plant and equipment acquisitions?

periodic physical inspection of plant and equipment by internal audit staff.

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What procedure is most likely to prevent the improper disposition of equipment?

a separation of duties between those authorized to dispose of equipment and those authorized to approve removal of work orders

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What control is most likely to allow for a reduction in the scope of the auditor's tests of depreciation expense?

review and approval of the periodic equipment depreciation entry by a supervisor who does not actively participate in its preparation

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In the audit of PPE, the auditor tries to do all of the following:

obtain an understanding of internal control, determine the extent of property abandoned during the year, judge to reasonableness of the depreciation

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What combination of procedures is an auditor most likely to perform to obtain evidence about fixed asset additions?

inspecting documents and physically examining assets

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When few PPE transactions occur during the year, the continuing auditor usually obtains an understanding of internal control and performs

extensive tests of current year property and equipment transactions

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Treetop Corporation acquired a building and arranged mortgage financing during the year. Verification of the related mortgage acquisition costs is least likely to include an examination of the related:

deed

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In testing for unrecorded retirements of equipment, an auditor is most likely to:

select items of equipment from the accounting records and then locate them during the plant tour

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the auditor is least likely to learn of retirements of equipment through:

review of the purchase return and allowance account

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An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all

expenditures for PPE have not been charged to expense

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Accounts payable department should be responsible for:

verification and approval of invoices for payments

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The accounts payable department should be independent of:

the purchasing department, other persons requesting specific expenditures, cashier or other person signing checks, receiving department

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Verification of invoices should include:

comparison of quantities with those per purchase order and receiving report, prices, discounts, and terms of shipment, proof of clerical accuracy

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Accounts payable trial balance should be balanced:

monthly to the control account

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Vendor's monthly statements should be reconciled

with accounts payable ledger

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Debit memos to vendors should be approved by an:

executive outside of accounts payable department and prenumbered

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procedures should be established within accounts payable to call attention to

invoices not paid within discount period

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all purchase transactions should be evidenced by

serially numbered purchase orders

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Primary objective of accounts payable

completeness- determine that all material liabilities existing or incurred as of the balance sheet date are reflected in the statements at the proper amounts

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The auditors are concerned about the possible understatement of

liabilities

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In the audit of liabilities, auditors seldom have problems with respect to:

valuation

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3 audit procedures that are concerned directly or indirectly with disclosing unrecorded accounts payable:

reconcile liabilities with monthly statements, confirm accounts payable by direct correspondence with vendors, perform a cutoff of inventory purchases

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What is least likely to be completed before the balance sheet date?

search for unrecorded liabilities

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An audit of the balance in accounts payable account is ordinarily not designed to:

detect accounts payable that are substantially past due

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What is the best audit procedure for determining the existence of unrecorded liabilities?

examine selected cash disbursements in the period subsequent to year end

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Auditor confirmation of account balances at the balance sheet date may be unnecessary because

there is likely to be other reliable external evidence available to support the balances

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A client erroneously recorded a large purchase twice. What internal control measures would be most likely to detect this?

reconciling vendor's monthly statements with subsidiary payable ledger accounts

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For effective internal control, the accounts payable department should compare the information on each vendor's invoice with the:

receiving report and the purchase order

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When confirming accounts payable, the approach is most likely to be one of:

selecting the accounts of companies with whom the client has previously done the most business, plus a sampling of other accounts

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In an audit, the valuation of year end accounts payable is most likely addressed by:

confirmation

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Ordinarily, the most significant assertion relating to accounts payable is:

completeness

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The least likely approach in auditing management's estimate relating to an accrued liability is to:

review subsequent events or transactions bearing on the estimate

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To determine that each voucher is submitted and paid only once, when a payment is approved, supporting documents should be canceled by the:

individual who signs the checks

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In performing a test of controls, the auditors vouch a sample of entries in the purchases journal to the supporting documents. Which assertion would this test of controls most likely test?

existence

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substantive procedure for determine the existence of year end recorded accounts payable and that the client has obligations to pay these liabilities

confirm outstanding year end balances of payables

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substantive procedure for establish the completeness of recorded accounts payable

vouch purchases recorded after year end

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substantive procedure for determine that the presentation and disclosure of accounts payable are appropriate

inquire of management concerning the existence of related party transactions

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substantive procedure for determine that the valuation of warranty loss reserves is measured in accordance with GAAP

test the computations made by the client to set up the accrual

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purpose of internal control procedure of monthly statements from vendors reconciled with the accounts payable listing

designed to reduce the risk of understatement or overstatement of accounts payable

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purpose of internal control procedure of checking to see if vendors invoices matched with receiving reports before they are approved for payment?

reduces risk that the client will pay for goods that were not received

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The operating effectiveness of reconciliation of vendors invoices to accounts payable may be tested by

reviewing the client's documentation of the reconciliations supplemented with inquiries of client personnel regarding the performance of reconciliations during the year

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The matching of receiving reports to vendors invoices could be tested by

vouching a sample of vendors payments made during the year to the supporting receiving reports

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To compensate for failure of client personnel to reconcile payables to vendors statements, the auditors might increase

the extent of their procedures for verification of the amount of accounts payable

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What question will an auditor most likely include on an internal control questionnaire for notes payable?

Are direct borrowings on notes payable authorized by the BOD?

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In auditing accounts payable, an auditor's procedures most likely will focus primarily on management's assertion of:

completeness

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What procedure is least likely to be performed before the balance sheet date?

search for unrecorded liabilities

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When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely is:

vendors with whom the entity has previously done business

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What is a substantive test that an auditor is most likely to perform to verify the existence and valuation of recorded accounts payable?

vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports

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What procedure would best detect a liability omission by management?

review purchase contracts and other legal documents

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Unrecorded liabilities are most likely to be found during the review of what document?

unpaid bills

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What audit procedure is best for identifying unrecorded trade accounts payable?

reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period

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What procedures relating to the examination of accounts payable may the auditor delegate entirely to the client's employees?

prepare a schedule of accounts payable

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An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about:

presentation and disclosure

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What is not a responsibility of the receiving department?

preparing a purchase invoice

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What best describes a voucher?

a document prepared by accounts payable authorizing cash disbursement

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What procedure is least likely to alert the auditors to unrecorded accounts payable?

confirmation of accrued liabilities

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What best explains why accounts payable confirmations procedures are not always used?

confirmations are better at identifying overstatements than understatements, and overstatements are not typically the major concern with accounts payable

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In examining liabilities of a company, what is the auditor's primary concern?

completeness

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What audit procedure is least likely to detect an unrecorded liability?

analysis and recompilation of depreciation expense

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What is most likely to be included in the auditors search for unrecorded accounts payable?

examine vouchers payable entered into the voucher register subsequent to the balance sheet date

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The auditor's verification of rapidly changing payable accounts is ordinarily most effective when performed:

after the balance sheet date

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Understatement of what account is most likely to overstate net income?

accounts payable

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Accrued liabilities generally differ from accounts payable in that accrued liabilities:

accumulate over time

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What best describes the auditors approach to the audit of accrued liabilities?

test computations

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Interest bearing obligations should be authorized by

the board of directors

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Banks from which loans are obtainable should be specified by

the BOD

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An independent trustee should be employed to account for all

bond issuances, cancellations, and interest payments

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When an independent trustee is not employed

unsigned bonds should be in custody of an officer, note and note certificates should be prenumbered, surrendered certificates and interest coupons should be canceled and preserved

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Detail records of interest bearing debt should be maintained and reconciled to

periodic statements of trustee and to the control account

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Board of directors or specific officers approve

issuance of notes

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board of directors has specified sources of

borrowing and loan limits

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Dual signatures should be required to issue

notes with at least one of which that is a senior executive

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numerical controls of unissued and outstanding

notes are maintained

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notes payable register should be maintained and balanced with

control account periodically

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records should be maintained of collateral pledged as

security for notes payable

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paid notes should be

canceled and placed in a paid file

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renewal of notes should be subjected to same

control procedures as new notes

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vouchers for for interest payment should be approved in writing by

2 executives not associated with the borrowing operation

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search for contingent liabilities involve inquiries of

client officers, client's banks, client's lawyers, client's suppliers and creditors. also reviewing minutes, purchase orders, and examining correspondence with financial institutions

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What specific steps may be taken by the auditors to determine that all their client's interest bearing liabilities are recorded?

include questions about liabilities to financial institutions, review minutes of directors

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What is the primary responsibility of an independent registrar with respect to capital stock?

to avoid overissuance of stock, countersigning of each certificate issued and the maintenance of records of certificates issued and canceled

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What is least likely to be an audit objective for debt?

determine that the client has rights to receive proceeds relating to the redemption of debt

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The auditors would be most likely to find unrecorded long term liabilities by analyzing

interest payments

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A likely reason that consideration of client compliance with debt provisions is important to an audit is that violation of such debt provisions may affect the total recorded:

current liabilities

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A transfer agent and a registrar are most likely to provide the auditor with evidence on:

shares issued and outstanding

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The audit procedure of confirmation is least appropriate with respect to:

holders of common stock

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An auditor is most likely to trace treasury stock purchase transactions to the:

numbered stock certificate on hand

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In the continuing audit of a manufacturing company of medium size, what areas would you expect to require the least amount of audit time?

owner's equity

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The auditors can best verify a client's bond sinking fund transactions and year end balance by:

confirmation with the bond trustee

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The auditors program for the examination of long term debt should include steps that require the:

examination of copies of debt agreements

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All corporate capital stock transactions should ultimately be traced to the:

minutes of the board of directors

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What is most likely to be an audit objective in the audit of owners' equity?

determine the presentation and disclosure of owners equity is appropriate

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In an audit of a sole proprietorship, a common difficulty is a lack of:

segregation of personal net worth and business capital

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What would an auditor most likely include on an internal control questionnaire for notes payable?

Are direct borrowings on notes payable authorized by the board of directors?

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The primary responsibility of a bank acting as registrar of capital stock is to:

verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation

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Where an independent stock transfer agent is not employed and the corporation issues its own stocks and maintains stock records, canceled stock certificates should:

be defaced to prevent reissuance and attached to their corresponding stubs

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an auditor would most likely inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of:

presentation and disclosure

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An auditor usually obtains evidence of stockholders equity transactions by reviewing the entity's:

minutes of board of director's meetings

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stock registrar

an institution charged with responsibility for avoiding overissuance of a corporation's stock

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stock transfer agent

an institution responsible for maintaining detailed records of shareholders and handling changes of ownership of stock

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sinking fund

cash or other assets set aside for the retirement of a debt

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treasury stock

shares of its own stock acquired by a corporation for the purpose of being reissued at a later date

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trust indenture

the formal agreement between bondholders and the issuer as to the terms of the debt

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Who should have control over the authorization of corporate bonds?

board of directors

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What is least likely to be included in the audit program for debenture bonds?

examine security pledged relating to the loan

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what is the most likely reason why auditors often set control risk at high level for bonds?

small number of transactions per year

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An auditor has calculated the interest paid on a company's recorded bonds and found the interest paid was 10% of the outstanding bond; in examining the bonds he notes that they are 8% bonds sold w/o premium or discount. What is the most likely?

understated debt outstanding

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an audit found that $10,000,000 of long term debt on the financial statements will become due in 6 months. The financial statement assertion that must be addressed in determining that the proper amount of debt is included as current is:

presentation

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For a large publicly traded client the auditors examination of capital stock amounts will not ordinarily include:

reconciliation of a stock certificate book with the general ledger

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An audit program for the examination of the retained earnings account should include a step that requires the verification of the:

authorization for both cash and stock dividends

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When a corporation has convertible debentures or stock options, what procedure should the auditor perform?

determine that enough shares are held in reserve to fulfill the obligations

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The primary responsibility of the stock transfer agent is:

maintenance of detailed stockholder records

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The auditor can best verify a client's bond sinking fund transactions and year end balance by

confirmation with bond trustee

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During an audit of an issuer, the auditor should obtain written confirmation regarding debenture transactions from:

the trustee

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An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about:

presentation and disclosure

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During the year under audit, a company has completed a private placement of a substantial amount of bonds. What is the most important step in the auditor's program for the audit of bonds payable?

tracing the cash received from the issue to the accounting records

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In auditing noncurrent bonds payable, an auditor most likely will:

compare interest expense with the bond payable amount for reasonableness

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The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because:

accrued liabilities usually pertain to services of a continuing nature while accounts payable are the result of completed transactions

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In the audit of a medium sized manufacturing concern, which one of the accounts can be expected to require the least amount of audit time?

equity

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When a client company does not maintain its own stock records the auditor should obtain written confirmation from the transfer agent and registrar concerning:

the number of shares issued and outstanding

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An audit plan for the retained earnings account should include a step that requires verification of the:

authorization for both cash and stock dividends

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During an audit of an entity's equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify:

classification and understandability

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Payroll transactions are concerned with:

personnel transactions-hiring, transfers, termination. and paying employees

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payroll separation of duties:

employment separate from timekeeping separate from payroll preparation separate from distribution of checks or funds

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payroll controls

separation of duties, formal hiring policies, detailed personnel records, use of time clocks, determine adequacy of internal control over payroll transactions

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major audit problems of loss contingency

determine the existence of loss contingency, period in which underlying cause occurred, appraise probability of unfavorable outcome, estimate reasonableness of amt loss, accrue vs. disclosure

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subsequent events

events or transactions which occur subsequent to the balance sheet date but before financial statements are issued, which have a material effect on the financial statements and thus require adj to or disclosure

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Type 1 subsequent event

subsequent events which pertain to conditions which exist as of the balance sheet date and affect the estimates used in preparing the financial statements, require adj to financial statements

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Type 2 subsequent event

subsequent events which relate to conditions arising after the balance sheet date, require disclosure in the financial statements

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audit procedures that must be completed near the date of the audit report

search for unrecorded liabilities, minutes of meetings, final analytical procedures, identify loss contingencies, subsequent events, representation letter

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What are loss contingencies?

possible losses, stemming from past events, which will be resolved as to existence and amount by some future event

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How should loss contingencies be presented in the financial statements?

disclosed in the notes whenever it is reasonably possible that a loss has been sustained. if both probably and the amount of the loss may be reasonably est, they should be recognized as actual losses in fin statements

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What is least likely to be considered a substantive procedure relating to payroll?

test whether employee time reports are approved by supervisors

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What is the best way for the auditors to determine that every name on a company's payroll is that of a bona fide employee presently on the job?

Make a surprise observation of the company's regular distribution of paychecks on a test basis

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As a result of analytical procedures, the independent auditors determine that the gross profit percentage has declined from 30% in the preceding year to 20% in current. The auditors should:

consider the possibility of a misstatement in the financial statements

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When auditing the statement of cash flows, what would an auditor not expect to be a source of receipts and payments?

capitalization

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The search for unrecorded liabilities for a public company includes procedures usually performed through the:

date of the auditor's report

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The aggregated misstatement in the financial statements is made up of:

known, projected, and other

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A possible loss, stemming from past events that will likely be resolved as to existence and amounts is referred to as:

loss contingency

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commitment

a contractual obligation to carry out a transaction at specified terms in the future, material should be disclosed in the financial statements

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general risk contingency

an element of the business environment that involves some risk of a future loss

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iron curtain approach

an approach to making materiality judgments that quantifies the total likely misstatement as of the year end based on the effects of reflecting all misstatements existing in the balance sheet at the end of the current year, whether current or previous

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known misstatements

specific misstatements identified by the auditors during the course of the audit

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likely misstatements

misstatements identified by the auditors during the course of the audit that are due to either extrapolation from audit evidence or differences in accounting estimates

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rollover approach

an approach to making materiality judgments that quantify the total likely misstatements as of the current year end based on the effects of reflecting misstatements only during the current year

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What is ordinarily the primary concern when auditing the income statement?

overstatement of revenues and net income and understatement of expenses

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In auditing the balance sheet, most revenue and expense accounts are also audited. What accounts are most likely to be audited when auditing accounts receivable?

sales and bad debt expense

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What audit procedure is not ordinarily used to examine selling, general, and admin expenses?

confirmations to advertising agencies confirming payments

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A manufacturer's employees are paid once a month, on the 3rd of the following month. What audit issue pertaining to labor costs exist at year end?

completeness

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A common audit procedure in the audit of payroll transactions involves vouching selected items from the payroll journal to employee time cards that have been approved by supervisory personnel. This procedure is designed to provide evidence in support of:

employees worked the number of hours for which their pay was computed

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The auditor's best course of action with respect to other financial information included in a client prepared annual report containing the auditor's report is to:

read and consider the manner of presentation of the other financial information

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A company oil tanker recently spilled a large amount of oil in a pristine fishing area. No lawsuits have yet been filed. What is the audit issue?

unasserted claim

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What is not a procedure to discover unasserted claims or contingent liabilities?

substantive testing of company prepaid assets

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Auditors should perform audit procedures relating to subsequent events:

through the date of the audit report

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In evaluating whether there is a sufficiently low probability of material misstatement in the financial statements, the auditors accumulate:

known, projected, and other estimated misstatements in the financial statement

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What department most likely approves changes in pay rates and deductions from employee salaries?

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The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the:

authorization of transactions from the custody of related assets

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In the audit of which profit oriented enterprises the auditor is most likely to place special emphasis on testing the controls over proper classification of payroll transactions?

manufacturing organization

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a large retail enterprise has established a policy that requires the paymaster to deliver all unclaimed payroll checks to the internal auditing dept. at the end of each payroll distr. day. this policy is adopted to:

detect any fictitious employee who may have been placed on the payroll

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Effective controls over the payroll function may include

verification of agreement of job time tickets with employee clock card hours by a payroll department employee

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Proper internal control over the cash payroll function mandates:

each employee should be asked to sign a receipt

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An auditor is most likely to perform substantive tests of details on payroll transactions and balances when:

analytical procedures indicate unusual fluctuations in recurring payroll entries

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to check the accuracy of hours worked, an auditor would ordinarily compare clock cards with:

shop job time tickets

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The primary source of information to be reported about litigation, claims, and assessments is the:

client's management

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The primary reason an auditor requests that letters of inquiry be sent to a client's attorneys is to provide the auditor with:

corroboration of the information furnished by management about litigation, claims, and assessments

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The letter of audit inquiry addressed to the client's lawyer will not ordinarily be:

limited to references concerning only pending or threatened litigation in connection with which the lawyer has been engaged

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What is not an audit procedure that the independent auditor performs with respect to litigation, claims, and assessments?

confirm directly with the client's lawyer that all claims have been recorded in the financial statements

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The appropriate date for the client to specify as the effective date in the audit inquiry to a lawyer is:

the expected date of the completion of audit field work

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The refusal of a client's lawyer to provide a representation on the legality of a particular act committed by the client is ordinarily:

considered to be a scope limitation

🗑

What procedures will an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

inquiring as to whether any unusual adjustments were made after year end

🗑

An auditor is concerned with completing various phases of the audit after the balance sheet date. This completed by the date of the:

auditors report

🗑

What procedure should an auditor ordinarily perform regarding subsequent events?

compare the latest available interim financial statements with the financial statements being audited

🗑

Subsequent events for reporting purposes are defined as events that occur subsequent to the:

balance sheet date but prior to the issuance of the financial statements

🗑

What procedures will an auditor most likely obtain evidence about the occurrence of subsequent events?

inquiring of the entity's legal counsel concerning litigation, claims, and assessments arising after year end

🗑

unmodified opinion

no material scope limitation, no material exception to fair presentation, no material departure from GAAP and disclosure is adequate

🗑

reports characterized as unmodified:

nonpublic companies: standard report, emphasis of matter paragraph, other matter paragraph, group financial statements

🗑

Qualified opinion (modified)

modified standard report using "except for" in the opinion paragraph

🗑

reasons for qualification

material scope limitation affecting certain items in the financial statements, material exception to fair presentation

🗑

impact of qualified opinion on audit report

have to have a bases for qualified opinion preceding opinion paragraph describing scope limitation, GAAP departure, and the opinion

🗑

adverse opinion

auditor states that the financial statements do not present fairly

🗑

reason for adverse

auditor takes material exception to fair presentation of financial statements, departure from GAAP or inadequate disclosure is pervasive in nature

🗑

disclaimer of opinion

auditor cannot obtain sufficient evidence to form an opinion

🗑

reason for disclaimer

a scope limitation which is pervasive in nature (affects financial statements as a whole)

🗑

report is generally dated on:

date that field work is substantially completed

🗑

dual dating

may be used when a subsequent event occurs after audit report date but before financial statements are issued

🗑

4 standards of reporting followed by the PCAOB

state where fin stmts are in accordance with GAAP, identify circumstances where GAAP has not been consistently applied, informative disclosures are adequate, clearly state degree of responsibility

🗑

group financial statements or shared responsibility opinion

part of audit performed by another audit firm, determine who is principal auditor, principal auditor can decide to refer or not refer to other auditors

🗑

If principal auditor decides to make reference to other auditors in group financial statements then

must make reference to work in Auditor's Responsibility and Opinion sections, intro must indicate portions, may name other auditor if given permission

🗑

If auditor decides not to reference other auditor in group financial statements then:

issue standard report

🗑

accounting requirements for accounting principles not being consistently applied:

principle to which the company changes must be generally accepted, acct for the effect of change conforms to GAAP, disclosures for change must be adequate, must be justified

🗑

The auditor discloses principle changes by

adding an additional paragraph to his report after the opinion paragraph making reference to the change and referring to a footnote describing the change

🗑

emphasis of a matter

addition paragraph that is added to report which calls attention to specific matters

🗑

going conern

additional paragraph is added to report which indicates substantial doubt about the ability of the company to continue in existence

🗑

scope limitation

a qualified or disclaimer of opinion is given, depending on the materiality, modification paragraph must be provided, describing nature of limitation

🗑

3 primary differences between the audit report for nonpublic entities and public entities

PCAOB requires the words "registered" in the title, references standards of PCAOB rather than GAAS, includes less detailed discussions of management and auditor responsibilities

🗑

A material departure from GAAP will result in auditor consideration of:

whether to issue an adverse opinion rather than a qualified one

🗑

The auditor's report should be dated as of the date of the:

auditors have accumulated sufficient evidence

🗑

In an audit report on combined financial statements, reference to the fact that a portion of the audit was performed by a component auditor is:

not to be construed as a qualification but rather as a division of responsibility between the 2 CPA firms

🗑

The auditors who wish to draw reader attention to a financial statement note disclosure on significant transactions with related parties should disclose this fact in

an emphasis of matter paragraph to the auditor's report

🗑

What type or types of audit opinion are appropriate when financial statements are materially and perversely misstated?

adverse

🗑

What ordinarily involves the addition of an emphasis of matter paragraph to an audit report?

a consistency modification

🗑

An audit report for a public client indicates that the audit was performed in accordance with:

Standards of the PCAOB (US)

🗑

An audit report for a public client indicates that the financial statements were prepared in conformity with:

GAAP (US)

🗑

When the matter is properly disclosed in the financial statements, the likely result of a substantial doubt about the ability of the client to continue as a going concern is the issuance of which audit opinion?

unmodified with emphasis of matter

🗑

A change in accounting principles that the auditors believe is not justified is likely to result in what type of audit opinion?

qualified

🗑

What is least likely to result in inclusion of an emphasis of matter paragraph in an audit report?

a decision not to confirm accounts receivable

🗑

An audit report is ordinarily dated on the date:

the auditors have obtained sufficient appropriate audit evidence

🗑

What is true regarding the notes to financial statements prepared following GAAP?

notes are an integral part of the financial statements

🗑

In a financial statement audit, an auditor would express an unmodified opinion with an emphasis of matter paragraph added to the audit report for:

neither an unjustified accounting change nor an unjustified departure from GAAP

🗑

What condition is an unmodified audit opinion least likely?

the auditor believes that inventory is valued following a method that is not considered GAAP

🗑

If the company's financial statements violate GAAP for an immaterial item which is expected to become material in the future, then the audit opinion the company will likely receive is:

unmodified standard report

🗑

In performing an audit, a client was found to have changed the estimated useful life of its assets. The auditors believe that the change in useful lives is realistic. The appropriate report is:

unmodified standard report

🗑

What condition is most likely to result in auditor consideration of issuing a going concern modification?

default on a loan agreement

🗑

When a company has a probably and material loss contingency and the company has accrued the loss in the financial statements the appropriate audit opinion is ordinarily:

standard unmodified

🗑

A departure from GAAP with a material effect on the financial statements is most likely to result in a:

qualified opinion

🗑

Issuance of a going concern modification relates most directly to what term?

substantial doubt

🗑

In what circumstance would an auditor be most likely to express an adverse opinion?

The financial statements are not in conformity with the FASB standards regarding the capitalization of leases

🗑

Addition of an "emphasis of matter" paragraph to what remains an unmodified opinion is least likely for what situation?

scope limitation

🗑

What best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?

The opinion of an independent party is needed because a company may not be objective with respect to its own financial statements

🗑

The auditor's judgement concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of:

GAAP

🗑

How are management's responsibility and the auditor's responsibility represented in the standard auditor's report?

explicitly

🗑

The auditor's report may be addressed to the company whose financial statements are being audited or to that company's:

BOD

🗑

An auditor's report on comparative financial statements should be dated as of the date of the:

completion of the auditor's most recent audit procedures

🗑

The auditor's responsibility for events occurring subsequent to the completion of the evidence collection process was:

limited to the specific event referred to

🗑

When financial statements contain a departure from GAAP, the effect of which is material the auditor should:

qualify the opinion and explain the effect of the departure from GAAP in separate paragraph

🗑

If an issuer releases financial statements that purport to present its financial position and results of operations but omits the statement of cash flows the auditor will ordinarily express

qualified opinion

🗑

What phrase will an auditor most likely include in the auditor's report when expressing a qualified opinion because of inadequate disclosure?

Except for the omission of the information discussed in the preceding paragraph.

🗑

When an issuer refuses to include in its audited financial statements any of the segment disclosures that the auditor believes are required, the auditor should express

a qualified opinion because of inadequate disclosure

🗑

An auditor may express a qualified opinion under which circumstances?

lack of sufficient appropriate evidence and restrictions on the scope of the audit

🗑

When financial statements are presented that are not in conformity with GAAP an auditor may express

a qualified opinion

🗑

In what situation will an auditor ordinarily choose between expressing a qualified opinion and an adverse opinion?

The financial statements fail to disclose information that is required by GAAP.

🗑

When an auditor expresses an adverse opinion, the opinion paragraph should include:

a direct reference to a separate paragraph disclosing the basis for the opinion

🗑

In what circumstance will an auditor choose between expressing a qualified opinion and disclaiming an opinion?

inability to obtain sufficient appropriate evidential matter

🗑

A limitation on the scope of an audit sufficient to preclude an unqualified opinion will always result when management:

refuses to furnish a management representation letter to the auditor

🗑

An auditor may issue the standard audit report when:

principal auditor assumes responsibility for the work of another auditor

🗑

when the report of a principal auditor refers to the audit by another auditor, the other auditor may be named if express permission to do so is given and if the

report of the other auditor is presented together with the report of the principal auditor

🗑

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for:

updating the report on the previous financial statements regardless of the opinion previously expressed

🗑

Comparative financial statements include the prior year's statements that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified the auditor should

indicate the substantive reasons for the qualification in the predecessor auditor's opinion

🗑

Comparative financial statements include the prior year's statements that were audited by a predecessor auditor whose report is not presented. If the predecessor auditor's report was unqualified, the auditor should

indicate in the report that the predecessor auditor expressed an unqualified opinion

🗑

An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. This inclusion of this separate paragraph is:

appropriate and would not negate the opinion

🗑

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