Accounting and Auditing Practices Quiz
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Questions and Answers

What is the percentage increase of accounts payable growth for the first company?

  • 49%
  • 30%
  • 33%
  • 9% (correct)

    • The inventory turnover is higher for the first company compared to the second company.

    False (B)

    What document authorizes the recording and payment of a liability?

    Voucher

    The cash disbursements journal records the daily reports of checks written or electronic funds transferred to _____ and amount paid.

    <p>vendors</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Accounts Payable Growth = Percentage increase in money owed to vendors Inventory Turnover = Time taken to sell inventory Cash Disbursements Journal = Record of payments made Vendor Invoices = Bills submitted by suppliers for goods or services</p> Signup and view all the answers

    Which of the following is a key concern in the revenue process related to the sale of goods in foreign countries?

    <p>Collection risk (A)</p> Signup and view all the answers

    The revenue process is uniform across all industries.

    <p>False (B)</p> Signup and view all the answers

    What role do tight margins play in the revenue auditing process?

    <p>Tight margins present a risk in accurately recognizing revenue.</p> Signup and view all the answers

    Auditors develop an expectation of total revenues by understanding the client's ____________.

    <p>capacity</p> Signup and view all the answers

    Which of the following assertions is NOT typically at risk during the auditing of revenue?

    <p>Maintenance (A)</p> Signup and view all the answers

    Bundled products can complicate the revenue recognition process.

    <p>True (A)</p> Signup and view all the answers

    What is one method auditors use to assess the client's performance measurement in revenue?

    <p>By analyzing various revenue streams.</p> Signup and view all the answers

    Match the following terms with their related concepts in the revenue process:

    <p>Collection risk = Difficulty in receivable recovery Gross margin = Standard measurement of profit Related party transactions = Transactions between connected entities Market share = Percentage of total industry sales held by a company</p> Signup and view all the answers

    What should the auditor examine for each exception received?

    <p>The reasons for the differences (B)</p> Signup and view all the answers

    Positive confirmations are not essential in the audit process.

    <p>False (B)</p> Signup and view all the answers

    What are the alternative audit procedures used when positive confirmations are not received?

    <p>Examination of specific subsequent cash receipts, shipping documentation, and other client documentation.</p> Signup and view all the answers

    The auditor’s working papers should contain a summary of results from confirming accounts receivable, including the number and dollar value of confirmations sent, responses received, and the proportion of the total __________ covered by the sample.

    <p>population</p> Signup and view all the answers

    Why is the evidence about the completeness assertion limited?

    <p>Unrecorded receivables cannot be confirmed (D)</p> Signup and view all the answers

    Match the following audit procedures with their descriptions:

    <p>Examination of subsequent cash receipts = To verify amounts collected from customers Examination of shipping documentation = To ensure goods were shipped and received Examination of other client documentation = To gather additional evidence Confirmation of accounts receivable = To validate the existence of receivables</p> Signup and view all the answers

    The relationship between the audited and book values of items included in the sample is not important.

    <p>False (B)</p> Signup and view all the answers

    What is the primary assertion being tested through confirmations for accounts receivable?

    <p>Existence assertion</p> Signup and view all the answers

    What does a significant decline in payables as a percent of total assets potentially indicate?

    <p>Completeness problems (C)</p> Signup and view all the answers

    The average accounts payable is a useful metric only for internal company analysis.

    <p>False (B)</p> Signup and view all the answers

    Calculate the gross profit for the current year, given that revenues are $5,638 and cost of goods sold is $2,691.

    <p>2,947</p> Signup and view all the answers

    The current ratio may be influenced by changes in current __________ accounts.

    <p>asset</p> Signup and view all the answers

    Match the following financial figures to their corresponding values for the current year:

    <p>Revenues = $5,638 Cost of goods sold = $2,691 Gross profit = $2,947 Accounts payable, net = $180</p> Signup and view all the answers

    What percentage did cost of goods sold represent in the current year?

    <p>47.7% (C)</p> Signup and view all the answers

    An increase in the current ratio compared to prior years always indicates financial health.

    <p>False (B)</p> Signup and view all the answers

    The average accounts payable is shown in relation to total __________.

    <p>assets</p> Signup and view all the answers

    What factor is NOT mentioned as contributing to the inherent risk of material misstatement in inventory transactions?

    <p>Uniformity of inventory items (A)</p> Signup and view all the answers

    What is a key method to ensure the accuracy of inventory valuation?

    <p>Regular review of obsolete inventory (C)</p> Signup and view all the answers

    The inherent risk of material misstatement is assessed lower for manufacturers compared to retailers.

    <p>False (B)</p> Signup and view all the answers

    Fraud risks related to inventory are typically a significant concern for auditors.

    <p>False (B)</p> Signup and view all the answers

    What are the two types of goods mentioned that relate to assessing manufacturing process efficiency?

    <p>Finished goods produced and raw material used</p> Signup and view all the answers

    What are two components included in auditors' tests concerning inventory?

    <p>Physical quantities and inventory pricing</p> Signup and view all the answers

    The _____ of purchases, manufacturing, and sales transactions increases opportunities for misstatements.

    <p>volume</p> Signup and view all the answers

    Match the factors affecting inherent risk with their descriptions:

    <p>High volume of transactions = Increases opportunities for misstatements Judgment in cost allocation = Complexity in measurement and identification of costs Diversity of inventory items = Requires special procedures for inventory valuation Product defects per million = Indicates a measure of manufacturing effectiveness</p> Signup and view all the answers

    Inventory can be held as collateral for _____, leading to pressure to overstate it.

    <p>loans</p> Signup and view all the answers

    Which aspect of inventory management requires special procedures?

    <p>Wide diversity of inventory items (A)</p> Signup and view all the answers

    Match the terms related to inventory with their descriptions:

    <p>Existence = Regular physical counts or cycle counts Accuracy/Valuation = Reviewing obsolete or slow-moving inventory Rights and Obligations = Strong controls over consignment inventory Completeness = Comparing physical counts to perpetual records</p> Signup and view all the answers

    Which of the following is an effective use of Analytical Data Analytics (ADA) in inventory testing?

    <p>Testing sales and quantities on hand (C)</p> Signup and view all the answers

    Direct labor hours do not play a significant role in evaluating production costs.

    <p>False (B)</p> Signup and view all the answers

    Consignment inventory must be segregated from other inventory for accurate accounting.

    <p>True (A)</p> Signup and view all the answers

    What can product defects per million help evaluate?

    <p>The effectiveness of the manufacturing process</p> Signup and view all the answers

    What is the historical significance of observing physical inventory in auditing?

    <p>It has been a generally accepted auditing procedure for 80 years.</p> Signup and view all the answers

    Flashcards

    Auditing Revenue Process

    A crucial audit area focused on ensuring the accuracy and reliability of revenue recognition.

    Revenue Process Risk

    The probability of material misstatements in revenue accounts and related assertions.

    Revenue Process Nature

    The unique way an entity generates and records revenues. It varies by industry and customer base.

    Key Revenue Process Assertions

    Essential elements within the revenue process needing audit confirmation, such as occurrence, completeness, accuracy, cut-off and valuation.

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    Revenue Process Understanding

    The auditor's goal to comprehend the specifics of revenue earning and recognition for each client.

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    Revenue Capacity

    The client's ability to generate and sell products and services, based on their current market share and access to customers.

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    Gross Margin Expectations

    The predicted average profitability of a company, based on its competitive advantage in the marketplace.

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    Audit Expectations

    Estimated revenue and gross margin ranges, based on understanding client operations and market conditions.

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    Accounts payable growth

    The percentage increase in the amount of money a company owes to its suppliers over a period of time.

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    Inventory turnover in days

    The average number of days it takes a company to sell its inventory. A higher number means inventory is taking longer to sell.

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    Voucher

    An internal document that authorizes recording and paying a liability.

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    Report of vendor invoices due

    A summary listing vendor invoices by their due date.

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    Cash disbursements journal

    A daily report showing checks written or electronic funds transfers made to vendors.

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    Timing Differences in Accounts

    Differences between a client's account balance and the balance indicated by customer records, often caused by delays in recording transactions.

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    Positive Confirmations

    A crucial method for confirming accounts receivable where the client is asked to confirm the balance.

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    Alternative Audit Procedures

    Procedures used when no response is received to positive confirmation requests.

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    Subsequent Cash Receipts

    An alternative audit procedure involving reviewing cash received after the balance sheet date to check for outstanding receivables.

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    Shipping Documentation

    An alternative audit procedure used to examine supporting documents for sales.

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    Existence Assertion (Accounts Receivable)

    The assertion that accounts receivable actually exist and represent legitimate obligations by customers.

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    Completeness Assertion (Accounts Receivable)

    All transactions and accounts that should be recorded as receivable have been.

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    Confirmation Summary

    A summary of results from receivable confirmation, including sent confirmations, received responses, sample proportion and comparison of audited and book values.

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    Inventory Inherent Risk

    The likelihood of material errors in inventory accounts due to the nature of the business.

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    Inventory Inherent Risk Factors

    The characteristics of inventory transactions that increase the risk of misstatements.

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    Volume of Transactions

    Large numbers of purchases, production, and sales create more opportunities for errors.

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    Judgment in Inventory

    Subjective decisions about costing and valuation can introduce bias.

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    Inventory Diversity

    A wide range of items requires specialized procedures for tracking and valuing.

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    Inventory Efficiency Ratio

    A measure of how effectively a company is using its inventory.

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    Product Defect Rate

    A measure of quality control in the manufacturing process.

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    Assessing Inherent Risk

    The auditor's process of evaluating the likelihood of material misstatements in inventory.

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    Cost of goods sold to average accounts payable ratio

    A ratio comparing the cost of goods sold to the average accounts payable. This ratio should remain relatively stable from year to year, unless the company has changed its payment policies.

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    Accounts payable as a percentage of total assets

    A ratio representing how much of a company's assets are tied up in accounts payable (money owed to suppliers).

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    Significant decline in payables as a % of total assets

    A substantial decrease in this ratio might indicate incomplete or inaccurate accounting records.

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    Current ratio

    A measure of a company's short-term liquidity, calculated as current assets divided by current liabilities.

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    Significant increase in current ratio

    If the current ratio rises significantly compared to prior years, this could indicate an accounting problem. It can also be a result of changes in current assets or liabilities.

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    Gross Profit

    The difference between revenues and the cost of goods sold.

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    Accounts Payable, Net

    The amount of money a company owes to its suppliers, after deductions or adjustments.

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    Common-sized percentages in accounts payable

    Comparing a company's accounts payable to industry averages to better benchmark performance.

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    Inventory Valuation Risk

    The risk that inventory is not valued correctly, leading to incorrect financial statements.

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    Obsolete Inventory Review

    A regular review of inventory items that are no longer in demand or have become outdated.

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    Inventory Cost vs. Sales Price

    Comparing the cost of inventory to the selling price to assess profitability and potential write-offs.

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    Consignment Out

    Goods sent to another party for sale, but the ownership remains with the original company.

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    Consignment In

    Goods received from another party for sale, but the ownership remains with the original company.

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    Inventory Existence Assertion

    Ensuring that all inventory listed on the books actually exists in the warehouse.

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    Inventory Completeness Assertion

    Ensuring that all inventory held by the company is included in the inventory records.

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    Inventory Pricing Assertion

    Ensuring that inventory is valued correctly, using appropriate methods and considering market trends.

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    Study Notes

    Chapter 11: Auditing the Revenue Process

    • This chapter focuses on the revenue process, a critical area for auditing
    • Revenue recognition varies by company; industry and customer nature influence revenue processes
    • Common concerns include commodity sales with fluctuating prices, international sales, bundled products, and industries with tight profit margins
    • Key assertions for transactions (occurrence, completeness, authorization, accuracy, cutoff, and classification). Key assertions for account balances (existence, rights and obligations, completeness, valuation and allocation) and disclosures (occurrence, completeness, accuracy, and classification) will also need to be considered and tested
    • Five-step audit process for revenue: initial planning phase, understanding internal controls, testing controls, determining substantive procedures and drawing conclusions regarding the fair presentation of transactions, balances, and disclosures
    • Key analytical procedures used for revenue: sales to capacity, market share, sales to total assets, accounts receivable growth to sales growth, accounts receivable turnover in days, and uncollectible accounts/expense ratios
    • Inherent risks in the revenue process: pressures to overstate revenues due to economic challenges, competition, or ineffective management to meet earnings targets/covenant needs
    • Understanding control activities for credit sales through a flow chart demonstrating authorization, shipping, and recording procedures
    • Example transaction flows, risks (WCGW), and examples of internal controls for the sales process were given, focusing on the risks and controls associated with initiating credit sales and delivering goods
    • Example transaction flows, risks (WCGW), and examples of internal controls for the cash receipts process were presented, addressing risks such as loss of mail receipts, cash skimming, and inappropriate cash discounts, and recording errors.
    • Important documents and records for sales adjustments and revenue process disclosures were presented

    Chapter 12: Auditing the Purchasing and Payroll Processes

    • Nature of Purchase Transactions and Balances: discusses purchasing transactions (credit, cash disbursements) and the accounts affected (merchandise inventory, accounts payable, cash, purchase discounts, etc.)
    • Control Activities and Tests of Controls − Purchase Transactions discusses assertions (occurrence, completeness, authorization, accuracy, cutoff, classification, and presentation) and corresponding control activities
    • Audit considerations for purchasing processes: availability of supplies, vendor count/management, price fluctuation in materials, time lag in receiving goods, quality issues, and transactions with related parties. Inherent risks in the purchasing process: high transaction volumes, potential for unauthorized or duplicated payments, misappropriation of purchased assets, or cutoff issues.
    • Control activities and testing controls for credit purchases and cash disbursements via flowcharts, illustrating the process from authorizing purchases to recording the receipt
    • Example Transaction Flows — Cash Disbursements: describes supporting documents, the report of vendor invoice due, recording cash disbursements via check or EFT, and cash disbursement journals. Data sources important for cash disbursements (purchasing database, bank statement, bank reconciliation, vendor statements).
    • Examples of analytic procedures for purchasing activities: accounts payable turnover in days, cost of goods sold to average accounts payable, payables as a percentage of total assets, and the current ratio
    • Inherent risks in the purchasing process: high volume transactions, unauthorized purchases, misappropriation of purchased assets, duplicate payments of vendor invoices, cutoff issues, when good are in
    • Inherent risks in the purchasing process: high volume transactions, unauthorized purchases, misappropriation of purchased assets, duplicate payments of vendor invoices, and cutoff issues related to recording invoices after goods have been received.
    • Substantive procedures for purchasing and payables: testing of details of transactions and account balances for purchase and cash disbursement transaction. Searching for unrecorded payables and confirming account balances
    • Common disclosures for the purchasing process: reclassification of material balances, segregation of short-term and long-term payables, dependence on a limited number of vendors, purchase commitments and long-term contracts, expenses reportable by business segment or geographic region, and payables to related parties
    • Audit reasoning examples for data analytics in the purchasing process and substantive procedures for identifying and testing transactions and account balances for purchasing, payables, and cash disbursements.
    • Audit procedures for identifying contingent liabilities: reading minutes of meetings, reviewing contracts, loan agreements, correspondence from government agencies, reviewing tax returns and schedules for income tax liability, confirming accounts, and inspecting other supporting documentation
    • Auditing cash and cash equivalents: understanding their function, management cash budgeting, seasonality effects, minimum balance expectations, and company policies regarding investments. Various analytical procedures and tests of controls for cash were shown
    • Understanding accounts for cash equivalents: distinguishing between cash and cash equivalents, assessing the reliability of those controls, and examining the relationships between cash-related transactions, account balances
    • Auditors' procedures for assessing control risk and fraud risk
    • Assessing the inherent risks of cash balances and transactions, discussing issues of fraud and material misstatement risk
    • Substantive procedures: bank cutoff statements and review of client-prepared reconciliations. Testing these transactions and balances (vouching entries to supporting documents, tracing recordings to supporting document, tracing and comparing the bank's cutoff statement, etc.)
    • Example of bank confirmation
    • Describing the three main categories within inventory cost: materials (identifying and valuing the materials), labor (gathering supporting evidence on their type and amount needed), and overhead (reviewing allocation methods)
    • Auditing inventory costs through procedures: assessing the valuation of the materials, the accuracy of raw materials, and goods in transit, verifying valuation and allocation, using the calculation for the cost of goods sold as the basis for the cost calculation
    • Procedures for testing inventory price and obsolescence
    • Key assertion concerns for inventory and processes for observing physical inventory
    • Presentation and disclosure of inventory regarding category, costing methods, pledged/assigned inventories, or purchase commitments

    Chapter 16: Reporting on the Audit

    • Standard unmodified audit report (private): a summary of the components included in an unmodified opinion for a private company (title, address, opinion section, basis for opinion paragraph, management's and auditor's responsibility paragraphs, signature, and date)
    • Standard unqualified audit report (public): a summary of the components included in an unqualified opinion for a public company (title, address, opinion paragraph, paragraph referencing the audit of internal control, basis for opinion paragraph, scope paragraph, critical audit matters, signature, and date). Differences between PCAOB and ASB audit reports are outlined.
    • Emphasis of matter paragraph: an explanatory paragraph added to unmodified reports when circumstances require additional clarification (going concern issues, adjustments are not made). Specific examples were shown for each of these
    • Consistency of financial statements: describes modifications in the financial statements (change in accounting principles, correction of a misstatement). The discussion highlights how immaterial changes do not affect the report's overall unmodified opinion whereas pervasive changes will.
    • Modifying the audit opinion and reporting on specific situations where the auditor may modify the opinion (scope limitation, not in conformity with GAAP, lack of independence, and pervasive material misstatements) and their effect on the audit report
    • Other information in documents containing audited financial statements: the auditor is not responsible for other info, but must read it and consider the relationship to the financial statements
    • Standard unqualified opinion on ICFR: a summary of the components included in an unqualified opinion on the effectiveness of ICFR for public companies, including the title, address, opinion paragraph, paragraph referencing the financial statement audit, etc.
    • Modified opinion on ICFR: situations where a modified opinion (disclaimer or adverse) is needed due to material weaknesses in internal controls, or a scope limitation
    • Compilation and review engagements: distinguish between the limited assurance provided in a compilation and the reasonable assurance that an audit provides. The need for these services for smaller private companies was brought up
    • Subsequently discovered facts known before/after the report release date: discussing the responsibility of the auditor if new information is discovered after the fieldwork concluded but before the report is issued
    • A detailed illustration of how to write out a "qualified opinion" report

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