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Questions and Answers
What is a management representation letter?
What is a management representation letter?
Pervasiveness of a misstatement refers to its confinement to specific accounts or items in financial statements.
Pervasiveness of a misstatement refers to its confinement to specific accounts or items in financial statements.
False
What type of opinion does an auditor issue when there is a material departure from GAAP?
What type of opinion does an auditor issue when there is a material departure from GAAP?
qualified opinion or adverse opinion
At the completion stage of an audit, __________ procedures are finalized to analyze the financial statement data.
At the completion stage of an audit, __________ procedures are finalized to analyze the financial statement data.
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Match the audit opinion types with their corresponding situations:
Match the audit opinion types with their corresponding situations:
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Which of the following is NOT considered during the final review stage of an audit?
Which of the following is NOT considered during the final review stage of an audit?
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A scope limitation allows the auditor to issue an unqualified opinion.
A scope limitation allows the auditor to issue an unqualified opinion.
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What is one key consideration for auditors when evaluating indications of fraud?
What is one key consideration for auditors when evaluating indications of fraud?
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Which of the following is NOT a major item on a bank reconciliation?
Which of the following is NOT a major item on a bank reconciliation?
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An auditor's confirmation from the bank is not necessary when cross-referencing bank balance statements.
An auditor's confirmation from the bank is not necessary when cross-referencing bank balance statements.
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What type of subsequent event requires adjustments to the financial statements?
What type of subsequent event requires adjustments to the financial statements?
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The auditor traces deposit in transit and outstanding checks to the ________ bank statement.
The auditor traces deposit in transit and outstanding checks to the ________ bank statement.
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Match the following inventory auditing concerns with their respective descriptions:
Match the following inventory auditing concerns with their respective descriptions:
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How does an auditor determine the potential loss related to litigation?
How does an auditor determine the potential loss related to litigation?
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Internal controls regarding cash receipts and disbursements are only relevant to the cash audit process.
Internal controls regarding cash receipts and disbursements are only relevant to the cash audit process.
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What type of inquiries does an auditor make regarding pending litigation?
What type of inquiries does an auditor make regarding pending litigation?
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Which of the following is NOT a procedure an auditor might use to search for unrecorded liabilities?
Which of the following is NOT a procedure an auditor might use to search for unrecorded liabilities?
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An auditor should ensure that all inventory items are counted multiple times during the physical inventory count.
An auditor should ensure that all inventory items are counted multiple times during the physical inventory count.
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What is one method an auditor can use to verify the cost of inventory items?
What is one method an auditor can use to verify the cost of inventory items?
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An auditor should inquire of employees about the existence of _____ inventory items.
An auditor should inquire of employees about the existence of _____ inventory items.
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Match the following audit procedures with their descriptions:
Match the following audit procedures with their descriptions:
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Which of the following procedures helps auditors ensure correct inventory valuation?
Which of the following procedures helps auditors ensure correct inventory valuation?
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Using pre-numbered inventory tags helps in controlling the count of inventory.
Using pre-numbered inventory tags helps in controlling the count of inventory.
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What should an auditor do with regards to consignments during the inventory count?
What should an auditor do with regards to consignments during the inventory count?
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Study Notes
Auditor Procedures for Unrecorded Liabilities
- Obtain a listing of payments made after the balance sheet date up to the current date.
- Select payment items and obtain supporting documents.
- Review documents to determine the payment time period (based on service/shipment dates).
- Determine if the liability was properly recorded in the correct period.
- Review unpaid/open invoices during fieldwork for the same.
Inventory Costing Audit Procedures
- Obtain a detailed inventory listing and select a sample.
- Obtain original purchase documents to verify the cost of sampled inventory items.
- Recalculate average cost in inventory and compare to the cost shown on the inventory listing.
- Recalculate finished goods costs by assessing labor and overhead components.
Physical Inventory Count Procedures
- Scrutinize how client employees follow the inventory plan.
- Observe that each item is counted only once (if tagged, avoid double tagging).
- Ensure electronic count media, pre-numbered tags, or compilation sheets are properly controlled.
- Perform test counts and trace quantities to the final count (sheet-to-floor or floor-to-sheet).
- Look for empty containers or hollow squares (empty spaces) in stacked goods.
- Identify the last receiving/shipping documents and ensure received goods are segregated.
- Check for damaged/obsolete inventory and evaluate its general condition.
- Inquire about slow-moving inventory.
- Ensure consignment inventory is properly separated and marked.
- Count locations outside the entity or confirm with locations.
- Examine consignment contracts or agreements.
Bank Reconciliation Items and Testing
- Major items: outstanding checks, deposits in transit, cash receipts, and cash disbursements.
- Foot the reconciliation and outstanding check listing.
- Trace book balances to the general ledger.
- Obtain bank confirmation and trace the bank balance to the bank reconciliation.
- Obtain a cutoff bank statement and trace deposits, outstanding checks, and other reconciling items.
Relationship Between Cash, Revenue, and Purchases/Payables Audits
- Cash balances are affected by internal controls related to cash receipts and disbursements.
- Controls over cash receipts and disbursements are tested as part of revenue and purchasing process testing.
- Inventory is affected by internal controls related to purchases and revenue sales.
- Tracing documentation of transactions decreasing inventory balances (such as sales) verifies existence, valuation, and accuracy assertions.
- Helps determine if entries were recorded and entered at correct amounts.
Audit Considerations for Pending or Threatened Litigation
- Obtain information on the existence of uncertainties from litigation.
- Note the time period when the cause for legal action occurred.
- Determine the probability of an unfavorable outcome for the client.
- Estimate potential loss.
Subsequent Events in Financial Statement Audits
- Type 1 events: provide evidence of conditions that existed at the financial statement date (require adjustments to financial statements)
- Type 2 events: provide evidence of conditions that arose after the financial statement date (no adjustments).
Audit Report Modifications
- Scope limitations: insufficient evidence about something in financial statements (qualified opinion or disclaimer).
- Departures from GAAP: material effects on financial statements (qualified opinion or adverse opinion).
- Auditor independence issues: prohibited relationship with the entity (disclaimer).
Audit Report Sections (Private Company)
- Title (must include independent).
- Address.
- Opinion section.
- Basis for opinion paragraph.
- Management's responsibility paragraph.
- Signature.
- Date
- Key differences between public and private company audit reports:
- Clean opinion for PCAOB is unqualified, ASB is unmodified.
- ASB audit report is called "independent auditors report," PCAOB is not.
- Critical audit matters are required for PCAOB (public) reports; but not always for ASB (private) reports (voluntary).
Audit Report Requirements
- To corroborate oral representations by management
- Serves as evidence (but cannot be the sole evidence for everything)
- Obtained at completion of the date
- Signed by the financial reporting head (CEO, CFO, audit committee chair)
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Description
This quiz covers essential audit procedures focusing on unrecorded liabilities and inventory costing. It includes steps for verifying payments, reviewing documents, and conducting physical inventory counts. Perfect for accounting students or professionals looking to enhance their understanding of audit processes.
