Auditing Procedures Quiz
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Questions and Answers

Which of the following is NOT a major item on a bank reconciliation?

  • Deposits in transit
  • Cash receipts
  • Inventory valuation (correct)
  • Outstanding checks

    • Type 1 subsequent events require an adjustment to financial statements.

    True

    What should an auditor obtain to verify cash receipts and cash disbursements during an audit?

    Internal control documentation and bank confirmations

    The auditor asks attorneys for information about pending or threatened litigation, including the probability of an unfavorable _____ for the client.

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

    Match the following types of subsequent events with their descriptions:

    <p>Type 1 = Event that requires adjustment to financial statements Type 2 = Event that does not require adjustments Pending litigation = Existence of uncertainties that may affect financial outcomes Cash reconciliation = Involves tracing cash balances to general ledger</p> Signup and view all the answers

    Which procedure is used to trace deposit in transit during a bank reconciliation?

    <p>Trace to the cutoff bank statement</p> Signup and view all the answers

    Cash balances are only affected by internal controls related to cash receipts.

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

    List one item that an auditor should check when testing a bank reconciliation.

    <p>Outstanding checks or deposits in transit</p> Signup and view all the answers

    Which section is NOT included in the major sections of a private company audit report?

    <p>Revenue projections</p> Signup and view all the answers

    The ASB audit report includes a reference to Internal Control over Financial Reporting (ICFR).

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

    What must the title of an independent audit report include?

    <p>The term 'independent'</p> Signup and view all the answers

    A clean opinion for a PCAOB audit is referred to as ______, while an ASB audit uses the term ______.

    <p>unqualified, unmodified</p> Signup and view all the answers

    Match the audit report sections with their descriptions:

    <p>Opinion Section = Expresses the auditor's conclusion on the financial statements Basis for Opinion = Explains the reasoning behind the auditor's opinion Management's Responsibility = Outlines the duties of management regarding the financial statements Signature = The auditor's confirmation of the report's authenticity</p> Signup and view all the answers

    What is the primary purpose of sending a legal letter to attorneys?

    <p>To obtain information about litigation, assessments, and claims</p> Signup and view all the answers

    Type 1 subsequent events require no adjustments to the financial statements.

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

    What is one method auditors use to identify subsequent events?

    <p>Inquiring with management</p> Signup and view all the answers

    A Type 2 subsequent event arises after the date of the __________.

    <p>financial statements</p> Signup and view all the answers

    Match the type of subsequent events with their descriptions:

    <p>Type 1 = Requires adjustment to financial statements Type 2 = No adjustment but disclosure is necessary if important Type 1 example = A legal judgment made before the reporting date Type 2 example = Purchase of another company after the reporting date</p> Signup and view all the answers

    What is the primary purpose of a cutoff bank statement?

    <p>To trace checks and deposits for accuracy</p> Signup and view all the answers

    Lapping is when cash is stolen after it is recorded on the company’s books.

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

    What are the key assertions in inventory management?

    <p>Existence, valuation, rights and obligations, completeness</p> Signup and view all the answers

    What should be avoided when tagging inventory?

    <p>Double tagging items</p> Signup and view all the answers

    Conducting regular __________ of physical inventory helps compare it with perpetual records.

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

    Consignment inventory should be mixed with regular inventory during counts.

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

    What is a contingent liability?

    <p>An existing condition involving uncertainty about a possible loss that will be resolved by a future event.</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Kiting = Transferring funds between accounts and recording improperly Cycle counts = Counting a portion of inventory on a rotating basis Proof of cash = Reconciles cash transactions between records and the bank Lapping = Stealing cash before it is recorded</p> Signup and view all the answers

    When evaluating inventory, it is important to watch for __________ items.

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

    Which type of fraud involves moving money around to cover cash shortages?

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

    Match the type of contingent liability with its description:

    <p>Probable = Future event likely to occur Reasonably possible = Chances of event occurring are more than remote but less than likely Remote = Chance of event occurring is slight Pending litigation = Legal action that has been initiated but is not yet resolved</p> Signup and view all the answers

    Cycle counts are performed only at the end of the fiscal year.

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

    What is the purpose of comparing physical counts to perpetual records?

    <p>To ensure completeness of inventory records</p> Signup and view all the answers

    Which of the following is an example of a contingent liability?

    <p>Pending litigation</p> Signup and view all the answers

    Legal letters are sent to attorneys to discuss a client's case.

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

    The process of __________ involves obtaining and verifying the costs of inventory items.

    <p>inventory price testing</p> Signup and view all the answers

    What should be examined to test for contingent liabilities?

    <p>Contracts, loan agreements, and correspondence from government agencies.</p> Signup and view all the answers

    Which of the following activities supports the existence assertion in inventory management?

    <p>Cycle counts</p> Signup and view all the answers

    To obtain information about contingent liabilities, one should inquire with __________.

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

    Which document is typically obtained to confirm contingent liabilities?

    <p>Legal letter</p> Signup and view all the answers

    What type of audit report is referred to as an 'unqualified' report?

    <p>Public company</p> Signup and view all the answers

    The ASB audit report includes a reference to internal control over financial reporting.

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

    What is the main purpose of an emphasis of matter paragraph in an audit report?

    <p>To add explanatory language for circumstances that require additional explanation.</p> Signup and view all the answers

    An auditor may issue a _______ opinion if financial statements are not in conformity with GAAP.

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

    A compilation engagement provides a reasonable level of assurance.

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

    During an audit, what must the auditor do concerning other documents containing financial statements?

    <p>Read other information and consider its consistency with the audited financial statements.</p> Signup and view all the answers

    Critical audit matters are required in _______ audit reports.

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

    Match the following concepts with their correct definitions:

    <p>Compilation = No level of assurance, using client source documents Review = Limited level of assurance with analytical procedures Audit = Reasonable level of assurance with substantive testing Qualified Opinion = Opinion issued when FS materially affected by GAAP departure</p> Signup and view all the answers

    What is a potential outcome if there is a scope limitation during an audit?

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

    All significant transactions must always be disclosed in a financial audit report.

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

    What is a primary difference between a compilation and a review engagement?

    <p>A compilation provides no assurance, while a review engagement provides limited assurance.</p> Signup and view all the answers

    In PCAOB reporting, the title must include the terms _______ and independent.

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

    What type of opinion is issued if the auditor is not independent?

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

    Which procedure is used to audit inventory costing?

    <p>Recalculate average cost and verify with purchase documents</p> Signup and view all the answers

    An auditor should observe that inventory is counted multiple times to ensure accuracy.

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

    List one procedure an auditor might use to search for unrecorded liabilities.

    <p>Obtain a listing of payments made after the balance sheet date.</p> Signup and view all the answers

    During the inventory count, the auditor must determine that goods received during the count are properly __________.

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

    Match the inventory procedures with their descriptions:

    <p>Inventory price testing = Verifying cost of inventory item Test counts = Tracing quantities to final count Segregation of inventory = Ensuring consignment items are marked Observing inventory plan = Scrutinizing client employees' adherence</p> Signup and view all the answers

    Which of the following is NOT a procedure during the count of the entity's physical inventory?

    <p>Count every item multiple times</p> Signup and view all the answers

    An auditor should perform inventory price testing by obtaining a sample of inventory items and verifying their cost.

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

    What is one item an auditor should be alert for during the physical inventory count?

    <p>Empty containers or hollow squares.</p> Signup and view all the answers

    What is the primary purpose of obtaining a management representation letter?

    <p>To corroborate significant oral representations made by management during the audit</p> Signup and view all the answers

    A management representation letter is signed by the Chief Information Officer (CIO).

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

    What types of analysis are performed during the final stage of an audit?

    <p>Final analytical procedures and review of corrected and uncorrected misstatements.</p> Signup and view all the answers

    A scope limitation may lead an auditor to issue a __________ opinion.

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

    Which of the following procedures is NOT typically performed near the end of an audit?

    <p>Select audit team members</p> Signup and view all the answers

    Match the following situations with the corresponding audit opinion:

    <p>Scope limitation = Qualified opinion or disclaimer Non-conformity with GAAP = Qualified opinion or adverse opinion Auditor not independent = Disclaimer</p> Signup and view all the answers

    Pervasiveness refers to how materiality affects specific elements rather than the overall financial statements.

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

    How does an auditor determine the effect of materiality on an opinion rendered?

    <p>By judging whether the item's effects are confined to specific elements or are pervasive across the financial statements.</p> Signup and view all the answers

    What is the primary purpose of a legal letter sent to attorneys?

    <p>To gather information about litigation, assessments, and claims</p> Signup and view all the answers

    What is an example of a Type 1 subsequent event?

    <p>A court ruling on a pending lawsuit that occurred before the financial statement date.</p> Signup and view all the answers

    The auditor verifies the outcomes of litigation by inquiring with the client's _______.

    <p>legal counsel</p> Signup and view all the answers

    Match the following types of subsequent events with their characteristics:

    <p>Type 1 = Event occurred before the financial statements date Type 2 = Event occurred after the financial statements date</p> Signup and view all the answers

    What is the primary purpose of a proof of cash?

    <p>To reconcile cash transactions between accounting records and the bank</p> Signup and view all the answers

    Kiting involves stealing cash before it is recorded in the company’s books.

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

    What is one way to test for lapping during an audit?

    <p>Analyze cash receipts and payments for unusual patterns.</p> Signup and view all the answers

    The process of _______ involves regularly comparing perpetual records with actual inventory.

    <p>cycle counts</p> Signup and view all the answers

    Which assertion is primarily tested through regular counts of physical inventory?

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

    Auditors should observe that all merchandise is counted once and only once during the _______.

    <p>inventory count</p> Signup and view all the answers

    Conducting regular reviews of obsolete inventory is part of the valuation assertion for inventory.

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

    What is the key assertion that pertains to the legal rights of ownership over inventory?

    <p>Rights and obligations</p> Signup and view all the answers

    What should an auditor do to check for unusual items on a cutoff bank statement?

    <p>Scan for unusual transactions</p> Signup and view all the answers

    What is the primary purpose of internal controls in the revenue process?

    <p>To prevent revenue manipulation</p> Signup and view all the answers

    All cash receipts transactions recorded have occurred is an assertion related to authorization.

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

    Name one procedural step involved in understanding a client's revenue process.

    <p>Conduct analytical procedures</p> Signup and view all the answers

    The ________ process is essential to ensuring the accuracy of accounts receivable.

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

    Match the assertion with its description:

    <p>Occurrence = Transactions recorded have occurred and pertain to the entity Completeness = All transactions that should have been recorded have been recorded Authorization = All transactions are properly authorized Accuracy = Amounts relating to transactions have been recorded appropriately</p> Signup and view all the answers

    Which of the following types of fraud is related to bid rigging?

    <p>Illegally influencing a bidding process</p> Signup and view all the answers

    The bank reconciliation process helps identify potential fraud and theft of cash.

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

    What are two methods auditors use to test the occurrence assertion?

    <p>Vouching entries and reviewing segregation of duties</p> Signup and view all the answers

    A major control over cash is ensuring __________ of duties in cash handling processes.

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

    Match the internal control activity with its purpose:

    <p>Restrictive endorsement of checks = Indicates which checks are approved for cashing Electronic funds transfer = Ensures timely deposit of cash Preparation of pre-list of mail receipts = Documents all cash received Independently verifying cash receipts = Provides an additional layer of security</p> Signup and view all the answers

    If an auditor identifies a high-risk material misstatement in revenue, what will they likely do?

    <p>Perform more extensive substantive procedures</p> Signup and view all the answers

    All tests of controls must be performed at year-end.

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

    State one common control used in the cash disbursements process.

    <p>Examination of cancelled checks for authorized signatures</p> Signup and view all the answers

    The main goal of accrued liabilities testing is to detect significant __________ obligations.

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

    What is classified as a 'probably' contingent liability?

    <p>Future event likely to occur</p> Signup and view all the answers

    What should an auditor inquire about to identify slow moving inventory items?

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

    A liability should be disclosed if it is deemed __________ possible.

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

    Match the following contingent liability types with their descriptions:

    <p>Probable = Must be shown as a liability and disclosed Reasonably Possible = Should disclose it Remote = Slight chance of occurrence Litigation = Pending or threatened legal action</p> Signup and view all the answers

    Which item indicates a need for the auditor's special attention during inventory counts?

    <p>Empty containers</p> Signup and view all the answers

    The presence of damaged and obsolete inventory items should not affect the auditing process.

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

    When should an auditor review contracts and government correspondence for contingent liabilities?

    <p>During the audit testing phase</p> Signup and view all the answers

    Attorneys cannot discuss a client's case without __________ from the client.

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

    Which document should be confirmed to assess contingent liabilities?

    <p>Legal letters</p> Signup and view all the answers

    Reviewing purchase documents to match inventory price is primarily concerned with which assertion?

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

    Reviewing subsequent payments after year-end is related to the assertion of existence.

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

    What assertion is associated with reviewing cash receipts during an audit?

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

    The circumstances under which an auditor may change their opinion for an audit report are often related to the __________ of the financial statements.

    <p>fair presentation</p> Signup and view all the answers

    Match the following audit procedures with their associated assertions:

    <p>Reviewing cash receipts = Existence Reviewing subsequent payments = Completeness Matching inventory price with purchase documents = Valuation Examining cutoff procedures = Accuracy</p> Signup and view all the answers

    Study Notes

    Audit Procedures for Unrecorded Liabilities

    • Obtain a listing of payments made after the balance sheet date up to the current date.
    • Select payment items for testing and supporting documents.
    • Review documents to determine the correct recording time period based on service or shipment dates.
    • Determine if liabilities were recorded in the correct period.
    • Review unpaid/open invoices during fieldwork for the same period.

    Auditing Inventory Costing

    • Obtain a detailed listing of inventory and select a sample for testing.
    • For the sample, obtain original purchase documents to verify costs.
    • Recalculate average inventory cost and compare it to the listed costs.
    • Recalculate finished goods costs by assessing labor and overhead components.

    Physical Inventory Procedures

    • Scrutinize client employees' inventory counting procedures.
    • Ensure all inventory items are counted only once. (e.g., don't double-tag)
    • Verify proper control of count media (e.g., compilation sheets, inventory tags).
    • Perform test counts to verify floor-to-sheet vs. sheet-to-floor quantities.
    • Check for empty containers or hollow squares to identify potential omissions.
    • Verify segregation of goods received during the count.
    • Inquire about slow-moving and damaged/obsolete inventory.
    • Ensure consignment inventory is properly separated and marked.
    • Count locations outside the entity or confirm with those locations.
    • Examine consignment agreements or contracts.

    Bank Reconciliation Testing

    • Major items on a bank reconciliation include outstanding checks.
    • Auditors might test the reconciliation by:
      • Foot the reconciliation and outstanding check listing.
      • Trace book balances to the general ledger.
      • Obtain bank confirmations and trace bank balances to the reconciliation.
      • Obtain cutoff bank statements.
      • Trace deposit in transit, outstanding checks and other reconciling items to cutoff bank statements.

    Relationships Between Audit Areas

    • Cash, revenue, and purchases/payables audits are related because cash balances are affected by internal controls related to cash receipts and disbursements.
    • Tracing documentation decreasing inventory (i.e. sales) provides evidence for existence, values, and accuracy of sales.
    • These audits help ensure accuracy of entries and proper recording of transactions.

    Litigation Information

    • Auditors request information from attorneys about pending or threatened litigation.
    • This includes existence of uncertainties, time period of legal action, probability of unfavorable outcomes, and estimation of potential losses.

    Subsequent Events

    • Type 1 subsequent events provide evidence of conditions existing at the balance sheet date and require adjustments to the financial statements.
    • Type 2 subsequent events provide evidence of conditions arising after the balance sheet date and do not require adjustments.

    Auditor's Representation Letter

    • Auditors obtain this letter from management to corroborate significant oral representations.
    • It serves as evidence, but not the sole evidence, supporting audit findings.

    Audit Procedures at Completion

    • Final analytical procedures are performed.
    • Materiality and risk assessment are re-evaluated.
    • Corrected and uncorrected misstatements are reviewed.
    • Procedures for fraud risk are examined.
    • Going concern considerations are considered.
    • Final work papers are reviewed.
    • Management representation letter is obtained.
    • Report is issued along with possible management comment or letters.

    Revenue and AR Process

    • Understand the client's revenue process.
    • Assess inherent risks related to the process.
    • Understand client controls for revenue cycle.
    • Perform tests of controls.
    • Perform substantive tests.
    • Understand areas where revenue can be manipulated
      • consignment sales
      • rights and returns
      • bill and hold transactions
    • Revenue and cash receipt process initiate, receive, and record credit sales.
    • The software matches customer and sales orders with customer master file. Software matches sales order amounts with credit authorization.

    Purchasing and AP Process

    • Similar to revenue but understand the client's purchasing process instead of revenue
    • Understand controls for purchasing and AP
    • Perform tests of controls
    • Perform analytical procedures
    • Understand areas where purchasing and AP can be manipulated

    Audit Procedures for Cash

    • Trace a sample of remittance advices to the cash receipts journal and deposit splits.
    • Examine check endorsements for authorization.
    • Foot remittance advices and deposit slips to cash receipts journal and bank statements.
    • Compare recording dates to deposit dates.
    • Observe cash on hand at year-end and trace to deposits.
    • Trace cash receipts journal entries to the general ledger.
    • Check for authorized signatures on cancelled checks.

    Audit Procedures for Accounts Payable

    • Obtain a listing of payments made after the balance sheet date.
    • Select items for testing and obtain supporting documentation.
    • Determine the correct recording time period based on service or shipment dates.
    • Review unpaid/open invoices in fieldwork.
    • Examine for unrecorded payables.

    Bank Reconciliation

    • Obtain bank confirmation.
    • Compare the confirming balance with the balance per books.
    • Investigate unusual items detected during the bank reconciliation.
    • Test for lapping or kiting.

    Major Sections of an Audit Report

    • Major sections of private company reports include title, address, opinion section, basis for opinion, management's responsibility paragraph, signature, and date.
    • Private company reports don't include reference to ICFR.
    • Public company reports do include reference to ICFR.

    Types of Audit Reports

    • Unmodified audit reports are issued when the financial statements are fairly presented in accordance with GAAP and there are no material misstatements.
    • Qualified reports are issued when there are limitations in the scope of the audit but not so severe that the auditor cannot express an opinion.
    • Adverse reports are issued when the financial statements are materially misstated or not fairly presented.
    • Disclaimer of opinion reports are issued when the scope of the audit is severely limited, preventing the auditor from expressing an opinion.

    Audit Procedures for Contingent Liabilities

    • Inquire with management.
    • Review correspondence with and invoices from attorneys.
    • Obtain a legal letter and management representation letter to confirm contingent liabilities.

    Management Representation Letter

    • Serves as evidence of representations made by management and confirms other material issues.
    • This is used when there are significant oral representations made by management.

    Differences Between Compilation, Review, and Audit

    • A compilation provides no assurance, a review limited assurance, and an audit reasonable assurance.
    • Different types of client engagements require specific procedures and levels of review.
    • Compilations, primarily for smaller entities, are based on client-provided information.

    Procedures for Evaluating Significant Accounting Policies and Estimates

    • Determine whether significant accounting policies and estimates are appropriate in the context of the financial reporting framework.
    • Understand the policies and methods used to develop estimates.
    • Assess the reasonableness of estimates for reasonableness.
      • Evaluate consistency with prior periods.
      • Obtain support from adequate documentation and evidence.

    Other Audit Procedures

    • Review any quantitative and qualitative factors from the effect of uncorrected misstatements.

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    Description

    Test your knowledge on various auditing procedures including unrecorded liabilities, inventory costing, and physical inventory practices. This quiz covers essential steps and considerations auditors must take into account during auditing processes.

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