Questions and Answers
What is the primary purpose of interim testing?
The audit report release date is the same as the date of the financial statements.
False
What is the purpose of roll-forward procedures?
To extend the conclusions from an interim date to the date of the financial statements
Surprise audits are a type of _______________________ procedure.
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What is the primary purpose of reviewing journal entries?
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Match the following audit procedures with their descriptions:
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Dual date reports are used to indicate that the auditor has performed additional audit procedures for a significant event that occurred before the date of the auditor's report.
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What is the purpose of examining material transactions between the interim testing date and the date of the financial statements?
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What is the purpose of testing controls in the purchasing cycle?
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In the purchasing cycle, substantive procedures are more prominent than testing controls.
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What is the purpose of reviewing changes in authorization when testing for proper authorization in the expenditure cycle?
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An auditor would find the proper authorization that indicates it is okay to pay a vendor on the _______________________.
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Match the following audit procedures with their descriptions:
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What is the primary focus of the audit approach in the purchasing cycle?
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A three-match control is a common automated control to ensure the proper recording of _______________________.
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Cut-off testing is a substantive procedure used to verify the timing of transactions.
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What is the purpose of audit procedures for unrecorded liabilities?
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In a high-risk material misstatement scenario, the extent of testing for accounts payable would be reduced.
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What is an example of an analytical procedure that can be used to test prepaid expenses and accrued liabilities?
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The purpose of verifying purchase orders is to test the _________ of liabilities.
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Match the following audit procedures with their corresponding objective:
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In a low-risk material misstatement scenario, the emphasis would be on detailed testing of transactions.
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Why is the emphasis on the completeness assertion for liabilities instead of on the existence assertion as in the audit of assets?
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In substantive procedures, the emphasis is on the ______________ assertion for liabilities.
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Study Notes
Expenditure Cycle Internal Control
- Proper authorization is essential for all expenditures, considering corporate values and ethics
- Security measures include restricting access to inventory and blank documents like purchase orders and receiving reports
- A three-match control is often used to ensure proper recording of expenses
Control Considerations
- Separation of responsibilities is crucial for internal controls
- Control-checking activities should be detailed and thorough
- Access to inventory and physical assets must be restricted to minimize risk
Testing of Operating Effectiveness of Internal Control
- Identify controls to rely on to reduce assessed control risk
- Select a sample of items from the data population for audit
- Actions of test of controls include:
- Inspecting
- Inquiry
- Observing
- Scanning
- Matching
- Recalculating
Authorization in Expenditure Cycle
- Review policies and procedures for proper authorization
- Sample transactions and check for signatures and supporting documents
- Review changes in authorization and inquire with personnel
- Evaluate segregation of duties
Authorization Sources
- Purchase order
- Receiving report
- Vendor invoice
- Authorization signature or approval
- Payment authorization form
Substantive Procedures
- Audit approach in purchasing cycle relies on testing controls and less on procedures
- Procedures for accounts payable are affected by risk of material misstatement
- Low risk: reduced extent of testing, less detailed testing, and reliance on controls
- High risk: increased extent of testing, detailed testing of transactions, and greater emphasis on analytical procedures and independent confirmations
Unrecorded Liabilities
- Purpose: to find unrecorded expenses or obligations
- Examples of audit procedures:
- Review subsequent payments
- Vendor statement reconciliation
- Examine receiving reports
- Inquire with management
- Review contracts
- Analytical procedures
Emphasis on Completeness Assertion
- Risk of understatement
- Control environment
- Impact on financial statements
- Fraud risk
Other Expenditure Cycle Accounts
- Prepaid expenses and accrued liabilities can be tested using analytical procedures
- Examples of audit procedures:
- Vendor verification
- Data analytics
- Examine purchase orders
- Inspect invoices
- Review receiving reports
- Segregation of duties assessment
- Surprise audits
- Confirmation of balances
- Review journal entries
Audit Timeline
- Interim testing: between the beginning of the year and the year-end date under audit
- Date of the financial statements: the year-end date of the latest period covered by the client's financial statements
- Date of the auditor's report (audit completion date): the date on which auditors have gathered evidence for their opinions
- Audit report release date: the date on which auditors allow the client to use their reports
- Dual date report: used to indicate additional audit procedures for a significant event occurring after the date of the auditor's report
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Description
This quiz assesses knowledge of internal control measures in business, including authorization, corporate values, security, separation of responsibilities, and control-checking activities.