Audit Exam 3

The auditors use a bank cutoff statement to compare:

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is:

Stamped “paid” by the check signer.

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except:

• Cutoff bank statement.

• Year-end bank statement.

• Bank confirmation.

• General ledger.

General ledger: you are verifying what the bank says should be the balance in cash @ year end, to do this you need external evidence. The GL is internal, and tells what the company’s books say, not what the bank says

A cutoff bank statement addresses whether checks outstanding at year-end were included in the list of outstanding checks in the year-end bank reconciliation.

True. It helps the auditor see if the checks the company said were still unpaid at year-end were actually cleared by the bank shortly after

The least crucial element of internal control over cash is:

separation of cash receipts from preparing deposits.

Which of the following is a frequent control over cash disbursements?

Checks should be sequentially numbered and the numerical sequence should be accounted for by the person preparing bank reconciliations.

Mailroom personnel of a company should prepare a control listing of incoming cash receipts and deposit them intact daily.

False, the mailroom should not be making the deposit

On receiving the bank cutoff statement, the auditor should trace:

Checks dated prior to year-end to the outstanding checks listed on the year-end bank reconciliation.

Outstanding checks are:

👉 Checks the company wrote and recorded before year-end
👉 But the bank has NOT processed (cleared) yet by year-end

A cutoff bank statement is just:

👉 A bank statement for a short period right after year-end (like Jan 1–Jan 10)

It shows:

• Which checks cleared the bank after year-end

• Which deposits were processed after year-end

Which of the assertions related to accounts receivable will confirmations be least likely to provide evidence in support of?

Completeness

A portion of a client’s accounts receivable consists of many small accounts, each of which is not significant. The company has a collection period of approximately one month and cash flows generally correspond to the previous month’s sales. As a result, the auditor considers the risk of material misstatement to be relatively low. Which type of accounts receivable confirmation is likely to be used by the auditor for these accounts?

Negative confirmations (used when risk of MM is low)

To test the existence assertion for recorded receivables, the auditors would select a sample from the

AR subsidiary ledger. The AR subsidiary ledger is:

• The detailed list of all customer balances

• A breakdown of what makes up Accounts Receivable on the books

👉 So it represents what the company claims exists

As one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. This test provides evidence as to whether:

Recorded sales have been properly posted to customer accounts.

When it is "impossible" to confirm accounts receivable, the auditors can never issue an unmodified opinion on the client's financial statements.

False

To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review?

Analyze transactions occurring within a few days before and after year-end.

The confirmation of the client's trade accounts receivable as a means of obtaining audit evidence is ordinarily considered to be a:

substantive procedure

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Physically examine items sold.

The confirmation of accounts receivable is most closely associated with:

Detection risk.

Tracing recorded sales transactions to the bills of lading provides evidence about the:

occurance of sales transactions

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts?

Confirming current (0-30 day) year-end accounts receivable.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?

The positive form used for large balances and the negative form for the small balances.

It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be:

Examining subsequent receipts of year-end accounts receivable.

If auditors can’t confirm receivables with customers, they:

👉 Look at cash the company received after year-end
to see if customers actually paid what they owed

Tracing copies of sales invoices to shipping documents will provide evidence that all:

Billed sales were shipped.

Which of the following is the best argument against the use of negative accounts receivable confirmation requests?

The inference drawn from receiving no reply may not be correct.

Instead of taking a physical inventory count on the balance sheet date, the client may take physical counts prior to the year-end if internal control is adequate and:

Well-kept records of perpetual inventory are maintained.

The primary objective of a CPA’s observation of a client’s physical inventory count is to:

Obtain direct knowledge that the inventory exists and has been properly counted.

During the inventory count, an auditor selects items and determines that the proper description and quantity were recorded by the client. This procedure is most closely related to:

Completeness.

Observation of inventories is a required audit procedure under all circumstances.

false

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all:

Cash disbursements.

(Even though the employee is stealing, cash is still leaving the company, test disbursements )

Which of the following is not true relating to the auditors' observation of the client's physical inventory?

The auditors should supervise the taking of the inventory.

When perpetual inventory records are maintained in quantities and in dollars, and internal control over inventory is weak, the auditor would probably:

Want the client to schedule the physical inventory count at the end of the year.

Which of the following is the best audit procedure for the discovery of damaged merchandise in a client’s ending inventory?

Observe merchandise and raw materials during the client’s physical inventory taking.

An auditor most likely would analyze inventory turnover rates to obtain evidence about:

Valuation.

Which of the following is true about the auditors' observation of the client's physical inventory?

The auditors' observation addresses the existence assertion.

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:

Observe physical counts of the inventory items.

An auditor who is engaged to examine the financial statements of a business enterprise will request a cutoff bank statement primarily in order to:

Verify reconciling items on the client’s bank reconciliation.

Which of the following manipulations of cash transactions would overstate the cash balance on the financial statements?

Understatement of outstanding checks.

Inventory Inherit risk questions

• What is the procedure or policy for significant adjustments or write-offs of inventory

• environmental and regulatory risks associated with inventory (hazardous or compliance issues)

• What valuation method does the client use for inventory FIFO or LIFO, why was this decision made and have there been any changes recently

• what policies or assumptions are applied to inventory (LCM LCNRV) and

• any changes in production, supply chain, product lines effecting inventory

• any impairment indicators for inventory

• customer complaint and return data, how does this effect the valuation of inventory

• any damaged

• how often are physical counts of inventory performed, are there any discrepancies between counts and system

• any significant fluctuations in demand for products

Inventory internal controls over purchasing

pre-numbered Purchase order is generated by purchasing

• purchasing keeps a copy

• copy goes to accounting

• BLIND copy goes to receiving

Inventory internal controls over receiving

• determines condition

• determines quantity

• Generates receiving report

internal control over producing/issuing

• master production schedule is kept

• evaluate variances between budget and actual

• job time tickets

• pre-numbered requisitions kept

Audit steps for substantive inventory test (inventory count)

• Obtain the instructions for an inventory observation, I want to know how everything should be tagged recorded, counted and

• Assess the timing and nature of the count: is it EOY or intrm, what areas and locations of inventory are material and need to be observed

• observe the count: i’m making sure there is good segregation of duties, that everything is being tagged, counted, recorded correctly and instructions are being followed

• request a final invetory listing select a sample based off materialtiy

• preform a physical count

  • sheet (final inventory listing to floor): auditor will select items on the final inventory listing sample and then locate them physically on the wharehouse floor to verify that they exist.

  • floor (wharehouse) to sheet(final inventory listing): auditor will select items that were physically observed on the floor and trace them back to the final inventory listing to verify completeness

• follow-up with the client about any discrepencies determine whether its fraud, counting errors, of missing

  • obtain a copy of their count but don’t share copies of yous

• Record the final count and propose adjusting entires for material misstatements

Alternative procedures if you miss inventory observation

If you miss the inventory count, you must preform alternate procedures:

• existence of strong internal control

• perpetual inventory records

• documentation of well planned, well-executed physical inventory

• making of test counts

Inventory price test

Make sure that the pirce of inventory is at LCM or LCNRV tests valuation