Auditing and Assurance Services, 15e, Global Edition (Arens)
Chapter 6 Audit Responsibilities and Objectives
Learning Objective 6-1 1) The objective of an audit of the financial statements is an expression of an opinion on: A) the fairness of the financial statements in all material respects !) the accurac" of the financial statements #) the accurac" of the annual report $) the accurac" of the balance sheet and income statement Ans%er: A &) 'f the auditor believes that the financial statements are not fairl" stated or is unable to reach a conclusion because of insufficient evidence( the auditor: A) should %ithdra% from the engagement !) should re)uest an increase in audit fees so that more resources can be used to conduct the audit #) has the responsibilit" of notif"ing financial statement users through the auditor*s report $) should notif" regulators of the circumstances Ans%er: # +) Auditors accumulate evidence to: A) defend themselves in the event of a la%suit !) determine if the financial statements are correct #) satisf" the re)uirements of the ,ecurities Acts of 1-++ and 1-+. $) reach a conclusion about the fairness of the financial statements Ans%er: $ 1 #op"right / &01. 1earson 2ducation Learning Objective 6-& 1) The responsibilit" for adopting sound accounting policies and maintaining ade)uate internal control rests %ith the: A) board of directors !) compan" management #) financial statement auditor $) compan"*s internal audit department Ans%er: ! &) 'f management insists on financial statement disclosures that the auditor finds unacceptable( the auditor can %ithdra% from the engagement or: A) 'ssue an adverse audit report 'ssue a )ualified audit report 3es 3es !) 'ssue an adverse audit report 'ssue a )ualified audit report 4o 4o #) 'ssue an adverse audit report 'ssue a )ualified audit report 3es 4o $) 'ssue an adverse audit report 'ssue a )ualified audit report 4o 3es Ans%er: A +) 'n certif"ing their annual financial statements( the #2O and #5O of a public compan" certif" that the financial statements compl" %ith the re)uirements of: A) 6AA1 !) the ,arbanes-Oxle" Act #) the ,ecurities 2xchange Act of 1-+. $) 6AA, Ans%er: # .) 7hich of the follo%ing statements is true of a public compan"*s financial statements8 A) ,arbanes-Oxle" re)uires the #2O onl" to certif" the financial statements !) ,arbanes-Oxle" re)uires the #5O onl" to certif" the financial statements #) ,arbanes-Oxle" re)uires the #2O and #5O to certif" the financial statements $) ,arbanes-Oxle" re)uires neither the #2O nor the #5O to certif" the financial statements Ans%er: # & #op"right / &01. 1earson 2ducation 9) The responsibilit" for the preparation of the financial statements and the accompan"ing footnotes belongs to: A) the auditor !) management #) both management and the auditor e)uall" $) management for the statements and the auditor for the notes Ans%er: ! Learning Objective 6-+ 1) The auditor*s best defense %hen material misstatements are not uncovered is to have conducted the audit: A) in accordance %ith generall" accepted auditing standards !) as effectivel" as reasonabl" possible #) in a timel" manner $) onl" after an ade)uate investigation of the management team Ans%er: A &) An audit must be performed %ith an attitude of professional s:epticism 1rofessional s:epticism consists of t%o primar" components: a )uestioning mind and: A) the assumption that upper-level management is dishonest !) a critical assessment of the audit evidence #) the assumption that all emplo"ees are motivated b" greed $) verification of all critical information b" independent third parties Ans%er: ! +) 7hich of the follo%ing is not one of the reasons that auditors provide onl" reasonable assurance on the financial statements8 A) The auditor commonl" examines a sample( rather than the entire population of transactions !) Accounting presentations contain complex estimates %hich involve uncertaint" #) 5raudulentl" prepared financial statements are often difficult to detect $) Auditors believe that reasonable assurance is sufficient in the vast majorit" of cases Ans%er: $ .) 7hich of the follo%ing statements is the most correct regarding errors and fraud8 A) An error is unintentional( %hereas fraud is intentional !) 5rauds occur more often than errors in financial statements #) 2rrors are al%a"s fraud and frauds are al%a"s errors $) Auditors have more responsibilit" for finding fraud than errors Ans%er: A 9) 7hen an auditor believes that an illegal act ma" have occurred( the auditor should first: A) obtain an understanding of the nature and circumstances of the act !) consult %ith legal counsel or others :no%ledgeable about the illegal act #) discuss the matter %ith the audit committee $) %ithdra% from the engagement Ans%er: A + #op"right / &01. 1earson 2ducation 6) The auditor has no responsibilit" to plan and perform the audit to obtain reasonable assurance that misstatements( %hether caused b" errors or fraud( that are not ;;;;;;;; are detected A) important to the financial statements !) statisticall" significant to the financial statements #) material to the financial statements $) identified b" the client Ans%er: # <) 5raudulent financial reporting is most li:el" to be committed b" %hom8 A) Line emplo"ees of the compan" !) Outside members of the compan"*s board of directors #) #ompan" management $) The compan"*s auditors Ans%er: # =) 7hich of the follo%ing %ould most li:el" be deemed a direct-effect illegal act8 A) >iolation of federal emplo"ment la%s !) >iolation of federal environmental regulations #) >iolation of federal income tax la%s $) >iolation of civil rights la%s Ans%er: # -) The concept of reasonable assurance indicates that the auditor is: A) not a guarantor of the correctness of the financial statements !) not responsible for the fairness of the financial statements #) responsible onl" for issuing an opinion on the financial statements $) responsible for finding all misstatements Ans%er: A 10) 7hich of the follo%ing is the auditor least li:el" to do %hen a%are of an illegal act8 A) $iscuss the matter %ith the client*s legal counsel !) Obtain evidence about the potential effect of the illegal act on the financial statements #) #ontact the local la% enforcement officials regarding potential criminal %rongdoing $) #onsider the impact of the illegal act on the relationship %ith the compan"*s management Ans%er: # 11) An auditor discovers that the compan"*s boo::eeper unintentionall" made an mista:e in calculating the amount of the )uarterl" sales This is an example of: A) emplo"ee fraud !) an error #) misappropriation of assets $) a defalcation Ans%er: ! 1&) The auditor has considerable responsibilit" for notif"ing users as to %hether or not the statements are properl" stated This imposes upon the auditor a dut" to: A) provide reasonable assurance that material misstatements %ill be detected . #op"right / &01. 1earson 2ducation !) be a guarantor of the fairness in the statements #) be e)uall" responsible %ith management for the preparation of the financial statements $) be an insurer of the fairness in the statements Ans%er: A 1+) ?The auditor should not assume that management is dishonest( but the possibilit" of dishonest" must be considered? This is an example of: A) unprofessional behavior !) an attitude of professional s:epticism #) due diligence $) a rule in the A'#1A*s #ode of 1rofessional #onduct Ans%er: ! 1.) 'f the auditor %ere responsible for ma:ing certain that all of management*s assertions in the financial statements %ere absolutel" correct: A) ban:ruptcies could no longer occur !) ban:ruptcies %ould be reduced to a ver" small number #) audits %ould be much easier to complete $) audits %ould not be economicall" practical Ans%er: $ 19) One of the characteristics of professional s:epticism is ;;;;;;;;( %hich is the conviction to decide for oneself( rather than accepting the claims of others A) interpersonal understanding !) autonom" #) suspension of judgment $) self-esteem Ans%er: ! 16) 7hen dealing %ith la%s and regulations that do not have a direct effect on the financial statements( the auditor: A) should in)uire of management about %hether the entit" is in compliance %ith such la%s and regulations !) has no responsibilit" to determine if an" violations of these la%s has occurred #) must report all violations( including inconse)uential violations( to the audit committee $) should perform the same procedures as for violations having a direct effect on the financial statements Ans%er: A 1<) 7hich of the follo%ing statements is usuall" true8 A) @aterialit" is eas" to )uantif" !) 5raudulent financial statements are often eas" for the auditor to detect( especiall" %hen there is collusion among management #) Aeasonable assurance is a lo% level of assurance that the financial statements are free from material misstatement $) An item is considered material if it %ould li:el" have changed or influenced the decisions of a reasonable person using the statements 9 #op"right / &01. 1earson 2ducation Ans%er: $ 1=) Auditing standards ma:e ;;;;;;;; distinctionBs) bet%een the auditor*s responsibilities for searching for errors and fraud A) little !) a significant #) no $) various Ans%er: # 1-) 'n comparing management fraud %ith emplo"ee fraud( the auditor*s ris: of failing to discover the fraud is: A) greater for management fraud because managers are inherentl" more deceptive than emplo"ees !) greater for management fraud because of management*s abilit" to override existing internal controls #) greater for emplo"ee fraud because of the higher crime rate among blue collar %or:ers $) greater for emplo"ee fraud because of the larger number of emplo"ees in the organiCation Ans%er: ! &0) @isappropriation of assets: A) is generall" committed b" compan" management !) harms the users of the financial statements b" providing them incorrect financial data for their decision ma:ing #) causes harm to stoc:holders because the assets are no longer available to their rightful o%ners $) causes the financial statements to be misstated since the misappropriation usuall" involves material amounts Ans%er: # &1) 7hen comparing the auditor*s responsibilit" for detecting emplo"ee fraud and for detecting errors( the profession has placed the responsibilit": A) more on discovering errors than emplo"ee fraud !) more on discovering emplo"ee fraud than errors #) e)uall" on discovering errors and emplo"ee fraud $) on the senior auditor for detecting errors and on the manager for detecting emplo"ee fraud Ans%er: # &&) 'f several emplo"ees collude to falsif" documents( the chance a normal audit %ould uncover such acts is: A) ver" lo% !) ver" high #) Cero $) none of the above Ans%er: A 6 #op"right / &01. 1earson 2ducation &+) 7hen planning the audit( if the auditor has no reason to believe that illegal acts exist( the auditor should: A) include audit procedures %hich have a strong probabilit" of detecting illegal acts !) still include some audit procedures designed specificall" to uncover illegalities #) ignore the issue $) ma:e in)uiries of management regarding their policies for detecting and preventing illegal acts and regarding their :no%ledge of violations( and then rel" on normal audit procedures to detect errors( irregularities( and illegalities Ans%er: $ &.) 7hen the auditor identifies or suspects noncompliance %ith la%s and regulations( the auditor: A) should discuss the matter %ith those %hom the" believe committed the illegal act !) begin communication %ith the 5A,! in accordance %ith 1#AO! regulations #) ma" disclaim an opinion on the basis of scope limitations if he is precluded b" management from obtaining sufficient appropriate evidence $) should %ithdra% from the engagement Ans%er: # &9) 7hen an auditor :no%s that an illegal act has occurred( she must: A) report it to the proper governmental authorities !) consider the effects on the financial statements( including the ade)uac" of disclosure #) %ithdra% from the engagement $) issue an adverse opinion Ans%er: ! &6) 7hich of the follo%ing is an accurate statement concerning the auditor*s responsibilit" to consider la%s and regulations8 A) Auditors can follo% an eas"( step-b"-step procedure to determine ho% la%s and regulations impact the financial statements !) The auditor*s responsibilit" %ill depend on %hether the la%s or regulations are expected to have a direct impact on the financial statements #) 't is the responsibilit" of the auditor to determine if an act constitutes noncompliance $) The auditor must inform an outside part" if management has :no%ingl" not complied %ith a la% or regulation Ans%er: ! &<) 7hich of the follo%ing statements best describes the auditor*s responsibilit" regarding the detection of fraud8 A) The auditor is responsible for the failure to detect fraud onl" %hen such failure clearl" results from nonperformance of audit procedures specificall" described in the engagement letter !) The auditor is re)uired to provide reasonable assurance that the financial statements are free of both material errors and fraud #) The auditor is responsible for detecting material financial statement fraud( but not a material misappropriation of assets $) The auditor is responsible for the failure to detect fraud onl" %hen an un)ualified opinion is issued < #op"right / &01. 1earson 2ducation Ans%er: ! &=) 'f a client has violated federal tax la%s: A) the auditor must notif" the 'A, !) and the amount is significant( the auditor should communicate %ith those charged %ith governance #) the noncompliance generall" %ill not impact the financial statements $) the auditor does not need to evaluate the effects of the noncompliance on other aspects of the audit Ans%er: ! &-) $iscuss the differences bet%een errors( frauds( and illegal acts 6ive an example of each Ans%er: The primar" difference bet%een errors and frauds is that errors are unintentional misstatements of the financial statements( %hereas frauds are intentional misstatements 'llegal acts are violations of la%s or government regulations( other than frauds An example of an error is a mathematical mista:e %hen footing the columns in the sales journal An example of a fraud is the creation of fictitious accounts receivable An example of an illegal act is the dumping of toxic %aste in violation of the federal environmental protection la%s +0) $iscuss the actions an auditor should ta:e %hen an illegal act is identified or suspected Ans%er: 7hen an auditor discovers or suspects noncompliance %ith a la% or regulation Billegal act)( unless the matters involved are inconse)uential( the auditor should: 1 #onsider the effects of the illegal act on the financial statements( including the ade)uac" of disclosures 'f the auditor concludes that disclosures are inade)uate( the auditor should express a )ualified or adverse opinion on the financial statements 'f the auditor is precluded b" management or those charged %ith governance from obtaining sufficient appropriate evidence to evaluate %hether noncompliance that ma" be material to the financial statements has occurred or is li:el" to have occurred( the auditor should express a )ualified opinion or disclaim an opinion on the financial statements on the basis of the scope limitation & #ommunicate %ith those charged %ith governance matters involving noncompliance %ith la%s and regulations that came to the auditor*s attention during the course of the audit 'f the matter is believed to be intentional and material( it should be communicated to those charged %ith governance( such as the board of directors( as soon as practicable + 'dentif" %hether a responsibilit" exists to report the identified or suspected noncompliance to parties outside the entit"( such as regulator" authorities . 2valuate the effects of the noncompliance on other aspects of the audit( including the auditor*s ris: assessment and the reliabilit" of other representations from management +1) $iscuss three reasons %h" auditors are responsible for ?reasonable? but not ?absolute? assurance Ans%er: D @ost audit evidence results from testing a sample of a population ,ampling involves some ris: of not uncovering material misstatements = #op"right / &01. 1earson 2ducation D Accounting presentations contain complex estimates( %hich inherentl" involve uncertaint" and can be affected b" future events As a result( the auditor has to rel" on evidence that is persuasive but not convincing D 5raudulentl" prepared financial statements are often ver" difficult for the auditor to detect( especiall" %hen there is collusion among management +&) The concept of professional s:epticism has been a foundational element of auditing standards for "ear and continues to be difficult to implement in practice Aecent academic research on the topic of professional s:epticism suggests that there are six characteristics to s:epticism List and briefl" describe each of these characteristics Ans%er: The six characteristics of s:epticism are: 1 Euestioning mindset - a disposition to in)uir" %ith some sense of doubt & ,uspension of judgment - %ithholding judgment until appropriate evidence is obtained + ,earch for :no%ledge - a desire to investigate be"ond the obvious( %ith a desire to corroborate . 'nterpersonal understanding - recognition that people*s motivations and perceptions can lead them to provide biased or misleading information 9 Autonom" - the self-direction( moral independence( and conviction to decide for oneself( rather than accepting the claims of others 6 ,elf-esteem - the self-confidence to resist persuasion and to challenge assumptions or conclusions Learning Objective 6-. 1) 7h" does the auditor divide the financial statements into smaller segments8 A) Fsing the c"cle approach ma:es the audit more manageable !) @ost accounts have fe% relationships %ith others and so it is more efficient to brea: the financial statements into smaller pieces #) The c"cle approach is used because auditing standards re)uire it $) All of the above are correct Ans%er: A &) 7h" does the auditor divide the financial statements into segments around the financial statement c"cles8 A) @ost auditors are trained to audit c"cles as opposed to entire financial statements !) The approach aids in the assignment of tas:s to different members of the audit team #) The c"cle approach is re)uired b" auditing standards $) The c"cle approach allo%s the auditor to detect illegal acts Ans%er: ! +) The most important general ledger account included in and affecting several c"cles is the: A) cash account !) inventor" account #) income tax expense and liabilit" accounts $) retained earnings account Ans%er: A - #op"right / &01. 1earson 2ducation .) 7hen using the c"cle approach to segmenting the audit( the reason for treating capital ac)uisition and repa"ment separatel" from the ac)uisition of goods and services is that: A) the transactions are related to financing a compan" rather than to its operations !) most capital ac)uisition and repa"ment c"cle accounts involve fe% transactions( but each is often highl" material and therefore should be audited extensivel" #) both A and ! are correct $) neither A nor ! is correct Ans%er: # 9) The c"cle approach to auditing: A) ties to the %a" transactions are recorded in journals and then summariCed in the general ledger and financial statements !) cannot combine transactions recorded in different journals %ith the general ledger balances that result from those transactions #) is the onl" %a" of segmenting an audit $) assumes that each account has t%o or more c"cles associated %ith it Ans%er: A 6) Auditors generall" use a financial statement c"cle approach %hen performing a financial statement audit $escribe the transaction flo%( using specific examples( from journals to financial statements that produce financial statements Ans%er: TransactionsGsales( cash receipts( ac)uisition of goodsHservices( cash disbursements( pa"roll services and disbursements( and allocation and adjustments IournalsGsales( cash receipts( ac)uisitions( cash disbursements( pa"roll( and general 6eneral ledger and subsidiar" ledgers to 6eneral ledger trial balance to financial statements Learning Objective 6-9 1) Auditors have found that generall" the most efficient and effective %a" to conduct audits is to: A) obtain complete assurance about the correctness of each class of transactions affecting the account !) obtain some combination of assurance for each class of transactions and for the ending balance in the related accounts #) obtain assurance about the ending balance of the account onl" $) verif" each entr" that %as made into an account Ans%er: ! &) The term audit objective refers to all of the follo%ing except for: A) transaction-related audit objectives !) presentation and disclosure-related audit objectives #) balance-related audit objectives $) c"cle-related audit objectives Ans%er: $ 10 #op"right / &01. 1earson 2ducation Learning Objective 6-6 1) 7hich of the follo%ing is not one of the three categories of assertions8 A) Assertions about classes of transactions and events for the period under audit !) Assertions about financial statements and correspondence to 6AA1 #) Assertions about account balances at period end $) Assertions about presentation and disclosure Ans%er: ! &) 'f a short-term note pa"able is included in the accounts pa"able balance on the financial statement( there is a violation of the: A) completeness assertion !) existence assertion #) cutoff assertion $) classification assertion Ans%er: $ +) 'nternational auditing standards and F, 6AA1 classif" assertions into three categories 7hich of the follo%ing is not a categor" of assertions that management ma:es about the accounting information in financial statements8 A) Assertions about classes of transactions for the period under audit !) Assertions about account balances at period end #) Assertions about the )ualit" of source documents used to prepare the financial statements $) Assertions about presentation and disclosure Ans%er: # .) @anagement assertions are: A) directl" related to the financial reporting frame%or: used b" the compan"( usuall" F, 6AA1 or '5A, !) stated in the footnotes to the financial statements #) explicitl" expressed representations about the financial statements $) provided to the auditor in the assertions letter( but are not disclosed on the financial statements Ans%er: A 9) @anagement ma:es the follo%ing assertions about account balances: A) existence( completeness( classification and cutoff !) existence( accurac"( classification and rights and obligations #) existence( completeness( valuation and allocation( and rights and obligations $) existence( completeness( rights and obligations( and cutoff Ans%er: # 6) 7hich of the follo%ing statements is true about the completeness and occurrence assertions8 A) !oth assertions are relevant to classes of transactions and events and account balances !) 'f management asserts that recorded sales transactions represent exchanges of goods or services that actuall" too: place( the" are asserting to completeness #) >iolations of the occurrence assertion relate to account overstatements 11 #op"right / &01. 1earson 2ducation $) The failure to record a sale that did occur is a violation of the occurrence assertion Ans%er: # <) 7hich of the follo%ing assertions is described as ?this assertion addresses %hether all transactions that should be included in the financial statements are in fact included?8 A) Occurrence !) #ompleteness #) Aights and obligations $) 2xistence Ans%er: ! =) 7hich of the follo%ing management assertions is not associated %ith classes of transactions and events8 A) Occurrence !) #lassification #) Accurac" $) Aights and obligations Ans%er: $ Learning Objective 6-< 1) 7hich of the follo%ing statements is true regarding the distinction bet%een general audit objectives and specific audit objectives for each class of transactions8 A) The specific audit objectives are applicable to ever" class of transactions !) The general audit objectives are applicable to ever" class of transactions #) Once the specific transaction-related audit objectives are established( the" can be used to develop the general transaction-related objectives $) 5or an" given class of transactions( usuall" onl" one audit objective must be met to conclude the transactions are properl" recorded Ans%er: ! &) The auditor is determining that the the correct selling price %as used for billing and that the )uantit" of goods shipped %as the same as the )uantit" billed ,he is gathering evidence about %hich transaction related audit objective8 A) 2xistence !) #ompleteness #) Accurac" $) #ut-off Ans%er: # +) The posting and summariCation audit objective is the auditor*s counterpart to management*s assertion of: A) occurrence !) completeness #) accurac" $) classification Ans%er: # 1& #op"right / &01. 1earson 2ducation .) After the general transaction related-audit objectives are understood( specific transaction- related audit objectives for each material class of transactions can be developed 7hich of the follo%ing statements is true8 A) There should be at least one specific objective for each relevant general objective !) There %ill be onl" one specific objective for each relevant general objective #) There %ill be man" specific objectives developed for each relevant general objective $) There must be one specific objective for each general objective Ans%er: A 9) 'n the context of the audit of sales( distinguish bet%een the occurrence and completeness transaction-related audit objectives ,tate the effect on the sales account Boverstatement or understatement) of a violation of each objective Ans%er: 7hen testing the occurrence objective for sales( the auditor*s focus is on %hether the sales that have been recorded in the sales journal actuall" occurred 'n contrast( tests of the completeness objective are concerned %ith determining %hether all sales that actuall" occurred have been recorded in the sales journal >iolations of the occurrence objective result in overstatements of salesJ violations of the completeness objective result in understatements of sales 1+ #op"right / &01. 1earson 2ducation 6) !elo% are five audit procedures( all of %hich are tests of transactions associated %ith the audit of the sales and collection c"cle Also belo% are the six general transaction-related audit objectives and the five management assertions 5or each audit procedure( indicate B1) its audit objective( and B&) the management assertion being tested Audit Objectives A Occurrence ! #ompleteness # Accurac" $ 1osting and summariCation 2 #lassification 5 Timing Assertions > Occurrence 7 #ompleteness K Accurac" 3 #lassification L #utoff 1 >ouch recorded sales from the sales journal to the file of bills of lading B1) ;;;;;;;; B&) ;;;;;;;; & #ompare dates on the bill of lading( sales invoices( and sales journal to test for dela"s in recording sales transactions B1) ;;;;;;;; B&) ;;;;;;;; + Account for the se)uence of prenumbered bills of lading and sales invoices B1) ;;;;;;;; B&) ;;;;;;;; . Trace from a sample of prelistings of cash receipts to the cash receipts journal( testing for names( amounts( and dates B1) ;;;;;;;; B&) ;;;;;;;; 9 2xamine customer order forms for credit approval b" the credit manager B1) ;;;;;;;; B&) ;;;;;;;; Ans%er: 1 B1) A B&) > & B1) 5 B&) L + B1) ! B&) 7 . B1) !( # B&) 7( K 9 B1) A B&) > 1. #op"right / &01. 1earson 2ducation <) !elo% are five audit procedures( all of %hich are tests of transactions associated %ith the audit of the ac)uisition and pa"ment c"cle Also belo% are the six general transaction-related audit objectives and the five management assertions 5or each audit procedure( indicate B1) its audit objective( and B&) the management assertion being tested Audit Objectives A Occurrence ! #ompleteness # Accurac" $ 1osting and summariCation 2 #lassification 5 Timing Assertions > Occurrence 7 #ompleteness K Accurac" 3 #lassification L #utoff 1 5oot the purchases journal and trace the totals to the related general ledger accounts B1) ;;;;;;;; B&) ;;;;;;;; & Aecompute the cash discounts ta:en b" the client B1) ;;;;;;;; B&) ;;;;;;;; + #ompare dates on cancelled chec:s %ith the ban: cancellation date B1) ;;;;;;;; B&) ;;;;;;;; . Trace from a sample of cancelled chec:s to the cash disbursements journal B1) ;;;;;;;; B&) ;;;;;;;; 9 2xamine supporting documentation for a sample of transactions for authoriCed pa"ee and amount and to determine services or goods %ere received B1) ;;;;;;;; B&) ;;;;;;;; Ans%er: 1 B1) $ B&) K & B1) # B&) K + B1) 5 B&) L . B1) ! B&) 7 9 B1) A B&) > 19 #op"right / &01. 1earson 2ducation Learning Objective 6-= 1) 'n testing for cutoff( the objective is to determine: A) %hether all of the current period*s transactions are recorded !) %hether transactions are recorded in the correct accounting period #) the proper cutoff bet%een capitaliCing and expensing expenditures $) the proper cutoff bet%een disclosing items in footnotes or in account balances Ans%er: ! &) The detail tie-in objective is not concerned that the details in the account balance: A) agree %ith related subsidiar" ledger amounts !) are properl" disclosed in accordance %ith 6AA1 #) foot to the total in the account balance $) agree %ith the total in the general ledger Ans%er: ! +) The detail tie-in is part of the ;;;;;;;; assertion for account balances A) classification !) valuation and allocation #) rights and obligations $) completeness Ans%er: ! 16 #op"right / &01. 1earson 2ducation .) The classification balance-related audit objective: A) involves determining if items included on a client*s listing are included in the correct general leger accounts !) is the counterpart to the management assertion of completeness #) involves determining if items included on a client*s listing are disclosed properl" in the financial statements $) involves t"ing in the account balances to the general ledger Ans%er: A 9) 7hich of the follo%ing best describes tests of details of balances8 A) Audit procedures designed to test for monetar" misstatements in the accounts summariCed in the financial statements !) Audit procedures designed to test for the monetar" amounts of transactions #) Audit procedures designed to test for reasonableness of account balances $) Audit procedures designed to test for effectiveness in recording accounting information Ans%er: A 6) 7hich of the follo%ing statements is not true8 A) !alance-related audit objectives are applied to ending account balances !) Transaction-related audit objectives are applied to classes of transactions #) !alance-related audit objectives are applied to the ending balance in balance sheet accounts $) !alance-related audit objectives are applied to both beginning and ending balances in balance sheet accounts Ans%er: $ <) An important balance related audit objective is realiCable value $escribe the purpose of this audit objective( %hat it is concerned %ith( and give an example Ans%er: 1urposeGto ma:e sure that assets are included on the balance sheet at the amounts estimated to be realiCed #onceptG%hether an account balance has been reduced for declines from historical cost or %hen accounting standards re)uire a fair value accounting treatment for the account 't is concerned %ith valuation and allocation 2xampleGallo%ance for uncollectible accounts( %rite-do%ns of inventor" 1< #op"right / &01. 1earson 2ducation =) !elo% are five audit procedures( all of %hich are tests of balances associated %ith the audit of accounts receivable Also belo% are the eight general balance-related audit objectives and the four management assertions 5or each audit procedure( indicate B1) its audit objective( and B&) the management assertion being tested Audit Objectives A 2xistence ! #ompleteness # Accurac" $ #lassification 2 #utoff 5 $etail tie-in 6 AealiCable value M Aights and obligations Assertions > 2xistence 7 #ompleteness K >aluation and allocation 3 Aights and obligations 1 Obtain an aged listing of accounts receivable 5or a sample of individual customers on the listing( agree the customer*s name( amount( and other information %ith the corresponding information in the accounts receivable master file B1) ;;;;;;;; B&) ;;;;;;;; & 2xamine details of sales for five da"s before and five da"s after "ear-end to determine %hether sales have been recorded in the proper period B1) ;;;;;;;; B&) ;;;;;;;; + Assess the reasonableness of the balance in the allo%ance for doubtful accounts B1) ;;;;;;;; B&) ;;;;;;;; . 'n)uire as to %hether an" accounts receivable have been factored or sold during the period B1) ;;;;;;;; B&) ;;;;;;;; 9 'n)uire as to %hether there are an" receivables from related parties B1) ;;;;;;;; B&) ;;;;;;;; Ans%er: 1 B1) 5 B&) K & B1) 2 B&) K + B1) 6 B&) K . B1) M B&) 3 9 B1) $ B&) K 1= #op"right / &01. 1earson 2ducation Learning Objective 6-- 1) $etermining that the footnote disclosures related to long-term debt are accurate is an example of the ;;;;;;;; audit objective A) occurrence !) completeness #) presentation and disclosure $) classification and understandabilit" Ans%er: # Learning Objective 6-10 1) Tests of details of balances are specific audit procedures that are intended to: A) test for monetar" misstatements in the financial statements !) prove that the accounts %ith material balances are classified correctl" #) prove that the trial balance is in balance $) identif" the details of the internal control s"stem Ans%er: A &) 7hich of the follo%ing statements is not correct8 A) There are man" %a"s an auditor can accumulate evidence to meet overall audit objectives !) ,ufficient appropriate evidence must be accumulated to meet the auditor*s professional responsibilit" #) 't is appropriate to minimiCe the cost of accumulating evidence $) 6athering evidence and minimiCing costs are e)uall" important considerations that affect the approach the auditor selects Ans%er: $ +) T%o overriding considerations affect the man" %a"s an auditor can accumulate evidence: 1 ,ufficient appropriate evidence must be accumulated to meet the auditor*s professional responsibilit" & #ost of accumulating evidence should be minimiCed 'n evaluating these considerations: A) the first is more important than the second !) the second is more important than the first #) the" are e)uall" important $) it is impossible to prioritiCe them Ans%er: A .) 'f the auditor has obtained a reasonable level of assurance about the fair presentation of the financial statements through understanding internal control( assessing control ris:( testing controls( and anal"tical procedures( then the auditor: A) can issue an un)ualified opinion !) can significantl" reduce other substantive tests #) can %rite the engagement letter 1- #op"right / &01. 1earson 2ducation $) needs to perform additional tests of controls so that the assurance level can be increased Ans%er: ! 9) After the auditor has completed all audit procedures( it is necessar" to combine the information obtained to reach an overall conclusion as to %hether the financial statements are fairl" presented This is a highl" subjective process that relies heavil" on: A) generall" accepted auditing standards !) the A'#1A*s #ode of 1rofessional #onduct #) generall" accepted accounting principles $) the auditor*s professional judgment Ans%er: $ 6) List the four phases of a 5inancial ,tatement Audit Ans%er: 1 1lan and design an audit approach based on ris: assessment procedures & 1erform tests of controls and substantive tests of transactions + 1erform anal"tical procedures and tests of details of balances . #omplete the audit and issue an audit report Terms: 1hases of financial statement audit <) $escribe %hat anal"tical procedures and tests of details of balances are and give an example of each Ans%er: Anal"tical procedures consist of evaluations of financial information through anal"sis of plausible relationships among financial and nonfinancial data Anal"tical procedures use comparisons and relationships to assess %hether account balances and other data appear reasonable An example of an anal"tical procedure is to examine sales transactions in the sales journal for unusuall" large amounts andHor compare monthl" sales %ith prior "ears Tests of details of balances are specific procedures intended to test for monetar" misstatements in balances in the financial statements An example is direct %ritten communication %ith the client*s customers to identif" an" incorrect amounts &0 #op"right / &01. 1earson 2ducation =) @atch seven of the terms Ba-:) %ith the definitions provided belo% B1-<): a Tests of details of balances b Tests of controls c ,ubstantive tests of transactions d Anal"tical procedures e Transaction-related audit objectives f @anagement assertions g !alance-related audit objectives h 5raud i 'llegal act j 2rror : @anagement fraud ;;;;;;;; 1 An intentional misstatement of the financial statements ;;;;;;;; & A set of six audit objectives the auditor must meet( including timing( posting and summariCation( and accurac" ;;;;;;;; + 'mplied or expressed representations made b" the client about classes of transactions( account balances and disclosures in the financial statements ;;;;;;;; . Audit procedures testing for monetar" misstatements to determine %hether the balance-related audit objectives have been satisfied for each significant account balance ;;;;;;;; 9 A set of nine audit objectives the auditor must meet( including completeness( detail tie-in( and rights and obligations ;;;;;;;; 6 Audit procedures designed to test the effectiveness of control policies and procedures ;;;;;;;; < Fse of comparisons and relationships to assess %hether account balances or other data appears reasonable Ans%er: 1 h & e + f . a 9 g 6 b < d &1 #op"right / &01. 1earson 2ducation