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auditing international approach

Auditing An Assertions Approach 7th Edition G. William Glezen, Donald H. Taylor - Solutions

Describe how analytical procedures may be applied to accounts payable and accrued liabilities.
The auditor normally uses two approaches to the audit of accounts payable. What are they and why are both used?
How does the auditor select the accounts to which accounts payable confirmations will be sent? Why is this method of selection used?
What are the similarities and differences in the form of accounts receivable and parable confirmation letters?
How and for what period is the review of subsequent disbursements made?
What are some inquiries an auditor can make when examining accounts payable to add value to the audit?
Name two approaches to auditing accrued liabilities.
What is a good starting point in an auditor's search for unrecorded accrued liabilities?
Which of the following internal control procedures would most likely be used to maintain accurate perpetual inventory records?a. Independent storeroom count of goods received.b. Periodic independent comparison of records with goods on hand.c. Periodic independent reconciliation of control and
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion ofa. Valuation or allocation.b. Rights and obligations.c. Existence or occurrence.d. Presentation and disclosure.
Periodic or cycle counts of selected inventory items are made at various times during the year rather than a single inventory count at year end. Which of the following is necessary if the auditor plans to observe inventories at interim dates?a. Complete recounts by independent teams are
Which of the following matters would auditors discuss with management to add value to the audit?a. Methods of measuring customer satisfaction with the client's products.b. Inventory instructions for client count teams.c. Financial statement presentation of inventory.d. Means of maintaining an
To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would tracea. Inventory tags noted during the auditor's observation to items listed in the inventory listing schedule.b. Inventory tags noted during the auditor's observation to
While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to recorda. Purchase
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probablya. Insist that the client perform physical counts of inventory items several times during the year.b. Apply gross profit tests to ascertain the
A CPA is engaged in the annual audit of a client for the year ended December 31, 19X9. The client took a complete physical inventory under the CPA's observation on December 15 and adjusted its inventory control account and detail perpetual inventory records to agree with the physical inventory. The
In an audit of inventories, an auditor would least likely verify thata. All inventory owned by the client is on hand at the time of the count.b. The client has used proper inventory pricing.c. The financial statement presentation of inventories is appropriate.d. Damaged goods and obsolete items
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?a. Testing the entity's computation of standard overhead rates.b. Obtaining confirmation of inventories pledged under loan agreements.c. Reviewing shipping and receiving
Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?a. Trace test counts noted during the entity's physical count to the entity's summarization of quantities.b. Inspect
Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion ofa. Valuation or allocation.b. Existence or occurrence.c. Completeness.d. Presentation and disclosure.
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?a. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.b. Investigating payables recorded just prior to and
To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of alla. Vendors' invoices.b. Purchase orders.c. Receiving reports.d. Canceled checks.
An auditor is performing a review of subsequent disbursements to search for unrecorded liabilities. All goods received are FOB destination. Which of the following disbursements represents an unrecorded liability as of December 31, \(19 \times 2 ?\) a. b. C. Date of receipt of goods 12-31-X2 Date of
Only one of the following four statements, which compare confirmation of accounts payable with suppliers and confirmation of accounts receivable with customers, is true. The true statement is thata. Confirmation of accounts payable with suppliers is a more widely accepted auditing procedure than is
Which of the following procedures relating to the audit of accounts payable could the auditor delegate entirely to the client's employees?a. Foot the accounts payable ledger.b. Reconcile unpaid invoices to vendors' statements.c. Prepare an audit lead schedule of accounts payable.d. Mail
Which of the following best explains why accounts payable confirmation procedures are not always used?a. Accounts payable are generally insignificant and can be audited by utilizing analytical procedures.b. Monthly statements from vendors are generally available for audit inspection on the client's
The audit procedures applied to accrued liabilities differ from those applied to accounts payable becausea. Accrued liabilities balances are less material than accounts payable balances.b. Evidence supporting accrued liabilities is nonexistent, whereas evidence supporting accounts payable is
Match each assertion to the related audit objective. Each assertion may be used once, more than once, or not at all. Audit objective 1. To determine whether the amount shown as invento- ries in the financial state- ments is represented by all physical items on hand, in transit, or on consignment.
Audit procedures should be designed to accomplish specific audit objectives. Review the following inventory audit procedures and indicate which audit objectives are being accomplished and how.a. Observe the taking of the client's physical inventory.b. Account for the sequence of inventory tags and
Your audit client, Household Appliances, Inc., operates a retail store in the center of town. Because of lack of storage space, Household keeps inventory that is not on display in a public warehouse outside of town. The warehouse supervisor receives inventory from suppliers and, on request from
Brown, CPA, is auditing the financial statements of Big Z Wholesaling, Inc., a continuing audit client, for the year ended January 31, 19X2. On January 5, 19X2, Brown observed the tagging and counting of Big Z's physical inventory and made appropriate test counts. These test counts have been
To audit a company's sales and purchases cutoffs at the close of the fiscal year ended December 31, 19X1, you have compiled the data listed on the following schedule. All sales and purchases of significant amount from December 26, 19X1, to January 4, 19X2, inclusive, are included. Refer to page
Late in December 19X9, your CPA firm accepted an audit engagement at Fine Jewelers, Inc., a corporation that deals largely in diamonds. The corporation has retail jewelry stores in several Eastern cities and a diamond wholesale store in New York Citv. The wholesale store also sets the diamonds in
Assume that a CPA's client proposes to have an independent firm that specializes in inventory taking count the merchandise rather than use their own employees. Under these conditions, would it be acceptable for the CPA to forgo the inventory observation? Support your answer.
You have been assigned to the audit of Hogeye Manufacturing Company as of December 31, 19X8. Hogeye maintains its raw material inventory on a FIFO basis. The balance at December \(31,19 X 8\) was \(\$ 216,385\). In performing the raw material inventory price test, you prepared an audit working
Kane, CPA, is auditing Star Wholesaling Company's financial statements and is about to perform substantive audit procedures on Star's trade accounts payable. After obtaining an understanding of Star's internal control for accounts payable, Kane assessed control risk at near the maximum. Kane
The following are situations or questions pertaining to the audit of accounts payable:a. With regard to statements requested from vendors, the auditor's memo states, "We requested statements from all vendors with balances over \(\$ 2,000\) as shown by the trial balance." Do you feel this procedure
Listed below are several misstatements that could occur in the inventory, accounts payable, and accrued liabilities accounts. For each misstatement, design a substantive audit procedure that would provide reasonable assurance of detecting it.a. When client employees counted the physical inventory,
Billy Joe Atlas, an experienced senior with a CPA firm, was sent to the hospital with intense chest pains after watching his favorite college football team lose a bowl game on December 31. He was scheduled to be in charge of the January 1 inventory observation of Heave Industries, a maker of
State the objectives in the audit of property and equipment and related accumulated depreciation.
What analytical procedures may be applied to property and equipment?
State the substantive tests applied to property and equipment to determine whether additions area. Recorded at cost.b. Represented by actual physical items.c. Properly capitalizable.
What test does the auditor make to determine if property additions are complete?
List five procedures the auditor could use to detect unrecorded property retirements.
What factors should an auditor consider in evaluating the adequacy of accumulated depreciation?
What are some inquiries an auditor can make when examining the property and equipment account to add value to the audit?
State the objectives in the audit of long-term investments and intangibles.
Describe four analytical procedures that may be applied to long-term investments and intangibles.
Why are security counts often made on the audit date? Under what circumstances may they be made at other dates?
What evidence would an auditor examine for in- vestments valued at cost? Underlying equity? Market value?
How does the CPA audit dividend and interest income?
What evidence does an auditor examine in support of purchases and sales of publicly traded securities?
What is the significance of the violation of a provision of a debt agreement?
State the objectives in the audit of long-term liabilities.
Give three analytical procedures an auditor may apply to long-term liabilities.
What audit procedures does an auditor apply to borrowings and repayments of long-term debt?
Name two factors that can determine the financial statement classification of long-term debt, other than its maturity date.
Describe the two methods that may be used to control the number of shares of stock issued and outstanding.
State the objectives in the audit of the equity accounts.
Describe two analytical procedures that may be applied to the equity accounts.
Explain how and why the audit approach to testing dividend payments would differ for companies paying their own dividends and those employing dividend-paying agents.
Why does the auditor examine the client's stock book?
What are some inquiries an auditor can make when examining the equity accounts to add value to the audit?
Which of the following audit procedures provides evidence regarding the valuation assertion for the purchase of an item of equipment?a. Examine a canceled check made payable to the seller of the equipment.b. Examine the physical item of equipment that was purchased.c. Examine an invoice from the
Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal control policy that provides fora. Review and approval of the monthly depreciation entry by the plant supervisor.b. Investigation of variances within a formal budgeting system.c.
The auditor may conclude that depreciation charges are insufficient by notinga. Large amounts of fully depreciated assets.b. Continuous trade-ins of relatively new assets.c. Excessive recurring losses on assets retired.d. Insured values greatly in excess of book values.
An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that alla. Noncapitalizable expenditures for repairs and maintenance have been properly charged to expense.b. Noncapitalizable expenditures for repairs and maintenance have been
In testing for unrecorded retirements of equipment, an auditor most likely woulda. Select items of equipment from the accounting records and then locate them during the plant tour.b. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment.c.
Which of the following would provide the best evidential matter pertaining to the annual valuation of a long-term investment in which the independent auditor's client owns a 30 percent voting interest?a. Market quotations of the investee company's stock.b. Current fair value of the investee
A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely willa. Request the bank to confirm to the auditor the contents of the safe deposit box at the balance
In establishing the existence and ownership of a long-term investment in the form of publicly traded stock, an auditor should inspect the securities ora. Correspond with the investee company to verify the number of shares owned.b. Inspect the audited financial statements of the investee company.c.
An auditor testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of thea. Existence of unrealized gains or losses in the portfolio.b. Completeness of recorded investment income.c. Classification between current and noncurrent portfolios.d.
In auditing the amount of goodwill recorded by a client, an auditor can obtain the most convincing evidence by comparing the recorded value of assets acquired with thea. Appraised value as evidenced by independent appraisals.b. Insured value as evidenced by insurance policies.c. Assessed value as
Two months before year-end, the bookkeeper erroneously recorded the receipt of a long-term bank loan by a debit to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type of error?a. Analyze the notes payable account.b. Prepare a year-end bank
An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions abouta. Existence or occurrence.b. Presentation and disclosure.c. Completeness.d. Valuation or allocation.
Of the following, which is the most efficient audit procedure for verification of interest expense on bonds payable?a. Tracing interest declarations to an independent record book.b. Re computing interest expense.c. Confirming interest rate with the holder of the bonds.d. Examining the canceled
An auditor's program to examine long-term debt most likely would include steps that requirea. Comparing the carrying amount of the debt to its year-end market value.b. Correlating interest expense recorded for the period with outstanding debt.c. Verifying the existence of the holders of the debt by
During its fiscal year, a company issued a substantial amount of first-mortgage bonds at a discount. When performing audit work in connection with the bond issue, the independent auditor shoulda. Confirm the existence of the bondholders.b. Trace the net cash received from the issuance to the bond
To ascertain the number of authorized shares of stock of a corporate client, the auditor relies primarily on thea. Corporate minutes.b. Bylaws.c. Transfer agent.d. Articles of incorporation.
When a company has treasury stock certificates on hand, a year-end count of the certificates by the auditor isa. Not required when the treasury stock is confirmed by the corporate secretary.b. Always required.c. Not required if treasury stock is a deduction from stockholders' equity.d. Required if
Which of the following is the most important consideration of an auditor when examining the stockholders' equity section of a client's balance sheet?a. Changes in the capital stock account are verified by an independent stock transfer agent.b. Entries in the capital stock account can be traced to a
Items(a) through(f) represent audit objectives for the investments and property and equipment accounts. To the right of each set of audit objectives is a listing of possible audit procedures for that account. For each audit objective, select the audit procedure that would primarily respond to the
When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerninga. The number of shares issued and outstanding.b. Restrictions on the payment of dividends.c. Guarantees of preferred stock liquidation
A staff assistant who was performing work in the property section of the Theta Industries audit prepared the vouching schedule for property additions shown below. Review this schedule and make notes of any deficiencies in the schedule or audit matters that require further attention. Theta
In connection with a recurring audit of the financial statements of Louis Manufacturing Company for the year ended December 31, 19X9, you have been assigned the audit of the manufacturing equipment, manufacturing equipment-accumulated depreciation, and repairs to manufacturing equipment accounts.
In connection with the annual audit of Johnson Corporation, a manufacturer of janitorial supplies, you have been assigned to audit property and equipment. Johnson Corporation maintains a detailed ledger for all property and equipment. You prepared an audit program for the balances of property and
One procedure for determining the existence of property and equipment is physical observation, although other methods may be as effective in some cases. Discuss means of gathering evidence as to the physical existence of the following property and equipment items, other than direct observation.a. A
During your audit of property and equipment, you review the following construction work order listing:List the items you would select for additional audit followup and give your reasons for listing them. Work Amount Amount order no. Description authorized expended 3103 Construct branch sales office
You have been engaged to audit the financial statements of the Elliott Company for the year ended December 31, 19X9. You performed a similar audit as of December 31, 19X8.Following is the trial balance for the company as of December 31, 19X9:You have obtained the following data concerning certain
Larkin, CPA, has been engaged to audit the financial statements of Vernon Distributors, Inc., a continuing audit client, for the year ended September 30, 19X1. After obtaining an understanding of Vernon's internal control, Larkin assessed control risk at the maximum level for all financial
Taylor, CPA, is auditing the financial statements of Palmer Company, a continuing audit client. Taylor is about to perform substantive audit procedures on Palmer's goodwill (excess of cost over the fair value of net assets purchased) that was acquired in prior years' business combinations. An
Johnson, CPA, has been engaged to audit the financial statements of Broadwall Corporation for the year ended December 31, 19X1. During the year, Broadwall obtained a long-term loan from a local bank pursuant to a financing agreement, which provided that the 1. Loan was to be secured by the
During the audit of notes payable of Mohamed Tractor Company, a CPA was reviewing the terms of a related loan agreement. She noted that the note matured within 12 months of the audit date but the loan agreement provided that the term of the note could be extended an additional 12 months at the
Discuss the audit procedures that a CPA might use in gathering evidence of the following transactions and balances.a. The refinancing (cancellation of old note and issuance of a new note) of a note payable to a bank.b. Acquisition of treasury stock.c. Year-end balance in additional paid-in capital
Companies that have stock option plans include a footnote in their financial statements that describes the plan and states the number of options for shares authorized, granted, exercised, and expired, the option prices, and the market prices of the stock on the grant and exercise dates.As this
Kalinki Supply Company is a small, privately held corporation that manufactures and sells Christmas tree ornaments. The stock book is maintained by the corporate secretary. Treasury stock is kept in a bank safe deposit box. The equity section of the corporation's balance sheet as of December 31,
Jones, CPA, the continuing auditor of Sussex, Inc., is beginning the audit of the common stock and treasury stock accounts. Jones has decided to design substantive tests with control risk assessed at maximum.Sussex has no par, no stated value common stock, and acts as its own registrar and transfer
The following misstatements could occur in the property and equipment, investments, goodwill, long-term debt, and equity accounts. Describe an audit procedure that provides reasonable assurance of detecting each misstatement.a. A repair expense is properly capitalized as property and equipment.b.
Explain the importance to investors and others of the statement of income.
State the objectives of the audit of revenue and expense.

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