Questions and Answers of Principles Of Auditing And Other Assurance Services

Explain how an auditor could perform a transaction walk-through for purchases and cash disbursements.
Why do auditors not usually rely on substantive tests alone when auditing accounts payable that result from credit purchase transactions?
What is the primary focus of an auditor's tests of controls over purchasing?
How does an auditor test whether purchase transactions are authorized in accordance with management's prespecified criteria?
Explain the primary focus of an auditor's tests of cash disbursements to vendors.
As a normal part of tests of controls for cash disbursements, an auditor examines signatures and endorsements on canceled checks, if they're available, looking specifically for unusual items. Give
Which of the following functions is not common to the expenditure/disbursement cycle?a. Resources are acquired from vendors in exchange for obligations to pay.b. Obligations to vendors are paid.c.
The expenditure/disbursement cycle begins with requisitions from user departments and ends with the receipt of materials and the recognition of a liability. An auditor's primary objective in
When considering internal controls over purchases and disbursements, the auditor will be influenced least by:a. Procedures manuals.b. Audit work done by an entity's internal auditors.c. Compensating
Which of the following is most crucial to a purchasing department?a. Authorizing the acquisition of goods.b. Assuring the quality of goods acquired.c. Verifying the propriety of goods acquired.d.
Which of the following control procedures would most likely prevent or detect purchases from unauthorized vendors?a. Maintain updated guidelines for purchase transactions.b. Establish procedures for
An auditor's primary concern when performing tests of controls over purchasing is to determine whether:a. Purchases are properly authorized.b. Purchases are properly recorded.c. Purchase orders agree
How can an auditor test to determine whether Receiving Department procedures are applied properly?a. Test a sample of receiving documents.b. Observe receiving procedures on a surprise basis.c. Review
Which of the following control procedures could prevent or detect payment of goods not received?a. Counting goods when received.b. Matching the purchase order, receiving report, and vendor's
An internal control questionnaire indicates that an approved receiving report accompanies every check request. To test this control, an auditor could select and examine:a. Receiving reports, to
Which of the following would prevent a paid disbursement from being paid a second time?a. Individuals responsible for signing checks should prepare vouchers.b. Disbursements should be approved by at
Assume you are considering a client's controls over purchases and cash disbursements. System documentation was accomplished through flowcharts and narratives and, in conjunction with a
During an audit of Dundee Corporation's financial statements, you become aware of the following control procedures over purchasing and cash disbursement activities:1. Purchases are made only from
Identifying Weaknesses and Inefficiencies in n Purchasing System Madeline Jones, the Lecimore Company's purchasing department manager, has established new policies and procedures to guide the
The flowchart on the following two pages illustrates a system for executing purchases and cash disbursement transactions.Required: Indicate what each of the letters A through L represents in the
Judging the Adequacy of Control Procedures Dunbar Camera, Inc., manufactures high-priced motion picture cameras for the movie industry. The component parts specifications are vital to the filmmaking
Long has been engaged to audit the financial statements of Maylou Corporation. To help consider controls over purchases. Long obtained the purchases flowchartRequired: Identify the procedures for
Recommending Improvements to a Purchase Requisition Properly designed documents and forms improve the likelihood that employees will adhere to prescribed policies and procedures. For example,
Taylor has been engaged to audit the financial statements of University Books, Inc., a full-service college bookstore serving the university community and the general public. University Books
Following are selected questions from internal control questionnaires relating to a company's purchasing, receiving, cash disbursement, and recording functions. A Yes response to a question would
Following are several tests of controls introduced in the chapter:• Examine periodic reports by non-Purchasing Department personnel regarding purchase prices and practices.• Observe Receiving
Harold Brodkey plans to apply sequential sampling to the receiving controls used by the Ozyck Corporation, a December 31, 1999 year end manufacturer and supplier of home lighting fixtures. Based on a
Few departments within a corporation, not-for-profit institution, or governmental entity can have quite as significant an influence on cost containment as Purchasing, since the purchasing function
How can an auditor test whether all payables transactions that should be recorded are actually recorded?
Explain how an auditor determines whether all recorded payables actually represent bona fide obligations of the entity.
What procedures might an auditor use in testing the valuation assertion for purchases and payables?
Under what conditions is an auditor most likely to confirm payables?
Why is confirmation ineffective in detecting understatement of liabilities?
How and why does an auditor test purchases cutoff?
Describe how an auditor searches for unrecorded liabilities.
What sources does an auditor use to test for overstated accounts payable, and how are those sources used?
In testing prepaid insurance, how does an auditor address rights and obligations?
What are the major internal controls an auditor considers when designing substantive tests of accrued property taxes?
What is meant by a "potentially responsible party"?
Under what conditions might an entity not responsible for dumping toxic waste be held responsible by the U.S. Environmental Protection Agency?
Which of the following procedures is most telling in addressing the existence assertion for accounts payable?a. Test for unrecorded liabilities.b. Confirm balances with creditors.c. Verify the
Assume an auditor's interim consideration of internal control in the expenditure/disbursement cycle reveals that control risk can be assessed below the maximum and detection risk above the minimum
Which of the following procedures would help an auditor test for overstatements of accounts payable at the balance sheet date?a. Trace entries in the cash disbursements records to items in the
In testing cutoff for purchases and payables at December 31, an auditor is confronted with the following four scenarios. Which of the four most likely represents a cutoff error, requiring that the
In performing analytical procedures in the expenditure/disbursement cycle, an auditor detects that payables divided by current liabilities appears low in comparison with prior years. Which of the
In addressing control procedures for prepaid insurance, which of the following controls would not be relevant to the auditor?a. Controls over purchase cutoff.b. Controls over the acquisition of new
Which of the following procedures is most relevant to testing the completeness assertion for prepaid insurance?a. Testing whether insurance coverage exceeds the replacement value of insured tangible
In addressing control procedures for accrued property taxes, which of the following controls would not be relevant to the auditor?a. Controls over the recognition of accrued taxes.b. Controls over
Which of the following are likely legitimate reasons why a potentially responsible party would have difficulty estimating environmental cleanup costs?a. Possible as yet unknown contamination.b.
Under which of the following conditions would it be inappropriate for a potentially responsible party to capitalize toxic waste cleanup costs?a. The costs relate to a long existing disposal site.b.
Following are errors, frauds, or other circumstances an auditor might encounter as a result of applying year end substantive tests of details to accounts payable as of December 31, 1999:a. The aged
Stanford Seeles, engagement partner for the audit of the Torgesen-Tate Corporation, is planning the nature, timing, and extent of audit procedures for accounts payable. Prior year working papers
Taylor is engaged to audit Rex Wholesaling for the year ended December 31, 1999. Taylor considered internal controls over purchasing, receiving, trade accounts payable, and cash disbursement and has
There is a presumption in the profession that an auditor is required to justify his or her opinion on financial statements when accounts receivable are not confirmed, but not when accounts payable
Partly to address the existence and completeness assertions, auditors typically test purchase cutoff at the balance sheet date, thereby addressing whether purchase transactions are recorded in the
Auditors are often concerned that liabilities may be understated as a result of unrecorded payables. On the other hand, auditors may be concerned that liabilities are overstated as a result of
Unrecorded payables result in two potentially material misstatements in an entity's financial statements: understated liabilities, because the credit to Payables is not recorded, and overstated
You are in the final stages of your audit of the Ozine Corporation's financial statements for the year ended December 31, 1999, when the corporation's chief executive officer, Gordon Sumner,
Harper has completed tests of accounts payable and other liabilities for the Hawthorne Corporation, and now plans to determine whether there are any loss contingencies arising from litigation,
During your audit of the financial statements of the John Delaney Manufacturing Company for the year ended December 31, 1999, you find that at January 1, 1999, the company had installed the following
During an audit of the financial statements of Custer-McClurg, Inc., Timothy Barnes, the engagement manager, requested and received a client prepared property and casualty insurance spreadsheet that
Following is an audit working paper that documents an auditor's work for Feldman Services, Inc.'s accounts payable aged trial balance for the year ended December 31, 1999.Required: List the
Following is an audit working paper that documents an auditor's work for Sempier & Fiske, Inc.'s accrued property taxes payable for the year ended December 31, 1999. Sempier & Fiske is a
During the planning stage of an audit, the engagement partner and manager tour the assembly facilities of York Chemicals, a manufacturer and supplier of chemical solvents to auto body shops
When using statistical sampling for tests of controls, an auditor's evaluation would include a statistical conclusion about whether:a. Deviations in the population are within an acceptable range.b.
Tests of controls provide reasonable assurance that controls are applied as prescribed.A sampling method that is useful when testing controls is:a. Nonstatistical sampling.b. Attribute estimation
Statistical sampling:a. Measures quantitatively the risk from testing only part of an audit population.b. Allows the same degree of confidence as nonstatistical sampling but with substantially less
Assessing control risk too high is the risk that the sample:a. Does not support tolerable error for some or all of management's assertions.b. Contains proportionately more deviations from prescribed
Assessing control risk too low relates to:a. The efficiency of the audit.b. The effectiveness of the audit.c. The preliminary estimate of materiality.d. Tolerable error.Choose the best answer.
Statistical sampling may be applied to test controls when a client's control procedures:a. Depend primarily on segregation of duties.b. Are carefully reduced to writing and are included in client
Which of the following statements is correct?a. The expected population deviation rate has little or no effect on sample size.b. As the population size doubles, the sample size also should double.c.
When sampling for attributes, which of the following would decrease sample size?Choose the best answer. Risk of Assessing Control Risk Too Low a. Increase b. Decrease c. Increase d. Increase
An auditor is performing an attribute estimation sampling plan. Assuming a .05 acceptable risk of assessing control risk too low, a .04 tolerable rate of deviation, and a .01 expected population
An auditor is performing an attribute estimation sampling plan. The risk of assessing control risk too low is .05 and sample size is 80.Assuming one deviation is detected, what is the auditor's
An auditor is performing a sequential (stop-or-go) sampling plan. Assuming 95 percent desired reliability, and a .04 tolerable rate of deviation, what is the auditor's initial sample size?a. 50.b.
An auditor is performing a discovery sampling plan. Assuming population size is 6,759, the critical rate of deviation is .4 percent, and the desired probability of observing at least one deviation is
Which of the following sampling plans varies sample size?a. Attribute estimation sampling.b. Sequential sampling.c. Discovery sampling.d. Stratified sampling.Choose the best answer.
When using statistical sampling for attributes, an auditor should assess control risk at the maximum assuming:a. The sample rate of deviation plus the allowance for sampling risk is less than the
Which of the following statements is true about nonstatistical sampling in tests of controls?a. Nonstatistical sampling plans provide a quantitative measure of sampling risk.b. The auditor's judgment
Auditors do not often have the luxury of testing 100 percent of the transactions and events underlying account balances or classes of transactions. More often, they rely on samples, thereby reducing
The use of statistical sampling in a financial statement audit does not eliminate the need for professional judgment.Required: Identify and explain four areas where judgment may be exercised by an
A sample of 80 accounts payable vouchers is to be selected from a population of 3,200. The vouchers are numbered consecutively from 1 to 3,200 and are listed in a computer spreadsheet
Within the chapter, three alternative statistical sampling plans are introduced and illustrated for use when conducting tests of controls under the second standard of field work: attribute estimation
Sampling for attributes is often used to allow an auditor to reach a conclusion concerning the rate of occurrence in a population. A common use in auditing is to test the rate of deviation from a
Assume that your audit objective is to estimate a true but unknovirn population rate of deviation. The risk of assessing control risk too low is .05, the maximum tolerable rate of deviation is .07,
Walter Cole has decided to use statistical, rather than nonstatistical, sampling to test a client's control over purchase transactions. Specifically, Cole is testing whether vendor invoices are
Using Statistical Sampling to Achieve Audit Program Steps Robin Hamilton, a first-year staff accountant, is reviewing the following selected audit procedures scheduled for use during the
Assume you are considering controls over a client's purchasing activities, and estimate the following for acceptable risk of assessing control risk too low, tolerable rate of deviation, and expected
From prior audits of Bristol, Inc. and recent discussions with management, an auditor believes that sales invoices agree in detail with related shipping documents, with very few exceptions.
Assume your audit plan requires observing at least one deviation at a specified critical rate of deviation, and the expected rate of occurrence is zero. Population size is 7,750, the critical rate of
Statistical sampling is not a panacea and is not necessarily appropriate for all tests of controls; nonstatistical sampling is often applied by practicing auditors, and for good reason.Required: 1.
You are auditing the financial statements of Elite Corporation, a continuing audit client, for the year ended December 31, 1998. Unlike prior years, you decide to use a statistical sampling plan to
Although the attributes sampling plans introduced in this chapter are accurate portrayals of plans applied in practice, they are by necessity generic. Over the years, professional journals such as
Translating sampling risk and audit risk into layman's terms is rather straightforward:Sampling risk translates loosely to "the risk that what you're looking for is not where you're looking," and
In an audit of a corporation that has a bond issue outstanding, the trust indenture is reviewed and confirmation as to the issue is obtained from the trustee. List eight matters of importance to the
Robertson Company had accounts receivable of $\$ 200,000$ at December 31, 200X, and had provided an allowance for uncollectible accounts of $\$ 6,000$. After performing all normal auditing
Tom Jones, CPA, is auditing the financial statements of a manufacturing company with a significant amount of trade accounts receivable. Jones is satisfied that the accounts are properly summarized
Elizabeth Cole, the senior auditor-in-charge of the audit of Thorne Company, a small manufacturer, was busy writing the audit report for another engagement. Accordingly, she sent Martin Joseph, a
Your regular annual audit of Palisades, Inc., included the confirmation of accounts receivable. You decided to use the positive form of confirmation request. Satisfactory replies were received from
Walter Conn, CPA, is engaged to audit the financial statements of Matthews Wholesaling for the year ended December 31,200X. Conn obtained and documented an understanding of internal control relating

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