cpa audit review ch10 review 1

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cpa audit review ch10 review 1
2014-09-13 23:23:04
cpa audit review ch10

cpa audit review ch10 review 1
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  1. Two assertions for which confirmation of accounts receivable balances provides primary evidence are

    A.Existence and completeness.

    B.Rights and obligations and existence.

    C.Valuation and rights and obligations.

    D.Completeness and valuation.
    B.Rights and obligations and existence.

    An external confirmation is audit evidence obtained as a direct, written response from a third party (the confirming party). External confirmation of accounts receivable is required unless (1) the overall account balance is not material; (2) the procedure would be ineffective; or (3) the assessed RMM at the assertion level is low, and other planned substantive procedures address the assessed risk. External confirmations are frequently relevant to assertions about account balances. Assertions about account balances at period end include (1) existence, (2) rights and obligations, (3) completeness, and (4) valuation and allocation. Assertions about existence address whether assets, liabilities, or equity interests of the entity exist. Assertions about rights and obligations address whether (1) the entity holds or controls the rights to assets, and (2) liabilities are the obligations of the entity. Thus, external confirmation provides relevant evidence that receivables exist and that the client has the right of collection. The valuation and allocation assertion states whether items have been included in the financial statements at appropriate amounts, and any valuation or allocation adjustments are recorded appropriately. However, external confirmation provides less relevant evidence for the valuation of gross accounts receivable balances than for the valuation of the related allowance accounts. The completeness assertion states whether all items that should be recorded are recorded, for example, all receivables. Unrecorded receivables are usually not discovered by confirmation. Thus, confirmation provides less relevant evidence about the valuation assertion and the completeness assertion than about the existence and rights and obligations assertions.
  2. An auditor would be least likely to use external confirmations in connection with the audit of

    A.Noncurrent debt.

    B.Shareholders’ equity.

    C.Refundable income taxes.

    C.Refundable income taxes.

    Income taxes are paid to governmental entities, which are in a better position to state what amounts have been paid than what amounts are refundable based on a tax return that may not yet have been filed. The U.S. government usually does not respond to confirmation requests.
  3. The appropriateness of evidence available to an auditor is least likely to be affected by the

    A.Relevance of such evidence to the financial statement assertion being investigated.

    B.Sampling method employed by the auditor to obtain a sample of such evidence.

    C.Timeliness of such audit evidence.

    D.Relationship of the preparer of such evidence to the entity being audited.
    B.Sampling method employed by the auditor to obtain a sample of such evidence.

    Appropriate audit evidence is relevant and reliable. Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. The sample selection method does not affect the appropriateness of evidence as long as the sample is representative of the population.
  4. Which of the following audit techniques most likely will provide an auditor with the most assurance about the effectiveness of the operation of a control?

    A.Recomputation of account balance amounts.

    B.Confirmation with outside parties.

    C.Observation of client personnel.

    D.Inquiry of client personnel.
    C.Observation of client personnel.

    Evidence about the effectiveness of the operation of a control obtained directly, such as by observation of client personnel, is more reliable than evidence obtained indirectly, such as through inquiry. Thus, evidence obtained by the auditor’s own observation of a client employee’s application of a control most likely provides greater assurance than an inquiry about the application of the control. Moreover, mere inquiry without corroboration ordinarily will not provide sufficient appropriate evidence to support a conclusion about the effectiveness of the operation of the control.
  5. The strongest criticism of the reliability of audit evidence that the auditor physically observes is that
    The auditor may not be qualified to evaluate the items (s)he is observing.

    The auditor may not be qualified to evaluate the quality or condition of the items observed, e.g., the quality of diamonds or the quantity of oil reserves. In such cases, the reliability of the evidence obtained is doubtful, and the auditor typically uses the work of an auditor's specialist. Moreover, observation does not verify the cost or ownership of assets. Ordinarily, observation is best suited to verifying the existence of an asset.
  6. The permanent file section of the audit documentation that is kept for each audit client most likely contains

    A.Correspondence with the client’s legal counsel concerning pending litigation.

    B.Narrative descriptions of the client’s accounting procedures and internal control.

    C.A schedule of time spent on the engagement by each individual auditor.

    D.Review notes pertaining to questions and comments regarding the audit work performed.
    B.Narrative descriptions of the client’s accounting procedures and internal control.

    The permanent section of the auditor’s audit documentation usually contains copies of important entity documents. They may include (1) the articles of incorporation, share options, contracts, and bylaws; (2) the engagement letter, which is the contract between the auditor and the client; (3) analyses from previous audits of accounts of special importance to the auditor, such as noncurrent debt, PP&E, and shareholders’ equity; and (4) information about internal control, e.g., flowcharts, organization charts, and questionnaires.