cpa audit review ch 13 review 4
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An auditor’s inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should
Evaluate management’s conclusion about the recognition of an impairment loss.
The auditor (1) evaluates management’s conclusion about recognition of an impairment loss for a decline in fair value below cost or carrying amount and (2) obtains support for the amount of the recorded adjustment, including compliance with the reporting framework.
An auditor’s principal objective in analyzing repairs and maintenance expense accounts is to
Discover expenditures that were expensed but should have been capitalized.
The auditor should vouch significant debits from the repairs and maintenance expense account to determine whether any should have been capitalized.
An auditor testing investments would ordinarily use analytical procedures to ascertain the reasonableness of the
Completeness of recorded investment income.
The auditor may develop expectations regarding the completeness assertion for recorded investment income from stocks by using dividend records published by standard investment advisory services to recompute dividends received. Interest income from bond investments can be calculated from interest rates and payment dates noted on the certificates. Income from equity-based investments can be estimated from audited financial statements of the investees. Thus, applying an expected rate of return to the net investment amount may be an effective means of estimating total investment income.
An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to
Records produced by investment services.
Standard investment advisory services publish dividend records for all listed stocks. They show amounts and payment dates for dividend declarations and permit the auditor to independently recompute the client’s reported dividend income.
A high assessed risk of material misstatement with regard to recording retirements of equipment may cause an auditor to
Select certain items of equipment from the accounting records and locate them in the plant.
The completeness assertion about classes of transactions and events is that all transactions and events that should be recorded are recorded. Thus, the equipment account should reflect all retirement transactions as well as all additions. To test for unrecorded retirements, the auditor inspects selected items chosen from the records. However, unlike external confirmation of receivables or observation of inventories, inspection of equipment, especially a complete physical inventory, is not a required auditing procedure. However, a high assessment of the risk of material misstatement may require the auditor to inspect a sample of items.
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