A4

Question 1

Where does support for the audit opinion come from?

Answer 1

audit evidence

Question 2

What is the purpose of substantive procedures?

Answer 2

*to detect material misstatements in the F/S

Question 3

Types of Audit Evidence

Answer 3

1. accounting records
2. corroborating evidence
3. evidence in electronic form

Question 4

Two key qualities for audit evidence

Answer 4

sufficient and appropriate

Question 5

Two key qualities for sufficiency of audit evidence

Answer 5

valid and relevant

Question 6

Influences on the sufficiency of audit evidence

Answer 6

1. RMM; increases mean more work

2. quality of audit evidence

Question 7

Two key factors for appropriateness of audit evidence

Answer 7

1. reliability

2. relevance

Question 8

Audit objectives from evaluation of audit evidence

Answer 8

1. evaluate management assertions

2. detect material misstatements

Question 9

Types of Substantive Procedures

Answer 9

1. test of detail (transaction or ending balances)

2. analytical procedures (financial and nonfinancial data)

Question 10

key to designing and performing substantive analytical procedures

Answer 10

developing an expectation

Question 11

What types of accounts should be analyzed using analytical procedures?

Answer 11

1. I/S accounts are more predictable

2. accounts with management discretion are less predictable

Question 12

Difference between confirmation and inquiry

Answer 12

confirmation is written whereas inquiry is oral

Question 13

Audit Procedures used in Substantive Procedures

Answer 13

F ooting, crossfooting, and recalculation
I nquiry 
V ouching
E xamination/inspection
C onfirmation
A nalytical Procedures
R eperformance
R econciliation 
O bservation 
T racing 
C utoff review
A uditing related accounts simultaneously 
R epresentation letter
S ubsequent events review

Question 14

Transaction Assertions

Answer 14

Occurence
Completeness
Cutoff
Classification
Accuracy
Authorization

Question 15

Account Balance Assertions

Answer 15

Existence
Completeness
Rights/Obligations
Valuation/Allocation

Question 16

Disclosures Assertions

Answer 16

Completeness
Understandability & classification
Rights & obligations & occurrence
Accuracy and valuation

Question 17

PCAOB Financial Statement Assertions

Answer 17

C ompleteness
E xistence
O ccurence

A llocation 
P resentation
R ights 
O bligations
V aluation 
E
D isclosure

Question 18

Two ways to override segregation of duties

Answer 18

1. collusion

2. management override of controls

Question 19

Credit approval influences which assertion

Answer 19

VALUATION

Question 20

Two actions auditor can do for understanding and testing I/C

Answer 20

observation and inquiry

Question 21

Best instances to use positive confirmations

Answer 21

1. large amounts
2. expect errors/disputes
3. weak I/C

Question 22

Best instances for negative confirmations

Answer 22

1. low risk
2. small balances
3. expect customer attention

Question 23

What to do if you do not receive a confirmation

Answer 23

ask a second and a third time

*you CAN ask the client to ask the customer to return the confirmation

Question 24

What to do if you receive a confirmation by fax or email

Answer 24

call and confirm the identity of the customer

Question 25

Accounts Payable has Three Functions

Answer 25

* record the payable * approve the invoice for payment * record the payment after it is paid by the treasurer

Question 26

Debit Memo vs Credit Memo

Answer 26

* debit is for returning inventory | * credit is for customer returning merchandise

Question 27

Who controls cash disbursements in the expenditure cycle?

Answer 27

the treasurer

Question 28

Best step for testing completeness in expenditure cycle

Answer 28

* the search for unrecorded liabilities | * focuses on COMPLETENESS, NOT CUTOFF

Question 29

How to detect lapping

Answer 29

*inspect date checks are deposited vs. when the receivable was credited

Question 30

How to detect kiting

Answer 30

*look to see if there are receipts per bank records before being disbursed per the books

Question 31

When can you do physical count checks with perpetual inventory systems?

Answer 31

*you can do them before, during, or after the end of the audit period if they have well-kept perpetual inventories and do physical counts throughout the year

Question 32

Inventory observation is not equal to

Answer 32

the auditor actually counting the client's inventory

Question 33

Assertion tested by comparing company pre-numbered inventory tags to the CPA test counts

Answer 33

accuracy

Question 34

Are consigned goods part of inventory?

Answer 34

no

Question 35

How can you check the accuracy of dividend income?

Answer 35

*access it electronically or from an investment advisory service

Question 36

Ways to test existence of PPE

Answer 36

1. company does not/cannot insure an asset they don't have 2. company does not pay taxes on unowned property 3. tour plant/inquire

Question 37

Primary assertion tested in reviewing the related repair and maintenance expense accounts

Answer 37

completeness of asset additions

Question 38

HR fills which function in A R C

Answer 38

authorization

Question 39

Audit risk with related party transactions

Answer 39

valuation, allocation, and accuracy

Question 40

Indicators of related party transactions

Answer 40

1. compensating balance arrangements 2. loan guarantees 3. unusual, nonrecurring transactions near year-end 4. transactions based on terms that differ significantly from market terms 5. nonmonetary exchanges

Question 41

One of the first steps to do when the team has identified a previously unidentified or undisclosed related party

Answer 41

communicate the information to the other members of the team and do more work with inquiry and understanding of controls

Question 42

Two key components regarding accounting estimates for management

Answer 42

1. responsible for estimates | 2. subjective = risk

Question 43

What to do when the estimate is unreasonable per PCAOB?

Answer 43

treat it as a misstatement and give management a new estimate

Question 44

Auditing Fair Values Consideration

Answer 44

1. consistent method with prior period 2. past track record is accurate 3. justify any changes in approach 4. appropriate in relation to industry

Question 45

Primary goal of the auditor in testing fair value measurements and disclosures

Answer 45

determine whether management's significant assumptions provide a reasonable basis for fair value measurements

Question 46

Who's responsibility is it to identify and account for contingent liabilities?

Answer 46

management's responsibility

Question 47

Who must ask permission to speak to client's lawyers?

Answer 47

management first must send the counsel a letter to okay it

Question 48

Refusal to Respond to Attorney Inquiry results in a

Answer 48

Qualified or Disclaimer

Question 49

Refusal to Permit Inquiry of Attorney results in

Answer 49

Disclaimer or Withdrawal

Question 50

When evaluating audit findings, which two criteria are used in assessing materiality?

Answer 50

Qualitative and quantitative | *PROFESSIONAL JUDGMENT

Question 51

Are engagement quality reviews/concurring approvals required?

Answer 51

they are mandatory under PCAOB but many firms require them

Question 52

Liquidity Ratios

Answer 52

Working Capital Current Ratio Acid-test ratio Cash ratio

Question 53

Activity Ratios

Answer 53

``` A/R turnover Days in A/R Inventory Turnover Days in Inventory Operating Cycle (A/R days + Inventory days) Working capital turnover (sales/average working capital) Total asset turnover A/P turnover Days in A/P ```

Question 54

Profitability Ratios

Answer 54

``` Net profit margin Return on total assets Return on assets Return on investment Return on common equity Net operating margin percentage Gross profit margin percentage Operating cash flow per share (operating/common outstanding) ```

Question 55

Investor Ratios

Answer 55

``` Degree of financial leverage (EBIT/EBT) Earnings per share P/E Dividend payout ratio Dividend yield Book value per share (S/E - preferred / common outstanding) ```

Question 56

Long-Term Debt-Paying Ability Ratios

Answer 56

1. debt/equity 2. debt ratio (debt/assets) 3. times interest earned 4. operating cash flow/total debt