Term
1. An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of
a) Valuation or allocation.
b) Completeness.
c) Existence or occurrence.
d) Rights and obligations. |
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Definition
| a) Valuation or allocation. |
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Term
2. Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?
a) Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.
b) Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.
c) Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.
d) Inquire about the entity's credit granting policies and the consistent application of credit checks. |
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Definition
| b) Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal. |
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Term
3. Which of the following internal control procedures most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?
a) Daily sales summaries are compared to daily posting to the accounts receivable ledger.
b) Each sales invoice is supported by a prenumbered shipping document.
c) The accounts receivable ledger is reconciled daily to the control account in the general ledger.
d) Each shipment on credit is supported by a prenumbered sales invoice. |
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Definition
| a) Daily sales summaries are compared to daily posting to the accounts receivable ledger. |
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Term
4. Two assertions for which confirmation of accounts receivable balances provides primary evidence are
a) Completeness and valuation.
b) Valuation, rights and obligations.
c) Rights & Obligations and existence.
d) Existence and completeness. |
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Definition
| c) Rights & Obligations and existence. |
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Term
5. 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 about
a) Existence or occurrence.
b) Presentation and disclosure.
c) Completeness.
d) Valuation or allocation. |
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Definition
| b) Presentation and disclosure. |
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Term
6. In testing the existence assertion for an asset, an auditor ordinarily works from the
a) Financial statements to the potentially unrecorded items.
b) Potentially unrecorded items to the financial statements.
c) Accounting records to the supporting evidence.
d) Supporting evidence to the accounting records. |
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Definition
| c) Accounting records to the supporting evidence. |
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Term
7. An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about
a) Presentation and disclosure.
b) Existence or occurrence.
c) Rights and obligations.
d) Valuation or allocation. |
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Definition
| d) Valuation or allocation. |
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Term
8. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would
a) Inspect the stock certificates evidencing the investment.
b) Examine the audited financial statements of the investee company.
c) Review the broker's advice or canceled check for the investment's acquisition.
d) Obtain market quotations from financial newspapers or periodicals. |
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Definition
| b) Examine the audited financial statements of the investee company. |
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Term
9. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of
a) Presentation.
b) Completeness.
c) Rights.
d) Existence. |
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Definition
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Term
10. Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of
a) Completeness.
b) Existence.
c) Presentation.
d) Valuation. |
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Definition
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Term
11. Which of the following control procedures most likely would assist in reducing control risk related to the existence or occurrence of manufacturing transactions?
a) Perpetual inventory records are independently compared with goods on hand.
b) Forms used for direct material requisitions are prenumbered and accounted for.
c) Finished goods are stored in locked limited-access warehouses.
d) Subsidiary ledgers are periodically reconciled with inventory control accounts. |
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Definition
| a) Perpetual inventory records are independently compared with goods on hand. |
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Term
12. 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 agreements to determine whether any inventory is pledged as collateral or subject to any liens. c) Select the last few shipping advices used before the physical count and determine whether the shipments were recorded as sales.
d) Inspect the open purchase order file for significant commitments that should be considered for disclosure. |
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Definition
| b) Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens. |
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Term
13. During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements or state law. This audit procedure most likely is intended to verify management's assertion of
a) Existence or occurrence.
b) Completeness.
c) Valuation or allocation.
d) Presentation and disclosure. |
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Definition
| d) Presentation and disclosure. |
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Term
14. Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?
a) Tracing amounts in the subsidiary ledger to details on shipping documents.
b) Comparing receivable turnover rates to industry statistics for reasonableness.
c) Inquiring about receivables pledged under loan agreements.
d) Assessing the allowance for uncollectible accounts for reasonableness. |
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Definition
| d) Assessing the allowance for uncollectible accounts for reasonableness. |
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Term
15. An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of
a) Existence or occurrence.
b) Completeness.
c) Presentation and disclosure.
d) Valuation or allocation. |
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Definition
| c) Presentation and disclosure. |
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Term
16. An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about
a) Existence or occurrence.
b) Rights and obligations.
c) Presentation and disclosure.
d) Valuation or allocation. |
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Definition
| d) Valuation or allocation. |
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Term
17. Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?
a) Compare a sample of shipping documents to related sales invoices.
b) Observe the client's distribution of payroll checks.
c) Confirm a sample of recorded receivables by direct communication with the debtors.
d) Review standard bank confirmations for indications of kiting. |
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Definition
| a) Compare a sample of shipping documents to related sales invoices. |
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Term
18. Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?
a) Investigating the open purchase order file to ascertain that prenumbered purchase orders are used and accounted for.
b) Receiving the client's mail, unopened, for a reasonable period of time after the year end to search for unrecorded vendor's invoices.
c) Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
d) Confirming accounts payable balances with known suppliers who have zero balances. |
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Definition
| c) Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. |
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Term
19. An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of
a) Existence or occurrence.
b) Rights and obligations.
c) Valuation or allocation.
d) Completeness. |
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Definition
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Term
20. In auditing accounts payable, an auditor's procedures most likely would focus primarily on management's assertion of
a) Existence or occurrence.
b) Presentation and disclosure.
c) Completeness.
d) Valuation or allocation. |
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Definition
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Term
21. An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including presentation and disclosure and
a) Valuation and allocation.
b) Completeness.
c) Existence or occurrence.
d) Rights and obligations. |
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Definition
| a) Valuation and allocation. |
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Term
22. An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of
a) Rights and obligations.
b) Completeness.
c) Existence or occurrence.
d) Valuation. |
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Definition
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Term
23. In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of
a) Completeness.
b) Existence or occurrence.
c) Presentation and disclosure.
d) Valuation or allocation. |
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Definition
| b) Existence or occurrence. |
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Term
24. Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?
a) Tracing amounts in the subsidiary ledger to details on shipping documents.
b) Comparing receivable turnover ratios to industry statistics for reasonableness.
c) Inquiring about receivables pledged under loan agreements.
d) Assessing the reasonableness of the allowance for doubtful accounts. |
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Definition
| d) Assessing the reasonableness of the allowance for doubtful accounts. |
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Term
25. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of
a) Presentation.
b) Completeness.
c) Rights.
d) Existence. |
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Definition
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Term
| 26. 6 Financial Statement Assertions |
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Definition
· Existence and Occurrence
· Rights and Obligations
· Completeness
· Cut Off
· Valuation
· Presentation and Disclosure |
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Term
| I. Existence and Occurrence |
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Definition
| —Assets, liabilities, and equity interests exist and recorded transactions have occurred |
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Term
| II. Rights and Obligations |
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Definition
| —The company holds rights to the assets, and liability are the obligations of the company |
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Term
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Definition
| —All assets, liabilities, equity interests, and transactions that should have been recorded have been recorded |
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Term
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Definition
| —Transactions and events have been recorded in the correct accounting period |
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Term
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Definition
| —All transactions, assets, liabilities and equity interests are included in the financial statements at proper amounts |
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Term
| VI. Presentation and Disclosure |
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Definition
| —Accounts are described and classified in accordance with generally accepted accounting principles, and financial statement disclosures are complete, appropriate, and clearly expressed |
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Term
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Definition
| —Risk of a material misstatement occurring in an assertion assuming no related internal controls. |
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Term
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Definition
| —Risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by the company’s internal control. |
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Term
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Definition
| —Risk that the auditors’ procedures will lead them to conclude that a material misstatement does not exist in an assertion when in fact such misstatement does exist. |
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Term
| Risk of Material Misstatement (RMM) |
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Definition
| Inherent Risk & Control Risk |
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Term
| Risk Auditors Fail to Detect Misstatement Material |
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Definition
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Term
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Definition
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Term
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Definition
= Audit risk
= Inherent risk
= Control risk
= Detection risk |
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Term
| Letter of Representation(Management Representation Letter) |
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Definition
A management representation letter is a form letter written by a company's external auditors, which is signed by senior company management. The letter attests to the accuracy of the financial statements that the company has submitted to the auditors for their analysis. The CEO and the most senior accounting person (such as the CFO) are usually required to sign the letter.
In essence, the letter states that all of the information submitted is accurate, and that all material information has been disclosed to the auditors. The auditors use this letter as part of their audit evidence. The letter also shifts some blame to management, if it turns out that some elements of the audited financial statements do not fairly represent the financial results, condition, or cash flows of the business. Following is a sample of the representations that may be included in the management representation letter: |
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Term
| Management Representation Letter |
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Definition
·Management is responsible for the proper presentation of the financial statements in accordance with the applicable accounting framework
·All financial records have been made available to the auditors
·All board of directors minutes are complete
·Management has made available all letters from regulatory agencies regarding financial reporting noncompliance
·There are no unrecorded transactions
·The net effect of all uncorrected misstatements is immaterial
·The management team acknowledges its responsibility for the system of financial controls
·All related party transactions have been disclosed
·All contingent liabilities have been disclosed
·All unasserted claims or assessments have been disclosed |
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Term
| Level of Reliability and Audit Evidence |
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Definition
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