AUDITING THEORY
8. Which of the following should an auditor do when control risk is assessed at the maximum level?
A. Perform fewer substantive tests of details.
B. Perform more tests of controls.
C. Document the assessment.
D. Document the internal control system more extensively.
9. Which of the following is least likely to be a test of a control?
A. Inquiries of appropriate personnel.
B. Inspection of management’s engagement letter.
C. Observation of the application of a policy.
D. Reperformance of the application of a policy.
10. Which of the following controls may prevent the failure to bill customers for some shipments?
A. Each shipment should be supported by a prenumbered sales invoice that is accounted for.
B. Each
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D. Audit evidence provided by original documents is more reliable than audit evidence generated through a system of effective controls.
20. Which of the following statements relating to the appropriateness of audit evidence is always true?
A. Audit evidence gathered by an auditor from outside an enterprise is reliable.
B. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions.
C. Oral representations made by management are not valid evidence.
D. Evidence gathered by auditors must be both valid and relevant to be considered appropriate.
21. An auditor may achieve audit objectives related to particular assertions by
A. Performing analytical procedures.
B. Adhering to a system of quality control.
C. Preparing auditor working papers.
D. Increasing the level of detection risk.
22. Which of the following is the best example of a substantive test?
A. Examining a sample of cash disbursements to test whether expenses have been properly approved.
B. Confirmation of balances of accounts receivable.
C. Comparison of signatures on checks to a list of authorized signers.
D. Flowcharting of the client’s cash receipts system.
23. To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would
A. Examine the shipping
The auditor must remember that all information collected during the audit needs to be sufficient enough to further the audit process. The information must not only possess the two qualities, relevance and reliability, but it should also test various assertions. For instance, in the audit of Walmart, the auditor should make an attempt to acquire information such as financial statements from the company’s bank, as opposed to acquiring the statements from Walmart’s management. Taking such crucial information from Walmart’s management will put the reliability of that information into question. It is possible that management may manipulate the financial statements, so that they are more appealing to the public and investors. Management may do things
Also he may conduct bank reconciliations on pertinent accounts to make sure no discrepancies or misstatements are found. The auditor should also perform vertical and horizontal analysis for the income statements and balance sheets by the use of ratios.
When performing risk assessment procedures and related activities to obtain an understanding of the client and its environment, the auditor shall obtain an understanding of the following:
To illustrate the linkage of management assertions to audit evidence in the context of auditing Notes Payable.
Elder, A. A., Beasley, M., & Elder, R. J. (2014). Auditing and assurance services (15th ed.). Upper Saddle River, NJ: Pearson.
Recommendation of types of accounting evidence and methods of gathering such evidence to support the financial status review.
It is possible for an auditor to come to an improper conclusion because documents, like invoices, could be easily falsified if management originally handles them or if the auditor receives them from management, like in the case of ZZZZ Best and Minkow. The auditor must always confirm payments directly with the third party.
Auditors have the responsibilities as well as management to report internal controls. The auditors must examine closely management’s claim of effectiveness and also physically test the controls. After the examination, the auditors should express their opinion and any recommendations to fix any internal control weaknesses.
The interview with Colin Smith, from Office Products Depot, meant I was able to identify the accounts receivable subsystem they used and their accounts receivable management. I focussed on their policies for the offering and checking of credit, managing credit levels, charging the credit customers, receiving payment from credit customers and the general management of credit customers. I will be using the information from the interview with Colin as well as information from fictitious accounts receivable to explain their policies.
SAS 67 (AU 330) describes two types of confirmations. A positive confirmation asks the respondent to provide an answer in all circumstances, while a negative confirmation asks for a response only if the information is incorrect. As you might predict, negative confirmations are not as competent as positive confirmations. Note that SAS 67 requires confirmation of a sample of accounts receivable due to the materiality of receivables for most companies.
They should be matching the invoice number and account numbers; this review should catch the error. Another control is the customers reviewing their statements to make sure that they are not being over charged, ect.
e. “The auditor considers the level of assurance, if any, he wants from substantive testing for a particular audit objective and decides, among other things, which procedure, or combination of procedures, can provide that level of assurance. For some assertions, analytical
* In the substantive test in stage, audit evidence is the information that the auditor is to make sure the appropriation of financial statement assertions, i.e. Existence, right and obligations, occurrence, completeness, valuation, measurement, presentation and disclosure of a particular transaction or account balance.
Assertions Existence and occurrence Audit Objectives: Substantiate the existence of receivables and the occurrence of revenue transactions. Prove none of the account receivables are fictitious. Completeness Audit objectives: Establish the completeness of receivables and revenue transactions. Rights and obligations Audit objectives: Determine the client has rights to the recorded receivables. Prove the accounts receivable are collectible in the normal course of business and are bona fide claims owe the company. Valuation or allocation Determine that the valuation of receivables and revenue is at appropriate net realizable values. Presentation and