Weekly Review Quiz #516 - Performing Further Procedures and Obtaining Evidence
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A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses a computer system is that the auditor may
- Consider increasing the use of substantive tests of transactions in place of analytical procedures.
- Substantiate the accuracy of data through self-checking digits and hash totals.
- Reduce the level of required tests of controls to a relatively small amount.
- Access information stored on computer files while having a limited understanding of the client's hardware and software features.
Correct Answer D.
This answer is correct because generalized audit software allows an auditor to test the client’s data, not the software or hardware. As the software is generalized, it can manipulate data from various types of information systems.
An auditor would be most likely to identify a contingent liability by obtaining a(n)
- Accounts payable confirmation.
- Transfer agent confirmation.
- Lawyer’s letter.
- Related-party transaction confirmation.
Correct Answer C.
This answer is correct because lawyers often address contingent liabilities relating to their clients.
In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year's audit, the auditor most likely would choose
- Individual overdue balances.
- Individual invoices.
- Small account balances.
- Large account balances.
Correct Answer A.
The requirement is to determine the best sampling unit for confirmation of accounts receivable when many differences between the recorded account balances and the confirmation replies have occurred in the past. Answer (b) is correct because the misstatements may have occurred because respondents are not readily able to confirm account balances. AU-C 505 suggests that in such circumstances certain respondents’ accounting systems may facilitate the confirmation of single transactions (individual invoices) rather than of entire account balances.
An auditor may decide to increase the risk of incorrect rejection when
- Increased reliability from the sample is desired.
- Many differences (audit value minus recorded value) are expected.
- Initial sample results do not support the planned level of control risk.
- The cost and effort of selecting additional sample items is low.
Correct Answer D.
This answer is correct because increasing the risk of incorrect rejection increases the likelihood of improperly concluding that a balance is materially misstated when it is not. Such an improper conclusion will typically result in the application of additional audit procedures, and in the consideration of other audit evidence that will ordinarily lead the auditor to the correct conclusion. When the cost and effort of selecting these additional sample items are low, the cost of incorrectly rejecting the balance will be low.
Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?
- Are assets that collateralize notes payable critically needed for the entity’s continued existence?
- Are two or more authorized signatures required on checks that repay notes payable?
- Are the proceeds from notes payable used for the purchase of noncurrent assets?
- Are direct borrowings on notes payable authorized by the board of directors?
Correct Answer D.
This answer is correct because companies frequently require that direct borrowings on notes payable be authorized by the board of directors; accordingly, auditors will determine whether proper policy has been followed.
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