Question: In the audit of a small corporation

> Comment on whether you agree with the following, and why: An audit report on comparative financial statements ordinarily compares current-year financial statements of two or mor companies with one another.

> What division of duties among independent departments is desirable to achieve maximum internal control over payroll?

> Describe how the auditors use analytical procedures in the examination of selling, general, and administrative expenses.

> What auditing procedure can you suggest for determining the reasonableness of selling, general, and administrative expenses?

> When you are first retained to audit the financial statements of Wabash Company, you inquire whether a budget is used to control costs and expenses. The controller, James Lowe, replies that he personally prepares such a budget each year but that he regar

> For which expense accounts should the auditors obtain or prepare analyses to be used in preparation of the client’s income tax returns?

> Identify three expense accounts that are verified during the audit of balance sheet accounts; also, identify the related balance sheet accounts.

> Identify three items often misclassified as miscellaneous revenue.

> In performing a substantive test of the book value of a population, auditors must be concerned with two aspects of sampling risk. What are these two aspects of sampling risk, and which aspect is of greater importance to auditors? Explain.

> Does incorrect required supplemental information included with audited financial statements result in a qualified or adverse audit opinion? Explain.

> When the auditors have audited the financial statements, what is their responsibility with respect to other information (not including required supplemental information) included in an annual report to shareholders?

> Describe a disclosure checklist. What is its purpose?

> Describe the manner in which the auditors evaluate their audit findings.

> What are subsequent events?

> What are general risk contingencies? Do such items require disclosure in the financial statements?

> What is the meaning of the term commitment? Give examples. Do commitments appear in financial statements? Explain.

> How are analytical procedures used in the verification of revenue?

> If the federal income tax returns for prior years have not as yet been reviewed by federal tax authorities, would you consider it necessary for the client to disclose this situation in a note to the financial statements? Explain.

> Explain how a loss contingency exists with respect to an unasserted claim. Should unasserted claims be disclosed in the financial statements?

> Describe what is meant by a sequential sampling plan.

> What is the usual procedure followed by the CPA in obtaining evidence regarding pending and threatened litigation against the client?

> What are loss contingencies? How are such items presented in the financial statements? Explain.

> List the audit procedures that should be completed near the date of the audit report.

> What is the purpose of analytical procedures performed as a part of the overall review?

> Should the auditors make a complete review of all correspondence in the client’s files? Explain.

> What specific procedures are suggested by the phrase “test of controls over payroll transactions”?

> You are asked by a client to outline the procedures you would recommend for handling of unclaimed wages. What procedures do you recommend?

> What safeguards should be employed when the inaccessibility of banking facilities makes it desirable to pay employees in cash?

> Identify three revenue accounts that are verified during the audit of balance sheet accounts; also, identify the related balance sheet accounts.

> Audit procedures for examination of accounts receivable and notes receivable often include investigation of selected transactions occurring after the balance sheet date as well as transactions occurring during the year under audit. Are the auditors conce

> What would be the difference between an attributes sampling plan and a variables sampling plan in a test of inventory extensions?

> In addition to verifying the recorded liabilities of a company, the auditors should also give consideration to the possibility that other unrecorded liabilities exist. What specific steps may be taken by the auditors to determine that all their client’s

> What is the principal reason for testing the reasonableness of the Interest Expense account in conjunction with the verification of notes payable?

> Is the confirmation of notes payable usually correlated with any other specific phase of the audit? Explain.

> Palmer Company has issued a number of notes payable during the year, and several of these notes are outstanding at the balance sheet date. What sources of information should the auditors use in preparing a working paper analysis of the notes payable?

> What information should be requested by the auditors from the trustee responsible for an issue of debentures payable?

> Most corporations with bonds payable outstanding utilize the services of a trustee. What relation, if any, does this practice have to the maintenance of adequate internal control?

> What errors are commonly encountered by the auditors in their examination of the capital and drawing accounts of a sole proprietor?

> Delta Company has issued stock options to four of its officers, permitting them to purchase 5,000 shares each of common stock at a price of $25 per share at any time during the next five years. The president asks you what effect, if any, the granting of

> Comment on the desirability of audit work on the owners’ equity accounts before the balance sheet date.

> Name three situations that might place a restriction on retained earnings, limiting or preventing dividend payments. Explain how the auditors might become aware of each such restricting factor.

> What relationship exists between the expected population deviation rate and sample size?

> In auditing the financial statements of Foster Company, you observe a debit entry for $200,000 labeled as Dividends in the Retained Earnings account. Explain in detail how you would verify this entry.

> In your second annual audit of a corporate client, you find a new account in the general ledger called Treasury Stock, which has a balance of $306,000. Describe the procedures you would follow to verify this item.

> Corporations sometimes issue their own capital stock in exchange for services and various assets other than cash. As an auditor, what evidence would you look for to determine the propriety of the values used in recording such transactions?

> Long-term creditors often insist upon placing certain restrictions upon the borrowing company for the term of the loan. Give three examples of such restrictions, and indicate how each restriction protects the long-term creditor.

> Your new client, Black Angus Valley Ranch, is a small corporation with fewer than 100 stockholders. It does not utilize the services of an independent stock registrar or transfer agent. For your first audit, you want to obtain or prepare a year-end list

> You have been retained to perform an audit of Valley Products, a small corporation that has not been audited during the previous 10 years of its existence. How will your work on the Capital Stock account in this initial audit differ from that required in

> Describe the ordinary role of paper stock certificates when a direct registration system (DRS) is utilized.

> What is the primary responsibility of an independent registrar with respect to capital stock?

> What do you consider to be the most important control a corporation can adopt with respect to capital stock transactions?

> If a sample of 100 items indicates a deviation rate of 3 percent, should the auditors conclude that the entire population also has approximately a 3 percent deviation rate?

> Compare the auditors’ examination of owners’ equity with their work on assets and current liabilities. Among other factors to be considered are the relative amounts of time involved and the character of the transactions to be inspected.

> Two assistant auditors were assigned by the auditor-in-charge to the verification of long-term liabilities. Some time later, they reported to the auditor-in-charge that they had determined that all long-term liabilities were properly recorded and that al

> Mansfield Corporation has outstanding an issue of 30-year bonds payable. There is no sinking fund for these bonds. Under what circumstances, if any, should this bond issue be classified as a current liability?

> “Auditors are not qualified to pass on the legality of a bond issue; this is a question for the company’s attorneys. It is therefore unnecessary for the auditors to inspect the bond indenture.” Criticize the quotation.

> What does the trust indenture used by a corporation in creating long-term bonded indebtedness have to do with the payment of dividends on common stock?

> List the major responsibilities of an accounts payable department.

> The operating procedures of a well-managed accounts payable department will provide for the verification of several specific points before a vendor’s invoice is recorded as an approved liability. What are the points requiring verification?

> Describe briefly an internal control activity that would prevent a paid disbursement voucher from being presented for payment a second time.

> The auditors usually find in the client’s possession documentary evidence, such as invoices, supporting both accounts receivable and accounts payable. Is there any difference in the quality of such evidence for accounts receivable and for accounts payabl

> Compare the auditors’ approach to the verification of liabilities with their approach to the verification of assets.

> When performing a dual-purpose test, how does the auditor arrive at the required sample size?

> Suggest two reasons why the adjustments proposed by independent auditors more often than not call for reducing recorded earnings.

> Assume that a highly placed employee has stolen company assets and is now planning to conceal the fraud by failing to make an accounting entry for a large transaction. Would the omission probably be for a transaction creating an asset or a liability? Exp

> What differences should auditors expect to find in supporting evidence for accrued liabilities as contrasted with accounts payable?

> What documentary evidence created outside the client’s organization is particularly important to the auditors in verifying accrued property taxes?

> Most auditors are interested in performing as many phases of an audit as possible in advance of the balance sheet date. The verification of accounts payable, however, generally is regarded as something to be done after the balance sheet date. What specif

> What is the purpose of the auditors’ review of cash payments subsequent to the balance sheet date?

> What do you consider to be the most important single procedure in the auditors’ search for unrecorded accounts payable? Explain.

> Identify three audit procedures (other than “Search for unrecorded accounts payable”) that are concerned directly or indirectly with disclosing unrecorded accounts payable.

> Explain how the auditors coordinate the year-end cutoff of accounts payable with their observation of the year-end physical inventory.

> Lawsuits against CPA firms are most likely to allege that the auditors were negligent in not detecting which of the following? (a) overstatement of liabilities and earnings, (b) understatement of assets and earnings, or (c) overstatement of owners’ equit

> What is a dual-purpose test?

> Vendors’ statements and accounts payable confirmations are both forms of documentary evidence created outside the client organization and useful in audit work on accounts payable. Which of these two represents higher-quality evidence? Why?

> Whitehall Company records its liabilities in an accounts payable subsidiary ledger. The auditors have decided to select some of the accounts for confirmation by direct communication with vendors. The largest volume of purchases during the year has been m

> Is the confirmation of accounts payable by direct communication with vendors as useful and important an audit procedure as such confirmation of accounts receivable? Explain.

> Outline a method by which the auditors may test the propriety of cash discounts taken on accounts payable.

> As part of the investigation of accounts payable, auditors sometimes vouch entries in selected creditors’ accounts back through the journals to original documents, such as purchase orders, receiving reports, invoices, and paid checks. What is the princip

> During the verification of the individual invoices composing the total of accounts payable at the balance sheet date, the auditors discovered some receiving reports indicating that the merchandise covered by several of these invoices was not received unt

> What internal control activity would you recommend to call attention to a failure to pay invoices within the discount period?

> For which documents relating to the accounts payable operation would you recommend the use of serial numbers as an internal control activity?

> Which do you consider the more significant step in establishing strong internal control over accounts payable transactions: the approval of an invoice for payment or the issuance of a check in payment of an invoice? Explain.

> In achieving adequate internal control over operations of the accounts payable department, a company should establish procedures that will ensure that extensions and footings are proved on all invoices and that the propriety of prices is reviewed. What i

> What effects will an auditor’s belief that the population’s actual deviation rate exceeds the tolerable deviation rate have on the test of controls sample size?

> If a corporation overstates its earnings, are its liabilities more likely to be overstated or understated? Explain.

> You are making your first audit of Clarke Manufacturing Company. The Plant and Equipment account represents a very substantial portion of the total assets. What verification, if any, will you make of the balances of the ledger accounts for Plant and Equi

> The auditors’ verification of current assets such as cash, securities, and inventories emphasizes observation, inspection, and confirmation to determine the physical existence of these assets. Should the auditors take a similar approach to establish the

> Does a failure to record the retirement of machinery affect net income? Explain.

> Moultrie Company discovered recently that a number of its property and equipment assets had been retired from use several years ago without any entries being made in the accounting records. The company asks you to suggest procedures that will prevent unr

> Explain the use of a system of authorizations for additions to plant and equipment.

> Identify at least three elements of strong internal control over property, plant, and equipment.

> What are the objectives of establishing internal control over plant and equipment?

> Suggest several comparisons to be made as part of the auditors’ analytical procedures for a. Plant and Equipment. b. Depreciation.

> Explain how the existence of lease agreements may result in understated plant and equipment.

> When performing attributes sampling, may auditors include several types of attributes in their definition of a deviation? Explain.

> K-J Corporation has current assets of $5 million and approximately the same amount of plant and equipment. Should the two groups of assets require about the same amount of audit time? Give reasons.

> Explain why the auditors may need to use the work of a specialist in the audit of goodwill.

> Do the auditors question the service lives adopted by the client for plant assets, or do they accept the service lives without investigation? Explain.

> List three substantive procedures the auditors could use to detect unrecorded retirements of property, plant, and equipment.