Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?
Choice 'd' is correct. During the final review stage of an audit, the auditor focuses on the overall presentation of the financial statements. Total debt/total assets indicates the portion of assets financed by creditors, which is a meaningful ratio to calculate during the final audit review.
Choice 'a' is incorrect. Quick assets/current assets simply indicates the percentage of current assets that are also 'quick' assets. It is not a particularly meaningful ratio.
Choice 'b' is incorrect. Accounts receivable/inventory is not a meaningful ratio because it compares a figure based on retail dollars with a cost-based figure.
Choice 'c' is incorrect. Interest payable/interest receivable is not a meaningful ratio because these two amounts are not related.
Wilson, CPA, obtained sufficient appropriate audit evidence to render an opinion on Abco's December 31, X1, financial statements on March 6, X2. A subsequent event requiring adjustment to the X1 financial statements occurred on April 10, X2, and came to Wilson's attention on April 24, X2. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated:
Choice 'a' is correct. Since the financial statements were adjusted without disclosure of the event in the footnotes, Wilson's report should be dated as of March 6, X2, the date on which sufficient appropriate audit evidence was obtained.
Choice 'b' is incorrect. An April 10, X2 report date would be used only if the event were disclosed and Wilson wanted to extend the responsibility for all significant events through April 10, X2.
Choice 'c' is incorrect. An April 24, X2 report date would be used only if the event were disclosed and Wilson wanted to extend the responsibility for all significant events through April 24, X2.
Choice 'd' is incorrect. Dual dating would only be used if the event were disclosed in the notes to the financial statements.
When an auditor tests a computerized accounting system, which of the following is true of the test data approach?
Choice 'b' is correct. Test data consists of 'dummy' data run through the client's computer system. The data should be processed under the auditor's control.
Choice 'a' is incorrect. Only transactions that the auditor wishes to test must be used.
Choice 'c' is incorrect. While the auditor will frequently use many valid and invalid conditions, it is not feasible to test every possible valid and invalid condition using a test data approach.
Choice 'd' is incorrect. The objective of the test data approach is to test programs that the client uses to process data. Using different programs defeats the primary purpose of the test.
In a well designed internal control, employees in the same department most likely would approve purchase orders, and also:
Choice 'd' is correct. In a well designed internal control, employees in the purchasing department most likely would approve purchase orders and also negotiate terms with vendors.
Choice 'a' is incorrect. Personnel in the accounts payable department reconcile the open invoice file while the purchasing agent approves purchase orders.
Choice 'b' is incorrect. Employees in the receiving department inspect goods upon receipt while the purchasing agent approves purchase orders.
Choice 'c' is incorrect. The stores department (personnel in the raw materials inventory area) authorize requisition of goods while the purchasing agent approves purchase orders.
Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness?
Choice 'd' is correct. In evaluating the reasonableness of an accounting estimate, the auditor should first obtain an understanding of how management developed its estimate.
Choice 'a' is incorrect. After first obtaining an understanding of how management developed its estimate, the auditor should use one or a combination of the following approaches: a) review and test the process used by management to develop the estimate, b) develop an independent expectation of the estimate to corroborate the reasonableness of management's estimate, or c) review subsequent events.
Choice 'b' is incorrect. After having first obtained an understanding of how management developed its estimate, the auditor should consider testing management's process by assessing the appropriateness of the key factors or assumptions used in preparing the estimate.
Choice 'c' is incorrect. After first obtaining an understanding of how management developed its estimate, the auditor should use one or a combination of the following approaches: a) review and test the process used by management to develop the estimate, b) develop an independent expectation of the estimate to corroborate the reasonableness of management's estimate, or c) review subsequent events.
