Okay, let's do some questions on our various financial statement accounts.
Let's start out with question number eight.
The primary purpose of sending a standard confirmation request to financial institutions
with which the client has done business during the year is to do what?
Why do we send out a confirmation to financial institutions or banks?
Why do we send out an AICPA standard bank confirmation?
What does it tell us in there?
It tells us about the account balances.
It tells us if there's a direct liability.
It tells us if there's a compensating balance.
So it tells us a lot of different stuff.
A, detect kiting activities that may otherwise not be discovered.
Remember, we are concerned about kiting, the deliberate overstatement of cash by showing
a deposit in x one and the withdrawal in x two, but that's more of an inter-bank transfer
schedule, not a bank confirmation.
B, corroborate information regarding deposit and loan balances.
Deposits, if we deposit money in there, our balance, and if we borrowed money, true, December
31st. C, provide the data necessary for a proof of cash.
We're not trying to proof of cash of anything.
D, request information about contingent liabilities and secure transactions.
Not with a bank confirm.
Best answer, B. Number nine, when an auditor does not receive
replies to positive requests for year-end account receivable confirmations, the auditor
would most likely what?
All right, so we send out a positive.
Do you expect a response on a positive?
Yes.
When do you not expense a response?
Negative.
So do you expect a response?
Yes we do.
We don't get a response, then what do we do?
Then we send a second.
We don't get a response, we ask the client to contact them.
They don't respond, we look at stubs from cash receipts.
We don't get anything, we look at shipping documents.
We don't look at it, we look at a confirmation file.
We still don't have it, we might consider an audit adjustment.
So A, inspect the allowance account to verify whether the accounts were subsequently written
off.
No, not yet.
B, increase the assessed level of detection risk for evaluation.
Hey, everything's wrong, let's increase our risk.
Might be a little aggressive.
Little premature.
C, ask the client to contact the customers to request the confirmation be returned.
Yes, send a second, ask them to respond.
D, increase the assessed level of inherit risk for the revenue cycle.
We're done with that, we're now looking at confirmations, which is a substantive test
to substantiate or corroborate the assertions.
Best answer is C. Number 10, in auditing accounts receivable,
the negative form of confirmation requests most likely would be used when?
Negative says, hey, according to our records, everything's fine, if you disagree, let us
know.
Remember, no news is good news.
It gives you implicit evidence.
You use it when reliance is high, control risk RMM is low.
A, the total recorded amount of receivables is immaterial to the financial statements
taken as a whole.
Well you probably would still send a few positives.
B, response rates in previous years to properly assigned positives were inadequate.
If you don't think people are going to seriously consider them, don't use negatives, use positives.
C, recipients are likely to return positives without verifying the accuracy.
Then maybe send a blank.
D, the combined assessed level of inherit risk and control risk relative to accounts
receivable is low.
If it's low, reliance is high, yes, then we'll use some negative form of confirmations.
Number 11, an auditor most likely would make inquiries of production and sales personnel
concerning possible obsolete or slow moving inventory to support management's financial
assertion of what?
So when we look at obsolete, remember we talked about inventory, we said when you're doing
an inventory observation is the count correct, price test, purchase and sales, damage and
obsolescence.
What is damage and obsolescence really tell us about slow moving?
It tells us well we know it exists, we know they own it, we know its right there, but
it's not salable, it tells us about what?
Valuation.