Audit CPA Exam || all solutions are accurate.
Existence Assertion correct answers Assets/revenues: whether the account actually exists & they
are not overstated
Completeness Assertion correct answers Liabilities/expenses: whether the items were actually
recorded & the accounts are not understated
Confirmations correct answers -provide evidence of existence
-2 forms of confirmation: positive & negative (blank)
-electronic confirmations must be verified & non-responses must be followed up or alt
procedures (if not GAAP problem)
Revenue cycle correct answers sales, accounts receivable, and cash receipts
Expenditure cycle correct answers purchases, accounts payable, and cash disbursements
Purchasing department correct answers This department enters/approves Purchase Order and
participates in vendor selection
Receiving department correct answers accepts goods for approved purchases, counts and inspects
goods, and prepares a receiving report.
Accounts payable department correct answers records the payable and approves the invoice
Treasurer department correct answers - should make the payment
- once signed, the check should be mailed to the payee by the check signer or an employee
operating under the supervision of the check signer to prevent defalcations of checks.
,Cash cycle correct answers cash receipts and disbursements
What is Lapping?
How Can Lapping be deterred?
What are the auditing procedures for Lapping? correct answers - a defalcation in which a cash
shortage is concealed by applying later customer remittances to a receivable account from which
money was stolen
- can be deterred by appropriate segregation of duties between receiving cash and posting to the
accounts receivable ledger. This makes it more difficult for the employee who is stealing the cash
to cover it up through inappropriate remittance credits.
- an auditor would compare the date the checks are deposited per bank statements with the date
remittance credits are recorded (not by reviewing bank transfers)
What is Kiting?
What does frequent Kiting result in?
How does an auditor detect Kiting? correct answers - concealing a cash shortage by depositing in
one bank an unrecorded check of another disbursement bank, effectively recording the same
funds in both bank accounts
- Frequent kiting may result in a high level of deposits coupled with a low average balance.
-An auditor would most likely detect kiting by reviewing the bank transfer schedule and
following-up on all transfers for which the receipt date per bank is recorded in the accounting
period before the disbursement date.
Relevant assertions for auditing cash correct answers completeness, valuation and allocation, and
existence
Inventory cycle correct answers purchases and sales of inv
Investment cycle correct answers purchases and sales of stocks, bonds, and derivative
instruments
, Auditing procedures for investments correct answers -confirmation
-examination of securities on hand
-cutoff testing
-review of board minutes
-recalculation
Investments should be measured at correct answers fair value
Other transaction cycles: PPE correct answers -includes all tangible assets used in the operation
of a business and not acquired for resale
-includes purchases, R&M, depreciation, disposal, and leasing
Other transaction cycles: Payroll and personnel cycle correct answers record keeping of
employees and calculation and authorization of payroll disbursements
Completeness assertion for PPE correct answers select a sample of fixed asset purchase
requisitions and trace to receiving reports and the fixed asset subsidiary ledger
Segregation of duties for payroll correct answers -authorization: operating managers and
personnel
-record keeping: payroll
-custody: treasurer
Financing cycle correct answers includes all debt and equity transactions
An Entity's Ability to Continue as a Going Concern correct answers Non-issuer: When an auditor
concludes that substantial doubt remains about an entity's ability to continue as a going concern
the auditor should add a separate section to the auditors report with the heading "substantial
doubt about the entity's ability to continue as a going concern" to the UM opinion
Existence Assertion correct answers Assets/revenues: whether the account actually exists & they
are not overstated
Completeness Assertion correct answers Liabilities/expenses: whether the items were actually
recorded & the accounts are not understated
Confirmations correct answers -provide evidence of existence
-2 forms of confirmation: positive & negative (blank)
-electronic confirmations must be verified & non-responses must be followed up or alt
procedures (if not GAAP problem)
Revenue cycle correct answers sales, accounts receivable, and cash receipts
Expenditure cycle correct answers purchases, accounts payable, and cash disbursements
Purchasing department correct answers This department enters/approves Purchase Order and
participates in vendor selection
Receiving department correct answers accepts goods for approved purchases, counts and inspects
goods, and prepares a receiving report.
Accounts payable department correct answers records the payable and approves the invoice
Treasurer department correct answers - should make the payment
- once signed, the check should be mailed to the payee by the check signer or an employee
operating under the supervision of the check signer to prevent defalcations of checks.
,Cash cycle correct answers cash receipts and disbursements
What is Lapping?
How Can Lapping be deterred?
What are the auditing procedures for Lapping? correct answers - a defalcation in which a cash
shortage is concealed by applying later customer remittances to a receivable account from which
money was stolen
- can be deterred by appropriate segregation of duties between receiving cash and posting to the
accounts receivable ledger. This makes it more difficult for the employee who is stealing the cash
to cover it up through inappropriate remittance credits.
- an auditor would compare the date the checks are deposited per bank statements with the date
remittance credits are recorded (not by reviewing bank transfers)
What is Kiting?
What does frequent Kiting result in?
How does an auditor detect Kiting? correct answers - concealing a cash shortage by depositing in
one bank an unrecorded check of another disbursement bank, effectively recording the same
funds in both bank accounts
- Frequent kiting may result in a high level of deposits coupled with a low average balance.
-An auditor would most likely detect kiting by reviewing the bank transfer schedule and
following-up on all transfers for which the receipt date per bank is recorded in the accounting
period before the disbursement date.
Relevant assertions for auditing cash correct answers completeness, valuation and allocation, and
existence
Inventory cycle correct answers purchases and sales of inv
Investment cycle correct answers purchases and sales of stocks, bonds, and derivative
instruments
, Auditing procedures for investments correct answers -confirmation
-examination of securities on hand
-cutoff testing
-review of board minutes
-recalculation
Investments should be measured at correct answers fair value
Other transaction cycles: PPE correct answers -includes all tangible assets used in the operation
of a business and not acquired for resale
-includes purchases, R&M, depreciation, disposal, and leasing
Other transaction cycles: Payroll and personnel cycle correct answers record keeping of
employees and calculation and authorization of payroll disbursements
Completeness assertion for PPE correct answers select a sample of fixed asset purchase
requisitions and trace to receiving reports and the fixed asset subsidiary ledger
Segregation of duties for payroll correct answers -authorization: operating managers and
personnel
-record keeping: payroll
-custody: treasurer
Financing cycle correct answers includes all debt and equity transactions
An Entity's Ability to Continue as a Going Concern correct answers Non-issuer: When an auditor
concludes that substantial doubt remains about an entity's ability to continue as a going concern
the auditor should add a separate section to the auditors report with the heading "substantial
doubt about the entity's ability to continue as a going concern" to the UM opinion
