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Unformatted text preview: Chapter 7 Multiple Choice 7-1. b 7-2. c 7-3. a 7-4. d 7-5. a 7-6. c 7-7. d 7-8. b Answer b is most relevant to the types of questions proposed by AS 2 as being helpful. Answer d might give the auditor some indication of whether the person performing the task is doing it carefully. Answer a is perhaps relevant, but a better question would be, How long have you been assigned to do this task? Answer d is not a possibility because the person typically would have no reason to have that information unless they were at a very high organizational level in the company. 7-9. c 7-10. b 7-11. d 7-12. a 7-13.d 7-14. a 7-15. c 7-16. d 7-17. b 7-18. d (Note: this question is not clear cut; should be thought provoking; I would expect students to argue about it if it were included on an exam) 7-19. b 7-20. a 7-21. c Discussion Questions 7-22. [LO 1, 4] To which of the following accounts would the management assertion valuation be relevant, and why? For any accounts that it is not relevant, explain why. Answer: Cash: Cash is the local currency does not normal have any valuation issues, so the auditor would not need to test whether the management assertion of valuation is relevant. The value of cash in the local currency is the face value. 1 Cash when foreign currency translation is involved: When currency of material amounts in other than the local denomination is a part of a companys transactions or end of year balances, the assertion of proper valuation is important to the auditor. Specific accounting methods are used to translate the non-local currency at the year end date, so whether that translation resulting in the local currency value has been performed properly is important. The issue of foreign currency can affect assets such as accounts receivable and liabilities such as accounts payable as well. When a company has receivables and payables as a result of transactions conducted on an international basis the auditor must understand which currencies are to be used to settle the receivables and payables. If the settlement is to be in a non-local currency the company has to deal with the value of the amount in the local currency. This may also require consideration of hedge transactions that have been entered into to offset the risk of currency value fluctuation. Gross amount of accounts receivable: Valuation is not relevant to gross accounts receivable, because gross accounts receivable is the total monetary amounts of the transactions. Net amount of accounts receivable: Net amount of accounts receivable is the result of the gross accounts receivable and the allowance for uncollectibles. The management assertion of valuation is relevant to the uncollectible balance part of net receivables. The account balance of the allowance for uncollectibles is the result of managements estimation, and although based on historical trends and derived through some systematic process, is still an uncertain amount. The question of whether the allowance account results in a proper balance of net accounts receivable that are likely to be collected makes...
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- Spring '11