ch09 - Chapter 9 Multiple choice 1 a 2 d 3 b 4 d 5 b 6 b 7...

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Chapter 9 Multiple choice 1. a 2. d 3. b 4. d 5. b 6. b 7. d 8. c 9. b 10. b 11. b 12. c 13. d 14. b 15. b 16. c #17 is a bad question if it is changed as follows the answer is d 17. The audit of accounts receivables [LO 6] a. will generally be completed using procedures that focus only on the receivables account b. may include steps related to understanding the client’s system and auditing debt c. can often be limited to confirmation as long as the confirmation process asks about the customers ability and willingness to pay in addition to confirming the existence and amount d. includes examining cash received in payment for receivables even though those payments would be received in the following fiscal year, which is not the period being audited 18. c 19. a 20. c 1
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Discussion Questions 21. 1. The audit risk model is: AR=(CR*IR)*(DR*AP), where AP is the risk that analytical procedures will not detect a material misstatement and DR is where your test of details of balances will not detect a material misstatement. Essentially, the higher the detection or analytical risk, the higher the audit risk, and vice versa. Essentially, the risks interrelate; if you are willing to set DR high, then you would also set AP risk low. 2. The risk is that your testing will not reveal accounts listed as receivable that are non-existent or delinquent; in either case, the accounts receivable is overstated and you don’t detect it. 3. Yes; if you set any of the risk components too high, then AR is also high, requiring additional testing. This additional testing may not be needed, leading to audit inefficiencies. The same result occurs when you incorrectly assess risk in an area as being high, when it is not (e.g. incorrect rejection); additional testing occurs which is inefficient and costly. 22 . The testing of assets involves the existence and valuation assertions: Does the asset exist and is it valued properly? Assets are more likely to be overstated than liabilities, therefore, auditors look for over-valued and non-existent assets. Auditors either observe the existence of assets directly (e.g. observation of the physical inventory; plant tour) or confirm them, with the intent of testing for overstatement. Conversely, the completeness, and disclosure assertions apply for liabilities. Liabilities are more likely to be understated or omitted than assets. Therefore, auditors search for unrecorded liabilities by examining payments made after the year-end cut-off and review the disclosure requirements for long-term liabilities, such as leases and pensions. 23. Assets are more likely to be overstated because they are recorded at the cost of obtaining the asset, which may have decreased between the date of purchase and the financial statement date (e.g. value of receivables is a function of collectability). As a result, the auditor devotes attention to the valuation of assets, such as accounts receivable, property, plant, and equipment, inventory, etc. to determine if the value of the asset has declined,
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ch09 - Chapter 9 Multiple choice 1 a 2 d 3 b 4 d 5 b 6 b 7...

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