Auditors can perform tests of controls separately from all other tests; therefore, it is inefficient to perform tests of controls, separately, from substantive tests of transactions.

Tests of controls are generally costlier to perform than analytical procedures.

Only tests of details of balances involve physical examination and confirmation.

Analytical procedures are the least costly type of audit test.

In a computerized environment, the auditor can often perform substantive tests of transactions quickly for a large sample of transactions.

The cost of each type of evidence does not vary in different situations.

Because of the high cost of tests of details of balances, auditors do not perform this type of testing unless fraud is suspected.

The auditor's understanding of internal control performed as part of risk assessment procedures provides the basis for the auditor's initial assessment of control risk.

Analytical procedures are the most expensive type of audit test to perform because of the expertise and training required to properly use them.

The results of tests of controls and substantive tests of transactions affect the design of tests of details of balances.

If internal controls are tested and are considered effective, the auditor generally will increase both substantive tests of transactions and tests of details of balances.

Tests of controls provide evidence about the likelihood for misstatements in a client's financial statements.

An exception in a test of control provides only an indication of the likelihood of monetary misstatements in the financial statements because tests of controls do not reveal whether monetary misstatements have actually occurred.

If the auditor's test of controls supports the control risk assessment, planned detection risk in the audit risk model is decreased, and planned substantive tests should therefore be reduced.

Like tests of controls, analytical procedures only indicate the likelihood of misstatements affecting the dollar value of the financial statements.

For accounts with small balances and minimal potential for material misstatements, auditors often limit their tests to substantive analytical procedures if they conclude the accounts are reasonably stated.

The evidence mix includes risk assessment procedures.

Subsequent events represent events that occasionally occur after the balance sheet date, but before the issuance of the financial statements and the auditor's report, that have an effect on the financial statements.

Substantive tests of balances performed before year-end provide significant assurance and are normally only done when internal controls are ineffective.

It is inappropriate for the auditor to make written suggestions to management to improve business performance upon completion of the audit.

Separate perpetual records are likely to be kept only for raw materials inventory.

In process cost systems, costs are accumulated by individual jobs.

In job cost systems, costs are accumulated by individual jobs.

In some inventory systems, raw materials can be requisitioned by automated computer software when raw materials reach a predetermined level.

The inventory and warehousing cycle is unique because of its close relationship to other transaction cycles.

The inventory and warehousing cycle ends with the sale of goods in the sales and collection cycle.

Inventory items such as jewels, chemicals, and electronic parts are easy for auditors to observe and to value.

It is not allowed under accounting standards to use different inventory valuation methods for different parts of the inventory.

Inventory valuation issues include the estimation of inventory obsolescence and the allocation of manufacturing costs to inventory.

Purchase requisitions are often initiated by stockroom personnel as raw materials are needed.

The receiving department prepares a receiving report which often is electronic notification of the receipt of goods that become part of the document before payment is made to the vendor.

An adequate cost accounting system is an important part of the processing of goods function for all manufacturing companies.

Inventory compilation tests are used to verify that the inventory is recorded at the lower of cost or market.

An approved purchase requisition form authorizes shipment of goods to customers.

The receipt of raw materials is a part of the acquisition and payment cycle.

The physical observation of the inventory and the acquisition of raw materials are part of the inventory and warehousing cycle.

Physical examination is an essential type of evidence used to verify the existence and count of inventory.

It is permissible for an auditor to test the entire inventory population for certain types of audit tests in order to eliminate the need for more costly tests involving sampling.

Many of the internal controls over inventory and the details of the entire inventory population can be tested using audit software.

Auditing standards recommend that auditors observe physical inventory counts by the client.

In the audit of inventory, the auditor and client are jointly responsible for making and recording the count of physical inventory, while the auditor is responsible for drawing conclusions about the adequacy of the physical inventory.

A common source of business risk for inventory is the reliance on a few key suppliers.

To test for proper sales cutoff, an auditor would obtain the number of the last bill of lading issued during the period under audit and verify that the item shipped had been excluded from the inventory listing.

When the client's perpetual inventory master files are inadequate, the auditor will probably choose to test the physical inventory prior to the balance sheet date.

When part of the client's inventory is in a public warehouse or in the possession of other outside custodians, the auditor does not need to observe a physical count of the inventory if a written confirmation is obtained directly from the inventory custodians.

The adequacy of internal controls over the physical count of inventory is one of the key determinants of the amount of time needed to test inventory.

Inherent risk is typically assessed at a low level for inventory due to the nature of the asset.

In pricing raw materials in manufactured products, auditors must consider both the unit cost of the raw materials and the number of units required to manufacture a unit of output.

The audit procedure "Perform tests of lower-of-cost-or-market, selling price, and obsolescence" provides assurance mainly for the realizable value objective for inventory pricing and compilation.

When performing price tests for purchased inventory, the auditor would not be concerned with the most recent vendors' invoices if the client uses the FIFO valuation method.

When a client has standard cost records, an efficient and useful method of determining valuation is to review and analyze variances.

Inventory price tests include testing the client's summarization of the inventory counts.

When performing substantive analytical procedures for notes payable, if actual interest expense is materially larger than the auditor's expectation, one possible cause would be interest payments on unrecorded notes payable.

The balance-related audit objective realizable value is not applicable when auditing notes payable.

The three most important balance-related audit objectives for notes payable are existence, realizable value, and accuracy.

The audit procedure "Foot the notes payable list and trace the totals to the general ledger" is performed when verifying the accuracy objective for notes payable.

The audit procedure "Review the notes to determine whether any are related party notes or accounts payable" is performed when verifying the classification objective for notes payable.

If loans require significant restrictions on the activities of the company, they must be disclosed in the footnotes.

Accounts including preferred stock, additional paid-in capital, and treasury stock are not included in the capital acquisition and repayment cycle.

Typically, auditors set inherent risk at a low level for notes payable, as the correct value is usually easy to determine.

Auditors often set performance materiality at a low level for accounts in the capital acquisition and repayment cycle because it is usually possible to completely audit the account balance and each of the transactions in these accounts.

Because the accounts in the capital acquisition and repayment cycle contain few transactions, control risk and the results of substantive transactions are normally more important for designing tests of details of balances in these accounts.

The Securities and Exchange Commission requires companies listed on exchanges to employ stock transfer agents.

Public companies whose stock is listed on a stock exchange must employ an independent registrar.

The shareholders' capital stock master file is used as the basis for the payment of dividends and also acts as a check on the accuracy of the common stock balance in the general ledger.

Independent registrars commonly disburse cash dividends to shareholders.

Few large companies employ stock transfer agents, but small companies commonly do so.

Most closely held corporations have numerous transactions during the year for capital stock accounts.

A shareholders' capital stock master file is a record of the issuance and repurchase of capital stock over the life of the corporation.

The evidence accumulated for cash balances depends heavily on the results of tests performed in the other major transaction cycles.

Cash is important because of its susceptibility to theft, and cash can be significantly misstated as illustrated in the China Media Express case.

Financial instruments, which include investments in debt and equity securities as well as derivative instruments, vary in significance across audit clients.

A growing number of organizations, especially larger organizations, use pre-approved V-cards to make miscellaneous purchases instead of maintaining a petty cash fund.

Consistent with financial accounting standards, equity investments are normally recorded at cost until they are disposed of in the future.

Debt instruments can be classified as trading securities, available-for-sale securities, or held-to-maturity securities; auditors should ensure that such debt instruments are classified, properly, in the financial statements consistent with accounting standards.

The general cash account will not be audited if the ending balance is immaterial.

Many of the auditor's audit procedures in the audit of cash center around the client's bank confirmations.

Tracing outstanding checks to subsequent period bank statements tests the cutoff audit objective.

When auditing the year-end cash balance, one of the areas of focus is on the accuracy objective.

The three most important audit objectives for cash are accuracy, existence, and classification.

The starting point for the verification of the balance in the general bank account is to obtain a bank cut-off statement.

When auditing the general cash account, receipt of a standard bank confirmation is the starting point for verifying the company's general cash account balance.

To test the client's list of outstanding checks on the bank reconciliation for completeness, the auditor should trace from the list to the checks included with the cutoff bank statement.

The client may mail the bank confirmation requests if the auditor believes doing so will increase the likelihood that the confirmation will be returned promptly.

Auditors usually design bank confirmations that address the client's specific circumstances.

Ordinarily, all deposits-in-transit listed on the year-end bank reconciliation should appear as deposits on the cutoff bank statement.

Auditors are not always required to obtain bank confirmations.

The auditor is generally concerned about the realizable value and the rights to cash.

Business risks associated with financial instruments are the same for all companies.

The starting point for testing the ending balance of financial instruments accounts is to obtain a gain or loss schedule for the year.

The auditor needs to have an understanding of the client's internal controls over determining fair value estimates.

A factor that increases inherent risk for financial instruments is the complexity of the relevant accounting standards.

Level 1 estimates require more management judgment than level 2 or level 3 estimates.

There is significant potential for misstatements and misclassification of financial instruments.

Assessing internal controls related to financial instruments may be necessary in order to reduce audit risk to an acceptable level.

When auditing financial instruments, interest income and dividends can be recomputed and compared to a public source.

Analytical procedures may be used to assess the year-end balances for financial instruments.

Completeness is an important objective for derivative financial instruments.

The most important objectives for financial instruments are existence and consistency.

Presentation and disclosure objectives are important when auditing financial instruments.

Tests related to realizable value will vary according to the type of security and the associated accounting standard.

Auditing guidance is provided for auditing accounting estimates specifically for fair values estimates as considerable auditor judgment is involved.

Cutoff is more important in testing transactions as a client may want to record a gain or a loss on the sale at the end of the year.

When an auditor is verifying quoted market prices, they are concerned about the balance-related audit objective of accuracy.

Securities and contracts will typically be held by the broker-dealer.

When auditing financial instruments, the most difficult objective to test is existence.

The auditor should test for the proper classification of debt instruments as either trading securities, available-for-sale securities, or held-to-maturity securities in the financial statements.

The proper classification of debt instruments in the financial statements is based solely on the nature of the debt instrument.

The majority of financial instruments are valued using fair value estimates.

At the completion of the audit, management is typically asked to make a written statement as a part of the engagement letter that it is aware of no undisclosed contingent liabilities.

Auditors are required to obtain a letter of representation that describes management's planned solutions to all internal control weaknesses identified during an audit.

The letter of representation is prepared on the CPA firm's letterhead, addressed to the client's chief executive officer, and signed by the audit engagement partner.

An independent review must be performed of all audits.

If, during the completion phase of the audit, the auditor determines that he or she has not obtained sufficient evidence to draw a conclusion about the fairness of the client's financial statements, there are two choices: accumulate additional evidence or issue either a qualified or an adverse opinion.

Auditors are required to communicate either orally or in writing with the audit committee about internal control weaknesses.

Subsequent discoveries of facts requiring the reissuance of financial statements arise from events occurring after the date of the auditor's report.