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auditing

Questions and Answers of Auditing

Describe the following types of computer software and their importance to processing and controls:• Operating systems software• Communications software• Application program software• Access
What is a virtual private network (VPN)? What are the primary characteristics of such networks? What major risks are associated with VPNs?
What are general controls? Do the general controls directly affect computer applications? How does the auditor determine whether general control procedures should be tested?
Explain why there should be a segregation of duties between data processing and users. Should data processing be allowed to initiate transactions (for example, automatically initiating a purchase
Identify the seven fundamental concepts important to evaluating the organization's data processing control structure, and briefly indicate the importance of each to the auditor's risk assessment
Briefly describes the purposes of the following control procedures and how each works: (1) financial total, (2) hash total and (3) record count.
What are the major elements of an audit trail? How does an audit trail in a computerized environment differ conceptually from an audit trail in a manual environment?
What is a self-checking digit? Why is its use such an important control procedure? What happens to a transaction if it is rejected from processing because it fails the self-checking digit test?
Briefly describe how each of the following edit controls works and the types of errors each is designed to detect. Give one example of each for a retail organization.a. Limit testb. Reasonableness
What major principles should guide the development of a comprehensive access control program for a data processing center? Assume that the organization uses automated access control software to
Identify the three primary methods for authenticating a user attempting to gain access to a restricted program or file. Briefly identify the major advantages and disadvantages of each method.
What is the potential danger of using a physical attribute, such as a retina scan or a fingerprint, to authenticate a user?
Briefly describe encryption and why it is important to controlling validity of transactions sent over a public network.
During a discussion between two staff auditors, one remarks:"The only way computer control procedures can be adequately tested for operation is to actually process test data through the computer
What is a monitoring control? Identify a monitoring control that might be used to inform a company whether its access controls are working effectively. How would the auditor evaluate the
What are the major objectives of the ITF approach? Would an ITF be well suited to monitoring an organization for fraud? Explain.
Compare and contrast the tagging and tracing technique with an ITF. In your comparison, specifically address:• Differences in audit approach• Assurances that can be gathered from each approach•
Assume the auditor wants to implement a tagging and tracing approach for a highly integrated system that accepts orders from customers, ships the orders, and bills the orders. What audit objectives
What is generalized audit software (GAS)? What are the major audit tasks for which an auditor would use it? What are its major advantages?
How might an auditor perform an "overall file validity analysis" using GAS? What does the auditor expect to learn from such an analysis? How would such information be utilized in conducting the audit?
Why might some CPA firms develop customized audit software rather than using GAS? Compare and contrast the relative advantages of GAS and customized audit software. Indicate the type of client
What risks are unique to auditing a client who engages in electronic commerce that might not be present in other clients?
1. In an automated payroll system, all employees in the finishing department were paid at the rate of $7.45 per hour when the authorized rate was $7.15 per hour. Which of the following controls would
You have been assigned to the audit of Mid-State Electronics Corporation, a medium-size distributor of electronics equipment serving a geographic area within a radius of 150 miles. Mid-State has
Bass Pro Shops is a catalog retailer concentrating on fishing and hunting equipment. It prints an annual catalog containing over 200 pages of products, as well as approximately six special sale
The following represent errors that could occur in a computerized environment.RequiredFor each error, identify a control procedure that would have been effective in either preventing or detecting the
A comprehensive program for controlling access to the computer equipment, computer programs, and data is an important control. In evaluating the comprehensiveness of an access policy, the auditor
Assume that the client has an adequate access control plan and, based on your interviews, the access policies are operating as described. The control procedures identified by the auditor include
Ajax, Inc., an audit client, recently installed a new computer system to more efficiently process its shipping, billing, and accounts receivable records. During interim work, an assistant reviewed
Paper-based documentation might not exist in an e-commerce environment, with the exception of the trading partner agreement and a separate agreement with an intermediate processor describing the
For each of the following situations involving computer fraud, briefly describe the following:a. A control procedure that would have been effective in preventing or detecting the fraud.b. An audit
Saris manufacture bicycle racks and wants to market on the Web. It also wants to cut production cost by manufacturing various bicycle racks that are custom designed for cars by manufacturing them
Hastings Manufacturing Company makes special-order equipment to be used by other manufacturers. The company has three major product lines and approximately 10 variations of each product line. The
The Integrated Test Facility (ITF) and the Tagging and Tracing approach have been identified as audit approaches designed to test accuracy of computer processing of transactions.Requireda. Explain
IDS Corporation processes mortgage payments and updates for itself, as well as for a number of other mortgage service companies. The program tables are updated frequently for changes in interest
The auditor has identified each of the following control procedures as important in reducing control risk in major accounting applications.RequiredFor each control procedure identified, indicate how
A CPA's client, Boos & Baumkirchner, Inc., is a medium-size manufacturer of products for the leisure-time activities market (camping equipment, scuba gear, bows and arrows, and so forth). During
Woodman's Grocery is a small chain of grocery retailers with four mega size stores. Each store has a networked computer that runs the automated cash registers. The merchandising manager, on the
Big Mart is one of the largest retail organizations in the country. It has implemented POS to record sales, bar codes, and EDI. Some vendors are given the authority to manage store space, for
Dreyfet Department Store maintains online prices on minicomputers in stores connected to the automatic cash registers. For most products, the product and price are read into the cash register by
The Saginaw Steering Gear Company makes automotive steering gears that it supplies to automobile manufacturers. The company, in turn, purchases a number of its component parts from other suppliers.
You have been assigned to the audit of Ford Motor Co. Ford is quite complex. In preparing for the audit, the partner describes the following characteristics about the audit client:• Ford is moving
How prevalent is fraud? What is the effect of fraud on the profitability of U.S. business?
Define the following types of fraud:• Defalcation• Asset misappropriation• Corruption• Financial reporting fraud Does the auditor's responsibility for detecting a fraud differ by the type of
What are the most common approaches taken to commit financial reporting fraud?
You are asked to be interviewed by a student newspaper regarding the nature of accounting fraud. The reporter says, "As I understand it, defalcations are more likely to be found in small businesses,
Define the term "materiality" as it applies to the concept of the auditor's responsibility for detecting material fraud. What are the factors that would cause the materiality threshold in dollars to
Why has financial reporting fraud become more prevalent as the financial markets have expanded? What is the motivation for privately owned businesses to commit financial reporting fraud; aren't the
What was the nature of the fraud at Equity Funding? How was the fraud covered up? What type of business analysis would have revealed the fraud?
What are the major lessons for the accounting profession that have been learned (or should have been learned) from Equity Funding?
What were the major findings of the second COSO Report on fraudulent financial reporting?
How has the responsibility of auditors for planning and conducting the audit to detect fraud changed over the past 30 years?
In what ways is the auditor required to increase the amount of fraud skepticism on every financial statement audit engagement?
Why is it important that the auditor review all major journal entries?
Does the auditor presume that there is a fraud in some specific accounts? Which accounts? How does this presumption change the nature of audit procedures?
What are the ten major steps that are included in the fraud risk model?
The fraud risk model identifies motivations, incentives, opportunities, and capabilities as being the major components of the fraud diamond. Define what is meant by each of these four factors and
Identify five factors that would be strong indicators of opportunities to commit fraud.
Is the "ability to rationalize" the fraud an important aspect of a fraud profile? What are some of the common rationales used by fraud perpetrators?
What major groups failed in the Enron case? How did each group fail? What were the motivations that influenced each group that partially led to the failure? To what extent did Sarbanes-Oxley address
Explain how "brainstorming" is supposed to work as part of the audit planning process. What are the advantages of using a "brainstorming" approach to identify the possible existence of fraud?
Explain why the auditor needs to examine the "tone at the top" in evaluating fraud risk. Identify the key information the auditor should gather on each of the following areas:• Corporate
Explain the important role analytical procedures play in identifying fraud risk. Identify three examples of analytical analysis that would increase the auditor's assessment of fraud risk.
How should the audit be adjusted when the auditor has identified a high risk of fraud occurring?
Why is it important for the auditor to develop a list of "hypothesized frauds" as opposed to first seeking management's explanations of differences in account balances?
An auditor may have to perform "extended audit procedures" if the auditor identifies fraud risk as high. Identify five examples of extended audit procedures that might be performed if the auditor
What is the auditor's primary responsibility for reporting a fraud that has been detected and corrected?
Explain the auditor's responsibility for reporting the following:• A defalcation that the client is willing to correct and portray in the financial statements• A defalcation that is material, but
Although each fraud is unique, there are commonalities among many of the major financial reporting frauds that have taken place in the past decade. What are the major commonalities and lessons that
Explain how a fraud perpetrator could use a disbursement scheme to misappropriate assets from the company.
Explain how an auditor should link control deficiencies to the design of audit tests. Identify the logic process utilized by the auditor to make the linkage.
Explain how audit procedures should be linked to the identification of fraud risk indicators.
Audit software can be very useful in reading a computer file and identifying potential fraud. Identify the major fraud-related procedures that can be performed using audit software.
What are illegal acts? What is the auditor's responsibility for detecting illegal acts? Does this responsibility differ from the auditor's responsibility for detecting fraud?
What is forensic accounting? How does it differ from auditing?
The auditing literature had traditionally classified fraud as either “defalcations” or “financial reporting fraud.”Requireda. What is the difference between the two types of fraud?b. Does the
The responsibility of auditors for detecting fraud has increased as users have made it clear that they expect auditors to detect material fraud.Requireda. In addition to dollar amounts, what other
The Equity Funding fraud was the first major financial reporting fraud. It was a fraud that people believed would change auditing forever. However, the profession has taken a while to learn the
The wauditor is to presume that there is fraud in revenue. Consider a company that manufactures high-tech fiber-optic gear. Assume that the Wall Street analysts believe the industry has good growth
The following scenario and analytical information describe a company. Three sets of facts are presented about this company. At the end of each set, perform a brainstorming analysis identifying all
The ten step audit process is a systematic approach to ensure that every audit engagement considers the possibility of fraud and how fraud might occur.Requireda. Identify the ten steps in the process
There are a number of factors that an auditor may consider when identifying opportunities to commit fraud. The following represent areas that have often been associated with frauds.Situations often
Approximately a decade ago, the following comments appeared in the The Wall Street Journal. In the article, the participants were talking about users expecting the auditors to do a better job of
The existence of fraudulent financial reporting has been of great concern to both the accounting profession and regulatory agencies such as the SEC. It has been asserted that companies in trouble
Most of the legislation has dealt with financial reporting fraud that has taken place in publicly traded companies. However, there has not been such legislation for non-public companies or for audits
Kent, CPA, is the engagement partner on the financial statement audit of Super Computer Services Co. (SCS) for the year ended April 30, 2007. On May 6, 2007, Smith, the senior auditor assigned to the
The auditor should consider known internal control deficiencies as part of the process of planning the audit.Requireda. The following is a list of internal control deficiencies that were found at a
Most CPA firms have responded to SAS 99 by performing detailed file validity analysis using audit software.Requireda. Identify the ways in which audit software might be used to perform file validity
An audit client of the Peninsula CPA firm is extensively involved in defense contracting. During the past year, the Defense Department has conducted an ongoing investigation of the client for
The facts below represent the audited financial statements of a public company for 2005 and 2006, along with management's representation regarding the unaudited amounts (i.e., the UNAUDITED column)
Dot-com companies grew rapidly in the late 1990s. Many opened up “shopping malls” through which they serve as a portal into several different companies. The SEC has expressed concerns about
The following is a list of defalcations that have occurred within various organizations. You may assume that the amounts involved are material.RequiredFor each defalcation, briefly indicate:a. How
Multiple Choice Questions1. Which of the following statements regarding the incidence of fraud is incorrect?a. Fraud is estimated to costs U.S. businesses less than 1 cent of every dollar of sales.b.
When is sampling appropriate to use in an audit?
What are non-sampling and sampling risks? How can each be reduced?
Why is it so important that a sample be as representative of the population as possible?
What factors should be considered when determining whether to use non-statistical or statistical sampling?
When using sampling to test control procedures, what factors should the auditor consider in setting the:a. Tolerable deviation rateb. Expected failure ratec. Allowable risk of assessing control risk
What is the effect of increasing each of the following on an attribute estimation sample size?a. The allowable risk of assessing control risk too lowb. The tolerable failure ratec. The expected
How does random-number sample selection differ from systematic selection? What precaution(s) must the auditor take when using systematic selection?

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