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business
auditing

Questions and Answers of Auditing

Multiple Choice Questions1. Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. These results most likely would
The audit of Humbird Company, a manufacturer of bicycle racks and golf carts, is almost finished. Gene Beam is the most experienced auditor on this audit and is in charge of performing analytical
Refer to the Biltrite financial statements in the Biltrite Practice Case Requireda. Calculate the Altman Z-score for Biltrite for 2007 using the model for public and private service and
An audit client is being sued for $500,000 for discriminatory hiring practices.RequiredIndicate the appropriate action the auditor should take for each of the following independent responses to the
Each of the following is an independent situation related to a contingency:1. The lawyer refused to furnish the requested information.2. The lawyer was unable to form an opinion on the probability or
During the course of the audit of Nature Sporting Goods for the year ended December 31, 2007, the auditor discovered the following:The accounts receivable confirmation work revealed one pricing
A staff auditor has just returned from a continuing professional education workshop on current auditing standards. One of her managers has asked her to prepare a training session for the rest of the
This is the third year of an audit of Green Lawns. comate company has carved out a new market niche for the delivery of lawn and garden supplies, including links with local companies that provide
An alfalfa co-op has an agreement with its farmers to purchase alfalfa at a price that is currently above the existing market price. In addition, the co-op has agreed to pay the farmers interest at
Consider the following areas in which estimates are made in the preparation of financial statements:• Pension obligation• Other post-retirement benefits• Warranty liability• Reserve for
Several communications involve the client and auditor.RequiredFor each of the following communications, indicate who signs the letter, who receives it, whether it is required or optional, when it
Milton Green, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 2007. Green plans to complete the fieldwork and sign the auditor's report about March
The auditor is auditing financial statements for the year ended December 31, 2007 and is completing the audit in early March 2008.The following situations have come to the auditor's attention:1. On
During the course of an interoffice quality review, it was discovered that the auditors had failed to consider whether inventory costs of a wholesale client exceeded their market value. The review
Cole & Cole, CPAs, are auditing the financial statements of Consolidated Industries Co. for the year ended December 31, 2006. On February 20, 2007, Cole asked the client to draft an inquiry
The facts of this case are drawn from the SEC's Accounting and Auditing Enforcement The Company Perpetrating the Fraud The case involves a fraud perpetrated by MCA Financial Corporation, which was
One of the fundamental changes that occurred upon passage of the Sarbanes-Oxley Act of 2002 is that the audit profession is no longer allowed to be self-regulatory. Now, the Public Company Accounting
Identify the five basic types of financial statement audit reports, and explain the circumstances under which each report is appropriate.
What is the difference between a scope limitation and an uncertainty? Give an example of each.
What types of opinions will the SEC not accept? How does this affect the auditor’s reporting environment?
What factors must the auditor consider when determining whether the financial statements are presented in conformity with generally accepted accounting principles?
Under what circumstances may an auditor express an unqualified opinion when the related financial statements contain a material departure from a FASB or GASB standard?
Under what circumstances must the auditor’s report refer to the consistency, or the lack of consistency, in the application of GAAP? What is the purpose of such reporting?
Why should the auditor ordinarily disclaim an opinion when the client imposes significant limitations on the audit procedures?
Under what circumstances might the auditor not refer to other auditors who worked on a part of the audit? What is a shared report? If the other auditors did not use due professional care and they are
Are comparative financial statements required by GAAP? Explain.
The fourth standard of reporting states that the auditor should express an opinion on the financial statements as a whole.a. Does this mean that the auditor must express the same opinion on all of
How should the auditor report on financial statements of a company whose financial statements are prepared in conformity with another country’s accounting principles if such statements are to be
What is?a. A compilationb. A review
Compare audits, reviews, and compilations in terms of:a. The types of procedures performedb. The level of assurance expressed by the accountantc. In which situation would an accountant’s standard
What is a special report? When might a special report be issued? What is meant by other comprehensive basis of accounting?
How does an audit report containing an unqualified opinion on financial statements prepared on the cash basis differ from one issued on GAAP-based financial statements?
Why would a client want to issue OCBOA financial statements when it is specifically noted that they are not prepared in accordance with GAAP?
What level of assurance is provided in a public accountant’s review report on interim financial statements?
Under what circumstances would the auditor’s report have to be modified because of the interim information contained in the annual report to shareholders?
Describe the nature of reports on:a. Prospective financial informationb. Pro forma financial informationc. Compliance engagementsd. Agreed-upon procedures engagements
MULTIPLE CHOICE QUESTIONS1. In which of the following circumstances would an auditor be most likely to express an adverse opinion.a. Information comes to the auditor’s attention that raises
MULTIPLE CHOICE QUESTIONS 1. Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country’s accounting principles, an auditor practicing
The fourth standard of reporting states:“The auditor must either express an opinion regarding the financial statements, taken as a whole, or state that an opinion cannot be expressed in the
What words and phrases in an unqualified audit report imply that there is a risk that the financial statements may contain a material misstatement?
You are a senior auditor working for Rittenberg & Schwinger, CPAs. Your staff assistant has drafted the following audit report. You believe the scope limitation is significant enough to qualify
Several independent audit situations are presented here. Assume that everything other than what is described would have resulted in an unqualified opinion.RequiredIndicate the type of opinion you
The following are independent audit situations for which you will recommend an appropriate audit report from the types listed. For each situation, identify the appropriate type of audit report and
Various types of accounting changes can affect the second reporting standard of GAAS.This standard reads:“The report shall identify those circumstances in which such principles have not been
You are in charge of the audit of the financial statements of Part, Inc., and consolidated subsidiaries covering the two years ended December 31, 2007. Another public accounting firm is auditing
The following auditor’s report was drafted by a staff accountant of Turner & Turner, CPAs, at the completion of the audit of the financial statements of Lyon Computers, Inc. (a non-public
Audit situations 1 through 8 present various independent factual situations an auditor might encounter in conducting an audit. List A (following) represents the types of opinions the auditor
On February 28, 2008, Stu & Dent, LLP completed the audit of Shylo Ranch, Inc. (a nonpublic company) for the year ended December 31, 2007. A recent fire destroyed the accounting records concerning
Compare and contrast the procedures that should be performed on inventory for an audit, review, and compilation. Assume that the auditor has knowledge of the business and industry. Give specific
You have reviewed the financial statements of Classic Company for the year ended June 30; 2006.The only unusual finding is that the company deferred $350,000 of research and development costs rather
Russ Major, CPA, drafted the following report on October 25, 2007 at the completion of the engagement to compile the financial statements of Ajax Company for the year ended September 30, 2007. Ajax
You have been assigned to perform a review of a client’s inventory containing electric motors, parts for motors, and raw materials used in making the motors.Requireda. What inquiries and analytical
A staff auditor of Earache & Diamond, CPAs, has prepared the following draft of an audit report on cash basis financial statements: Accountant’s Report to the Shareholders of Halon Company:We
Young & Young, CPAs, completed an examination of the financial statements of XYZ Company, Inc., for the year ended June 30, 2007 and issued a standard unqualified auditor’s report dated August 15,
The auditor is auditing the Ingush Company, which has a bond indenture, dated March 26, 2005, with the Last International Bank of Chicago that contains the following covenants in paragraphs E through
Answer the following concerning the compliance report for the Inguish Company:a. Outline the basic elements of a compliance report.b. Write the paragraph containing negative assurance if1. All of the
You are auditing Osakis Electronics USA, Ltd., a subsidiary of a Japanese company, and will issue an audit report covering the balance sheets as of December 31, 2007 and 2006 and the income
The chapter describes societal and judicial factors that affect lawsuits against auditors. Identify these factors, and briefly describe their impact.
Distinguish between common law and statutory law.
What are the potential causes of action against an auditor under a breach of contract lawsuit?
In what significant ways might settlements brought against an auditor under a breach of contract suit differ from those when a client brings a lawsuit under common law?
When a client sues the auditor under common law, is the client or the auditor required to furnish the burden of proof? What must be proven in order for the client to receive damages?
What defenses might an auditor use in successfully defending a: a. Breach of contract suitb. Suit brought under tort law
What is meant by the due diligence standard? What factors might an auditor cite in using due diligence as a defense in a court case?
What precedent was set by the Ultramares case? What was the primary argument used by Judge Cardozo in setting the precedent?
Three tests have been used by various courts in common-law decisions to determine which third-party users can successfully bring a suit against the auditor for negligence. Identify each of these
What are the administrative sanctions the SEC can bring against auditors?
Briefly explain the primary purpose of the:a. Securities Act of 1933.b. Securities Exchange Act of 1934.
What is meant by the effective date of a registration statement? How does this affect the auditor’s responsibility for reviewing subsequent events?
What items should the auditor discuss with the audit committee near or at the end of the audit? Why is this important? Discuss.
What is?a. A 10-Kb. A 10-Qc. An 8-K
What are the negative effects on a public accounting firm of:a. Losing a lawsuitb. Winning a lawsuit
Is there a conceptual difference between an “error” on the part of the auditor and “ordinary negligence”? Explain.
What precedent was set in the Hochfelder case described in the chapter? What actions would be necessary to change the precedent?
What are the continuing education requirements for an AICPA member in public practice? How does the 150 credit-hour education requirement for CPAs respond to the need to reduce liability?
What is meant by defensive auditing? What are some of the actions a public accounting firm can take to minimize the likelihood of lawsuits?
What services are registered public accounting firms prohibited from performing for public company audit clients?
What services are non-registered public accounting firms prohibited from performing for non-public company audit clients?
Explain the advantage to a public accounting firm of proportionate liability as opposed to joint and several liability.
Explain the difference between the purposes of a concurring partner review and an interoffice review.
What was the impact of each of the following court cases on auditing standards?a. 1136 Tenants’ Corporationb. McKesson-Robbinsc. Yale Expressd. U.S. Financial
Multiple Choice Questions 1. In a common-law suit for damages, the jury awards the plaintiffs $1 million. The jury also determines that management is 80% at fault, the auditors are 15% at fault, and
MULTIPLE CHOICE QUESTIONS1. Which of the following, if present, would support a finding of constructive fraud on the part of a CPA?a. Privity of contractb. Intent to deceivec. Reckless disregardd.
An auditor was sued for and found guilty of ordinary negligence.RequiredFor each of the following situations, indicate the likelihood the plaintiff would win if the plaintiff is:a. A financial
a. Compare an auditor’s liability to third parties for negligence under Ultramar’s, Credit Alliance, 1965 Restatement (Second) of Torts, and Rosenblum. Which approach do you think auditors
An investor is suing an auditor for issuing an unqualified opinion on the financial statements of Duluth Industries, which contained a material error. The auditor was negligent in performing the
A client applied for a bank loan from First Bank. In connection with the loan application, the client engaged an auditor to audit its financial statements, and the auditor issued an unqualified
It is often difficult for courts to interpret the negligence standard in deciding whether an act or omission by the auditor constitutes a simple error, negligence, or gross negligence. Often the
The Monicker Co. engaged the accounting firm of Gasner & Gasner to audit the financial statements to be used in connection with a public offering of securities. Monicker’s stock is regularly
Plaintiffs purchased stock of Shiloh, Inc. in the over-the-counter market. The market price subsequently went up and the plaintiffs purchased more stock. Shiloh’s profits, the economy, and general
The SEC plays a significant role in setting accounting and auditing standards. Sometimes the SEC can set precedence through its litigation.RequiredGo to the SEC’s web site www.sec.gov . Select a
a. Explain the advantages and disadvantages of requiring rotation of the partner-in-charge of an audit at least every five years.b. Providing financial information system consulting services to an
There are several types of inspections/ peer reviews: (1) A concurring partner review, (2) An interoffice review,(3) An inspection of registered CPA firms by PCAOB, and (4) An external peer review of
It has been generally asserted that a standard of “due care” was sufficient to meet the negligence standard. Yet the chapter also indicates that the court system has been an influence on the
To expand its operations, Dark Corp. raised $4 million by making a private interstate offering of $2 million in common stock and negotiating a $2 million loan from Safe Bank. The common stock was
Part AThe common stock of Wilson, Inc. is owned by 20 stockholders who live in several states. Wilson’s financial statements as of December 31, 1994 were audited by Doe & Co., CPAs, who rendered
You have worked as a staff auditor for two and one-half years and have mastered your job well. You will likely be promoted to a senior position after this busy season. Your current senior was
What are the major functions of internal audit?
Can an internal audit function be both an assurance and a consulting activity? What are the differences between these two concepts? How can the internal auditing profession logically perform both an
What is the “systematic and disciplined approach” that constitutes one of the unique attributes of internal auditing?

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