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auditing

Questions and Answers of Auditing

McClain Plastics has been an audit client of Belcor, Rich, Smith & Barnes, CPAs (BRS&B), for several years. McClain Plastics was started by Evers McClain, who owns 51% of the company’s
Auditing standards require the auditor to obtain an understanding of the entity and its environment as a basis for assessing the risks of material misstatements. Business models differ across
Define each of the following terms:a. Acceptable risk of overreliance (ARO)b. Computed upper exception rate (CUER)c. Estimated population exception rate (EPER)d. Sample exception rate (SER)e.
Auditors often have to test the effectiveness of infrequently operating controls, such as monthly closing and reconciliation processes. Determining the appropriate extent of testing of such controls
Why does an auditor review sales returns subsequent to year-end? What audit objective does this procedure satisfy?
The following are common tests of details of balances or analytical procedures for the audit of accounts receivable:1. Request 30 positive and 50 negative confirmations of accounts receivable.2.
Tim Flynn is the engagement manager for the audit of O’Donnell Enterprises. Tim is currently planning tests of details of balances for accounts receivable and is considering the use of electronic
Parts III, V, and VI of this case study dealt with obtaining an understanding of internal control and assessing control risk for transactions affecting accounts payable of Pinnacle Manufacturing. In
What is the relationship between ARIA and ARO for tests of controls?
List five asset accounts, three liability accounts, and five expense accounts included in the acquisition and payment cycle for a typical manufacturing company. Discuss.
If an audit client does not have prenumbered checks, what type of misstatement has a greater chance of occurring? Under the circumstances, what audit procedure can the auditor use to compensate for
As part of the June 30, 2013, audit of accounts payable of Milner Products Company, the auditor sent 22 confirmations of accounts payable to vendors in the form of requests for statements. Four of
Organizations frequently use procurement cards (often referred to as P-Cards) to purchase goods or services using processes outside normal acquisition and cash disbursement procedures. P-Cards are a
You are auditing the financial statements of Austin Software Company, which is a fast-growing software development company. As part of the company’s strategy, management has been aggressively
The Securities and Exchange Commission (SEC) found that Centerpulse, Ltd., a publicly traded company based in Switzerland, fraudulently misstated its 2002 third and fourth quarter financial
Identify three tests of controls or substantive tests of transactions in the payroll and personnel cycle that an auditor may perform using audit software.
Alyssa Ghose is auditing payroll accruals for a manufacturing company. The client has accrued payroll taxes, accrued vacation pay, and accrued bonuses for salespersons as of the end of the fiscal
Chief executive officer compensation can be a material amount and is often scrutinized by regulators, analysts, competitors, and investors. For CEOs of publicly traded companies, compensation can
Included in the December 31, 2013, inventory of the Wholeridge Supply Company are 2,600 deluxe ring binders in the amount of $5,902. An examination of the most recent acquisitions of binders showed
Below are four independent client scenarios:1. Colburn Pharmacy, Inc., has 77 stores located in the New England area. Approximately 60 percent of the inventory recorded on the balance sheet for the
In an annual audit at December 31, 2013, you find the following transactions near the closing date:1. Merchandise costing $625 was received on December 28, 2013, and the invoice was not recorded. You
You are assigned to the December 31, 2013, audit of Sea Gull Airframes, Inc. The company designs and manufactures aircraft superstructures and airframe components. You observed the physical inventory
Items 1 through 6 are questions typically found in a standard internal control questionnaire used by auditors to obtain an understanding of internal control for notes payable. In using the
The following audit procedures were performed to address presentation and disclosure-related audit objectives related to notes payable.1. The schedule of notes payable in the footnotes includes all
Your client, Red Horse, Inc., prepared the following schedule for long term debt for the audit of financial statements for the year ended December 31, 2013:Requireda. What type of evidence would you
The following covenants are extracted from the indenture of a bond issue. The indenture provides that failure to comply with its terms in any respect automatically makes the loan immediately due (the
Before a company can begin trading on an exchange, it must meet certain initial requirements. The exchanges set their own standards for initial listing, which include minimum thresholds for the
Explain the relationships among the initial assessed control risk, tests of controls and substantive tests of transactions for cash receipts, and the tests of details of cash balances. Discuss.
Explain the relationships among the initial assessed control risk, tests of controls and substantive tests of transactions for cash disbursements, and the tests of details of cash balances. Give one
Explain why an auditor compares the “date of deposit according to the books” to the date of disbursement according to the books” on an interbank transfer schedule to detect kiting.
Briefly explain why accounting standards related to fair value estimates make the audit of financial instruments more complex.
How would an auditor test the realizable value audit objective for a financial instrument classified as a level 3 fair value estimate?
The following are various potential misstatements due to errors or fraud (1 through 7), and a list of auditing procedures (a, through h.) the auditor would consider performing to gather evidence to
McNeil Company, a medium-sized manufacturer of microwave ovens, has been an audit client for the past five years. McNeil Co. has been steadily growing and recently hired a new CEO who has decided to
Five months after issuing an unqualified audit opinion and an unqualified opinion on internal controls for the audit of the year ended December 31, 2013, for a large publicly traded client, the
How does an auditor evaluate the unadjusted misstatement schedule (also called summary of possible misstatements) at the end of the audit engagement to assess whether the financial statements are
The fieldwork for the June 30, 2013, audit of Tracy Brewing Company was finished August 19, 2013, and the completed financial statements, accompanied by the signed audit reports, were mailed
Callie Peters is completing the audit of MakingNewFriends.com for the year ended December 31, 2013. Callie has been the audit manager on this engagement for the past three years. MakingNewFriends.com
What are the differences between the review reports for a private company under SSARS and for the interim financial statements of a public company? Discuss.
You have been asked to provide assurance on information contained in New Dominion’s Corporate Sustainability Report. What standards would you use to perform this engagement?
Jennifer Branson is a new staff auditor on the audit engagement of Greenville Light & Sound, which is a publicly traded company with a calendar year-end. The engagement team has completed its
With greater frequency, organizations are issuing corporate social responsibility (CSR) reports that describe how they are engaging in socially responsible activities. Many believe that users will
The audit firm of Waggoner and Allen, LLP, recently received a request to submit a proposal to audit the financial statements of the Williamson County Public School System. The system is funded
The following questions address CPA firms and entities that regulate them. Choose the best response:a. Which of the following statements accurately describes U.S. CPA firms that are not sole
On February 17, 2014, a CPA completed all the evidence gathering procedures on the audit of the financial statements for the Buckheizer Technology Corporation for the year ended December 31, 2013.
The following questions concern persuasiveness of evidence. Choose the best response.a. Which of the following types of documentary evidence should the auditor consider to be the most reliable?(1) A
Who is considered the client when auditing public companies?
Table 13-3 illustrates variations in the emphasis on different types of audit tests. What are the benefits to the auditor of indemnifying the best mix of tests?
Explain the relationship of performance materiality, inherent risks, and control risk to planned tests of details of balances.
Evaluate the necessity of following the practice described by an auditor: “In confirming bank accounts, I insist upon a response from every bank the client has done business with in the past 2
Explain what is meant by basic precision. How is it determined?
TRUE-FALSE QUESTIONS 1. When the auditor has no reservations about management's financial statements or internal controls, the audit opinion is said to be unqualified.2. Independence is referred to
MULTIPLE-CHOICE QUESTIONS1. Which of the following factors does not create a demand for external audit services?a. Potential bias by management in providing information.b. Requirement of the Center
What is the objective of external auditing? Describe the role of external auditing in meeting society’s demands for unbiased financial and internal control information.
Why is it important that users perceive auditors to be independent? What is the difference between being independent in fact and being independent in appearance?
It has been stated that auditors must be independent because audited financial statements must serve the needs of a wide variety of users. If the auditor were to favor one group, such as existing
Refer to the Auditing in Practice feature “Why Is Owning Stock in an Audit Client Unacceptable?” and answer the following:a. Describe the unethical actions of Susan Birkert.b. Compare and
Green Day Golf Distributors is a relatively small, privately held golf distributing company that operates in the Midwest and handles several product lines, including shoes, clothing, and golf clubs.
Refer to Exhibit and identify the primary parties involved in preparing and auditing financial statements, and then briefly describe their roles.
List the various types of audit service providers. What types of audit firms are best suited for auditing large multinational companies versus small, regional companies that are not publicly traded?
What types of skills and knowledge are needed by professionals entering the external auditing profession?
Refer to the Auditing in Practice feature “Should I Work for a Large or a Small Audit Firm?” Compare and contrast the workplace environments at larger versus smaller audit firms. Explain which
Briefly describe the various roles of the following organizations that affect the external auditing profession and the nature of those effects:a. Congressb. Public Company Accounting Oversight Board
Distinguish between the roles of the PCAOB and the AICPA in(a) Setting audit standards,(b) Performing quality-control reviews of member firms,(c) Setting accounting standards.
The PCAOB has the authority to set audit standards for all audits of public companies registered in the United States. The AICPA continues to set audit standards for nonpublic companies through its
Define audit quality. What are the five primary drivers of audit quality as articulated by the Financial Reporting Council’s “Audit Quality Framework”?
Refer to Exhibit the “Audit Quality Framework.”a. How does positive audit firm culture, along with expert skills and qualities of both the audit partner and the engagement team affect audit
Auditing standards emphasize the importance of independence. Explain why independence is often considered the cornerstone of the auditing profession. Explain why independence issues were a primary
Describe the following requirements that help to achieve audit quality and thereby help to minimize the exposure of external auditors to lawsuits:a. Maintaining auditor independenceb. Participating
Describe the seven threats to independence articulated in the AICPA’s independence conceptual framework.
Describe the safeguards to independence articulated in the AICPA’s independence conceptual framework, and provide examples of each.
Refer to the Professional Judgment in Context feature at the outset of the chapter, which discusses the PCAOB enforcement action related to the audit of Alloy Steel International. As you will recall,
Enron was an energy company based in Houston, Texas that made energy trades. It was formed in 1985 with the merger of Houston Natural Gas and InterNorth. After an aggressive expansion plan that
Locate and read the article listed below and answer the following questions:Almer, E. D., M. Lightbody, L. E. Single, and B. Vigilante. 2011. New Leadership Tracks in Accounting Firms: An Alternative
What factors create a demand for an independent external audit?
Refer to the Auditing in Practice feature “Who are the Leaders of the PCAOB?” Why is there a requirement that no more than two of the board members are CPAs?
Access the SEC home page at www.sec.gov.a. Refer to the Auditing in Practice feature “Locating Enforcement Actions on the SEC Web Site”. Follow the directions and locate an enforcement action
In April 2010, the PCAOB issued a disciplinary order instituting disciplinary proceedings, making findings, and imposing sanctions in the case of Robert T. Taylor, CPA (both the firm and the
TRUE-FALSE QUESTIONS1. The Great Salad Oil Swindle of 1963 could best be categorized as an asset misappropriation fraud.2. The Koss Corporation fraud could best be categorized as fraudulent financial
MULTIPLE-CHOICE QUESTIONS1. What is the primary difference between fraud and errors in financial statement reporting?a. The materiality of the misstatement.b. The intent to deceive.c. The level of
You are asked to be interviewed by a student newspaper regarding the nature of accounting fraud. The reporter says, “As I understand it, asset misappropriations are more likely to be found in small
Refer to Exhibit 2.1 and answer the following questions.a. What is a Ponzi scheme?b. Describe the key elements of the Bernie Madoff fraud.c. Is this fraud primarily a case of asset misappropriation
Refer to the Auditing in Practice feature, “The Great Salad Oil Swindle of 1963,” and answer the following questions.a. How did management perpetrate the fraud?b. What was management’s
If one of the three elements of the fraud triangle is not present, can fraud still be perpetrated? Explain.
Each of the following scenarios is based on facts in an actual fraud. Categorize each scenario as primarily indicating (1) an incentive to commit fraud, (2) an opportunity to commit fraud, or (3) a
Refer to Exhibit 2.3 and briefly describe the frauds that were perpetrated at the following companies. For each company, categorize the fraud as involving primarily (1) asset misappropriation, or (2)
Refer to the Auditing in Practice feature, "Professional Skepticism."a. What is professional skepticism?b. Why is professional skepticism necessary to detecting fraud?c. What are the key behaviors
For each of the following situations indicating heightened fraud risk, discuss how a professionally skeptical auditor might interpret the situation.a. The company is not as profitable as its
The Committee of Sponsoring Organizations released its third study on fraudulent financial reporting in 2010. Describe major findings of the study.
The Enron fraud is considered by many to be one of the most significant frauds of the early 2000s.a. Describe the various failures and environmental characteristics during this time period that
What is the responsibility of the external auditor to detect material fraud?
Refer to Exhibit and answer the following questions.a. (Sections 101, 104, and 105) How does the establishment and operation of the PCAOB help to ensure quality external audits? How will audit firm
Corporate governance is the process by which the owners and creditors of an organization exert control over and require accountability for the resources entrusted to the organization. Refer to
Describe the five key principles of effective corporate governance articulated in the 2010 report of the NYSE.
Below is a summary of the NYSE corporate governance requirements of companies listed on this stock exchange. For each requirement, state how it is intended to help to address the risk of fraud in
Below is a summary of the NYSE listing requirements for audit committee responsibilities of companies listed on this stock exchange. For each requirement, state how it is intended to help to address
Audit committees are an important corporate governance party and have taken on additional responsibilities following the passage of the Sarbanes-Oxley Act.a. Describe the changes in audit committee
The following factors describe a potential audit client. For each factor, indicate whether it is indicative of poor corporate governance. Explain the reasoning for your assessment. Finally, identify
In the Professional Judgment in Context feature at the outset of the chapter, we introduced you to the Koss Corporation fraud. In this problem we provide you with further details about that fraud.
Read the facts of the case in Problem 2-51 to become familiar with the fraud involving Koss Corporation. From the Company's October 7, 2009, proxy statement (Def 14A filing with the SEC), we know the

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