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business
auditing

Questions and Answers of Auditing

TRUE-FALSE QUESTIONS1. The auditor is expected to obtain evidence about the operating effectiveness of internal control on all audits.2. When testing controls, the auditor tests only transaction
MULTIPLE-CHOICE QUESTIONS1. Which of the following statements is correct regarding the setting of auditing standards in the U.S.?a. The AICPA is responsible for the setting auditing standards for
MULTIPLE-CHOICE QUESTIONS1. Assume that an auditor is physically examining a client's equipment. What type of audit procedure is the auditor performing?a. Inspection of documentation.b. Inspection of
MULTIPLE-CHOICE QUESTIONS1. The auditor is testing the operating effectiveness of controls in the revenue cycle and notes the following: (a) the organization does not regularly follow its credit
Briefly describe the relevance of the following standard setters for auditors.a. AICPAb. PCAOBc. IAASB
Compare the ten generally accepted auditing standards currently used by the PCAOB with the AICPA’s “Principles Governing an Audit in Accordance with Generally Accepted Auditing Standards.”
What are the client responsibilities that are relevant to the auditor? How do those responsibilities affect the audit opinion formulation process?
Refer to Exhibit 5.3. List the phases of audit opinion formulation process. What are the primary activities within each of the five phases?
Professional guidance says that revenue recognition should always be considered to be high risk in planning an audit of a company’s financial statements.a. Identify the activities that affect the
Assume that an organization asserts that it has $35 million in net account receivables. Using the assertions listed in Exhibit 5.5, describe specifically what management is asserting with respect to
What is an audit program? What information should an auditor gather before developing an audit program?
Exhibit lists types of audit procedures. Describe how you would you use those procedures to test the inventory account. For each procedure, indicate the purpose of the procedure—is it a risk
Define the term audit documentation and provide examples.
Refer the Auditing in Practice feature, “Accepting a New Audit Engagement.” Assume that an auditor is following U.S. auditing standards. What communication must an auditor of a new client have?
How do the sources of risk of misstatement listed help the auditor plan the audit?
Refer to the Auditing in Practice feature, “Controls to Address Fraud Risk.” When assessing control design effectiveness, what types of controls would an auditor expect a client to have in place
Refer to the Auditing in Practice feature, “Weak Internal Control Design and Links to Substantive Audit Procedures.” Explain how the auditor’s preliminary assessment of control risk affects
An important part of Phase II of the audit opinion formulation process is determining how to respond to identified risks of material misstatement. As indicated in Exhibit 5.8, the auditor might
Refer to the Auditing in Practice feature, "Risk Assessment Procedures and Tests of Operating Effectiveness of Controls." Can risk assessment procedures be used as tests of controls? Explain.
Auditing standards indicate that if the preliminary control risk assessment is low, the auditor must gain assurance that the controls are operating effectively.a. What is meant by testing the
An important principle of the control environment is the organization's commitment to ethics and integrity (COSO Principle 1). How might an auditor test the organization's commitment to ethics and
What are the external auditor testing requirements of internal controls for?a. Large, publicly held companies?b. Nonpublic companies and small, publicly held companies?
When the auditor determines that controls are not operating effectively, the auditor needs to consider the kind of misstatements that could occur, how they might occur, and how the auditor would
In analyzing the results of the tests of controls, there are two potential outcomes: (a) Deficiencies are identified (b) Deficiencies are not identified. What are alternative courses of action for
If a company's control risk is assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls.For each of the following control activities listed as (1) - (10)
Assume that you are going to test computerized controls that your client has put in place. Consider the concept related to program changes. What is the important concept for you to consider when
Assume that you are planning to test a client's reconciliation. You could test by either inspecting documentation of the reconciliation or by reperforming the reconciliation. What factors would cause
What are some of the key decisions that influence the substantive testing to be performed by the auditor?
Refer to the Auditing in Practice feature, “Dual-Purpose Tests.” What is a dual-purpose test, and why might an auditor choose to perform dual purpose tests?
Explain how the factors in the first column affect the auditor’s decision about substantive testing.
What substantive procedures could an auditor use to determine that all purchases debited to a fixed asset account in the current year are properly valued?
Audits of financial statements are designed determine whether account balances are materially correct. Assume that your client is a construction company that has the following assets on its balance
The auditor provides an opinion on internal control over financial reporting for one of its public companies.a. Is the auditor also required to audit the company's financial statements at the same
Review the external auditor's report on the integrated audit, presented in Exhibit. What are the important elements in that report related to internal control?
When testing internal controls, does the auditor test the same transactions that management and the internal auditors tested, or does the auditor test different transactions? Explain your rationale.
The auditor is evaluating the internal control of a new client. Management has prepared its assessment of internal control and has concluded that it has some deficiencies, but no significant
Refer to the Professional Judgment in Context feature at the outset of the chapter, which features details on the Ernst& Young-UK audits of Thornton Precision Components from 2004-2006.a. What is
Refer to the Professional Judgment in Context feature at the outset of the chapter, which features details on the Ernst & Young-UK audits of Thornton Precision Components from 2004-2006. Use the
In March 2006, General Motors (GM) announced that it needed to restate its prior year's financial statements.Excerpts from the Wall Street Journal describing the restatements include the
Identify the PCAOB AS that relates to audit documentation. Review that AS and describe the characteristics of good audit documentation that are noted in that standard.
Refer to the Appendix in the chapter. Identify the IAASB ISA that relates to the terms of an audit engagement. Review the example audit engagement letter contained in the standard, and identify the
Exhibit identifies the five management assertions contained in the PCAOB standards. Refer to the Appendix to this chapter. Identify the IAASB ISA that provides guidance on management assertions. List
Locate and read the article listed below and answer the following questions.Bierstaker, J. L., J. E. Hunton, and J. C. Thibodeau. 2009.Do client-prepared internal control documentation and business
Identify typical accounting cycles not listed in the Exhibit and list their associated accounts.
Describe how auditing standards affect the design of audit programs.
Refer to the Auditing in Practice feature, “Documenting the Auditor’s Understanding of an Organization’s Internal Controls.” What should an auditor document with respect to the design of
What controls might an auditor test related to the valuation assertion for the sales account?
Assume that you want to test an entity-wide control related to the control environment. Specifically, you want to obtain evidence that the audit committee has periodic discussions about fraud. Recall
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
Two Auditing in Practice features in the chapter highlight audit deficiencies related to tests of controls and substantive procedures that were noted in PCAOB inspection reports. See “The Need for
TRUE-FALSE QUESTIONS1. The appropriateness of audit evidence refers to its relevance and reliability.2. The sufficiency of evidence is a measure of evidence quality.3. When testing for existence, the
TRUE-FALSE QUESTIONS1. Because management estimates are often subjective, the auditor does not need to test these estimates, but can rely solely on management’s work.2. When testing management
MULTIPLE-CHOICE QUESTIONS1. Which of the following statements best describes what is meant by the term appropriateness of audit evidence?a. Appropriateness is a measure of the quality of audit
MULTIPLE-CHOICE QUESTIONS1. Which of the following procedures would an auditor typically perform first when assessing the reasonableness of management's estimate of its pension liability?a. Inspect
Auditing standards require the auditor to gather sufficient appropriate evidence to ensure that the auditor has a reasonable basis for an opinion regarding the financial statements. What are the
Refer to Exhibit. Describe how the appropriateness and sufficiency of evidence for a specific account is influenced by the risk of material misstatement associated with that account. Contrast how
Appropriateness of audit evidence considers what two evidence characteristics? Define these characteristics and identify factors that affect these characteristics.
Refer to Exhibit and describe the differences between vouching and tracing.
Discuss the relative reliability of internal and external documentation. Give two examples of each type of documentation.
Refer to Exhibit and identify the nine types of audit procedures. Assume that you are planning the audit of the PageDoc Company’s inventory. PageDoc manufactures a variety of office equipment.
Refer to Exhibit 6.5 to identify the nine types of audit procedures used as part of the audit evidence-gathering process. Following is a list of audit procedures performed. For each procedure (listed
Assume that an automotive company discloses the following risk factors (labeled 1. through 7. below) that might affect the financial statements.1. Continued decline in market share, and a market
An auditor has to determine both the reliability and the relevance of potential audit evidence in order to determine that appropriate audit evidence is gathered.a. Explain the difference between
What are the basic assumptions that must hold for an auditor to justifiably use analytical procedures as a substantive audit procedure?
Refer to the Auditing in Practice feature "Analytical Procedures are Not Client Estimates." What is the relationship between the auditor's use of an analytical procedure and a client estimate?
Assume that the auditor proposes that sales be audited by examining the relationship of sales and cost of sales to that of the previous two years, as adjusted for an increase in gross domestic
Assume that an auditor wishes to use analytical procedures as a substantive procedure. Indicate how substantive analytical procedures could be used in assisting the auditor in testing the following
Assume that you have finished your substantive analytical procedures in the area of revenue. You used trend analysis and a reasonableness test and conducted the procedures at a disaggregated level.
Review Exhibit and describe how the two audit approaches presented in the Exhibit differ. What factors would lead to such a difference?
Sufficiency is a measure of the quantity of evidence. Identify factors that affect evidence sufficiency.
An auditor typically selects samples when testing controls. What are some factors that that affect the sample sizes used when testing controls?
Refer to the Auditing in Practice feature "Description of Common Types of Earnings Management Techniques." Why might it be difficult for auditors to disallow companies' preferences to decrease
Why would an auditor need to use an outside specialist when performing an audit? Identify specific accounts or assertions where a specialist might be needed.
What factors should the auditor consider when evaluating the professional qualifications of a specialist?
What is a related-party transaction? Provide examples of transactions that would be considered related-party transactions.
Review Exhibit and identify audit procedures that an auditor might use for related-party transactions.
What is audit documentation? Refer to Exhibit and identify the key components that each audit document should contain.
What is meant by the statement audit documentation ought to stand on its own? What is the importance of this concept?
What are the purposes of an audit program? Review Exhibit and identify the major items that should be included in an audit program.
The Professional Judgment in Context feature "Evidence-Related Findings in PCAOB Inspection Reports" presented at the beginning of the chapter provides excerpts of various PCAOB inspection reports
In August 2011, the PCAOB barred two former Ernst & Young LLP (E&Y) employees from auditing public companies, alleging they provided misleading documents to PCAOB inspectors who were
In May 2011, Deloitte Touche Tohmatsu (DTT) resigned as the auditor for Longtop Financial Technologies Limited (Longtop). Excerpts from DTT's resignation letter are provided here:As part of the
On May 4, 2010, the PCAOB issued its public inspection of Deloitte & Touche, LLP, covering their inspection of audits conducted during 2009. In their summary comments, the PCAOB inspectors
Adecco SA is the world's largest temporary employment company. It lost several major accounts because customers felt it was not adequately serving their complex staffing needs. In lawsuits filed in
Cendant Corporation, a company that sold travel and health club memberships, was the subject of an intensive fraud investigation that culminated in 1998. The company's Web site revealed the following
Entry-level auditing staff often inspects client records and documentation supporting accounting transactions in order to gain evidence about the appropriate application of the applicable financial
Using appropriate resources, locate the financial statements of a company with which you are familiar. Identify specific account balances for which analytical procedures would be appropriate for
Refer to the Appendix to Chapter and identify the PCAOB AS that addresses the topic of audit evidence. Obtain a copy of that AS and answer the following questions.a. What are the three alternative
Obtain a copy of Accounting and Auditing Enforcement Release (AAER) No. 3146, issued by the SEC on June 24, 2010.a. Identify the audit evidence deficiencies described in the release.b. In what ways
Locate and read the article listed below and answer the following questions.Kaplan, S., E. O’Donnell, and B. Arel. 2008. The influence of auditor experience on the persuasiveness of information
Locate and read the article listed below and answer the following questions.Kohlbeck, M. and B. Mayhew. 2010. Valuation of firms that disclose related party transactions. Journal of Accounting and
a. Consider Ford's inventory account on the balance sheet, along with the accompanying footnote. What are the most relevant assertions that management is making with regard to its inventory?b. Ford,
You are auditing Pell grants provided to students at six state universities. The Pell grant program is a federal financial aid program for college students. The maximum grant a student can receive
When testing accounts that are based on management estimates, the auditor should understand the process management uses to develop those estimates. As part of obtaining that understanding, what
TRUE-FALSE QUESTIONS1. Material misstatements refer only to intentional misstatements that exist in a transaction or financial statement account balance.2. Performance materiality is set less than
TRUE-FALSE QUESTIONS1. Each of the following factors would lead the auditor to assess control risk at a higher level: the company lacks personnel or expertise to deal with changes in the industry,
MULTIPLE-CHOICE QUESTIONS1. Which of the following statements is true regarding the concept of materiality?a. Materiality is the magnitude of an omission or misstatement of accounting information
MULTIPLE-CHOICE QUESTIONS1. Which of the following characteristics would lead the auditor to assess control risk at a higher level?a. It is difficult for the auditor to determine or gain access to
Define the term misstatement and describe characteristics that would make a misstatement material.
Define the following terms: (a) Performance materiality,(b) Tolerable misstatement, (c) Clearly trivial.

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