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business
auditing

Questions and Answers of Auditing

List two substantive analytical procedures that can be used to provide audit evidence related to the payroll expense accounts and the payroll- related liabilities.
Discuss how an auditor would audit the accrued payroll taxes account.
Identify three possible disclosure issues for payroll expense and payroll-related liabilities.
Multiple Choice1. During the year being audited, the Matthews Corporation changed from a system of recording time worked on clock cards to an IT payroll system in which employees record time in and
You have been hired by Morris & Son, Inc., to manage its human resource department. As a first step, you want to determine personnel needs and assigned duties in order to prevent errors and fraud in
A CPA’s audit documentation (working papers) contains a narrative description of a segment of the Croyden Factory, Inc., payroll system and an accompanying flowchart as follows.Narrative The
McCarthy, CPA, was engaged to audit the financial statements of Kent Company, a continuing audit client. McCarthy is about to audit Kent’s payroll transactions. Kent uses an in- house payroll
James, who was engaged to examine the financial statements of Talbert Corporation, is about to audit payroll. Talbert uses a computer service center to process weekly payroll as follows.Each Monday
Service Corporation hired an independent computer programmer to develop a simplified payroll application for its newly purchased computer. The programmer developed an online database microcomputer
Executive compensation ballooned in the 1990s, and as highlighted in there were notable compensation abuses. The most popular form of executive compensation in the 1990s was company stock. Designers
Search the Internet for information on labor costs in the retail catalog industry ( e. g., labor costs as a percentage of sales).
Why does inventory represent one of the more complex parts of the audit?
How does the inventory management process relate to the revenue, purchasing, and payroll processes?
Briefly describe each of the following documents or records: production schedule, materials requisition, inventory master file, production data information, and cost accumulation and variance reports.
What duties are performed within the inventory management, stores, and cost- accounting functions?
List the key segregation of duties in the inventory management process. What errors or fraud can occur if such segregation of duties is not present?
List the inherent risk factors that affect the inventory management process.
List the major steps in setting control risk in the inventory management process.
What control activities can an entity use to prevent unauthorized inventory production?
List three substantive analytical procedures that can test the fairness of inventory and related accounts.
Describe how an auditor audits standard costs.
List the procedures the auditor should perform during the count of the entity’s physical inventory.
What are some possible causes of book- to- physical inventory differences?
List five items for inventory and related accounts that may require disclosure.
Multiple Choice 1. The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that a. Independent
Yardley, CPA, prepared the flowchart on the following page, which portrays the raw materials purchasing function of one of Yardley’s entities, a medium- size manufacturing company, from the
Rasch is the partner-in-charge of the audit of Bonner Distributing Corporation, a wholesaler that owns one warehouse containing 80 percent of its inventory. Rasch is reviewing the working papers that
Abbott Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse but instead uses statistical sampling to estimate the year- end
Kachelmeier, CPA, is auditing the financial statements of Big Z Wholesaling, Inc., a continuing audit client, for the year ended January 31, 2013. On January 5, 2013, Kachelmeier observed the tagging
An auditor is examining the financial statements of a wholesale cosmetics distributor with an inventory consisting of thousands of individual items. The distributor keeps its inventory in its own
In obtaining evidential matter in support of financial statement assertions, the auditor develops specific audit procedures to address those assertions. Required: Hillmart is a retail department
The following discussion case extends. Harris decided that the easiest way to make the Fabricator Division appear more profitable was through manipulating the inventory, which was the largest asset
Using an Internet browser, search for information on inventory turnover and merchandise liquidations in the retail catalog industry.
Visit the SEC’s website (www. sec.gov) and identify a company that has been recently cited for financial reporting problems related to inventory. Prepare a memo summarizing the inventory issues for
Distinguish between prepaid expenses and intangible assets. Give two examples of each.
Prepaid expenses are generally assessed to have a low inherent risk. Why would intangible assets present serious inherent risk consideration?
How does the purchasing process affect prepaid insurance and property, plant, and equipment transactions?
Describe how substantive analytical procedures may be used to provide evidence on the reasonableness of interest expense.
Confirmations of long- term debt provide evidence about which assertions?
What are the functions of the registrar, the transfer agent, and the dividend-disbursing agent?
What is the major segregation of duties that should be maintained when the entity does not use a registrar or transfer agent and sufficient personnel are available to perform the stock transactions?
List two common disclosures for stockholders’ equity and why such disclosures are necessary.
Describe common audit procedures to audit dividends and retained earnings.
List three substantive analytical procedures that the auditor might use in auditing the income statement.
Why might the auditor do an account analysis and vouch selected transactions in income statement accounts such as legal expense, travel and entertainment, and other income/ expenses?
Multiple Choice 1. Which of the following questions would an auditor most likely include on a control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed
Maslovskaya, CPA, has been engaged to examine the financial statements of Broadwall Corporation for the year ended December 31, 2013. During the year, Broadwall obtained a long- term loan from a
Your audit client, The Brant Group, reported total interest expense for the year of $ 2,000. The table below provides the monthly balance of their long- term debt. Interest is paid monthly on the
The long- term debt working paper on the next page was prepared by client personnel and audited by Andy Fogelman, an audit assistant, during the calendar year 2013 audit of American Widgets, Inc., a
Lee, CPA, the continuing auditor of Wu, Inc., is beginning to audit the common stock and treasury stock accounts. Lee has decided to design substantive procedures without relying on the company’s
On September 10, Melinda Johnson was auditing the financial statements of a new audit client, Mother Earth Foods, a health- food chain that has a June 30 year-end. The company is privately held and
Diebold, Inc., a public company, is a maker of ATMs, bank security systems, and electronic voting machines. Research how Diebold accounted for liability accruals and capitalized expenses (“Division
How do the entity’s controls over cash receipts and disbursements affect the nature and extent of the auditor’s substantive tests of cash balances?
Briefly describe each type of bank account. How does an imprest account help to improve control over cash?
Why are analytical procedures of limited use in the audit of the cash balance?
Explain why the standard bank confirmation form does not identify all information about an entity’s bank accounts or loans.
Why does an auditor obtain a cutoff bank statement when auditing a bank account? What information is examined on the canceled or substitute checks returned with the cutoff bank statement?
List three fraud- related audit procedures for cash.
What approach is used by the auditor to test for kiting?
What are the main transaction- related assertions for investments? Identify the key segregation of investment- related duties and possible errors or fraud that can occur if this segregation is not
Briefly describe the classification and valuation issues related to investments in debt and equity securities.
What two presentation classification issues are important for the audit of investments?
How does the fair value evidence the auditor is likely to gather differ between Level 1 and Level 3 assets?
Multiple Choice1. The tick mark most likely indicates that the amount was traced to thea. December cash disbursements journal.b. Outstanding check list of the applicable bank reconciliation.c.
Cassandra Corporation, a manufacturing company, periodically invests large sums in investment (debt and equity) securities. The investment policy is established by the investment committee of the
Sevcik Company’s auditor received, directly from the banks, confirmations and cutoff statements with related checks and deposit tickets for Sevcik’s three general- purpose bank accounts. The
The following client- prepared bank reconciliation is being examined by Zachary Kallick, CPA, during the examination of the financial statements of Simmons Company.Required:Items (a) through (e)
The schedule on the following page was prepared by the controller of World Manufacturing, Inc., for use by the independent auditors during their examination of World’s year- end financial
Phung, CPA, has been engaged to audit the financial statements of Vernon Distributors, Inc., a continuing audit client, for the year ended September 30. After obtaining an understanding of
To support financial statement assertions, an auditor develops specific audit procedures to satisfy or accomplish each assertion.Required:Items (a) through (c) represent assertions for investments.
Spencer, CPA, has been engaged to audit the fair value measurements of Christensen & Son, a high- tech company in the Midwest. During the audit, Spencer must obtain evidence that management of
Both Intel (www.intel. com) and Microsoft (www.microsoft. com) have large amounts of investment securities. Visit their home pages, and review their financial statements for information on how they
Define what is meant by contingent liability. What three categories are used to classify a contingent liability? Give four examples of a contingent liability.
What information does the auditor ask the attorney to provide on pending or threatened litigation?
Provide two examples of commitments. Under what conditions do such commitments result in a decrease in Other Comprehensive Income?
What are the types of subsequent events relevant to financial statement audits? Give one example of each type of subsequent event that might materially affect the financial statements.
Under what circumstances would the auditor dual date an audit report?
Are analytical procedures required as part of the final overall review of the financial statements? What is the purpose of such analytical procedures?
Why does the auditor obtain a representation letter from management?
Describe the purposes of an independent engagement quality review by a quality review partner.
List the three overall steps in the going concern evaluation process.
What four major categories of events or conditions may indicate going concern problems? Give two examples for each category.
What items should be included in the auditor’s communication with those charged with governance (i. e., the audit committee or similar group)?
What types of events would generally require restatement of the issued financial statements? What procedures should the auditor follow when the entity refuses to cooperate and make the necessary
Multiple Choice1. An auditor would be most likely to identify a contingent liability by obtaining a (n)a. Accounts payable confirmation.b. Bank confirmation of the entity€™s cash
During an audit engagement, Harper, CPA, has satisfactorily completed an examination of accounts payable and other liabilities and now plans to determine whether there are any loss contingencies
Cole & Cole, CPAs, are auditing the financial statements of Consolidated Industries Company for the year ended December 31, 2013. On April 2, 2014, an inquiry letter to J. J. Young, Consolidated’s
Namiki, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 2013. Namiki plans to complete the fieldwork and sign the auditor’s report about March 10,
For each of the following items, assume that Josh Feldstein, CPA, is expressing an opinion on Scornick Company’s financial statements for the year ended December 31, 2013; that he completed
Arenas, an assistant accountant with the firm of Gonzales & Ramirez, CPAs, is auditing the financial statements of Tech Consolidated Industries, Inc. The firm’s audit program calls for the
During the examination of the annual financial statements of Amis Manufacturing, Inc., a nonpublic company, the company’s president, R. Heinrich, and Luddy, the auditor, reviewed the matters that
Items 1 through 16 represent a series of unrelated statements, questions, excerpts, and comments taken from various parts of an auditor’s working paper file. Below is a list of the likely sources
In February 2014, Ceramic Crucibles of America was notified by the state of Colorado that the state was investigating the company’s Durango facility to determine if there were any violations of
Medical Products, Inc. (MPI) was created in 2011 and entered the optical equipment industry. Its made- to- order optical equipment requires large investments in research and development. To fund
Wyly Waste Management. Wyly Waste Management (“WWM”) is an SEC registrant and your firm is its auditor. Overall materiality for the audit is $ 100,000. Shortly after the end of the year, WWM’s
A number of companies have pending lawsuits or other contingent liabilities reported in their financial statements.Required:a. Search the EDGAR database found
Over the past 10 years it has become quite common for an accounting firm to withdraw its opinion on a set of previously issued financial statements. Search the Internet to find a recent example of a
Describe what is meant when an auditor is “associated with” a set of financial statements.
Distinguish between accounting changes that affect consistency and changes that do not. To what does the word consistency refer? How is it possible for an accounting change to affect comparability
Give examples of a client- imposed and a condition- imposed scope limitation. Why is a client- imposed limitation generally considered more serious?

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