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business
auditing

Questions and Answers of Auditing

For each of the following misstatements in property, plant, and equipment accounts, state an internal control that the client can implement to prevent the misstatement from occurring and a
The following types of internal controls are commonly used by organizations for property, plant, and equipment:1. A fixed asset master file is maintained with a separate record for each fixed
The following audit procedures were planned by Linda King, CPA, in the audit of the acquisition and payment cycle for Cooley Products, Inc.:1. Review the acquisitions journal for large and unusual
Your client, Edgartown Corporation, prepared the following schedule of land, buildings and equipment for the audit of financial statements for the year ended December 31, 2011:a. What type of
The following program has been prepared for the audit of accrued real estate taxes of a client that pays taxes on 25 different pieces of property, some of which have been acquired in the current
As part of the audit of different audit areas, auditors should be alert for the possibility of unrecorded liabilities. For each of the following audit areas or accounts, describe a liability that can
While you are having lunch with a banker friend, you become involved in explaining to him how your firm conducts a typical audit. Much to your surprise, your friend is interested and is able to
Examine the tests of controls and substantive tests of transactions results, including the sampling application in Case 18-32, for Ward Publishing Company. Assume that you have already reached
You are doing the audit of the UTE Corporation, for the year ended December 31, 2011. The following schedule for the property, plant, and equipment and related allowance for depreciation accounts has
You are the manager in the audit of Vernal Manufacturing Company and are turning your attention to the income statement accounts. The in-charge auditor assessed control risk for all cycles as low,
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 statements
Identify five general ledger accounts that are likely to be affected by the payroll and personnel cycle in most audits.
Explain the relationship between the payroll and personnel cycle and inventory valuation.
List five tests of controls that can be performed for the payroll and personnel cycle and state the purpose of each control tested.
Explain why the percentage of total audit time in the cycle devoted to performing tests of controls and substantive tests of transactions is usually far greater for the payroll and personnel cycle
Evaluate the following comment by an auditor: “My job is to determine whether the payroll records are fairly stated in accordance with accounting standards, not to find out whether they are
Distinguish between the following payroll audit procedures and state the purpose of each: (1) Trace a random sample of prenumbered time cards to the related payments in the payroll register and
In auditing payroll withholding and payroll tax expense, explain why emphasis should normally be on evaluating the adequacy of the payroll tax return preparation procedures rather than the payroll
List several analytical procedures for the payroll and personnel cycle and explain the type of misstatement that might be indicated when there is a significant difference in the comparison of the
Explain the circumstances under which an auditor should perform audit tests primarily designed to uncover fraud in the payroll and personnel cycle. List three audit procedures that are primarily for
Distinguish among a payroll master file, a W-2 form, and a payroll tax return. Explain the purpose of each.
List the supporting documents and records the auditor will examine in a typical payroll audit in which the primary objective is to detect fraud.
List five types of authorizations in the payroll and personnel cycle and state the type of misstatement that is likely to occur when each authorization is lacking.
Explain why it is common to verify total officers’ compensation even when the tests of controls and substantive tests of transactions results in payroll are excellent. What audit procedures can be
Explain what is meant by an imprest payroll account. What is its purpose as a control over payroll?
List several audit procedures that the auditor can use to determine whether payroll transactions are recorded at the proper amounts.
Explain how audit sampling can be used to test the payroll and personnel cycle.
Multiple Choice QuestionsThe following questions concern internal controls in the payroll and personnel cycle. Choose the best response.a. A factory foreman at Steblecki Corporation discharged an
Multiple Choice QuestionsThe following questions concern audit testing of the payroll and personnel cycle. Choose the best response.a. When control risk is assessed as low for assertions related to
Items 1 through 8 are selected questions typically found in internal control questionnaires used by auditors to obtain an understanding of internal control in the payroll and personnel cycle. In
Following are some of the tests of controls and substantive tests of transactions procedures often performed in the payroll and personnel cycle. (Each procedure is to be done on a sample basis.)1.
The following misstatements are included in the accounting records of Lathen Manufacturing Company:1. Joe Block and Frank Demery take turns “punching in” for each other every few days.The absent
The following audit procedures are typical of those found in auditing the payroll and personnel cycle:1. Scan journals for all periods for unusual transactions to determine whether they are recorded
The following are steps in the methodology for designing tests of controls, substantive tests of transactions, and tests of details of balances for the payroll and personnel cycle:1. Design tests of
In comparing total payroll tax expense with that of the preceding year, Merlin Brendin, CPA, observed a significant increase, even though the total number of employees increased only from 175 to 185.
You are assessing internal control in the audit of the payroll and personnel cycle for Rogers Products Company, a manufacturing company specializing in assembling computer parts. Rogers employs
The following are various asset misappropriations involving the payroll and personnel cycle.1. The payroll clerk submitted payroll information for a fictitious employee and had the funds directly
Archer Uniforms, Inc., is a distributor of professional uniforms to retail stores that sell work clothing to professionals, such as doctors, nurses, security guards, etc. Traditionally, most of the
During the first-year audit of Jones Wholesale Stationery, you observe that commission’s amount to almost 25 percent of total sales, which is somewhat higher than in previous years. Further
Roost and Briley, CPAs, are doing the audit of Leggert Lumber Co., an international wholesale lumber broker. Because of the nature of their business, payroll and telephone expense are the two largest
Outsourcing the payroll function can provide many benefits, but there are also risks associated with outsourcing. The IRS (www.irs.gov) provides information on outsourcing payroll duties for
Give the reasons why inventory is often the most difficult and time consuming part of many audits.
Explain the relationship between the acquisition and payment cycle and the inventory and warehousing cycle in the audit of a manufacturing company.List several audit procedures in the acquisition and
State what is meant by cost accounting records and explain their importance in the conduct of an audit.
Many auditors assert that certain audit tests can be significantly reduced for clients with adequate perpetual records that include both unit and cost data. What are the most important tests of the
Before the physical examination, the auditor obtains a copy of the client's inventory instructions and reviews them with the controller. In obtaining an understanding of inventory procedures for a
At the completion of an inventory observation, the controller requested the auditor to give him a copy of all recorded test counts to facilitate the correction of all discrepancies between the
What major audit procedures are involved in testing for the ownership of inventory during the observation of the physical counts and as a part of subsequent valuation tests?
In the verification of the amount of the inventory, one of the auditor's concerns is that slow-moving and obsolete items be identified. List the auditing procedures that can be used to determine
During the taking of physical inventory, the controller intention ally withheld several inventory tags from the employees responsible for the physical count. After the auditor left the client's
Explain why a proper cutoff of purchases and sales is heavily dependent on the physical inventory observation. What information should be obtained during the physical count to make sure that cutoff
Define what is meant by compilation tests. List several examples of audit procedures to verify compilation.
List the major analytical procedures for testing the overall reasonableness of inventory. For each test, explain the type of misstatement that could be identified.
Included in the December 31, 2011, 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
The Ruswell Manufacturing Company applied manufacturing overhead to inventory at December 31, 2011, on the basis of $3.47 per direct labor hour. Explain how you will evaluate the reasonableness of
Each employee for the Gedding Manufacturing Co., a firm using a job-cost inventory costing method, must reconcile his or her total hours worked with the hours worked on individual jobs using a job
Assuming that the auditor properly documents receiving report numbers as a part of the physical inventory observation procedures, explain how the proper cutoff of purchases, including tests for the
Multiple Choice QuestionsThe following questions concern internal controls in the inventory and warehousing cycle. Choose the best response.a. Which of the following controls will most likely justify
Multiple Choice QuestionsThe following questions concern testing the client's internal controls for inventory and warehousing. Choose the best response.a. When an auditor tests a client's cost
Multiple Choice QuestionsThe following questions deal with tests of details of balances and analytical procedures for inventory. Choose the best response.a. Which of the following procedures is the
Items 1 through 8 are selected questions typically found in questionnaires used by auditors to obtain an understanding of internal control in the inventory and warehousing cycle. In using the
The Frist Corporation has the following internal controls related to inventory:1. The inventory purchasing system only allows purchases from pre-approved vendors.2. The perpetual inventory system
The cost accounting records are often an essential area to audit in a manufacturing or construction company.Requireda. Why should the auditor review the cost accounting records and test their
Following are audit procedures commonly performed in the inventory and warehousing cycle for a manufacturing company:1. Read the client's physical inventory instructions and observe whether they are
The following misstatements are included in the inventory and related records of Westbox Manufacturing Company:1. An inventory item was priced at $12 each instead of at the correct cost of $12 per
You are responsible for the audit of inventory for Honey Best Grocery Wholesales, Inc., a closely held grocery wholesaler that sells to independent grocery stores. Inventory is by far the largest
Your client, Ridgewood Heating and Cooling, specializes in residential air conditioning and heating installations. The company maintains an inventory of air conditioning units, furnaces, and air
You encountered the following situations during the December 31, 2011, physical inventory of Latner Shoe Distributor Company:Requireda. Latner maintains a large portion of the shoe merchandise in 10
In connection with his audit of the financial statements of Knutson Products Co., an assembler of home appliances, for the year ended May 31, 2011, Ray Abel, CPA, is reviewing with Knutson's
The following are sales, cost of sales, and inventory data for Aladdin Products Supply Company, a wholesale distributor of cleaning supplies. Dollar amounts are in millions.Requireda. Calculate the
In an annual audit at December 31, 2011, you find the following transactions near the closing date:1. Merchandise costing $1,822 was received on January 3, 2012, and the related acquisition invoice
As a part of your clerical tests of inventory for Martin Manufacturing, you have tested about 20% of the dollar items and have found the following exceptions:1. Extension errors:2. Differences
You have been engaged for the audit of the Y Company for the year ended December 31, 2011. The Y Company is in the wholesale chemical business and makes all sales at 25% over cost. Following are
You are assigned to the December 31, 2011, audit of Sea Gull Airframes, Inc. The company designs and manufactures aircraft superstructures and airframe components. You observed the physical inventory
Since 1938, when auditors failed to uncover fictitious inventory recorded by the McKesson & Robbins Company, auditors have been ordinarily required to physically observe the counting of inventory. It
List four examples of interest-bearing liability accounts commonly found in balance sheets. What characteristics do these liabilities have in common? How do they differ?
Why are liability accounts included in the capital acquisition and repayment cycle audited differently from accounts payable?
It is common practice to audit the balance in notes payable in conjunction with the audit of interest expense and interest payable. Explain the advantages of this approach.
Which internal controls should the auditor be most concerned about in the audit of notes payable? Explain the importance of each.
Which analytical procedures are most important in verifying notes payable? Which types of misstatements can the auditor uncover by the use of these tests?
Why is it more important to search for unrecorded notes payable than for unrecorded notes receivable? Suggest audit procedures that the auditor can use to uncover unrecorded notes payable.
What is the primary purpose of analyzing interest expense? Given this purpose, what primary considerations should the auditor keep in mind when doing the analysis?
Distinguish between (a) Tests of controls and substantive tests of transactions (b) Tests of details of balances for liability accounts in the capital acquisition and repayment cycle.
List two types of restrictions long-term creditors often put on companies when granting them a loan. How can the auditor find out about these restrictions?
What are the primary objectives in the audit of owners' equity accounts?
Evaluate the following statement: "The corporate charter and the bylaws of a company are legal documents; therefore, they should not be examined by the auditors. If the auditor wants information
What are the major internal controls over owners' equity?
How does the audit of owners' equity for a closely held corporation differ from that for a publicly held corporation? In what respects are there no significant differences?
Describe the duties of a stock registrar and a transfer agent. How does the use of their services affect the client's internal controls?
What kinds of information can be confirmed with a transfer agent?
Evaluate the following statement: "The most important audit procedure to verify dividends for the year is a comparison of a random sample of cancelled dividend checks with a dividend list that has
If a transfer agent disburses dividends for a client, explain how the audit of dividends declared and paid is affected. What audit procedures are necessary to verify dividends paid when a transfer
What should be the major emphasis in auditing the retained earnings account? Explain your answer.
Explain the relationship between the audit of owners' equity and the calculations of earnings per share. What are the main auditing considerations in verifying the earnings per share figure?
Multiple Choice QuestionsThe following multiple choice questions concern interest-bearing liabilities. Choose the best response.a. The audit program for long-term debt should include steps that
Multiple Choice QuestionsThe following questions concern the audit of accounts in the capital acquisition and repayment cycle. Choose the best response.a. During an audit of a publicly held company,
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 are frequently performed audit procedures for the verification of bonds payable issued in previous years:1. Analyze the general ledger account for bonds payable, interest expense, and
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, 2011:Requireda. What type of evidence would you
The ending general ledger balance of $186,000 in notes payable for the Sterling Manufacturing Company is made up of 20 notes to eight different payees. The notes vary in duration anywhere from 30

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