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auditing

Questions and Answers of Auditing

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
The Redford Corporation took out a 20-year mortgage on June 15, 2011, for $2,600,000 and pledged its only manufacturing building and the land on which the building stands as collateral. Each month
Items 1 through 6 are common questions found in internal control questionnaires used by auditors to obtain an understanding of internal control for owners' equity. In using the questionnaire for a
The following audit procedures are commonly performed by auditors in the verification of owners' equity:1. Review the articles of incorporation and bylaws for provisions about owners' equity.2.
You are engaged in the audit of a corporation whose records have not previously been audited by you. The corporation has both an independent transfer agent and a registrar for its capital stock. The
You are a CPA engaged in an audit of the financial statements of Pate Corporation for the year ended December 31, 2011. The financial statements and records of Pate Corporation have not been
E-Antiques, Inc. is an Internet-based market maker for buyers and sellers of antique furniture and jewelry. The company allows sellers of antique items to list descriptions of those items on the
Many companies aspire to go public and have their shares traded on exchanges such as the New York Stock Exchange (NYSE) and NASDAQ. Visit the Website of the NYSE(www.nyse.com) and search 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.
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
Why is the monthly reconciliation of bank accounts by an independent person an important internal control over cash balances? Which individuals will generally not be considered independent for this
Evaluate the effectiveness and state the shortcomings of the preparation of a bank reconciliation by the controller in the manner described in the following statement: "When I reconcile the bank
How do bank confirmations differ from positive confirmations of accounts receivable? Distinguish between them in terms of the nature of the information confirmed, the sample size, and the appropriate
Describe what is meant by a cutoff bank statement and state its purpose.
Why are auditors usually less concerned about the client's cash receipts cutoff than the cutoff for sales? Explain the procedure involved in testing for the cutoff for cash receipts.
What is meant by an imprest bank account for a branch operation? Explain the purpose of using this type of bank account.
Explain the purpose of a four-column proof of cash. List two types of misstatements it is meant to uncover.
When the auditor fails to obtain a cutoff bank statement, it is common to verify the entire statement for the month subsequent to the balance sheet date.How is this done and what is its purpose?
Distinguish between lapping and kiting. Describe audit procedures that can be used to uncover each.
Assume that a client with excellent internal controls uses an imprest payroll bank account. Explain why the verification of the payroll bank reconciliation ordinarily takes less time than the tests
Distinguish between the verification of petty cash reimbursements and the verification of the balance in the fund. Explain how each is done. Which is more important?
Why is there a greater emphasis on the detection of fraud in tests of details of cash balances than for other balance sheet accounts? Give two specific examples that demonstrate how this emphasis
Explain why, in verifying bank reconciliations, most auditors emphasize the possibility of a nonexistent deposit in transit being included in the reconciliation and an outstanding check being omitted
How will a company's bank reconciliation reflect an electronic deposit of cash received by the bank from credit card agencies making payments on behalf of customers purchasing products from the
Multiple Choice QuestionsThe following questions deal with auditing year-end cash. Choose the best response.a. A CPA obtains a January 10 cutoff bank statement for a client directly from the
Multiple Choice QuestionsThe following questions deal with discovering fraud in auditing year-end cash. Choose the best response.a. Which of the following is one of the better auditing techniques to
The following are misstatements that might be found in the client's year-end cash balance (assume that the balance sheet date is June 30):1. The outstanding checks on the June 30 bank reconciliation
The following audit procedures are concerned with tests of details of general cash balances:1. Obtain a standard bank confirmation from each bank with which the client does business.2. Compare the
You are auditing general cash for the Pittsburgh Supply Company for the fiscal year ended July 31, 2011. The client has not prepared the July 31 bank reconciliation. After a brief discussion with the
In the audit of the Regional Transport Company, a large branch that maintains its own bank account, cash is periodically transferred to the central account in Cedar Rapids. On the branch account's
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
In connection with an audit you are given the following work sheet:Checks Drawn but Not Paid by BankNo. Amount573 ......... $ 267.27724 ......... 39.92903 ......... 454.67907 .........
You are doing the first-year audit of Sherman School District and have been assigned responsibility for doing a four-column proof of cash for the month ofOctober 2011. You obtain the following
The Check Clearing for the 21st Century Act (Check 21 Act) allows recipients of paper checks to create a digital image of the original check, eliminating the need for further handling of the actual
Identify and describe the four presentation and disclosure audit objectives.
Describe the purpose of a financial statement disclosure checklist and explain how it helps the auditor determine if there is sufficient appropriate evidence for each of the presentation and
Distinguish between a contingent liability and an actual liability and give three examples of each.
In the audit of the James Mobley Company, you are concerned about the possibility of contingent liabilities resulting from income tax disputes. Discuss the procedures you could use for an extensive
Explain why an auditor is interested in a client's future commitments to purchase raw materials at a fixed price.
Explain why the analysis of legal expense is an essential part of every audit.
During the audit of the Merrill Manufacturing Company, Ralph Pyson, CPA, has become aware of four lawsuits against the client through discussions with the client, reading corporate minutes, and
Distinguish between an asserted and an unasserted claim. Explain why a client's attorney may not reveal an unasserted claim.
Describe the action that an auditor should take if an attorney refuses to provide information that is within the attorney's jurisdiction and may directly affect the fair presentation of the financial
Distinguish between the two general types of subsequent events and explain how they differ. Give two examples of each type.
In obtaining letters from attorneys, Bill Malano's aim is to receive the letters as early as possible after the balance sheet date. This provides him with a signed letter from every attorney in time
What major considerations should the auditor take into account in determining how extensive the review of subsequent events should be?
Identify five audit procedures normally done as a part of the review for subsequent events.
Distinguish between subsequent events occurring between the balance sheet date and the date of the auditor's report, and subsequent discovery of facts existing at the date of the auditor's report.
Miles Lawson, CPA, believes that the final summarization is the easiest part of the audit if careful planning is followed throughout the audit. He makes sure that each segment of the audit is
Compare and contrast the accumulation of audit evidence and the evaluation of the adequacy of the disclosures in the financial statements.Give two examples in which adequate disclosure could depend
Distinguish between a client letter of representation and a management letter and state the primary purpose of each. List some items that might be included in each letter.
Explain what is meant by information accompanying basic financial statements. Provide two examples of such information. What levels of assurance may the CPA offer for this information?
What is meant by reading other financial information in annual reports? Give an example of the type of information the auditor is examining.
Distinguish between regular audit documentation review and independent review and state the purpose of each. Give two examples of potential findings in each of these two types of review.
Describe matters that the auditor must communicate to audit committees of public companies.
Multiple Choice QuestionsThe following questions deal with contingent liabilities. Choose the best response.a. The audit step most likely to reveal the existence of contingent liabilities is (1) A
Multiple Choice QuestionsThe following questions concern communications between management, those charged with governance, and the auditor. Choose the best response.a. A principal purpose of a letter
Multiple Choice QuestionsThe following questions deal with review of subsequent events.Choose the best response.a. Subsequent events for reporting purposes are defined as events that occur subsequent
Multiple Choice QuestionsThe following questions concern information accompanying basic financial statements. Choose the best response.a. The Form 10-K filed by management of a public company
Elizabeth Johnson, CPA, has completed the audit of notes payable and other liabilities for Valley River Electrical Services and now plans to audit contingent liabilities and commitments.Requireda.
In an audit of the Marco Corporation as of December 31, 2011, the following situations exist. No entries have been made in the accounting records in relation to these items.1. During the year 2011,
In analyzing legal expense for the Boastman Bottle Company, Mary Little, CPA, observes that the company has paid legal fees to three different law firms during the current year. In accordance with
The following unrelated events occurred after the balance sheet date but before the audit report was prepared:1. The granting of a retroactive pay increase2. Declaration of a stock dividend3. Sale
The field work for the June 30, 2011, audit of Tracy Brewing Company was finished August 19, 2011, and the completed financial statements, accompanied by the signed audit reports, were mailed
Leslie Morgan, CPA, has prepared a letter of representation for the president and controller to sign. It contains references to the following items:1. Inventory is fairly stated at the lower of cost
As a part of the audit of Ren Gold Manufacturing Company, a nonpublic company, management requests basic financial statements and separately, the same basic financial statements accompanied by
The following items were discovered during the December 31, 2011 audit of the financial statements of Westmoreland Corporation:1. The company's financial statements did not include an accrual for
In a letter to the audit committee of the Cline Wholesale Company, Jerry Schwartz, CPA, informed them of material weaknesses in the control of inventory. In a separate letter to senior management, he
In your audit of Aviary Industries for calendar year 2011, you found a number of matters that you believe represent possible adjustments to the company's books. These matters are described below.
Audit committees of public companies have many responsibilities in today's financial reporting environment. Visit the website of Microsoft Corporation (www.microsoft.com) and locate the Audit
What is the “special function” that auditors perform? Whom does the public accounting profession serve in performing this special function?
What types of reports does management of public companies prepare that are subject to audit?
Does an audit always require a report to a third-party user? Explain how an audit differs from an assurance function in providing reports to third parties.
What are the primary factors that create a need for assurance services? Explain how these factors are important to the public accounting profession.
What kind of surprises should an audit be designed to avoid? Why is it important that the audit function operate to avoid surprises?
The fairness of financial statements and the adequacy of internal controls are judged only by reference to pre-established criteria. What serves as the criteria to judge the fairness of financial
How does complexity affect (1) The demand for auditing services and (2) The performance of auditing services?
What are user’s interests in reports on internal control over financial reporting? Identify the factors that influenced congress in developing Section 404 of the Sarbanes-Oxley Act that requires
Who is the most important user of an auditor’s report on a company’s financial statements: company management, the company’s shareholders, or the company’s creditors? Briefly explain your
How does an audit enhance the quality of financial statements and its reports on internal control? Does an audit ensure a fair presentation of a company’s financial statements or that internal
Who is primarily responsible for choosing the accounting principles that are used to portray the company’s financial position and results? Explain.
What is corporate governance and why is it important? Explain how an independent and competent audit committee improves corporate governance.
In what other areas, besides the audit committee, did the Sarbanes-Oxley Act improve corporate governance?
Why is independence important to the auditing profession? Who decides whether an auditor is independent?
How do assurance services differ from audit services? What are the primary drivers of the need for assurance services? Does a market for assurance services already exist or do auditors need to
Who generally pays for assurance services—those receiving the assurance or the party on which the assurance is given? Why is it important who pays?
What is an attestation function? What are major factors that create a demand for the performance of attestation services by the public accounting profession?
In what ways is the auditing profession uniquely qualified to expand into the broader arena of assurance services?
What are the six areas identified by the Special Committee on Assurance Services that represent the largest market potential for providing new assurance services for the next decade? Which service,
What is the major difference between auditing services and assurance services?
What are the four attributes needed to perform assurance services? Briefly describe each attribute and its importance. Are these attributes also required for audits of a non-public company?
It is noted that an auditor can provide (1) Positive assurance, (2) Negative assurance, or (3) No assurance. Briefly describe these three levels of service and when they might be used.
In what ways does the practice of internal auditing differ from the practice of public accounting? To whom is the internal auditing function responsible?
In what ways might a public accounting practice of a firm that has no public audit clients differ from audit firms that audit public companies? In formulating your answer, focus on the nature of
What is the GAO? What types of audits does it perform? What is its role in setting standards for municipal audits?
What is the role of the SEC in setting accounting and auditing standards?
What is the role of the PCAOB and the AICPA in (a) Setting audit standards, (b) Performing quality control reviews of member firms, and (c) Setting accounting standards?
What is COSO? Why is COSO, as a non-regulatory body, important to the auditing profession?
Are small, local CPA firms that serve only small businesses and other local clients subject to the same auditing and accounting standards as the large international CPA firms? If there are
Many public accounting firms are legally formed as networks of accounting firms. Explain what the term “network of accounting firms” means.

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