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business
auditing

Questions and Answers of Auditing

What are the two major types of constraints on decisions that involve ethical issues? Provide examples of each type.
The AICPA Code of Professional Conduct includes rules in various areas. Which of those rules apply to CPAs not in public practice, but in business or other positions (e.g., retired or unemployed)?
In what circumstances are the various conceptual frameworks within the Code of Professional Conduct considered by accountants?
Describe the relationships among the AICPA Code of Professional Conduct's principles, rules and interpretations?
This problem requires access to the AICPA Code of Professional Conduct at: pub.aicpa.org/ code of conduct.Sandra Singer is the partner incharge of the Minneapolis office of Wellsley and Associates,
List the broad categories of threats to independence included in the AICPA Conceptual Framework for Independence Standards?
During the audit of a dealership selling only new luxury automobiles, the auditors calculated the year 2 and year 1 ratios in the table below.Select the most reasonable explanation the controller
"The best means of verification of cash, inventory, office equipment, and nearly all other assets is a physical count of the units; only a physical count gives the auditors complete assurance as to
As part of the verification of accounts receivable as of the balance sheet date, the auditors might inspect copies of sales invoices. Similarly, as part of the verification of accounts payable, the
Certain audit risks are significant in that they require special audit consideration. Describe the typical characteristics of these significant risks?
The overall audit strategy, the audit plan, and the time budget are three important working papers prepared early in an audit. What functions do these working papers serve in the auditors' compliance
Can a standard audit plan be used for most engagements?
List the principles related to an organization's control environment?
During your first audit of a medium-size manufacturing company, the owner, John Bell, explains that in order to establish clear-cut lines of responsibility for various aspects of the business, he has
Describe the two types of monitoring and provide an example of each?
What is a dual-purpose test?
Auditors perform a number of procedures relating to cash-some unique, some not unique. For each substantive procedure below, identify its primary objective or indicate that the procedure serves no
Delta Company has issued stock options to four of its officers, permitting them to purchase 5,000 shares each of common stock at a price of $25 per share at any time during the next five years. The
When a CPA has prepared a client's financial statements how is the fact that no assurance is provided indicated?
Assume that a public accounting firm is reviewing the financial statements of a nonpublic company and discovers that the firm is not independent. What options are available to the firm?
You are conducting the first audit of the marketing activities of your organization. Your preliminary survey has disclosed indications of deficient conditions of a serious nature. You expect your
How might economic trends affecting a business impact the planning and execution of an audit? Give one example.
In what ways are the standards issued by the IAASB different from the standards issued by the AICPA and the PCAOB? In what ways are the standards issued by the IAASB consistent with the standards
Describe the audit opinion formulation process. What are the key steps within each of the five phases in the process?
What failures was Congress trying to address in passing the Sarbanes-Oxley Act of 2002? Identify some ways in which that Act affected the public accounting profession.
How does a financial statement audit differ from broader assurance services with respect to providing reports to third parties? Explain in terms of the scope of the activity and the potential users.
Auditors often refer to the need for "professional judgment."Requireda. In examining the audit opinion formulation process, identify the areas in which auditor judgment must be made. To what extent
It is stated in the chapter that understanding a client's business is important to the conduct of an audit.Requireda. Explain how an understanding of a business and the business environment would be
Assume an e-commerce company that sells various products over the Internet to consumers (e.g., Amazon.com, E-Toys, or eBay) wants certification from an auditor that states the company has(a)
The internal audit profession has grown rapidly in the past decade and has developed its own professional certification programs. Some companies are developing policies to recruit new personnel into
Briefly describe the roles and responsibilities of the following professional organizations in developing and maintaining auditing standards and monitoring the quality of the various auditing
The term professional judgment is used throughout the chapter. In what ways might an auditor be called upon to exercise professional judgment in the course of performing an audit? To what extent does
Access the PCAOB home page at www.pcaobus.org.a. Identify the members of the Board and their background. What is their background in accounting or using financial statements?b. Identify the most
Access the SEC home page at www.sec.gov.a. Identify the most recent litigation brought by the SEC against a public company or against an accounting firm. Read the abstract of the complaint and
As companies become more global, auditors are becoming aware that there are a number of different standard setters for audit and assurance services, including the PCAOB, the AICPA, and the IAASB.
The PCAOB has the authority to set audit standards for all audits of public companies registered in the U.S. The AICPA continues to set audit standards for nonpublic companies through its auditing
What factors create a need for independent assurance? Explain how these factors are important to the public accounting profession.
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
A financial statement audit involves attesting to management assertions by reference to pre-established criteria. What serves as the criteria to judge the fairness of financial statements? Explain
Knechel, W.R. and Willekens, M. (2006). The Role of Risk Management and Governance in Determining Audit Demand. Journal of Business Finance &Accounting: 33(9) & (10), 1344-1367.i. What is the
To whom do a company's financial statements belong: management, the audit committee, or the auditor? Explain and discuss why the ownership issue is important.
What characteristics should audit committee members possess?
Explain how an independent and competent audit committee improves corporate governance.
1 .Which of the following are critical improvements related to auditing and financial statements that the Sarbanes-Oxley Act was intended to provide?a. Improved corporate governanceb. Required
Auditors are required to assess various components of corporate governance. Respond to the following questions related to this important assessment.Requireda. An important aspect of corporate
One of the criticisms of corporate America in the last decade was that there was a failure in corporate governance.Requireda. Define the term corporate governance and identify the major parties
The following describes a potential audit client:● The Company is in the financial services sector and has a large number of consumer loans, including mortgages, outstanding.● The CEO and CFO's
The audit committee is required to evaluate the independence of both the internal and external audit functions.Requireda. What factors would you suggest an audit committee look at in evaluating the
The development of the Public Company Accounting Oversight Board (PCAOB) was one of the most significant portions of the Sarbanes-Oxley Act of 2002.Requireda. What is the main rationale that led
The opening scenario of this chapter lists several questions for your group to consider.RequiredAddress the following questions raised at the beginning of the chapter.a. Why is the corporate
What should users reasonably expect from the audit profession?
Archambeault, D., DeZoort, F. T., & Holt, T. (2008). The Need for an Internal Auditor Report to External Stakeholders to Improve Governance Transparency.Accounting Horizons 22(4): 375-388.i. What
The Sarbanes-Oxley Act contains various requirements that reflect responses to ethical lapses in professional judgment on the part of various financial market participants. Refer to Exhibit 3.2 for
In considering the AICPA's Code, under what circumstances is it appropriate for a CPA to:a. Provide services on a contingent fee basis?b. Accept a commission for referring a product or service to the
Why is ethical behavior by auditors required to justify the public's trust in the profession?
Explain the decision process used to encourage high-quality decision-making. Discuss how the concepts of audit evidence, uncertainty, risk, and professional skepticism affect the approach to
What are the major differences in the guidance on auditor independence as put forth by the IESBA, the AICPA, and the SEC? How might the AICPA justify differences that might appear to create a
Compare the meaning of the terms professional judgment and professional skepticism.
How does auditor independence facilitate professional skepticism?
In small groups, consider the following situations. Based on your discussion, determine which of the following would not be considered a violation of the four underlying independence principles
You are the senior in charge of the audit of NOB Company. The CFO is pressuring you to complete the audit in two weeks. Some of the audit team members are new staff and have required a significant
a. What are the four guiding principles that have been developed by the SEC for auditor independence?b. Are the principles applicable only to auditors of SEC companies, or do they apply to auditors
In small groups, consider the following situations. In your discussions, consider the SEC's four basic principles regarding independence. Using only those principles, discuss and reach a conclusion
In her book Extraordinary Circumstances, Cynthia Cooper describes her life as going from an internal auditor to a whistleblower. In the book, she states that she never believed she was a
This chapter lays out a framework for high-quality decision-making that has been applied across a number of different professions, including the medical profession. The framework has been adapted in
a. Why is it sometimes difficult for auditors to exercise appropriate levels of professional skepticism in practice?b. What practices can individual auditors apply to help them to remember to be
During the Fall of 2009, Koss Corporation, a Wisconsin-based manufacturer of stereo headphone equipment, revealed that its Vice President of Finance (Sujata "Sue" Sachdeva) had defrauded the company
In a 1988 article, Arthur Wyatt, a former member of the FASB, stated, "Practicing professionals should place the public interest above the interests of clients, particularly when participating in a
The following case requires you to read published academic papers that discuss ethics in auditing and accounting, and that will provide you with insight on opinions regarding how ethics training can
Academic research addresses the conceptual issues outlined in this chapter. To help you consider the linkage between academic research and the practice of auditing, read the following research
Consider a manufacturing company in an environment in which the overall business conditions are declining. What are the major risks associated with the inventory account balance? Explain how those
List at least five risks that may be present in a company, and that may be associated with material misstatements in the company's financial statements. Does the existence of one or more of these
In deciding whether to accept a new manufacturing client, the auditor usually arranges to take a tour of the manufacturing plant. Assuming that the client has one major manufacturing plant, identify
Explain why so many corporate losses are tied to poor risk management. How does the quality of risk management relate to the long-term viability of an organization?
1. All of the following are true except: a. Materiality at the financial statement level is set at a higher level than planning materiality. b. Planning materiality moves in the same direction as
Auditors need to understand the relationship of business risk to the planning of an audit. Required a. Explain how the existence, or nonexistence, of a good risk management process by an organization
In a small group, discuss the views expressed by the following three auditors. Auditor 1: "Risk analysis is good. But, when all is said and done, it does not add much to the audit. You still need to
Analytical review can be an extremely powerful tool in identifying potential problem areas in an audit. Analytical review can consist of trend and ratio analysis and can be performed by comparisons
Keune and Keune, CPAs, a regional audit firm with most of its activities located in one state, just accepted a new privately held company as an audit client. The company is considered a plum because
The introductory material to the chapter painted a scenario that was based on the financial crisis that first came to light in the fall of 2008. In that scenario, it was stated that:• For many
In August 2010 the PCAOB approved AS No. 12. Access this standard at the PCAOB website (www.pcaob.org). Paragraph 5 of the standard lists five risk assessment procedures that the auditor is to
The auditor for ABC Wholesaling Company has just begun to perform preliminary analytical procedures as part of planning the audit for the coming year. ABC Wholesaling is in a competitive industry,
How does financial reporting risk relate to audit risk and the planning of the audit engagement? What are the most important factors that affect financial reporting risk?
Academic research addresses the conceptual issues outlined in this chapter. To help you consider the linkage between academic research and the practice of auditing, read the following research
Why do auditors and accountants place such a high emphasis on segregation of duties? What kinds of segregation of duties are important in accounting applications? Give an example of a segregation of
How do compensation programs generally affect individual performance? What is the auditor's responsibility to evaluate the effect of compensation schemes on the risk of financial statement
In a computer environment, what are general computer controls? What is the relationship between general computer controls and application controls?
The auditor wishes to test the controls around the assertion that all valid transactions are recorded at the correct time and at the correct price. Consider the revenue cycle and identify the types
Is management required to assess the following issues in performing its evaluation of internal control? If yes, how might management and external auditors assess each one? • The independence and
It has been alleged that many recent corporate failures such as those at Enron, AIG, Citigroup, Merrill Lynch, and World Com were largely due to the lack of adequate controls in the organization. The
Waste Management is an $18 billion company that picks up solid waste and operates landfills, recycling centers, and electrical-generation facilities. It produces electricity from landfill by-products
JC Penney is the largest retailer of men's shirts in North America. In order to reduce inventory and order time, and to better anticipate market trends, JC Penney has established a sole sourcing
The restated 2004 Annual Report of Milacron, Inc. contained the following description of a material weakness in the company's internal controls: Review of Complex and Judgmental Accounting
Grant, G., Miller, K., & Alali, F. (2008). The Effect of IT Controls on Financial Reporting. Managerial Auditing Journal 23(8): 247-271. i. What is the issue being addressed in the paper? ii. Why is
Are integrated audits only required for publicly held companies, or is the requirement also applicable to privately held or not-for-profit organizations?
Explain the relationship between risk analysis, internal control, and material account balances in designing an approach to an integrated audit. In doing so, explain the differences between business
What factors most influence the auditor's assessment about the potential existence of material misstatements in an account balance? How are those factors addressed in an integrated audit?
What is an integrated audit? What are the major opportunities for efficiencies in an integrated audit?
What are the important criteria that an auditor should use in selecting which controls to test when performing an integrated audit?
The chapter emphasizes that when the auditor determines that controls are not working, the auditor needs to anticipate (a) What kind of misstatements could occur in the financial statements, (b)

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