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auditing international approach
Questions and Answers of
Auditing International Approach
How does an auditor gain knowledge of his or her client's business operations?
How is ratio analysis used in an audit?
How does the auditor use regression analysis?
List six pairs of accounts on which audit work is often performed simultaneously.
What records does an auditor review to detect related party transactions?
Describe five transactions or events that may create substantial doubt as to the ability of an entity to continue as a going concern.
Explain the review process for audit working papers.
Differentiate among known, projected, and likely misstatements.
Describe nine matters about which the auditor should determine that the audit committee is informed.
Which of the following statements is generally correct about the competence of evidential matter?a. Competence of evidential matter refers to the amount of corroborative evidence obtained.b. The more
Although the validity of evidential matter is dependent on the circumstances under which it is obtained, there are three general presumptions that have some usefulness. The situations given below
In testing the existence assertion for an asset, an auditor ordinarily works from thea. Financial statements to the potentially unrecorded items.b. Potentially unrecorded items to the financial
An auditor audits an accounting estimate by any of the following means excepta. Testing the process used by management to develop the estimate.b. Obtaining a confirmation from an independent
When analytical procedures are used as substantive tests, some account relationships are more predictable than others. For which of the following accounts is the prior-year balance likely to be the
For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent As a substantive test a. Yes b. Yes c. No
Which of the following best describes the most important stage of an auditor's statistical analysis of significant ratios and trends?a. Computation of significant ratios and trends.b. Reconciliation
Which one of the following items is not a measure of a company's liquidity?a. Accounts receivable turnover.b. Acid test ratio.c. Debt-to-equity ratio.d. Operating cycle.e. Days' sales in inventory.
An auditor may use regression analysis to predict an account balance. In the regression equation \(E(Y)=B_{0}+B_{1} X, B_{1}\) represents thea. Account being audited.b. Fixed cost in the account
Audit work is often performed simultaneously on all the following pairs of accounts excepta. Cash and common stock.b. Inventories and cost of goods sold.c. Property and depreciation expense.d.
An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity becausea. This may permit the audit of intercompany account
If related party transactions are detected, the auditor cannot complete the audit until he or shea. Sends confirmations to all parties.b. Determines what the comparable arm'slength transaction would
An auditor has a responsibility to evaluate the going concern status of an audit client for \(\mathrm{a}(\mathrm{an})\)a. Period of one year from the balance sheet date.b. Period of one year from the
All the following may indicate substantial doubt as to an entity's ability to continue as a going concern excepta. Work stoppages.b. Legal proceedings.c. Purchase of catastrophe insurance.d.
If an auditor has substantial doubt as to an entity's ability to continue as a going concern, he or she shoulda. Discontinue the audit.b. Consider management's plans for generating additional cash
Analytical procedures used in the overall review stage of an audit generally includea. Gathering evidence concerning account balances that have not changed from the prior year.b. Retesting control
In the course of an audit, the auditor will normally prepare a schedule of unadjusted differences for which the auditor did not propose adjustment when they were uncovered. What is the primary
In the audit of accounts receivable an auditor sends confirmations to all customers with balances of \(\$ 50,000\) or more and to a sample of 25 percent of the customers with balances of less than
An auditor would least likely initiate a discussion with a client's audit committee concerninga. The methods used to account for significant unusual transactions.b. The maximum dollar amount of
An auditor is considering whether the omission of a substantive procedure considered necessary at the time of an audit may impair the auditor's present ability to support the previously expressed
For each description, match the term or terms that relates to the description. Each term may be used once, more than once, or not at all. Description 1. Sufficient competent evidential matter is to
In each of the following cases, rank the various items of evidence on a scale from most persuasive to least persuasive. Furnish support for your rankings.a. Evidence to support the cash account.(1)
One of the audit clients of Brown and Brown, CPAs, is We-Fit Manufacturing Company, makers of shirts, sweaters, and other clothing items. The finished goods inventory consists of merchandise placed
One of the clients of Cain, CPA, is a local financial institution. As part of the standard audit procedures, Cain sent notes receivable confirmations to 50 of the 2,000 customers.Although a return
Classify the following items of audit evidence from most reliable (1) to least reliable (17). Discuss the reasons for your classifications.a. Canceled payroll check.b. Copy of client sales invoice.c.
Mary Smith, a new staff auditor, has been assigned to interview Mad Dog Clancy, controller, about variations between expected and book amounts noted in performing analytical procedures as substantive
You are the auditor of Star Manufacturing Company. A trial balance taken from the books of Star at year-end follows.Required:a. Which accounts should be confirmed with outside sources?b. Describe by
The purpose of all auditing procedures is to gather sufficient competent evidence to form an opinion regarding the financial statements taken as a whole.Required:a. In addition to the example below,
Bill Kelting, audit senior from New York City, was assigned to be in charge of the Hogeye Ranch Company audit. Before this engagement the only cows Bill had seen were in pictures. However, Bill knew
Analytical procedures are an important part of the audit process and consist of evaluations of financial information made by the study of plausible relationships among both financial and nonfinancial
Trend and Jones, CPAs, were planning their initial audit of Kargo Corporation, whose stock traded on the New York Stock Exchange. Although the partners had consulted with the predecessor auditor and
Joyce Cover, CPA, was engaged to audit the financial statements of Extensive, Inc., a first time audit client, for the year ended December 31, 19X6. The assessment of control risk was conducted
You are completing your audit of Carleson Motorcycle Manufacturing Company and evaluating the going concern status of the company. Competition from foreign motorcycle makers has been severe. The
You have completed your audit of Ethridge Construction Company for the year ended November \(30,19 \times 5\), and have scheduled a meeting with the company's audit committee for the next day. The
Presented below are two sets of financial ratios. The ratios in the first column were computed from EAZ Manufacturing's prior-year audited statements. In the second column are ratios computed from
For each audit procedure, indicate (1) the assertion to which it relates, (2) the means of gathering audit evidence, and (3) the characteristic of the audit evidence gathered. The first audit
Describe the two types of sampling risks for substantive tests.
When sampling is used to test the hypothesis that the evidence supports the account balance, what are the two parts of the sampling objective?
In most audit sampling situations, what is the characteristic of primary interest?
What situations should the auditor consider when defining the population for a substantive test? ways could the sampling unit be defined for a substantive test?
In what three ways could the sampling unit be defined for a substantive test?
What three sampling techniques can the auditor use for a substantive test?
What five items must the auditor consider to determine the sample size when using statistical or non statistical sampling methods for a substantive test?
What is stratification, and how does it affect sample size for substantive tests?
What are the consequences of incorrectly rejecting a hypothesis that the evidence supports an account balance?
What is the relationship between tolerable misstatement and sample size?
Why does the sample size of a substantive test increase as the expected misstatement in the population increases?
Discuss three ways that a sample can be selected in substantive testing.
Describe two ways to calculate a projected misstatement in the population when non statistical sampling is used.
What three methods can be used to estimate the dollar amount of a population when classical statistical sampling is used?
In classical statistical sampling, what four items are used to obtain the optimum sample size for estimating the dollar amount of a population?
Why do ratio and difference estimation methods usually produce smaller sample sizes than the mean estimation method?
In classical statistical sampling, what six steps should be followed in applying mean estimation?
In classical statistical sampling, how does the auditor determine whether to accept or reject the hypothesis that the evidence supports the account balance?
What are the characteristics of a population to which an auditor would apply probability proportional to size sampling?
What four items are needed to determine the sample size when probability proportional to size sampling is used?
Sampling results could lead the auditor to believe erroneously that the account does not contain more dollar error than can be tolerated. Which of the following corresponds to the preceding
To determine an optimum sample size when sampling methods are used in a substantive test, all of the following factors must be considered except thea. Variation in the population.b. Risk levels the
Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected amount of misstatements No Measure of tolerable
The relationship between the sampling risk of incorrect acceptance and the sample size of substantive tests isa. Inverse.b. Positive.c. Indeterminate.d. None of the above.
Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?a. Discovery sampling.b. Sampling for variables.c. Sampling for
In assessing sampling risk, the risk of incorrect rejection of an account balance relates to thea. Efficiency of the audit.b. Effectiveness of the audit.c. Selection of the audit.d. Audit quality
Which of the following statements is correct concerning the auditor's use of statistical sampling?a. An assumption of PPS sampling is that the underlying accounting population is normally
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups ifa. Probability proportional to size sampling is used.b. The
An advantage of statistical sampling over non statistical sampling is that statistical sampling helps an auditor toa. Minimize the failure to detect errors and fraud.b. Eliminate the risk of non
If the achieved allowance for sampling risk of a statistical sample is greater than the planned allowance for sampling risk, this is an indication that thea. Standard deviation was larger than
An auditor is performing substantive tests of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates numerous pricing and extension
Using statistical sampling to assist in auditing the year-end accounts payable balance, an auditor has accumulated the following data:Using the ratio estimation technique, the auditor's estimate of
Use of the ratio estimation sampling technique to estimate dollar amounts is inappropriate whena. the total book value is known and corresponds to the sum of all the individual book values.b. There
In classical statistical sampling, which of the following must be known to estimate the appropriate sample size?a. The total amount of the population.b. The planned standard deviation.c. The planned
The major reason that the difference and ratio estimation methods would be expected to produce audit efficiency compared to mean estimation is that thea. Number of members of the populations of
Probability proportional to size sampling (PPS) is normally used when it is thought that the population contains aa. Few understatements.b. Large number of understatements.c. Few overstatements.d.
Vale has decided to use PPS sampling in the audit of a client's accounts receivable balances. Vale plans to use the following PPS sampling table:What sample size should Vale use?a. 120b. 108c. 60d.
In a PPS sample with a sampling interval of \($10,000,\) an auditor discovered that a selected account receivable with a recorded amount of \($5,000\) had an audit amount of \($3,000.\) The projected
In a PPS sample with a sampling interval of \(\$ 5,000\), an auditor discovered that a selected account receivable with a recorded amount of \(\$ 9,000\) had an audit amount of \(\$ 8,000\). If this
Which of the following statements is correct concerning PPS sampling?a. The sampling distribution should approximate the normal distribution.b. Overstated units have a lower probability of sample
In each of the following cases involving non statistical sampling, indicate what conclusions the auditor might draw and why.a. The likely misstatement is more than the tolerable misstatement.b. The
Assume that an account has the following characteristics:Number of items in the account-300 Recorded amount- \(\$ 600,000\)Sample size-100 Required:a. If the sample mean is \(\$ 1,800\) and mean
Take the population in the table and perform the following (use sampling without replacement and a standard deviation of the recorded amounts of 20),a. Determine the sample size for a classical
The following data for a substantive test using sampling are available:Population recorded amount- \(\$ 200,000\)Tolerable misstatement \(\$ 10,000\)Number of items in the population-200 Risk of
During the planning of the audit of Strong Company, the partner in charge of the audit was discussing sampling plans with a manager and a senior. The discussion centered on the potential use of
You desire to estimate the amount of the inventory of your client. Draper. Inc. You satisfied yourself earlier as to the inventory quantities. During the audit of the pricing and extension of the
In the following situations solve the problems and answer the questions.a. Non statistical sampling is used. The number of items in the population is 1,000 , and the recorded amount on the books is
Smith, CPA, has decided to assess control risk applicable to the existence of accounts receivable at a low level. Smith plans to use sampling to obtain substantive evidence concerning the existence
Edwards has decided to use probability proportional to size (PPS) sampling in the audit of a client's accounts receivable balance. Few, if any, account balance overstatements are expected. Edwards
Take the illustration of PPS sampling starting on page 450 of the chapter material and do the following:a. Assume a tolerable misstatement of \(\$ 150,000\) instead of \(\$ 100,000\), leaving all
Mead, CPA, was engaged to audit Jiffy Co.'s financial statements for the year ended August 31, 19X8. Mead is applying sampling procedures.During the prior year's audits Mead used classical variables
Why are assets more likely to be overstated than understated, and what effect does this have on the auditor's emphasis in the audit of assets?
Give an example and explain the importance of restrictions on cash.
State the objectives in the audit of cash.
What analytical procedures may an auditor apply to cash?
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