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auditing international approach
Questions and Answers of
Auditing International Approach
An auditor includes a separate paragraph in an otherwise unmodified report to emphasize that the entity being reported on had significant transactions with related parties. The inclusion of this
Eagle Company's financial statements contain a departure from generally accepted accounting principles because, due to unusual circumstances, the statements would otherwise be misleading. The auditor
When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the
Miller Company uses the first-in, first-out method of costing for its international subsidiary's inventory and the last-in, first-out method of costing for its domestic inventory. Under these
An auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are
An auditor who qualifies an opinion because of an insufficiency of evidential matter should describe the limitation in an explanatory paragraph. The auditor should also refer to the limitation in the
Restrictions imposed by a client prohibit the observation of physical inventories, which account for 35 percent of all assets. Alternative audit procedures cannot be applied, although the auditor was
Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, 19X3. Park obtained sufficient audit evidence for all of Tech's financial statement
A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when managementa. Is unable to obtain audited financial statements supporting the entity's
Green, CPA, was engaged to audit the financial statements of Essex Co. after its fiscal year had ended. The timing of Green's appointment as auditor and the start of field work made confirmation of
If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor ordinarily will
When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a separate explanatory paragraph and modify the Introductory paragraph
An auditor's report that refers to the use of an accounting principle at variance with generally accepted accounting principles contains the words, "In our opinion, with the foregoing explanation,
Items a through \(\mathrm{h}\) present various independent factual situations an auditor might encounter in conducting an audit. List A represents the types of opinions the auditor ordinarily would
In which of the following circumstances would an auditor be most likely to express an adverse opinion?a. Information comes to the auditor's attention that raises substantial doubt about the entity's
The auditors' report below was drafted by Moore, a staff accountant of Tyler \& Tyler, CPAs, at the completion of the audit of the financial statements of Park Publishing Co., Inc., for the year
You are the auditor of X Company, and during your audit for the year ended September 30, 19X7, you note that approximately 76 percent of the company's sales were to one customer. In the prior year,
Y Company has never been audited and is to be acquired by one of your present clients and combined on a pooling-of-interest basis. Your client includes ten years of financial statements in its annual
In connection with your audit of Z Company for the year ended December 31, 19XX, you find that as a result of an improper cutoff of inventory shipments at the end of the year, approximately \(\$
You have been engaged to audit W Company, a new company formed to explore for oil and gas. During the year, W Company acquired several large undeveloped lease holdings for \(\$ 1\) million and
During the current year, your client, U Company, acquired B Company in a business combination accounted for as a pooling-of-interest. B Company previously had reported on a fiscal year ending on June
As a normal procedure in your audits, you request management of your clients to furnish you a management representation letter including, among other things, representations that the financial
During 19X7, R Company, your client, changed its method, effective January 1, 19X7, of computing inventory cost from the average cost method to the last-in, first-out method. This change had the
You recently were engaged to audit the financial statements of P Company, a company that previously has not been audited. During your work, you learn that three years ago a serious fire destroyed
The auditor's report below was drafted by Miller, a staff accountant of Pell \& Pell, CPAs, at the completion of the audit of the consolidated financial statements of Bond Co. for the year ended July
The partner in charge of the audit of Weishar Inc. began to draft the audit report for the year ended June 30, 19X2. She completed the first paragraph, which is shown below, before being called to
The following circumstances affect the comparability of financial statements between periods. The effect is material unless otherwise indicated. For each circumstance, state whether the auditor's
What is the purpose of tests of controls?
Describe the four procedures that can be used in conducting tests of controls.
Why are some tests of controls performed during the interim period?
What four factors should the auditor consider in deciding what evidence, if any, needs to be obtained during the period from the interim date to the balance sheet date?
Sampling is more likely to be used for certain types of tests of controls. What types are these?
For what types of procedures would sampling be appropriate?
For purposes of tests of controls, what is a deviation?
Give three examples of a sampling unit.
What is the difference between block sampling and haphazard sampling?
What is the difference between unrestricted random selection and systematic sampling?
Name the factors the auditor should consider in deciding on the size of a sample for a test of controls.
In performing the sampling plan, how should the auditor classify unlocated documents?
List the decision rules the auditor can use in evaluating sample results.
When nonstatistical sampling is used, two decisions are made judgmentally. These two are determined scientifically when statistical sampling is used. What are these two decisions?
In what situation is the assessed level of control risk most likely to be maximum?
What assessed level of control risk requires documentary support?
Describe the three ways in which substantive tests may be revised.
What is a reportable condition?
To whom should reportable conditions be communicated?
What is a material weakness?
Which of the following statements is true?a. Tests of controls are necessary if the auditor plans to use the primarily substantive approach.b. Tests of controls are necessary if the auditor plans to
In considering the evidence needed to assess control risk during the period from interim to year-end, all of the following should be considered except thea. Significance of the assertion being
The assessment of control risk can be made at any of the following times excepta. Immediately after obtaining an understanding of internal control.b. After some tests of controls are performed
Which of the following statements is true?a. If control risk is assessed at maximum, the nature of related substantive tests should be changed from more to less effective.b. If control risk is
Which of the following would not be a method used to conduct tests of controls?a. Inquiry.c. Confirmation.b. Walkthrough.d. Observation.
What is the reason for ensuring that every copy of a vendor's invoice has a receiving report?a. To ascertain that merchandise billed by the vendor was received by the company.b. To ascertain that
Which of the following procedures is most likely to ensure that employee job time tickets are accurate?a. Approve the payroll voucher in the accounts payable department.b. Keep employment
Which of the following audit techniques most likely would provide an auditor with the most assurance about effectiveness of the operation of an internal control procedure?a. Inquiry of client
The likelihood of assessing control risk too low is the risk that the sample selected to test controlsa. Does not support the tolerable misstatement for some or all of management's assertions.b. Does
The likelihood of assessing control risk too low relates to thea. Effectiveness of the audit.b. Efficiency of the audit.c. Preliminary estimates of materiality levels.d. Allowable risk of tolerable
Which of the following is not an auditing procedure that is commonly used in performing tests of controls?a. Inquiry.c. Comparison.b. Observation.d. Inspection.
The proper use of prenumbered termination notice forms by the payroll department should provide assurance that alla. Uncashed payroll checks were issued to employees who have not been terminated.b.
As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population wasa. Less
After obtaining an understanding of internal control and assessing control risk, an auditor decided to perform tests of controls. The auditor most likely decided thata. It would be efficient to
Which of the following statements is correct concerning reportable conditions in an audit?a. An auditor is required to search for reportable conditions during an audit.b. All reportable conditions
Which of the following statements is correct concerning statistical sampling in tests of controls?a. As the population size increases, the sample size should increase proportionately.b. Deviations
The likelihood of assessing control risk too high is the risk that the sample selected to test controlsa. Does not support the auditor's planned assessed level of control risk when the true operating
A partially completed charge sales systems flowchart is on page 312. The flowchart depicts the charge sales activities of the Bottom Manufacturing Corporation.A customer's purchase order is received,
The flowchart on page 313 depicts the activities relating to the shipping, billing, and collection processes used by Smallco Lumber, Inc.Required:a. Identify the financial statement assertions and
The Art Appreciation Society operates a museum for the benefit and enjoyment of the community. During hours when the museum is open to the public, two clerks who are positioned at the entrance
Dunbar Camera Manufacturing, Inc., is a manufacturer of high-priced precision motion picture cameras in which the specifications of component parts are vital to the manufacturing process. Dunbar buys
You were engaged to audit the financial statements of Blank City Newspapers, Inc., for the year ended December 31. The company publishes a newspaper with a daily circulation of approximately 65,000
During the audit of Clements Manufacturing Company, Bill Gahagan, CPA, noticed that scrap steel from the manufacturing process was piled in an unfenced vacant lot next to the plant. No records were
During the course of an audit, Mr. Robin, CPA, observed that one of the clerks in the small toy department consistently was taking money from the customers in areas other than at the cash register.
During an audit of a loan company, the auditor discovered that the recipient of a loan with a principal balance of \(\$ 2,100\) had received only \(\$ 2,000\) when the loan was written. The auditor
During the course of an audit, Ms. Command, the senior, decided to use non statistical sampling (per SAS No. 39 guidelines) on a test of controls. The sampling plan included the following.1. The
An auditor is applying statistical sampling for attributes to the testing of extensions on sales invoices. There are 250 invoices with an average of four sales on each invoice. The auditor uses 1,000
Jiblum, CPA, is planning to use sampling in a test of controls relating to sales. Jiblum has begun to develop an outline of the main steps in the sampling plan as follows:1. State the objective or
While obtaining an understanding of internal control for a client's system of cash disbursements, an auditor decided to test the controls by taking a sample of vendor invoices and examining them to
Describe three types of acts by entity personnel that represent errors.
Describe three types of acts that represent fraud.
Describe the broad framework of the auditor's responsibility to detect errors and fraud.
Describe the broad-based matters that the auditor must consider at the financial statement level when deciding on the scope of the audit work necessary to provide reasonable assurance of detecting
Describe the narrowly focused matters that the auditor must consider at the account balance level when deciding on the scope of the audit work necessary to provide reasonable assurance of detecting
What two steps should the auditor take if he or she determines that a difference between amounts on the client's accounting records and audited amounts is fraud that could not be material to the
What four steps should the auditor take if he or she determines that a difference between amounts on the client's accounting records and audited amounts is fraud that could be material to the
What type of audit report should the auditor issue if a material fraud is detected and the financial statements are not revised?
Give five reasons why fraudulent financial reporting is committed.
Name two situations that will increase the risk of fraudulent financial reporting.
Describe three risk factors relating to fraudulent financial reporting.
Describe four recommendations made by the National Commission on Fraudulent Financial Reporting.
Fraudulent financial reporting has been described as a function of three requirements. Describe these requirements (not the primary or secondary indicators of each requirement).
Describe the two types of illegal acts
Summarize the auditor's detection and reporting responsibilities for each of the two types of illegal acts.
Which of the following is not an example of an error?a. Entity personnel make mistakes in gathering or processing accounting data from which financial statements are prepared.b. Entity personnel
Which of the following is an incorrect statement?a. The auditor should assess the risk that errors and fraud may cause the financial statements to contain a material misstatement.b. The auditor
Which of the following statements concerning illegal acts by clients is correct?a. An auditor's responsibility to detect illegal acts that have a direct and material effect on the financial
When an auditor becomes aware of a possible illegal act by a client, the auditor should obtain an understanding of the nature of the act toa. Increase the assessed level of control risk.b. Recommend
What assurance does the auditor provide that errors, fraud, and direct-effect illegal acts that are material to the financial statements will be detected?a. Negative.b. Limited.c. Absolute.d.
Which of the following statements best describes an auditor's responsibility to detect errors and fraud?a. The auditor should study and evaluate the client's internal control, and design the audit to
Which of the following statements describes why a properly designed and executed audit may not detect a material fraud?(a.) Audit procedures that are effective for detecting an unintentional
An auditor concludes that a client's illegal act, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on the materiality of the effect
Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?a. Turnover of senior accounting personnel is
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