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auditing international approach
Questions and Answers of
Auditing International Approach
Jones, CPA, is auditing the financial statements of XYZ Retailing, Inc. What assurance does Jones provide that direct effect illegal acts that are material to XYZ's financial statements, and illegal
An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if thea. Auditor is precluded
John Petite was performing his first audit as a senior. His client was a small toy store with a reputation as a solid and expanding merchandiser. John's CPA firm had performed the audit for several
During the audit of Irreg. Company, Betty Bestow was examining the endorsements on payroll checks and comparing the endorsements to the names of the payees on the face of the checks. In prior audits,
Warren Presit was the senior in charge of the audit of Put-on, Inc., a maker of men's fashion shoes. He had instructed his assistant, Stephie Scent, to examine support for every sales invoice
Smog, Inc. is a manufacturer of equipment designed to limit emissions from the tailpipes of automobiles. An audit of the financial statements of Smog, Inc. was being performed by Clean \& Clean, a
The studies conducted by the Treadway Commission revealed that fraudulent financial reporting usually occurs as the result of certain environmental, institutional, or individual influences and
In the last decade, there has been significant growth in the number and size of legal actions against accounting firms. A study of several years' lawsuits suggests that auditors' legal problems arose
Modern Office Furnishings, Inc. (MOF) is a relatively small public company. Its stock is listed on the NASDAQ national exchange. MOF manufactures and sells a limited variety of office furnishings
What is the auditor's overall objective in an audit of financial statements?
How does the auditor determine the objectives of auditing each account?
What five general assertions does management make regarding individual account balances and disclosures?
How do auditors determine what audit procedures to apply to a particular account?
Provide four examples of control risk assessment procedures.
What are substantive tests?
Explain the relation between control risk assessment procedures and substantive tests.
Provide two examples of tests of details of balances and transactions.
What are analytical procedures?
List five sources from which expectations for analytical procedures may be developed.
In what two stages of an audit are analytical procedures required to be performed?
What is the significance of the lack of privileged communication between an auditor and his or her client?
What are the two types of working paper files?
What is the purpose of the permanent audit file?
List five types of data found in the current audit files.
Explain the difference between adjusting and reclassifying entries proposed by the auditor.
What is a lead schedule?
Who has the final responsibility for determining whether or not a proposed adjusting entry will be recorded?
State three ways of indicating the performance of audit work in the working papers.
What is the purpose of an index system for the working papers? Describe the system illustrated in the text.
An auditor's overall objective in a financial statement audit is toa. Determine that all individual accounts and footnotes are fairly presented.b. Employ the audit risk model.c. Express an opinion on
When auditing individual accounts and disclosures, an auditor's objective is to determine the validity of management'sa. Calculations.b. Recording process.c. Assertions.d. Internal control.
All of the following are general audit objectives for auditing an account or disclosure excepta. Existence.b. Reliability.c. Valuation.d. Completeness.
Recording a sale for goods not shipped and failing to record a sale for goods that are shipped violate the accounts receivable assertions ofa. Existence and valuation.b. Rights and completeness.c.
Management makes all of the following assertions about the financial statements in general excepta. The entity will continue as a going concern for a period of at least one year from the balance
Auditors determine the audit procedures to be performed for a specific account by reference toa. Audit objectives for that account.b. Generally accepted auditing standards.c. AICPA sanctioned
Control risk assessment procedures include all of the following excepta. Inspection of documents.b. Observation of procedures.c. Confirmation of bank balances.d. Inquiry of client personnel.
A basic premise underlying analytical procedures is thata. These procedures cannot replace tests of details of balances and transactions.b. Statistical tests of financial information may lead to the
Evidence of the performance of control risk assessment procedures includes all of the following excepta. Flowcharts.b. Lead schedules.c. Questionnaires.d. Memoranda.
Which of the following is ordinarily designed to detect possible material dollar errors in the financial statements?a. Control risk assessment procedures.b. Analytical procedures.c. Computer
An auditor's working papers shoulda. Not be permitted to serve as a reference source for the client.b. Not contain critical comments concerning management.c. Show that the accounting records agree or
Working papers ordinarily would not includea. Initials of the in-charge auditor indicating review of the staff assistants' work.b. Cut-off bank statements received directly from the banks.c. A memo
In connection with a lawsuit, a third party attempts to gain access to the auditor's working papers. The client's defense of privileged communication will be successful only to the extent it is
Which of the following statements ordinarily is correct concerning the content of working papers?a. Whenever possible, the auditor's staff should prepare schedules and analyses rather than the
The permanent file of an auditor's working papers generally would not includea. Bond indenture agreements.b. Lease agreements.c. Working trial balanced. Flowchart of the internal control.
The audit working paper that reflects the major components of an amount reported in the financial statements is thea. Interbank transfer schedule.b. Carry-forward schedule.c. Supporting schedule.d.
An auditor ordinarily uses a working trial balance resembling the financial statements without foot-a. Cash flow increases and decreases.b. Audit objectives and assertions.c. Reclassifications and
During an audit engagement, pertinent data are compiled and included in the audit working papers. The working papers are primarily considered to bea. A client-owned record of conclusions reached by
Match the term or terms with the related description. Each term may be used once, more than once, or not at all. Description 1. The auditor expresses an opinion on the fairness with which the
The general audit objectives apply to all financial statement accounts. The general objectives are used to determine specific audit objectives for each account.a. Describe the specific audit
Indicate the audit objectives that are accomplished by the following audit procedures:a. Confirmation of the cash bank balance with the bank.b. Analysis of inventory turnover.c. Review of a copy of a
Classify the following audit procedures as (1) control risk assessment procedures, (2) tests of details of balances and transactions, or (3) analytical procedures. Give reasons for your
Analytical procedures are useful substantive tests.Required:a. Explain why analytical procedures are considered substantive tests.b. Explain how analytical procedures are used in the audit planning
Indicate whether you would expect to find the following documents in the permanent audit file or the current-year audit file.a. A letter from a customer confirming an account balance.b. A memorandum
Using the indexing method described in this chapter, index the following audit working papers.a. Notes receivable confirmation control schedule.b. Analysis of allowance for doubtful accounts.c. Test
Indicate whether the following matters would require (1) an adjusting entry, (2) a reclassification entry, or (3) a footnote disclosure. Give reasons for your answers.a. An uncollectible account
Review the following audit working paper and list the deficiencies in its preparation. Hogeye Ranch Company Cattle Inventory Average Quantity Price Bulls 10+ $3,000 Amount $ 30,000 Steers 35+ 500*
Grace Mature was conducting a training class for new audit staff assistants. She was trying to emphasize the need for them to think about proper auditing procedures rather than merely relying on the
Describe what the auditor does in each of the following sections of an audit.a. Planning.b. Studying and testing internal control.c. Performing substantive tests.d. Issuing the audit report.
Paraphrase the section or sections of the scope and/or opinion paragraphs that refer or allude to the following terms:a. Material.b. Risk.c. Sampling.
Describe six quantitative and five qualitative factors auditors may consider when making materiality decisions.
Why do auditors make preliminary estimates of materiality for the total financial statements?
Why do auditors make preliminary estimates of materiality for the individual accounts in the financial statements?
Explain two alternative courses of action that the auditor can follow if the total misstatement in the fi- nancial statements is more than materiality for the total financial statements.
Describe the sequence the auditor might use in applying the concept of audit risk to planning the audit.
Name the five general assertions in financial statements.
Describe the four steps the auditor takes to set an acceptable risk of not detecting material misstatements in an assertion.
Describe the two sources of detection risk that can be identified and controlled by the auditor.
Give two versions of the audit risk model
Demonstrate with percentages the inverse relationship between (1) detection risk and inherent risk and (2) detection risk and control risk.
Why is the audit risk model not normally used in the evaluation of audit evidence?
Why is it inappropriate to apply the audit risk model to business risk?
Which of the following parts of the audit is described by this statement? "The auditor examines and evaluates processes that produce the numbers and disclosures in the financial statements."a.
Which of the following parts of the audit is described by this statement? "The auditor examines evidence supporting the account balances and disclosures in the financial statements."a. Planning.b.
Which of the following phrases or sentences in the independent auditor's report is improperly stated?a. Those standards require that we plan and perform the audit to obtain assurance about whether
The term testing alludes to the concept ofa. A guarantee.b. A certificate.c. Accuracy.d. Sampling.
Which of the following is an incorrect statement?a. Financial statements are materially misstated when they contain misstatements whose effect, individually or in the aggregate, is impor tant enough
Which of the following is an incorrect statement?a. Detection risk is a function of the effectiveness of an auditing procedure and its application.b. Detection risk arises partly from uncertainties
Which of the following is an incorrect statement?a. Detection risk cannot be changed at the auditor's discretion.b. If individual audit risk remains the same, detection risk bears an inverse
The existence of audit risk is recognized by the statement in the independent auditor's standard report that the auditora. Obtains reasonable assurance about whether the financial statements are
The risk that an auditor will conclude, based on audit tests, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to asa.
Inherent risk and control risk differ from detection risk in that inherent risk and control risk area. Elements of audit risk while detection risk is not.b. Changed at the auditor's discretion while
Inherent risk and control risk differ from detection risk in that theya. Arise from the misapplication of auditing procedures.b. May be assessed in either quantitative or nonquantitative terms.c.
Which of the following statements is not correct about materiality?a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity
The acceptable level of detection risk is inversely related to thea. Assurance provided by substantive tests.b. Risk of misapplying auditing procedures.c. Preliminary judgment about materiality
For each description, list the letter or letters of the term or terms that are identified with the description. Each term may be used once, more than once, or not at all. Description 1. This term is
This question consists of 15 items pertaining to an auditor's risk analysis of an entity. Select the best answer for each item.Bond, CPA, is considering audit risk at the financial statement level in
Evaluate the following statement:There is a 10 percent or less risk that the financial statements are misstated by more than \(\$ 3,000\).Required:a. Give the definition of materiality and audit
Audit risk and materiality should be considered when planning and performing an audit of financial statements in accordance with generally accepted auditing standards. Audit risk and materiality
Begin Company was organized in January of 19X7. The company is in the business of taking computer chips from discarded personal computers and making vases and other items that are used to decorate
Using the audit risk model, calculate detection risk if the other risks are set at these levels.a. Individual audit risk of 5 percent.Inherent risk of 50 percent.Control risk of 40 percent.b.
For the following sets of circumstances, indicate whether the auditor would have a high or low risk of failing to detect these circumstances with appropriate audit procedures. Give reasons for your
The auditor decided to examine 100 percent of the invoices supporting additions to property and equipment. Several months after the audit was completed and the audit report was issued, significant
Green, CPA, is considering audit risk at the financial statement level in planning the audit of National Federal Bank (NFB) Company's financial statements for the year ended December 31, 19X0. Audit
Assume that the audit risk model used to set detection risk contains the following percentages (from the prior-year audit) relating to the valuation assertion for net accounts receivable.Required:a.
The noise of the huge folder dropping on his desk startled Alan Weisner, a new staff member of Kosner \& Kosner. He had recently returned from the firm's staff training school."What's this?" inquired
Custom Furniture Company was ready for an audit by a new CPA firm after replacing the previous auditor who had performed the audit for several years. The lawsuit filed by Custom's creditors against
What is meant by opinion shopping?
Describe four potential duties of audit committees.
Who has the responsibility to initiate communications when a change of auditors occurs? What specific inquiries should be made?
List the matters normally included in an audit engagement letter.
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