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principles of auditing

Questions and Answers of Principles of Auditing

a. What is the purpose of professional ethics?b. How are professional ethics imposed?
What are the responsibilities of the AICPA's Professional Ethics Division?
a. Identify the two sections of the AICPA's Code of Professional Conduct and the two types of pronouncements related to them,b. Explain the enforceability of each of the sections and related
a. What is the meaning of the term "practice of public accounting?"b. What is the meaning of the term "holding out?"
a. What is the significance of the Principles of the AICPA's Code?b. State the essence of the six principles in the Code.
a. What authority underlies the Rules of the Code?b. To whom and in what circumstances do the Rules apply?
a. State Rule 101—Independence.b. Indicate the bodies who have issued technical standards that include a requirement that a CPA be independent.
Identify the two groups responsible for enforcement of the Rules of Conduct and indicate the maximum sanction that can be imposed by each.
What is the purpose of the Joint Ethics Enforcement Program (JEEP) and how does it operate?
What is the composition of the joint trial board, when does it become involved, and what disciplinary actions can it take?
Explain the automatic disciplinary provisions of the AICPA and the actions by members that result in application of the provisions.
The membership of the AICPA has adopted the Code of Professional Conduct that is administered by the Institute's Professional Ethics Division.a. With the many general theories of ethics developed by
Ethical standards for the profession have been published in the form of the AICPA's Code of Professional Conduct.Requireda. Identify and distinguish between the two sections of the Code.b. Are both
Obtain a copy of any code of ethics issued by your state society ofCPAs or board of accountancy. Prepare a summary comparison of it with the AICPA's Codeof Professional Conduct in terms of structure
For your state, determine whether there are any laws or board of accountancy rules or regulations, other than those in a code of ethics, that deal with the matters listed below. If so, determine
What is a management representation letter? Who usually prepares it? Who should sign it? When should it be dated? How does it differ from a management letter?
For what purpose does an auditor perform analytical procedures in the final stages of the audit?
What is an internal quality review process? How can a sole public accounting practitioner accomplish the objectives of this process?
An auditor accepted an engagement to audit the 2003 financial statements of EFG Corporation and began the fieldwork on September 30, 2003. EFG‘gave the auditor the 2003 financial statements on
Milton Green, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 2003. Green plans to complete the fieldwork and sign the auditor’s report about March
The auditor is auditing financial statements for the year ended December 31, 2003, and is completing the audit in early March 2004. The following situations have come to the auditor’s attention:1.
An alfalfa co-op has an agreement with its farmers to purchase alfalfa at a.price that is currently above the existing market price. In addition, the co-op has agreed to pay the farmers interest at 2
During the course of the audit of Nature Sporting Goods for the year ended December 31, 2003, the auditor discovered the following errors (documentation references are in parentheses):1. The accounts
Obtain an annual report of a public company. For significant accounting policies, leases, pensions, and long-term debt, identify any disclosures that appear to be missing, and try to identify why
Cole & Cole, CPAs, are auditing the financial statements of Consolidated Industries Co. for the year ended December 31, 2003. On February 20, 2004, Cole asked the client to draft an inquiry
When is an audit firm considered to be associated with financial statements? What must the firm do when associated with financial statements?
What isa. A compilation?b. A review?
What are reportable conditions as defined for reports on internal control? What is the significance of reportable conditions to the audit of a company’s annual financial statements?
Identify each of the different situations in which the auditor may report on internal controls, and the type of assurance provided in each case.
What are two examples of growth opportunities proposed by the AICPA’s Special Committee on Assurance Services?
In what reporting situations covered in this chapter can an auditor provide each of the following levels of assurance?a. An opinionb. Negative/limited assurance
Under which of the following circumstances would a disclaimer of opinion not be appropriate?a. The auditor is engaged after fiscal year-end and is unable to observe physical inventories or apply
Before issuing a report on the compilation of financial statements of a nonpublic entity, the accountant shoulda. Apply analytical procedures to selected financial data to discover any material
You are a senior auditor working for Rittenberg & Schwieger, CPAs. Your staff assistant has drafted the following audit report. You believe the scope limitation is significant enough to qualify the
You are in charge of the audit of the financial statements of Parat, Inc., and consolidated subsidiaries covering the two years ended December 31, 2003. Another public accounting firm is auditing
The following auditor’s report was drafted by a staff accountant of Turner & Turner, CPAs, at the completion of the audit of the financial statements of Lyon Computers, Inc., for the year ended
The audit of Shylo Ranch, Inc. for the year ended December 31, 2003, was completed by Stu & Dent, LLP on February 28, 2004. A recent fire destroyed the accounting records concerning the cost of
The following report was drafted on October 25, 2004, by Russ Major, CPA, at the completion of the engagement to compile the financial statements of Ajax Company for the year ended September 30,
You have been assigned to perform a review of a client’s inventory containing microcomputers and related software.Required:a. What inquiries and analytical procedures should you perform?b. What
Write a report on your perceptions of the effectiveness of audit, review, and compilation reports in communicating the nature of the service and the degree of assurance provided.
A staff auditor of Erwachen & Diamond, CPAs, has prepared the following draft of an audit report on cash basis financial statements:Accountant’s Report to the Shareholders of Halon Company:We have
Young & Young, CPAs, completed an examination of the financial statements of XYZ Company, Inc., for the year ended June 30, 2004, and issued a standard unqualified auditor’s report dated August 15,
Compare and contrast the auditor’s responsibility for (1) reporting reportable conditions based on an audit of the financial statements and(2) expressing an opinion on management's assessment of
Hart, CPA, has been approached by Unidyne Co. to accept an attest engagement to examine and report on management's written assertion about effectiveness of Unidyne’s internal controls-over
The auditor is auditing the Inguish Company, which has a bond indenture, dated March 26, 2001, with the Last International Bank of Chicago that contains the following covenants in paragraphs E
Visit the AICPA’s website and identify what new assurance services are being provided. Prepare a report describing the nature of those services, and include a brief description of the criteria
You are auditing Osakis Electronics USA, Ltd., a subsidiary of a Japanese company, and will issue an audit report covering the balance sheets as of December 31, 2003 and 2002 and the income
The chapter describes societal and judicial factors that have served to increase the number of lawsuits, in general, and the number of lawsuits against auditors in particular.Identify the major
Four tests have been used by various courts in common-law decisions to determine which third-party users can successfully bring a suit against the auditor for negligence. Identify each of these
What isa. A 10-K?b. A 10-Q?c. An 8-Ke
Why is the Rosenblum case a particularly important case in auditor liability?
What is meant by practice monitoring or peer review? How are the elements of quality control used in a peer review?
What are the continuing education requirements for an AICPA member in public practice?
Using the resources of your library, such as The Wall Street Journal Index, the Accountants Index, ABI Inform, and the Business Periodicals Index, prepare briefs of recent common-law cases brought
What is value-added auditing? How does the auditor know when value is added?
Does the Code of Ethics for internal auditing apply to all internal auditors, whether or not they are members of the Institute of Internal Auditors?
To whom must an internal auditor report a significant fraud? Is an internal auditor obligated to report a fraud to an appropriate outside regulatory agency? Explain.
Define and describe the following types of internal audits:a. Operational auditsb. Information systems audits.c. Compliance auditsd. Financial reporting and control auditse. Program and performance
What is a compliance audit? What areas are typically covered in a compliance audit?
What is the internal auditor’s unique role in financial reporting and control audits?How does the internal auditor’s current role differ from the historical financialaudit role?
What major risks in financial reporting and control should be addressed by an internal audit department? How does addressing those risks improve the effectiveness of an audit committee?
Can an internal audit department provide assurance services on information systems to outside users? For example, can an internal audit department provide assurance services to a company’s trading
What are the major objectives of operational auditing? How does operational auditing differ from financial auditing?
Explain how knowledge of internal controls allows internal auditors to perform useful operational audits of an organization’s technical areas, even when the auditor does not have the technical
Why do organizations find internal audits useful? In what ways does internal auditing have a competitive advantage over external auditing?
What are some basic techniques for developing and maintaining good relations with auditees?
What information should normally be included in an operational audit report? How does the evolving audit report differ from the traditional audit report?
What is a program audit? What audit objectives are addressed in a program audit?
What is a performance audit? What audit objectives are addressed in a performance audit?
What are the major trends in value-added and internal auditing?
A typical objective of an operational audit is to determine whether an entity’sa. Internal controls are operating as designed.b. Operational information is in accordance with governmental auditing
Which of the following is not a deficiency associated with most internal audit reports?The reportsa. Are not written from a risk point of viewb. Are often not issued on a timely basisc. Are formald.
Which of the following statements are correct regarding program and performance audits by governmental auditors?I. A program audit contains elements of an operational audit.II. A performance audit
The highest priority of a financial audit by an internal audit department practicing under the new definition of internal auditing would be to:a. Test the effectiveness of internal controls over
The major objective of an operational audit is to:a. Analyze operational areas for control deficiencies, especially those that would allow a fraud to go undetected.b. Perform trend analysis to
The following are findings resulting from various audits of company employee benefit plans:1. Piecework accounting—During an internal audit of a wage incentive plan, an internal auditor found that
Internal auditing is defined as an integral part of the corporate governance process.Required:a. What is the governance process?b. What special functions does internal auditing provide for the audit
Auditors try to identify predictable relationships when using analytical procedures.Transactions from which of the following accounts would likely yield the most persuasive evidence in relation to
The auditor’s analytical procedures are facilitated if the clienta. Uses a standard cost system that produces variance reportsb. Segregates obsolete inventory before the physical inventory countc.
Which of the following is not one of the independent auditor’s objectives regarding the examination of inventories?a. Verifying that inventory counted is owned by the clientb. Verifying that the
Which of the following procedures in the cash disbursements cycle should not be performed by the accounts payable department?a. Comparing the vendor’s invoice with the receiving reportb. Canceling
Tracing debits from an expense account to receiving reports and purchase orders provides evidence thata. All receipts of merchandise were properly recorded.b. Recorded expenses were for goods
The client has taken a complete physical inventory at year-end, and you have observed the inventory, taken test counts, accounted for tag sequencing, and so on. You are confident that the client took
Inshalla Retail Company keeps its inventory on a perpetual FIFO basis for internal reporting, but adjusts the year-end FIFO balance to a LIFO basis using a dollar-value LIFO index. The auditor is
One of the firm’s largest clients, Ropper Company, makes gas grills, gas stoves, and gas dryers. Its financial position has deteriorated, but its management is confident that the worst has passed.
You are auditing Inventory of HUSKY Corp. as of December 31, 2002. The inventory general ledger balance is $8,124,998.66. HUSKY manufactures lawn and garden tractors, snowmobiles, and supplies. If
Could the fraud at CMH have been detected if standard audit procedures had been used to observe the client’s physical inventory? Explain why it is important that auditors assigned to the
What types of operational audits should an internal audit department perform in the cash and cash management area?
Which of the following would not represent an advantage to using a lockbox arrangement with a bank?a. It expedites the receipt of cash and provides earlier access to it.b. It is less costly than
Which of the following checks might indicate kiting?a. 101 and 303b. 202 and 404c. 101 and 404d. 202 and 303 The following information was taken from the bank transfer schedule prepared during the
Which of the following checks illustrate deposits/transfers in transit at December 31, 2003?a. 101 and 202b. 101 and 303c. 202 and 404d. 303 and 404 The following information was taken from the bank
The auditor must be aware of loan and debt covenants that may affect the client. A regular part of each audit should include the examination of these covenants.Required:a. What information should the
Assume that you have just gone to work for Wipfli, Barber, & Zeitlow, a regional CPA firm with seven offices in your state. The company is interested in automating much of its documentation. The
A staff auditor is assigned the audit of equipment. The audit senior remarks, “This is the easiest account to audit. All you have to do is vouch the major additions and disposals. The client has
What particular problems are encountered in the audit of property, plant, and equipment, and goodwill when another entity is purchased? Explain the specific audit implications when the acquisition is
What audit procedures are used to determine that all fully depreciated equipment is properly valued?
During the audit of a new client, you uncover an accounting policy stating that all purchases of equipment or other items under $500 will be expensed, regardless of their nature. When you ask the
An audit client has acquired another company and accounted for the acquisition as a purchase. An independent real estate appraiser has been hired to value the assets of the acquired company. What are
The auditor’s program for the examination of long-term debt should include steps that requirea. Verification of the existence of the bondholdersb. Examination of the bond trust indenturec.
The audit senior has asked you to perform analytical procedures to estimate the reasonableness of recorded depreciation expense of a manufacturing client. The client has seven different classes of

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