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principles of auditing
Questions and Answers of
Principles of Auditing
The following questions relate to various aspects of selecting audit procedures. Select the best response.a. The sequence of steps in gathering evidence as the basis of the auditor's opinion is 1.
The following list includes common auditing procedures. For each procedure: (1) describe the procedure; (2) identify the primary financial statement assertion, such as existence, for which the
As explained in Chapter 3, evidential matter obtained through the auditor's personal knowledge is more reliable than evidential matter obtained from internal sources, such as the client's accounting
The specific audit objectives for the inventory of a manufacturing company might include the following: a. Inventories included in the balance sheet physically exist. b. Inventory quantities
Important audit procedures for the balance accounts receivable usually include the following: a Confirm account balances with selected customers. b Inquire of management and read agreements and
The scope of audit procedures can be modified by varying the nature, timing, or extent of procedures selected. Explain how materiality at the account balance level may be a consideration that
Listed below is the balance sheet portion of the 19X6 trial balance of Russ & Co. and additional information on some of the account balances. (Allowance accounts are ignored for convenience.) You
Winters & Allen is a mail-order seller of party supplies and novelty items. It sells to both businesses and individuals, but the accounting processing and controls are the same for all sales
For the following account balances, what are some specific examples of items that might be considered individually significant because of their nature?a. Accounts receivableb. Inventoryc. Property
Martin & Co., a CPA firm, has adopted the following specific percentages for the indicated qualitative levels of risk:Minimum 30%Moderate 50%Maximum 100%Martin & Co. has also decided to use a 5
Benis & Co., a CPA firm, has adopted the following specific percentages for the indicated qualitative levels of risk: Minimum 30% Moderate 50% Maximum 100% Benis & Co.'s partners have decided to use
Coordination of the direction of testing can increase the efficiency of audit tests. If an auditor has adopted the strategy of testing asset and expense account balances directly for overstatement
Using the activity format for the balance sheet account cash, identify the indi- rect testing effects on the components of directly testing the ending balance for overstatement. Also, explain how the
Your client is the Mission Mountain Shopping Center Inc., a shopping center with 30 store tenants. All leases with the store tenants provide for a fixed rent plus a percentage of sales, net of sales
Meals Inc. presents the following items in its balance sheet:Meals Inc. is a small business with two employees in its accounting department, and for that reason its internal control structure is
In 19X1, Reid, who had been in the lumbering business for many years, incorporated his business as Reid Ltd. Reid became president of the company and Zilker, the chief accountant, was appointed
Your client, Zitzitz Inc., issues its own trading stamps along with the sale of merchandise. These stamps are redeemable at Zitzitz when a book is filled. Thus, with each sale Zitzitz creates a
Milenburg Inc., sells chemicals in large, costly returnable containers. Its procedures in accounting for the containers are as follows:1. When containers are purchased, their cost is charged to
What is the difference between a privity relationship and a primary beneficiary relationship?
What is the difference between a primary beneficiary relationship and a foreseen party relationship?
What is the difference between a foreseen party relationship and a foreseeable party relationship?
Describe six major differences between the type of audit conducted in 1915 and the type conducted today.
What common law relationships between auditors, clients, and third parties were established by the Ultramares case?
What statutory law relationships between auditors and certain third parties were created with the Securities Act of 1933?
What is the “due diligence” defense that may be used by auditors under the Securities Act of 1933? What are the ‘‘good faith” and “no knowledge” defenses that may be used under the
How did the Barchris case change the auditor’s working climate?
In what way is the auditor potentially affected by the Racketeer Influenced and Corrupt Organizations Actl
In what way did the Rusch Factors case change the relationship between auditors and third parties insofar as ordinary negligence under common law is concerned?
How does the Continental Vending case illustrate a different dimension of the auditor’s legal risk?
In what way did the Rosenblum v. Adler case extend the auditor’s liability for ordinary negligence under common law? In what way did the Credit Alliance case narrow the auditor’s liability?
In the 1136 Tenants' case, what was the difference between the client’s and the CPA’s view of the purpose of the professional services?
What did the management of Equity Funding Corporation do to falsify its records and cover up the fraud?
What is the differerfce between errors and irregularities?
Describe the auditor’s responsibility to detect and report illegal acts.
In the Report of the National Commission on Fraudulent Financial Reporting there were four major recommendations that directly affect the role of the auditor. What were these recommendations?
What is the difference between business failure and audit failure?
The Securities Act of 1933a. Extended the auditor’s liability for ordinary negligence under common law.b. Created foreseen and foreseeable parties.c. Reversed the decisions made in the Ultramares
In the Continental Vending case the defendants were charged witha. Violation of federal criminal statutes.b. Ordinary negligence under statutory law.c. Ordinary negligence under common law.d.
In the 1136 Tenants’ case all of the following were factors in the case excepta. Violation of federal criminal statutes.b. Due care.c. A clearly written engagement letter.d. Misunderstanding as to
In the Equity Funding case all of the following were factors in the case excepta. The integrity of management.b. Massive collusion by management.c. Liability for ordinary negligence.d. A
Read the following statements and indicate whether you agree or disagree with each one. Give your reasons for agreement or disagreement. Support your answers with references to applicable cases
A colleague has read about the legal cases with which auditors have been involved in recent years. During a discussion, you consider it beneficial to summarize some highlights of auditors' legal
Answer the following questions or discuss the following statements.a. It seems that every time a legal challenge is made to an audit, CPAs either lose the case or are embarrassed about the facts
Indicate whether you think the following third-party groups would normally represent a (1) primary beneficiary, (2) foreseen party, or (3) foreseeable party. Give reasons for your answers.a. A
Use and Dispose Company was organized to manufacture and sell inexpensive golf clubs that can be used during the golf round and then thrown away at the end of the round. In order to “keep the
Explain the limitations that auditors face when they perform the attest function.
What three assurances can auditors give to the parties that rely on financial statements?
What is materiality?
Why is it necessary for the auditors to establish a threshold of materiality?
What factors must auditors consider when making materiality decisions?
In planning an audit and evaluating audit evidence what consideration must be coupled with materiality?
What is the difference between overall planned audit risk and the individual audit risks?
What are the following risks?a. Inherent riskb. Control riskc. Detection risk
What is the difference between the following?a. Non sampling riskb. Sampling risk
Under what conditions would the achieved individual audit risk for an account be the same as the individual audit risk that is used to plan the audit of that account?
What situation would have to exist for the achieved overall audit risk to exceed the planned overall audit risk?
Describe four audit procedures that do not require the use of audit sampling.
What five questions need to be answered in planning an audit sample?
Describe four advantages of using statistical sampling.
Which of the following is not an assurance that the auditors give to parties that rely on financial statements?a. Auditors know how the amounts and disclosures in the financial statements were
Which of the following phrases is not a part of the definition of materiality?a. The magnitude of an omission or misstatement of accounting information that,b. in light of surrounding
Which of the following is the reason preliminary estimates of materiality should be made by the auditor?a. Materiality guidelines cannot be adjusted after the audit procedures are conducted.b. There
Which of the following is not a part of the audit risk model?a. Inherent risk.b. Control risk.c. Materiality risk.d. Detection risk.
Which of the following is a correct statement?a. There is an inverse relationship between risk levels and the amount of necessary audit effort.b. There is a direct relationship between risk levels
Which of the following is true of audit sampling?a. A sample is less time-consuming and provides less assurance than examining all items in the population.b. A sample is less time-consuming and
Which of the following audit procedures is more likely to be performed with the use of audit sampling?a. Interview with management personnel.b. Completion of questionnaires.c. Confirmation of
Which of the following best illustrates an error caused by sampling?a. A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.b. An auditor
The application of statistical sampling techniques is least related to which of the following generally accepted auditing standards?a. The work is to be adequately planned and assistants, if any, are
Which of the following is an error caused by sampling?a. Choosing an audit procedure that is inconsistent with the audit objective.b. Choosing a sample size that is too small to achieve the sampling
Auditors who prefer statistical sampling to non statistical sampling may do so because statistical sampling helps the auditora. Measure the sufficiency of the evidential matter obtained.b. Eliminate
Which of the following audit risk components may be assessed in non quantitative terms?a. Inherent risk and control risk but not detection risk.b. Inherent risk but not control risk and detection
Rank the following conditions as having the most inherent risk (as discussed in the chapter), the second most inherent risk, and so on. Give reasons for your rankings.a. The processing of charge
In each of the following situations, indicate the nature or type of non sampling risk that caused the error to occur.a. Letters were sent to accounts payable vendors for each amount recorded on the
The auditor examined a sample of invoices supporting expenditures charged to repairs expense. No misclassification of any expenditure was found. Later, a material amount of expenditures was
For each of the following procedures, indicate whether sampling would or would not be used. Give reasons for your answers.a. Examinations of marketable securities.b. Confirmation letters sent to
What assertions does management make regarding the financial statements taken as a whole?
What are control risk assessment procedures?
What are the general guidelines as to what working papers should include?
Explain the general concept of the organization of working papers in the current files.
To what extent may an independent auditor use the client’s internal audit staff?
Which of the following statements concerning working papers is incorrect?a. An auditor may support an opinion by other means in addition to working papers.b. The form of working papers should be
In planning a new engagement, which of the following is not a factor that affects the CPA’s judgment as to the quantity, type, and content of working papers?a. The content of the client’s
For each one of the following statements, indicate whether the statement is true or false.a. During the early 1900s a statutory requirement for audits resulted in rapid development of the accounting
The following questions relate to financial auditing and auditing standards. Select the best response.a. The first general standard requires that a person or persons have adequate technical training
The following questions relate to audit reporting standards. Select the best response.a. The first standard of reporting requires that, "the report shall state whether the financial statements are
The following questions relate to modification of the standard audit report. Select the best response. a. When the client fails to include information that is necessary for the fair presentation of
List several reasons the following types of organizations would want to have an annual audit by a CPA. Church Municipal government Local United Fund organization Labor union National hobby
The following statement on one objective of an audit appeared in Principles of Accounting by William A. Paton and Russell A. Stevenson, published by The Ann Arbor Press in 1916: A large number of
In connection with current problems relating to audited financial statements it has been stated that: The bulk of the problems can be traced to a single crucial flaw in the basic structure (of the
The independent auditor issues a report at the end of the audit. Refer to the standard report in the chapter. 1 What is the difference between (a) "generally accepted auditing standards" and (b)
It has been observed that "there is a certain apparent similarity between notes to financial statements and qualifications in the auditor's report: both are means by which the auditor may be certain
On page 29 is an actual auditor's report rendered in 1927 by Touche, Niven & Co., on the financial statements of The Studebaker Corporation. 1 Explain what representations are made by the
Discuss the following observation recently made by a businessman: "Published financial statements should be designed to enable the efficiency and skill of management to be evaluated."
The following statements refer to the standard auditor's report. List the numbers of the statements that are not appropriate in the currently used report. 1. We have examined the balance sheet. . .
Minker expresses an unqualified opinion concerning the financial statements of the Zee Company, in which statements the basis of valuation of the fixed assets is not shown. She is aware of the fact
Coleson is practicing on his own account and has audited the books of the Koltron Company for many years. This year, as a result of a press of duties, he is able to spend only enough time to read the
In the South African Chartered Accountant's Handbook, the following statement appears: The term "Auditing Principles and Standards" appears to connote or to suggest one proposition and it is perhaps
Beth Jones & Co. has grown from a small firm that originally included only Ms. Jones and one junior accountant to a regional firm with 7 partners and 21 professional staff members occupying four
Until about 1945, staff accountants were hired at very low pay on a seasonal basis. They often worked only from December through the following March to become unemployed, at least as auditors, until
Technical accounting and auditing ability, supervisory ability, public relations ability, good judgment, and general decision-making ability are all important to the operation of an audit firm. Which
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