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principles of external auditing
Questions and Answers of
Principles Of External Auditing
The auditor should consider known control deficiencies as part of the process of planning the audit.Requireda. A list of internal control deficiencies that were found at a small manufacturing
Briefly define the following communication controls, and describe how they work:a. Encryptionb. Callbackc. Echo check
Why is ITF normally implemented by internal auditors rather than external au- ditors?
Assume that an internal audit department develops an integrated test facility (ITF) for use in performing continuous audits of the organization's mortgage pro- cessing system. The ITF has been in use
What kinds of system interdependencies are there in a vendor-managed inven- tory system like the one described in the text that exists between Wal-Mart and many of its larger vendors?
How can a tagging and tracing technique be used with an e-business client if the tagged transaction cannot be traced through the trading partners' computing sys- tem?
In an automated payroll system, all employees in the finishing department were paid at the rate of $7.45 per hour when the authorized rate was $7.15 per hour.Which of the following controls would
A deposit for Julie A. Smith at the local bank was inadvertently recorded as a de- posit in the account of June A. Smith. The control that would most likely have detected the error in depositing the
Which of the following independent errors would not be detected by batch con- trols? a. The computer operator added a fictitious employee to the processing of the weekly time cards. b. An employee
A mail-order retail organization sells complex electronic equipment through its catalogs. Orders are taken over phone lines and transmitted via terminal to the company's main warehouse for
What factors determine the reliability of audit evidence? Give an example of two types of evidence, one that is more reliable and one that is less reliable.
What assertions are tested by confirmations sent to customers?
Which of the following is the least persuasive documentation in support of an auditor’sopinion?a. Schedules of details of physical inventory counts conducted by the clientb. Notation of inferences
An auditor determines that management integrity is high, the risk of account misstatements is low, and the client’s information system is reliable. Which of the following conclusions can be reached
A test of an asset for overstatement provides corresponding evidence on: Expense a. Overstatement b. Understatement c. Understatement d. Overstatement Revenue Overstatement Overstatement Liability
Observation is considered a reliable audit procedure but one that is limited in its usefulness. Which of the following does not represent a limitation of the use of observation as an audit
Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concern about the receivables’:a. Valuation.b.
An auditor observes inventory held by the client and notes that some of the inventory appears to be old, but in good condition. Which of the following conclusions is justified by the audit
Which of the following statements is not true concerning the auditor's documentation?a. The auditor should document the reasoning process and conclusions reached for significant account balances even
During the investigation of the Building and Land accounts, the auditor notes that one of the buildings was sold last year for a very large profit as authorized by the board of directors. The audit
Which of the following statements regarding the incidence of fraud is incorrect?a. Fraud is estimated to cost U.S. businesses less than one cent on the dollar.b. Defalcations occur more often than
Fraudulent financial reporting includes all of the following except: a. Misappropriation of assets for personal use. b. Manipulation, falsification, or alteration of accounting records or
Which of the following statements is/are correct regarding the auditor’s use of materiality as it applies to a financial statement audit:a. The auditor is required to report all incidences of
An auditor discovers a material defalcation involving the theft of $500,000 of inventory. Restitution will not be made. Which of the following statements is not correct regarding the auditor’s
Which of the following is not a correct statement regarding the use of brainstorming as part of a financial statement audit?a. It is required as a normal part of every engagement.b. It should include
The auditor notes the following changes in ratios:From just this information, the auditor should conclude all of the following about fraud risk except:a. Inventory has declined in quality because of
Which of the following would not be considered a motivation to commit fraud?a. Personal financial problemsb. Stock compensation programsc. Poor internal controlsd. Tight debt covenants
The accounting profession may have contributed to the downfall of Enron and the large public losses in all of the following ways except:a. Accounting became very rule-oriented and created a group of
The largest form of defalcation (both in dollars and frequency) is:a. Theft of cash directly from the company.b. Theft of cash through disbursement schemes.c. Theft of inventory and small tools.d.
Green, CPA, has been engaged to audit the financial statements of Star Manufacturing, Inc., a medium-size entity that produces a wide variety of household goods. All acquisitions of materials are
(Internal Control Questionnaire-Purchases) Green, CPA, has been engaged to audit the financial statements of Star Manufacturing, Inc., a medium-size entity that produces a wide variety of household
What is a control risk assessment? What is the importance of a control risk assess- ment in an audit engagement?
What are the requirements for the auditor to assess an entity's control environ- ment? Assume the auditor finds significant weaknesses in the entity's control en- vironment. Answer the following
The audit report described by the PCAOB is developed as part of an "integrated audit." Explain what is meant by the term "integrated audit."
What are the major elements of the auditor's report on management's assessment of internal control?
What kind of report should the auditor prepare if the auditor concludes that management's report on internal control omits significant deficiencies in either the design or operation of the entity's
Does the auditor's report on internal control cover all internal controls or only those over financial reporting? Explain the difference.
Assume an auditor concludes that there are material deficiencies in an organiza- tion's internal controls over financial reporting. Management agrees and reports the weaknesses in its report to
How should auditors use prior-year audit documentation in performing the con- trol risk assessment for the current year? What are the advantages and disadvan- tages of using prior-year documentation
How does the auditor determine which controls need to be tested?
Describe a dual-purpose test. What is the purpose of such a test? Give an example of such a test.
What are the implications to the conduct of an audit and the auditor's assessment of internal control over financial reporting if the auditor concludes that an orga- nization's control environment
The auditor concludes that a public company has significant deficiencies in its in- ternal controls over financial reporting. Which of the following is a proper re- sponse to this finding? a. Report
Which of the following would be considered a significant deficiency in an organization's control environment? a. The internal audit function is outsourced to a public accounting firm that is not
An auditor finishes the audit of a company's financial statements and discovers a material misstatement that was due to recording revenue on a transaction to a regular customer twice. The client
Which of the following would not be considered an advantage of using an internal control questionnaire in understanding and documenting the controls in an important accounting application?
Which of the following controls would be most effective in assisting the organi- zation in achieving the completeness objective? a. All employee time cards should be collected by the supervisor and
Proper implementation of reconciliation controls would be effective in detecting all of the following errors except: a. Transactions were appropriately posted to individual subsidiary accounts, but
Which of the following statements would not be correct regarding the authori- zation function as implemented in an organization? a. Blanket authorizations can be implemented in computer systems on
Authorization of transactions in a computerized processing environment can take place in the form of: a. Computerized authorization in the form of user-approved blanket authoriza- tions. b.
The accounts payable department receives the purchase order form to accomplish all of the following except. a. Compare invoice price to purchase order price. b. Ensure that the purchase had been
Assume that you were given these five options to describe the tone at the top: Excellent Moderate Indifferent Nonexistent Machiavellian (do whatever it takes)Requireda. How would the auditor go
Brown Company provides the follow- ing office support services for more than 100 small clients: 1. Supplying temporary personnel 2. Providing monthly bookkeeping services 3. Designing and printing
With your instructor's consent, identify a company and perform a background review of it to identify high-risk areas for an upcoming audit. Utilize all the electronic sources that have information
Who is the audit client? Why is it important that the auditor understand who the true audit client is and why that party is the audit client?
Explain how "privileged communication" differs from confidential information.
Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for en- suring their observance?a. Vigorous
Which of the following is not a major threat to an auditor's independence?a. Audit partner's compensation based on obtaining and retaining clientsb. Becoming too friendly with the client's
The Sarbanes-Oxley Act prohibits public accounting firms from providing cer- tain services to audit clients that are public companies. Which of the following services is not prohibited?a. Internal
According to the AICPA's ethical standards, an auditor would be considered in- dependent in which of the following instances?a. The auditor has an automobile loan from a client bank.b. The auditor is
A violation of the profession's ethical standards would most likely have occurred when a CPA:a. Purchased a bookkeeping firm's practice of monthly write-ups for a percent- agc of fees received over a
A CPA is permitted to disclose confidential client information without the con- sent of the client to:I: Another CPA who has purchased the CPA's tax practice.II. Another CPA firm if the information
Manny Tallents is a CPA and a lawyer. In which of the following situations is Tal- lents violating the AICPA's Rules of Conduct?a. He uses his legal training to help determine the legality of an
CPA firms performing management consulting services can accept contingent fee contracts when:a. The amounts are not material in relationship to the audit billings.b. The consulting services are for
Applying utilitarianism as a concept in addressing ethical situations requires the auditor to perform all of the following except:a. Identify the potential stakeholders that will be affected by the
The following are situations in which auditors may find themselves.Situations: 1. Spencer is the partner in charge of the audit of Flip Company. He has half in- terest in a joint venture with Flip's
Following is a list of potential viola- tions of the AICPA's Code of Professional Conduct.Auditor Situations:1. T.O. Busy is unable to perform a service requested by a client. Therefore, Busy refers
Two CPAs visiting at a recent meeting of the state CPA society were talking about accepting commissions and performing work on a contingent fee basis. The first one said he did not accept commissions
In analyzing the reported income of General Motors Corporation, Abraham Briloff reported that General Motors made only $22.8 million from the sale of cars:General Motors reported only $22.8 million
What are the eight elements of the COSO ERM model? Explain each component and its importance to effective enterprise risk management.
What are the major advantages to a company of implementing an effective enterprise risk management process?
How might an organization go about sharing or transferring risk?
Explain why it may be easier for the auditor to assess environment risk as opposed to separately assessing inherent risk and control risk.
4-32 Why is it important for the auditor to use risk analysis to develop expectations about client performance? 4-33 What background information might be useful to the auditor in planning the audit
4-36 What ratios would best indicate problems with potential inventory obsolescence or collectibility of receivables? How are those ratios calculated?
Management integrity affects all of the following risks except: a. Enterprise risk. b. Financial reporting risk.c. Engagement risk. d. All of the above
A key element of the COSO ERM model is risk appetite. Risk appetite is a. Best determined by management with board of director review and concur- rence. b. An integral part of the risk culture. c.
4-41 An external auditor is interested in whether a company has implemented an ef- fective ERM because: a. It reduces the likelihood that an organization will fail. b. It provides a framework for
Which of the following would not be a source of information about risk of a po- tential new audit client? a. The previous auditor b. Management c. The Internet d. The new auditor's permanent
An engagement letter should be written before the start of an audit because: a. It may limit the auditor's legal liability by specifying the auditor's responsibili- ties. b. It specifies the
If the auditor has concerns about the integrity of management, which of the following would not be an appropriate action? a. Refuse to accept the engagement because a client does not have an
Which of the following combinations of engagement risk, audit risk, and mate- riality would lead to the most audit work? Engagement Risk a. Low b. Moderate c. Low d. High Audit Risk High Low Moderate
Which of the following would not be considered a limitation of the audit risk model?a. The model treats each risk component as a separate and independent factor when some of the factors are
Which of the following models expresses the general relationship of risks associated with the auditor's evaluation of control risk (C R), inherent risk (I R), and audit risk (A R) that would lead the
Comparing client data with industry data and with its own results for the previous year, the auditor finds that the number of days' sales in accounts receivable for this year is 66 for the client, 42
An auditor suspects that fictitious sales may have been recorded during the year. Which of the following analytical review results would most likely indicate that fictitious sales were recorded? a.
The COSO organization has issued a document describing a com- prehensive approach to Enterprise Risk Management (ERM). Required a. What are the major elements contained in the definition of
Access the SEC home page at http://www.sec.gov. a. Identify the most recent Staff Accounting Bulletin that provides guidance to the profession. b. Identify the guidance given.
What role did the widespread use of stock options contribute to corporate fail- ures?
What is the PCAOB and what is its mandate?
What studies were conducted by the GAO as part of the Sarbanes-Oxley Act?
Sarbanes-Oxley contains certification requirements of management. What are they and how do they differ from the responsibilities that management previously had?
What are the whistleblowing provisions of the Sarbanes-Oxley Act? What is the organization's responsibility for establishing and monitoring a Corporate Code of Conduct?
What does it mean to have management certify that the financial statements are correct? How does this certification differ from the previously acknowledged re- sponsibility for the fairness of the
The audit committee is supposed to be the external auditor's client. Explain what this means and how it is implemented.
What responsibility does the audit committee of a public company have regard- ing the selection of a chief audit executive for its internal audit activity? What role does the audit committee play in
Does the audit committee need to separately approve nonaudit services to: (a) the company, (b) management, or (c) members of the board of directors? Explain.
Explain the difference between the proposed standard for understanding the en- tity and its environment (including internal control) from the previous standard focusing on internal control.
What is the base of authority for each of the audit standard setters identified in question 2-33?
All of the following are parts of corporate governance except:a. Oversight of management by the board of directors.b. Established processes to provide accountability back to stockholders.c.
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