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Auditing a business risk appraoch 6th Edition Larry e. rittenberg, bradley j. schwieger, karla m. johnston - Solutions

Discuss the following situations in a group and report to the class:a. What rules would you expect the codes of other professions to have in common with the AICPA? Explain.b. Examine the SEC's basic principles regarding independence. Using only those principles, discuss and reach a conclusion as to
Public accounting firms have taken many positive steps to ensure the independence of their firms in conducting audits.Requireda. Identify five ways in which a public accounting firm can take positive actions to improve the firm's independence in conducting an audit.b. Identify three unique
Independence is often hailed as the "cornerstone of auditing" and recognized as the most important characteristic of an auditor.Requireda. What is meant by independence as it is applied to the CPA?b. Compare independence of an auditor with that of a1. Judge2. Lawyerc. Describe the difference
The following are a number of scenarios that might constitute a violation of the Code of Professional Conduct.RequiredFor each of the following situations, identify whether it involves a violation of the ethical standards of the profession, and indicate which principle or rule would be violated.a.
Rule 301 on confidentiality recognizes a fundamental public trust between the client and the auditor and reflects the manner in which all professionals conduct themselves. However, in certain instances the auditor may be required to communicate confidential information.Requireda. Briefly explain
Robert, CPA, has a large one-office firm in a growing city, but his practice is shrinking.6 Several other firms recently opened offices in the city, and Robert lost several key clients to his new competitors.Because of the changed competitive climate, Robert decided his firm needed to offer a wider
As the auditor for XYZ Company, you discover that a material sale ($500,000 sale, cost of goods of $300,000) was made to a customer this year. Due to poor internal accounting controls, the sale was never recorded. Your client makes a management decision not to bill the customer because such a long
Your audit client, Germane Industries, has developed a new financial instrument, the major purpose of which is to boost earnings and to keep a significant amount of debt off the balance sheet. Its investment banker tells the firm that the instrument is structured explicitly to keep it off the
In a 1988 article, Arthur Wyatt, a former member of the FASB, stated:"Practicing professionals should place the public interest above the interests of clients, particularly when participating in a process designed to develop standards expected to achieve fair presentation. . . . Granted that the
In The Fund of Funds, Ltd. v.Arthur Andersen & Co., Arthur Andersen auditors completed the audit of Fund of Funds with no problems encountered and issued an unqualified opinion. Shortly thereafter, essentially the same audit team began the audit of King Resources. While conducting that audit, the
You have been engaged to examine the balance sheet of Hi-Sail Company, which provides services to financial institutions. Its revenue source comes from fees for performing these services. Its primary expenses are related to selling and general and administrative costs. The company has assets and
Define the following terms:• Enterprise risk• Engagement risk• Financial reporting risk• Audit risk
What is enterprise risk management (ERM) and why is it important that an organization implements an effective ERM? Who has the primary responsibility for the effective implementation of an ERM?
Explain how enterprise risk affects engagement risk and how both enterprise risk and engagement risk affect financial reporting risk.
Explain why the internal environment is so important and why many corporate losses are tied to a poor risk management environment.
How are risks and controls related? Why is it important to assess risks prior to evaluating the quality of an organization's controls?
What kinds of risks does a company encounter if it decides to develop a new product?
What are the major procedures an auditor will utilize to identify the risks associated with an existing or a potential new client?
Why is the quality of corporate governance a significant determinant of the auditor's risk assessment of an entity?
How would an auditor go about assessing management integrity? Why management integrity is considered the most important factor affecting the client acceptance or continuation decision?
What are the primary factors an auditor will want to investigate before accepting a new audit client?
What is a "high risk" audit client? What are the characteristics of clients that are considered high risk?
Why do related party transactions represent special risks to the auditor and the conduct of an audit?
What sources of information should an auditor look at in determining whether to accept a new client? Why is it important that the auditor systematically make the accept decision?
What information should the auditor seek from the predecessor auditor?
What is an engagement letter? What is the purpose of the engagement letter?
How will an auditor find out if there has been a dispute between the client and the preceding auditor regarding accounting principles?
What is audit risk? Does the auditor determine audit risk or does the auditor assess it? What factors most influence audit risk?
Explain how the concepts of audit risk and materiality are related. Must an auditor make a decision on materiality in order to implement the audit risk model?
Some audit firms develop very specific guidelines, either through quantitative guidelines or in tables, relating planning materiality to the size of sales or assets for a client. Other audit firms leave the materiality judgments up to the individual partner or manager in charge of the audit. What
Explain how an accounting estimate would not be materially misstated for two consecutive years, but because of the "swing" in the accounting estimate, net income could be misstated by a material amount.
The SEC is very concerned that auditors recognize the qualitative aspect of materiality judgments. Explain what the "qualitative" aspect of materiality means.
A recent graduate of an accounting program went to work for a large international accounting firm and noted that the firm sets audit risk at 5% for all major engagements. What does a literal interpretation of setting audit risk at 5% mean? How could an audit firm set audit risk at 5% (i.e., what
What is inherent risk? How can the auditor measure it? What are the implications for the audit risk model if the auditor assesses inherent risk at less than 100%?
What are the major limitations of the audit risk model? How should those limitations affect the auditor's implementation of the audit risk model?
What are the major lessons learned in the analysis of the audits of Lincoln Savings & Loan? Where would the auditor obtain information regarding the real estate market in the Phoenix area or in the southwestern United States? Why is it important that the auditor have such information during an
Janice Johnson is an experienced auditor in charge of several clients. Her approach to an audit is to plan the audit without referring to previous year's documentation to ensure that a fresh approach will be taken in the audit. Explain why Johnson should examine the permanent file, as well as other
Explain the linkage of a risk-based approach to particular account balances. Use either inventory or accounts receivable to explain the linkage.
Why is it important for the auditor to use risk analysis to develop expectations about client performance?
What background information might be useful to the auditor in planning the audit to assist in determining whether the client has potential inventory obsolescence or receivables problems? Identify the various sources the auditor would utilize to develop this background information.
On accepting a new manufacturing client, the auditor usually arranges to take a tour of the manufacturing plant. Assuming that the client has one major manufacturing plant, identify the information the auditor might obtain during the tour that will help in planning and conducting the audit.
Explain how ratio analysis and industry comparisons can be useful to the auditor in identifying potential risk on an audit engagement. How can such analysis also help the auditor plan the audit?
What ratios would best indicate problems with potential inventory obsolescence or collectibility of receivables? How are those ratios calculated?
Explain why a thorough understanding of the business, its risks, and the competitive environment is essential to an auditor in making judgments about the quality of accounting choices used by the client.
How does risk analysis affect the nature of procedures performed on specific account balances? Use as an example the following accounts for illustration:• Allowance for loan losses• Inventory• Sales commissions• Accounts receivable
Multiple Choice Question1. Management integrity affects all of the following risks except:a. Enterprise riskb. Financial reporting riskc. Engagement riskd. All of the above2. An external auditor is interested in whether or not a company has implemented an effective Enterprise Risk Management
Multiple Choice Question1. Which of the following models expresses the general relationship of risks associated with the auditor€™s evaluation of control risk (CR), inherent risk (IR), and audit risk(AR) that would lead the auditor to conclude that additional substantive tests of details
The auditor can control some types of risks, but must assess other types of risks. A number of different types of risk were introduced in this chapter.Requireda. Define each of the following risk concepts that were introduced in this chapter.b. Indicate the importance of the risk to the conduct of
The concepts of risk and control are integrally related.Requireda. Explain how risk and control are related. Is one concept broader than the other? Explain.b. What risks does a company have in developing and introducing a new product? Take the example of a new product in any industry that you are
Consider the payment of individuals working in a factory and who are paid by the hour. According to union contract, they have extensive benefits.RequiredWhat are the risks that affect the processing and payment of the employees? What controls do you suggest to address those risks? Organize your
Two auditors were having the following discussion:Auditor 1: Risk analysis is good. But, when all is said and done, it does not add much to the audit. You still need to directly test the account balances with procedures such as confirmations or observation. You can't ever get away from good
The auditor needs to assess management integrity as a potential indicator of risk. Although the assessment of management integrity takes place on every audit engagement, it is difficult to do and is not often well documented.Requireda. Define management integrity, and discuss its importance to the
In early summer, an auditor is advised of a new assignment as the senior auditor for Lancer Company, a major client for the past five years. She is given the engagement letter for the audit covering the current calendar year and a list of personnel assigned to the engagement. It is her
Bob Jones, a relatively new partner for Kinde & McNally, CPAs, has recently received a request to provide a bid to perform audit and other services for Wolf River Outfitting, a large regional retailing organization with more than 50 stores in the surrounding five-state area. Wolf River is a
A staff auditor was listening to a conversation between two senior auditors regarding the audit risk model. The following are some statements made in that conversation regarding the audit risk model.RequiredIndicate whether you agree or disagree with each of the statements. Present the rationale
The audit report provides reasonable assurance that the financial statements are free from material misstatements. The auditor is put in a difficult situation because materiality is defined from a user's viewpoint, but the auditor must assess materiality in planning the audit to ensure that
Assume that the auditor has set $100,000 as materiality for misstatements affecting income and $125,000 for asset or liability misstatements that do not affect income. The auditor tests some accounts and has a great deal of confidence in the correct determination of the account balance. For other
James Johnson has just completed a detailed analysis of a potential new audit client, Rural Railroad and Pipeline, Inc. (RRP). James reports that the name is deceiving. The company is no longer in the railroad business but owns a significant amount of land rights along former railway lines. The
The auditor needs to understand the business in order to assess the risk of potential account misstatements. In preparing for a new audit, the auditor arranges to take a tour of the manufacturing plant and the distribution center. The client is a manufacturer of heavy machinery. Its major
Analytical review can be an extremely powerful tool in identifying potential problem areas in an audit. Analytical review can consist of trend and ratio analysis and can be performed by comparisons within the same company or comparisons across industry. The following information shows the past two
The following table contains calculations of several key ratios for Indianola Pharmaceutical Company, a maker of proprietary and prescription drugs. The company is publicly held and is considered a small- to medium-size pharmaceutical company. Approximately 80% of its sales have been in
The auditor for ABC Wholesaling Company has just begun to perform analytical procedures as part of planning the audit for the coming year.ABC Wholesaling is in a competitive industry, selling products such as STP Brand products and Ortho Grow products to companies such as Wal-Mart, Kmart, and
What is "audit evidence"? Describe the basic sources of audit evidence.
What are the three basic decisions auditors must make concerning audit evidence during the planning process?
Explain the importance of audit assertions for financial statement audits. Define each of the following types of assertions:• Existence• Occurrence• Completeness• Cutoff• Accuracy• Rights and obligations• Valuation or allocation• Understandability
The valuation assertion is often difficult to audit. Identify all the components of the valuation assertion for short-term investments in marketable securities.
The third standard of fieldwork requires the auditor to gather sufficient appropriate evidence to afford a reasonable basis for an opinion regarding the financial statements. What are the basic presumptions about the reliability of audit evidence?
Are the concepts of reliability of evidence and audit risk interrelated, or are they two separate concepts? For example, could the auditor accept less reliable audit evidence for an engagement in which audit risk has been set high as opposed to an engagement in which audit risk has been set lower
Explain how the following transaction assertions are related to the account balance assertions: Transaction Assertions Account Balance Assertionsa. Cutoff .............. Existence and Completenessb. Classification ............. Existence and Completenessc. Accuracy ............. Valuation and
Discuss the relative reliability and usefulness of internal and external documentation. Give two examples of each.
What is directional testing? How can the concept of directional testing assist the auditor in attaining audit efficiency?
Explain how testing an asset account for overstatement provides evidence on potential overstatements of revenue and understatement of expenses. Illustrate using accounts receivable and inventory as examples.
Which assertions are best tested by observation? What are the relative strengths and weaknesses of observation as an audit procedure?
Are inquiries of management considered reliable evidence? Under what conditions and for what assertions would inquiry of management be considered reliable evidence?
Is paper-based evidence more reliable than the same evidence generated through EDI and stored on a computer system? Explain. Under what conditions is electronically stored evidence as reliable as paper based evidence?
What is the difference between reprocessing a transaction and vouching a transaction? What underlying assertion does each test address?
Assuming that the client has external documentation on hand, such as correspondence with its lawyers or payments from its customers, why is sending confirmations to those same parties considered necessary?
Confirmations at times may be unreliable even if they involve external documentation. What assumptions should the auditor address concerning confirmations before concluding that utilizing confirmations will result in reliable audit evidence?
Why is it generally more efficient to test ending account balances rather than testing transactions throughout the year? Explain why the efficiency might change in a computerized environment with effective internal controls.
What are the purposes of an audit program?
What are the important considerations (judgments) that determine what is included in an audit program?
What is audit documentation? What key components should each audit document contain?
Is a memo that explains the rationale for an auditor's conclusion about the correctness of an account balance considered an audit document?
Many organizations are consciously eliminating paper documents by integrating their computer system with those of their suppliers and customers. Paper documents, such as purchase orders, are being replaced by machine-generated purchase orders. How is this change in documentation likely to affect
What is meant by the phrase," Audit documentation ought to stand on its own"? What is the importance of this concept?
Assume an auditor wishes to estimate an account balance by reference to outside data or other information generated from outside the accounting system. Under what conditions would such a procedure generate reliable audit evidence?
What is a concurring partner review, and what is its purpose?
Multiple Choice Question1. The auditor wishes to gather evidence to test the assertion that the client's capitalization of leased equipment assets is properly valued.Which of the following sources of evidence will the auditor find to be the most persuasive (most reliable and relevant)?a. Direct
Accounts Payable is generally one of the larger, and most volatile, liability accounts to audit. However, the auditor can use the assertion approach developed in this chapter to develop an overall audit program for accounts payable.Assume that you are auditing the Accounts Payable account for
Several of the financial statement assertions are interrelated.Requireda. For each of the following, indicate what transaction assertion is violated and describe the affect on related account balance assertions and, where appropriate, on the disclosure assertions.1. Sales shipped FOB destination
You are planning the audit of the Pagemate Company's inventory. Pagemate manufactures a variety of office equipment.Required Describe how each of the following procedures could be used in the audit of inventory and the related assertion(s) it tests:Procedure How used Assertion(s)
The following are examples of documents typically obtained by auditors.RequiredFor each example:a. Classify the document as internal or external evidence.b. Classify the document as to its relative reliability (high, moderate, or low).c. Identify an account balance and related assertion(s) for
In this chapter, several different kinds of audit evidence were identified. The following questions concern the reliability of audit evidence.Requireda. Explain why confirmations are normally considered more reliable than inquiries of the client. Under what situations might the opposite hold
One way that the auditor might achieve audit efficiency is to recognize the interrelationship between accounts. In many situations, evidence gathered in auditing a balance sheet account (asset, liability, or equity) can be easily expanded to audit a related income statement account.Requireda. For
With the double-entry accounting system, testing one account balance produces audit evidence concerning another account balance or class of transactions. For example, testing for overstatement of current marketable securities may uncover an understatement of long-term investments due to a
Nine major types of audit procedures are identified as part of the audit evidence-gathering process. These procedures are as follows:Observation Physical examination of documents Inquiry of company personnel Reprocessing Recomputation Analytical procedures Vouching ConfirmationsRequiredFollowing is
One major task for an auditor is to evaluate the reliability of testimonial evidence, which may come in the form of oral representations from management or in written form from parties outside the organization.Requireda. In the course of an audit, the auditor asks many questions of client officers
The following situations present the auditor with alternative sources of evidence regarding a particular assertion.Requireda. For each of the following situations, identify the assertion the auditor is most likely testing with the procedure.b. For each situation, identify which of the two sources
You have been assigned to audit the notes receivable of a medium-size audit client, Eagle River Distributing. The notes receivable account is new this year and per discussion with the controller, it came about because three major customers were experiencing payment difficulties. The three customers
The audit documentation represents the auditor's accumulation of evidence and conclusions reached on an audit engagement. Prior year audit documentation can provide insight into an audit engagement that will be useful in planning the current year audit.Requireda. What are the purposes or primary

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