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business
auditing
Auditing a business risk appraoch 6th Edition Larry e. rittenberg, bradley j. schwieger, karla m. johnston - Solutions
The following equipment schedule was prepared by the client and audited by Sam Staff, an audit assistant, during the calendar-year 2001 audit of Roberta Enterprises, a continuing audit client. As engagement supervisor, you are reviewing the documentation.RequiredIdentify the deficiencies in the
The SEC took action against Gateway Computer in 2001 because they believed that Gateway systematically understated their allowance for doubtful accounts to meet sales and earnings targets. This is essentially the way the alleged fraud took place:• Gateway sold most of its computers over the
Addeco SA is the world’s largest temporary employment company. It lost several major accounts because customers felt it was not adequately serving their complex staffing needs. It announced that it was not able to deliver its 2003 financial statements on schedule. Ernst & Young, its auditors,
As reported in The Wall Street Journal (September 11, 1989), MiniScribe, Inc., inflated its reported profits and inventory through a number of schemes designed to fool the auditors. At that time, MiniScribe was one of the major producers of disk drives for personal computers. The newspaper article
Cendant Corporation has been the subject of an intensive fraud investigation. A look at the company's web site reveals the following statements contained in a report given to the Scathe Company sold travel and health club memberships. Some of the most significant irregularities now confirmed
How are internal control and corporate governance interrelated?
How are the concepts of risk and control interrelated?
What are the elements of the COSO Internal Control, Integrated Framework? How has the Sarbanes-Oxley Act affected the use of the COSO framework?
Define the term "internal control over financial reporting." What are the main components of an organization's internal control system? What is the difference between internal control and internal control over financial reporting? What are the implications of the difference to the auditor?
What is meant by the "tone at the top," and where does it fit into the COSO framework? Why is the tone at the top so important? How would an auditor go about assessing the tone at the top and its potential effect on the quality of an organization's controls?
What is an organization's control environment? What are the major elements of a control environment?
What functions do an organization's board of directors and the audit committee of the board of director’s play in promoting a strong control environment? Explain.
What is monitoring? Give two examples of internal control monitoring and explain how they would be used by management.
What types of controls might a large-scale organization use to ensure that its divisional management is conducting business in a manner that will best achieve the objectives of the business? What control risks might be associated with a compensation system that places a heavy emphasis on year-end
Define the following terms:• Deficiency in internal controls over financial reporting• Significant deficiency in internal controls over financial reporting• Material weakness in internal controls over financial reporting
Assume an audit committee is not effective. It has weak directors with little financial knowledge and they are not independent of management. How do the weaknesses affect the auditor's evaluation of internal control over financial reporting? Would a non-effective audit committee constitute a
What does it mean to have a "material weakness in internal control"? How does the author distinguish between a significant deficiency in internal control and a material weakness in internal control? How does the auditor use the knowledge that there is a weakness in internal control as a basis to
Why would a company's potential customers or suppliers be interested in the quality of an organization's controls, particularly its computer controls?
Assume a stockholder or a creditor receives an audit report on a company's financial statements. Why would they be interested in a report on the effectiveness of internal control over financial reporting?
What is management's responsibility to report on the effectiveness of internal controls over financial reporting? How does the responsibility differ for public companies and privately-held companies?
What is the role of internal audit in assisting management in preparing its report on the effectiveness of internal control over financial reporting? Is internal audit considered to be independent of management, or an extension of management? Explain.
How does management gain assurance about the effectiveness of internal control over financial reporting?
Identify the major processes the auditor goes through in developing an understanding of internal control over financial reporting.
What is segregation of duties? What kinds of segregation of duties are important in accounting applications? Give an example of each type of segregation of duties that an auditor might look for in evaluating internal controls in a given accounting application.
What are the essential components of compensation practices that an auditor should look at when evaluating the control environment?
Identify controls the auditor would be looking for to achieve the objective that "all transactions that should have been recorded are recorded." For each control identified, briefly indicate how the auditor would go about testing whether the control operated effectively.
Identify the major control objectives related to the occurrence assertion. How is the occurrence assertion related to the accuracy assertion? Identify two or three key controls an organization might implement to achieve the occurrence objectives.
Identify the major objectives associated with the accuracy control objective. Briefly identify one or two controls that an organization might adopt to achieve the accuracy objective.
Is the auditor required to test the operation of controls on every audit engagement? Explain.
What are the testing requirements of internal controls for:• A publicly-held company• A non-publicly-held company Identify situations in which an auditor might choose not to test internal controls.
What are the factors the auditor should consider in determining the sample size for tests of controls as part of the auditor's attestation to management's assertion on the effectiveness of internal control over financial reporting? Consider the following types of controls:• Controls performed on
What are the advantages and disadvantages of using a questionnaire compared to a flowchart for documenting and assessing internal control?
Explain how a walkthrough would help the auditor understand and document the adequacy of controls in an accounting application.
How could a tour of the plant assist the auditor in gaining an understanding of the controls in place for important accounting applications?
What does the PCAOB standard require regarding auditor documentation of internal control?
What historical issues may have affected the PCAOB's decision to issue a standard on audit documentation, particularly a standard that emphasizes the retention of audit documentation files?
Multiple Choices Questions1. 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 performing the financial statement audit.b. Management has approximately 60%
Internal control has been identified as a crucial part of corporate governance.Requireda. What is the relationship between internal control and good governance practices?b. Has mandatory reporting on internal control over financial reporting improved the quality of governance in organizations?
The COSO Internal Control, Integrated Framework describes an organization's internal controls as consisting of five elements.Requireda. Briefly describe the relationship among the five components of an organization's internal controls.b. Briefly explain how a deficiency in any one of the components
A review of corporate failures as described in the financial press, such as The Wall Street Journal, often describes the tone at the top as one of the major contributors to the failure. Often the tone at the top at the failed companies reflects a disdain for controls and an emphasis on
Companies can gain efficiencies by implementing effective monitoring of their internal control processes.Requireda. Explain the importance of monitoring and identify the two major types of monitoring controls.b. What comfort can the auditor get about the effectiveness of other controls in operation
Management needs to document (a) the controls that exist to accomplish the objectives of good internal control over financial reporting, and (b) management's evaluation of the effectiveness of those controls.Requireda. To what extent must the nature of internal controls utilized by a public company
Various parties are taking an increased interest in the quality of an entity's internal controls.Requireda. Briefly explain the difference between internal control and internal control over financial reporting. What are the major distinctions?b. The Sarbanes-Oxley Act requires public reporting on
Management and the auditor have to develop processes to assess the effectiveness of each principle contained in the control environment.RequiredExhibit is an example of an approach to identify the important elements of the company's control environment and an approach to gather evidence to
Auditing standards indicate that if control risk is assessed as low or moderate, the auditor must gain assurance that the controls are operating effectively.Requireda. What is meant by testing the effectiveness of control procedures? How does an auditor decide which controls to test?b. Do all
Assume the auditor is testing management's assertion that internal control is effective. The company is a manufacturing company with high-dollar specialized machines used in constructing medical equipment. The auditor is testing controls over the revenue recognition process, including the recording
For each of the following situations, evaluate the segregation of duties implemented by the company and indicate the following:a. Any deficiency in the segregation of duties described (Indicate None if no deficiency is present.)b. The potential errors or irregularities that might occur because of
The auditor might document the preliminary analysis of an organization's internal controls in various ways. Three of the most common methods are (1) A flowchart, (2) An internal control questionnaire, and (3) A written narrative.Requireda. For each of the three approaches:1. Identify the relative
If a company's control risk is low, the auditor needs to gather evidence on the operating effectiveness of the controls.Requireda. For each of the following control activities, indicate the audit procedure the auditor would use to determine its operating effectiveness.b. Briefly indicate the audit
Authorization of transactions is considered a key control in most organizations. Authorizations should not be made by individuals who have incompatible functions.RequiredIndicate the individual or function (for example, the head of a particular department) that should have the ability to authorize
Brown Company provides the following office support services for more than 100 small clients:1. Supplying temporary personnel2. Providing monthly bookkeeping services3. Designing and printing small brochures4. Copying and reproduction services5. Preparing tax reports Some clients pay for these
A CPA's audit documentation contains a narrative description of a segment of the Crayden Factory, Inc., payroll system and an accompanying flowchart as follows:€¢ The internal control structure of the personnel department functions well and is not included in the accompanying
During a discussion, a new auditor stated that an assessment of the organization's control environment is not very meaningful because it does not directly affect the processing of individual transactions, and it is the transactions that make up the account balance. As long as the auditor can test
The university has a cafeteria plan that provides a meal ticket to each dormitory resident. Each meal ticket represents $20 of meals that can be purchased in any university cafeteria. All cafeterias also accept cash instead of a meal ticket. After choosing the entrees they desire, customers pay a
You have been assigned to review the internal controls of the credit department of a recently acquired subsidiary. The subsidiary imports several lines of microcomputers and sells them to retail stores throughout the country. The department consists of the credit manager (hired six months ago to
Waste Management is an $11 billion company that picks up solid waste, and operates landfills, recycling centers, and electrical generation facilities. It produces electricity from land-fill by-products that serves about 1 million homes a year. It operates solely in North America. It is organized as
J. C. Penney department stores are the number one retailer of men's shirts in North America. In order to reduce inventory and order time, and to better anticipate market trends, J. C. Penney has established a sole sourcing contract with TAL industries of Hong Kong. J. C. Penney has signed a
What role does the auditor's assessment of the control environment play in the auditor's planning of an integrated audit of controls and financial statements? Explain.
Assume that internal controls are effective as assessed by the auditor through an analysis of their design and operation. To what extent does the auditor still need to directly test account balances? Explain.
What opinion must the external auditor provide regarding the adequacy of internal control over financial reporting?
What are the primary factors that should be considered in determining whether the auditor needs to directly test year-end account balances?
To what extent does the auditor need to comment on whether a material weakness resulted in a misstatement in the financial statements that was subsequently discovered by the auditor, or alternatively, that the deficiency did not lead to a misstatement?
In testing account balances such as accounts receivable, why is it important that some of the tests be performed after year-end? Provide an example of a test that might be performed after year-end.
To what extent can the auditor use management's process in evaluating internal control, including evidence gathered, to plan and execute the auditor's integrated audit?
In applying a top-down, risk-based approach to an audit, should the auditor start with the ending account balances or does the auditor start with the significant processes that lead to material account balances? Is one approach preferred over the other? Explain.
How do business risk and fraud risk affect the planning of an integrated audit?
Explain the following:"The effectiveness of internal control over financial reporting requires an integrated analysis of the COSO control components to reduce the residual risk to an acceptable level."
Define what constitutes an "acceptable level of residual risk" when evaluating the effectiveness of internal control over financial reporting.
What evidence might the auditor gather to evaluate whether or not a company has made a commitment to appropriate levels of financial competencies? For example, Milicron, Inc. indicated it had a deficiency related to financial competencies. How would the auditor assess whether the company's
What factors influence the auditor's confidence in the quality of the tests of controls? Explain how each factor might affect the auditor's confidence in the quality of the tests.
Does the auditor test the same transactions that management tested, or does the auditor test similar transactions? Explain the rationale.
To what extent can the auditor rely on tests of controls performed by the company's internal audit function?
What are the important controls that the auditor should expect to find over management's process of making accounting estimates? Consider for example, the process of estimating the proper allowance for uncollectible accounts.
What risks must an auditor evaluate in preparing for a top-down, risk based approach to performing an integrated audit?
How does the subjectivity of an accounting process, e.g., making an accounting estimate, affect (a) the nature of the controls the auditor expects to find over the process, and (b) the amount of direct testing of the account balance that should be performed?
Is it possible to have effective controls over a subjective accounting process? Choose an example of a subjective process and use the process to explain your answer.
What is monitoring? How should the auditor go about determining whether management's process for monitoring the effectiveness of internal controls is adequate?
What are the factors that should be considered by management and the auditor in determining whether a deficiency is a "significant deficiency" or a "material weakness"?
How might a company reduce the costs of complying with Section 404 of the Sarbanes-Oxley Act of 2002? Explain.
Multiple Choice Questions1. The auditor wants to develop an efficient approach to perform an integrated audit of internal controls and financial statements for a public company. Which of the following statements is correct regarding the integrated audit?a. The auditor should concentrate on
In the report on internal control by Milacron's management, they indicate that they are going to remediate the control deficiencies they had encountered.Requireda. Identify the control deficiencies that management identified in its report on internal control.b. For each control deficiency
The auditor of a public company in the retailing industry is planning an integrated audit. The company has approximately 260 retail stores, primarily in the southeast part of the United States.Requireda. Explain why an analysis of the company's control environment is important to the planning of
Consider a company like General Motors that must make estimates on pension liabilities, health care liabilities, guarantees on the contracts with Delphi, warranty liabilities for its cars, uncollectible loans from its subsidiary (GMAC), and costs associated with restructuring.Requireda. With the
The auditor prepares a report on internal control over financial reporting. Requireda. Is the auditor also required to audit the company’s financial statements at the same time? Explain.b. Does an unqualified report on internal controls over financial reporting imply that the company does not
In preparing a report on internal control, the auditor is required to assess the process used by management in developing their report on internal control. Assume that the auditor did not find any material weaknesses in controls.Requireda. The auditor did find that management's approach to
Planning for an integrated audit consists of five phases that lead to audit testing of controls and financial statement account balances.Requireda. Identify the five phases and indicate the process used by the auditor in each phase and the outcome of each phase.b. Does the auditor need to evaluate
Segregation of duties is an important concept in internal control. However, segregation of duties is often a challenge for smaller businesses because they do not have sufficient staff to always segregate duties. Normally, the segregation of duties identified below is either a significant deficiency
The SEC has stated that revenue recognition should always be considered to be high risk in planning an audit of a company's financial statements.Requireda. Identify the major accounting and operational processes that affect revenue.b. Identify the other financial accounts normally associated with
The COSO internal control framework provides guidance to management to reduce residual risk to an acceptable level.Requireda. Define the term "residual risk."b. Should residual risk be determined by:• Management• The external auditor• The audit committee• A regulatory body such as the
There are many factors that may affect the size of the sample the auditor takes to test controls.Requireda. Identify the factors the auditor should consider in developing the sample to perform tests of controls.b. For each factor identified, indicate how it should affect the sample size for testing
There are many factors that affect the auditor's decision as to how much direct testing of an account balance will be required.Requireda. Identify the factors that affect the auditor's decision as to whether to perform direct tests of an account balance, and if so, how much testing is required.b.
The auditor determines that there may be misstatements in the inventory and cost of goods sold account. During the conduct of the audit, the auditor found a material weakness in internal controls in that (a) some shipments were recorded before the actual shipment took place (this happened
For the company identified in Problem 7-45, assume that the company has an internal audit department that makes periodic test counts of inventory and management adjusts the inventory records to the test counts.Requireda. What factors should the auditor consider in determining whether or not to rely
For the inventory scenario developed in Problems 7-45 and 7-46, consider the type of monitoring that might be performed.Requireda. Explain the monitoring element of the COSO internal control framework. More explicitly, does monitoring refer to the monitoring of other controls, or does it refer to
The PCAOB states that the auditor must perform enough of the testing of internal controls himself or herself so that it provides the principal evidence for the opinion on internal control. However, the auditor may use the work of others, such as internal auditors or other company personnel, to
Adjusting entries have been utilized to improperly manage earnings.Requireda. Identify two types of "routine" adjusting entries and two types of non-routine adjusting entries that might be made either monthly or quarterly.b. Explain the types of controls that might be expected to be associated with
For context, the auditor is assigned to analyze and test the controls related to purchasing, including inventory items as well as items that are expensed. There are three purchasing agents for a medium-sized company ($250 million in sales) with each specializing in areas. Department heads are
One of the fundamental changes that occurred upon passage of the Sarbanes-Oxley Act of 2002 is that the audit profession is no longer allowed to be self-regulatory.Now, the Public Company Accounting Oversight Board (PCAOB) has the authority to assess whether audit firms are conducting high quality
General Motors is in the process of restructuring its operations. In recent years, it has spun off its major parts supplier, it’s financing arm, and is restructuring most of its operations. In March of 2006, it announced that it needed to restate its prior year's financial statements. Excepts
General Motors has generally been considered to be an ethical company that was hit hard by current economic events and the culmination of bad management decisions leading up to the current environment.Requireda. General Motors received an audit opinion that its internal controls were effective in
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