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Auditing a business risk appraoch 6th Edition Larry e. rittenberg, bradley j. schwieger, karla m. johnston - Solutions
What is meant by haphazard sample selection? Can it be used for statistical sampling? Explain why or why not.
An auditor audited a random sample of 60 cash disbursements and found one improperly authorized disbursement (error).The achieved upper limit of control failures is 7.7% at a 5% risk of assessing control risk too low. What does this achieved upper limit mean? How does the auditor decide whether
In any sampling application, why is it important to project the sample results to the population before drawing a conclusion about the population?
Why is it so important to specify the audit objective when planning a sample to test an account balance?
Describe the steps needed to plan a sample to test an account balance.
Define the following:a. Misstatementb. Populationc. Tolerable misstatementd. Test of Details (TD) risk
Why is it important to project sample results to the population?
When using non-statistical sampling, how does the auditor:a. Determine the sample sizeb. Select the samplec. Evaluate the sample results
What information is needed to design a PPS sample? Where does the auditor gather such information?
Explain the relationship between planning materiality and tolerable misstatement when using PPS sampling.
Explain how the probability of selecting an item is proportional to its size in PPS sampling.
What is OSPR? How does the auditor measure or estimate it?
All else being equal, what is the effect on a PPS sample size of an increase in the:a. Tolerable misstatementb. Expected misstatementc. Allowable TD riskd. Population
What alternatives are available to the auditor when a population contains a few items with negative balances, such as credit balances in accounts receivable, and the auditor wishes to utilize PPS sampling?
Would an item with a zero balance be included in a PPS sample? If not, what is the effect of not including the item in the sample?
What is basic precision, and how is it determined?
What is the upper misstatement limit (UML), and how is it determined?
Why is it important to determine whether the difference between the customer's balance shown in the client's records and the amount confirmed by the customer is the client's error or fraud, the customer's error, or a timing difference? What are the implications of this determination on the conduct
What alternative courses of actions might an auditor take if the UML exceeds tolerable misstatement in PPS sampling? Are these possible actions any different than those available when using non-statistical sampling and the sample evaluation indicates a possible material misstatement in the
Multiple Choice Questions1. Which of the following represents sampling risk?a. Improperly assessing the risk of material misstatementb. Testing the wrong population to achieve the audit objectivec. Selecting a sample that is not representative of the populationd. Inaccurately identifying
Requireda. The risk of assessing control risk too low is 10%. Determine the sample size for each of the following controls:b. Explain why the sample sizes for controls 2 and 3 are different from those for control 1.c. What is the general effect on sample size of using a 10% risk of assessing
a. When evaluating an attribute estimation sample, why is the focus on the upper limit rather than on the failure rate in the sample?b. If the achieved upper limit of control failures exceeds the tolerable rate in an attribute sampling application, what alternative courses of action are open to the
The auditor designed an audit procedure to test the following control procedures in the revenue cycle of a company that makes large factory equipment:1. Credit approval2. Sale price taken from authorized sales price list unless specifically approved by the division sales manager3. A shipping
Avation is a public company and, therefore, the auditor is required to test controls and issue an opinion on the effectiveness of the client's controls as well as the fairness of the financial statements. Avation manufactures specialty clocks used for such things as sales promotions and achievement
You are using attribute estimation sampling to test the controls over revenue recognition of the Packet Corporation, a public company, and will use the results as part of the evidence on which to base your opinion on its internal controls and to determine what additional audit procedures should be
In confirming individual accounts receivable balances, your client's customers reported the following exceptions.RequiredThis of these exceptions should be considered misstatements for evaluation purposes if misstatements are defined as:a. Differences that affect the account balanceb. Differences
The following information relates to a non-statistical sample used for a price test of inventory:Requireda. What is the best estimate of the total misstatement?b. Are these results acceptable assuming tolerable misstatement is $15,000? Explain.c. If the results are not acceptable, what possible
The auditor must quantify the following parameters when using PPS sampling:1. Tolerable misstatement2. Expected misstatement3. Risk of incorrect acceptanceRequiredDescribe each of these parameters and how they can be determined.
Your evaluation of a statistical sample indicates that there may be a material misstatement in the population. Upon analyzing the detected misstatements, a common cause was discovered: most of the misstatements were caused by the failure to record sales returns on a timely basis. That is, sales
You are designing a PPS sample to determine how many accounts receivable confirmations to send. There are 2,000 customer accounts with a total book value of $5,643,200.You estimate the maximum misstatement to be $40,000 and tolerable misstatement is set at $175,000.Requireda. Complete the
You are planning the confirmation of accounts receivable. There are 2,000 customers with a total book value of $5,643,200.Tolerable misstatement is set at $175,000 and expected misstatement is $40,000.The allowable risk of incorrect acceptance (TD risk) is 30%.Requireda. What is the sampling
Based on the information in Problem 10-43, assume that your sampling interval is $100,000.Requireda. What is your statistical conclusion if no misstatements are found in the sample? Is this acceptable? Explain.b. Calculate the most likely misstatement and upper misstatement limit and prepare a
The auditor is auditing accounts receivable. The company is a long-time client. Because of problems encountered in previous years, the auditor has assessed control risk as moderate and assigns a control risk assessment of 50% and a desired audit risk of 5%. Other factors considered by the
You are performing a price test of inventory, which has a book value of $2,750,699 and 3,875 items. Tolerable misstatement is $150,000, expected misstatement is $30,000, and the TD risk is 10%.Requireda. What sampling interval should be used for this sample?b. Without prejudice to your answer in
Mead, CPA, was engaged to audit Jiffy Co.'s financial statements for the year ended August 31, 2007. Mead is applying the following sampling procedures.During the prior years' audits, Mead used classical variables sampling in performing tests of controls on Jiffy's accounts receivable. For the
This case is to be used in conjunction with the facts in Problem 10-47 and can be completed individually or in groups via classroom discussion.Part 1.Without regards to the dollar amount of the calculated upper misstatement limit for accounts receivable in Problem 10-47, assume that you have
What accounts are typically affected by transactions in the revenue cycle? Identify the relationships among them.
What are the internal control objectives in the revenue cycle?
What are the major processes involved in generating and recording a sales transaction? What are the major documents generated during each process?
Why should auditors ordinarily consider revenue recognition as a fraud risk factor?
What criteria has the SEC utilized to help determine if revenue can be recognized?
Why might it be necessary to do some research in order to determine whether a client's revenue recognition policies are proper?
What methods are sometimes used to fraudulently inflate revenue?
What sometimes motivates management to overstate revenue?
What analytical procedures can help auditors identify areas of potential misstatements and design appropriate audit procedures?
What are the audit steps associated with assessing the risk of material misstatement for the revenue cycle?
What are the basic inherent risks associated with sales and accounts receivable?
Why should auditors develop an understanding of a client's control environment as it affects the accounts in the revenue cycle?
What important control functions are served by mailing monthly statements to customers? Why is it important to separate the duties of responding to customer complaints from the accounts receivable and cash collection functions?
Monitoring controls are effective in alerting management to the potential breakdown of other internal controls. Identify two or three monitoring controls that are applicable to the revenue cycle.
In assessing whether the controls are operating effectively, is it necessary for the auditor to re-perform the work of the control itself? For example, if someone tests for the correctness of computations and initials the bottom of a document to indicate that such a control procedure has been
What alternative methods can be used to test the effectiveness of controls in the revenue cycle?
How do auditors use their knowledge about the risk of material misstatement in designing substantive tests?
What is the relationship between audit objectives, account balance assertions, and audit procedures?
Explain how audit evidence gathered about accounts receivable also provides evidence about sales, and vice versa.
Why is it important to directly test sales transactions as well as accounts receivable?
How can the audit of revenue provide a good opportunity to test the completeness assertion for both sales and accounts receivable?
From what population should a sample be selected to test the completeness of recorded sales? Explain your choice.
When might it be advisable to send the confirmation to the customer's personnel who is familiar with the details of sales contracts rather than to the accounts payable department?
Are direct tests of account balances generally more effective in detecting overstatements or understatements? Explain.
What is the effect on the nature, timing, and extent of substantive tests of accounts receivable when the risk of material misstatement is assessed as being low instead of high?
What are the advantages and disadvantages of performing direct tests of account balances prior to the balance sheet date?
Under what circumstances should an auditor consider confirming individual unpaid invoices as opposed to confirming the customer's total balance?
What is an aged trial balance of accounts receivable? For what purposes does an auditor use it? How does an auditor determine that it is correctly aged?
Distinguish between the positive and negative forms of accounts receivable confirmation.
Which confirmation form, the positive or the negative, is considered the more reliable? Why?
If a confirmation is not returned by a customer, what follow-up work should the auditor perform if it is aa. Positive confirmationb. Negative confirmation
Under what circumstances can a customer's confirmation be considered reliable?
When might an auditor consider using negative confirmations? What factors must be present in the client-customer environment to justify the use of the negative confirmation form?
What is a confirmation exception? Why is it important to investigate confirmation exceptions?
What evidence do vouching cash collections after the balance sheet date provide?
What are cutoff tests? What assertion(s) do they test?
What are some potential fraud indicators that may be identified by direct tests of revenue cycle accounts? What audit procedures could be used to help determine if fraud actually occurred?
How can the auditor determine whether the allowance for doubtful accounts is reasonable?
1. A manufacturing client received a substantial amount of goods returned during the last month of the fiscal year and the first month after yearend. The client recorded the returns when credit memos were issued (usually six to eight weeks after receipt of the goods).The control procedure that
1. The auditor wants to gain assurance that all telephone orders received were shipped and billed in a timely fashion. Which of the following audit procedures would be most effective in meeting the auditor's objective?a. Use an integrated test facility and submit product orders to the ITF. Compare
Judgments about whether revenue should be recognized are among the most contentious that an auditor faces.The following are situations in which the auditor will be required to either acquire additional information or make decisions about the amount of revenue to be recognized.Requireda. Identify
One of your audit clients manufactures fishing boats and sells them all over the country. Boats are sold to dealers who finance their purchases on a floor-plan basis with their banks. The banks usually pay your client within two weeks of shipment. The company’s profits have been increasing
You are auditing FloorMart, a retailer with 200 stores around the country. It has two basic sizes of stores—minimarts with 3,000 square feet and maxim arts with 7,500 square feet. Both types of stores carry the same types of products. The client has provided an Excel file with the square feet,
Stainless Steel Specialties (SSS) is a manufacturer of hot water-based heating systems for homes and commercial businesses. The company has grown about 10% in each of the past five years. The company has not made any acquisitions. Following are some of the statistics of the company during the past
The following is a list of procedures performed in the audit of the revenue cycle:a. Take a block of shipping orders and account for the invoicing of all items in the block and account for the pre-numbering of the documents.b. Review the general access controls to the computer application and the
Field, CPA, is auditing the financial statements of Miller Mail order, Inc. (MMI) for the year ended January 31, 2008. Field has compiled a list of possible errors and irregularities that may result in the misstatement of MMI's financial statements, and a corresponding list of internal controls
Drea Tech Company has been growing rapidly and has recently engaged your firm as its auditors. It is actively traded over the counter (OTC) and believes it has outgrown the service capabilities of its previous auditor. However, on contacting the previous auditor, you learn that a dispute led to the
Verona Shoe Company is considering automating its credit approval function. It manufactures a brushed pigskin shoe and acts as a wholesaler by buying closeouts of other brands and selling them to approximately 3,000 retail customers. The company has moved into new lines by recently acquiring the
A client has a computerized credit approval process that incorporates various factors, such as:• Previous credit history with the company• Current credit rating obtained online from Dun & Bradstreet• Current account balance• Size of proposed credit balance• Last credit review rating by
The following is a list of controls typically implemented in the processing of sales transactions:Requireda. For each control identified, briefly indicate the financial misstatement that could occur if the control is not implemented effectively.b. Identify an audit procedure to test for
Jason Co. accepts VISA and MasterCard for any sales transaction exceeding $50.The company has not yet implemented online recording of the credit card transaction, but does have a toll-free number to call for authorization for all sales over $50.The company has two cash registers, but three clerks
Computer accounting systems have the ability to generate exception reports that immediately identify control procedure failures or transactions that are out of the norm, so that management can determine whether any special action is needed.Requireda. Identify how the auditor might use each type of
The audit of the revenue cycle accounts of Acco, Inc. has been planned with a low preliminary assessment of control risk related to each of the relevant assertions. A sample of sales transactions was audited. Each of the following types of control or transaction processing deviations uncovered in
All invoicing for a company is done on a computer system from a price list table incorporated into the system. Only the sales department can change the prices on the approval of the department manager. One copy of the up-to-date price list is printed monthly for verification purposes and is
During a discussion, one auditor noted that her approach to testing sales transactions was to select a random sample of recorded sales and trace back through the system to supporting documents, noting that all items billed were shipped and were invoiced at correct prices. She stated that she then
Bert Finney, CPA, was engaged to conduct an audit of the financial statements of Clayton Realty Corporation for the month ending January 31, 2008.The examination of monthly rent reconciliation is a vital portion of the audit engagement. The following rent reconciliation was prepared by the
The following sales were selected for a cutoff test of Genius Monitors, Inc., for the December 31, 2007financial statements. All sales are credit sales and are FOB shipping point. They are recorded on the billing date.Requireda. What adjusting journal entries, if any, would you make for each of
You are auditing the revenue from membership fees of your local chapter of the Institute of Management Accountants, of which you are not a member. The local chapter receives an allocation of national dues. The remainder of the dues comes from chapter members. The chapter maintains as detailed list
Sales cutoff tests are performed to obtain evidence that sales are recorded in the proper period. You are to perform a cutoff test of sales for a manufacturer that uses pre numbered bills of lading and sales invoices. All sales are FOB shipping point.RequiredHow would you perform the cutoff test if
Sean Edwards, CPA, is engaged to audit the financial statements of Matthews Wholesaling for the year ended December 31, 2007. Edwards obtained and documented an understanding of the internal controls relating to the accounts receivable and assessed control risk relating to accounts receivable at
During the year, Strang Corporation began to encounter cash flow difficulties, and a cursory review by management revealed receivable collection problems. Strang's management engaged Elaine Stanley, CPA, to perform a special investigation. Stanley studied the billing and collection cycle and noted
The existence and completeness assertions are complementary but require different audit approaches.Requireda. Why is it more difficult to test for the completeness than the existence/ occurrence of an account balance or a class of transactions?b. What procedures can an auditor use to test the
Your audit client, Daman, Inc., has a fully computerized accounts receivable system. There are two master files, a customer data file and an unpaid invoice file. The customer data file contains the customer's name, billing address, shipping address, identification number, phone number, purchase
MiniScribe Case (based on "Cooking the Books," The Wall Street Journal, September 11, 1989; and "MiniScribe's Investigators Determine That 'Massive Fraud’ Was Perpetrated," The Wall Street Journal,September 12, 1989).In October 1988, MiniScribe, a computer disk drive manufacturer, announced its
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