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Auditing a risk based approach to conducting a quality audit 9th edition Karla Johnstone, Audrey Gramling, Larry Rittenberg - Solutions

Locate and read the article listed below and answer the following questions.Mustafa, S.T., and N.B. Youssef. 2010. Audit committee financial expertise and misappropriation of assets. Managerial Auditing Journal 25(3): 208-225.a. What is the issue being addressed in the paper?b. What are the
Within many of the subsequent chapters of this textbook, we highlight chapter-relevant material using Ford Motor Company (Ford) and Toyota Motor Corporation (Toyota) as practical examples. We pose questions that require you to apply the concepts introduced in that chapter to the facts of Ford and
Define fraud, and explain the two types of misstatements that are relevant to auditors’ consideration of fraud.
What are the most common approaches that perpetrators use to commit fraudulent financial reporting?
The fraud triangle identifies incentives, opportunities, and rationalizations as the three elements associated with most frauds.
Identify factors (red flags) that would be strong indicators of opportunities to commit fraud.
The Center for Audit Quality (CAQ) issued a paper in 2010 on deterring and detecting fraud. The CAQ report identifies three ways in which individuals involved in the financial reporting process (management, the audit committee, internal audit, external audit, and regulatory authorities) can
Are nonpublic organizations required to adhere to the requirements of the Sarbanes-Oxley Act? Explain.
In August 2010, Michael Dell, Dell Inc.'s CEO and chairman of the board, was reelected to Dell's board of directors by Dell's shareholders. However, not all of the shareholders were happy with Mr. Dell's reappointment. Specifically, two labor groups that own shares of Dell stock wanted Mr. Dell
Obtain a copy of the PCAOB's report titled "Observations on Auditors' Implementation of PCAOB Standards Relating to Auditors' Responsibilities with Respect to Fraud." You can use any search engine or go to www.pcaobus.org/Inspections/Documents/ 2007_01-22_Release_2007-001.pdf.In the report, the
Select either a public company or a company that is near your university and perform a preliminary review of its corporate governance. Identify all the sources, including Internet sources, of evidence for your conclusion regarding corporate governance. Identify the strengths and weaknesses of the
Corporate governance is not just an issue for U.S. companies; companies throughout the world need to focus on corporate governance issues. However, the principles and challenges of corporate governance vary across countries. Select a country and research the corporate governance issues in that
Locate and read the article listed below and answer the following questions.Knechel, W.R. and M. Willekens. 2006. The Role of Risk Management and Governance in Determining Audit Demand. Journal of Business Finance & Accounting 33 (9) and (10): 1344-1367.a. What is the issue being addressed in
Locate and read the article listed below and answer the following questions:Archambeault, D., F.T. DeZoort, and T. Holt, T. 2008. The Need for an Internal Auditor Report to External Stakeholders to Improve Governance Transparency. Accounting Horizons 22(4): 375-388.a. What is the issue being
TRUE-FALSE QUESTIONS1. Effective internal control allows for more informed decisions by internal and external users of the financial information.2. While understanding a client’s internal control over financial reporting may help the external auditor plan the audit, the external auditor is not
TRUE-FALSE QUESTIONS1. There is one set of control activities that all organizations should implement.2. Control activities include both preventive and detective controls.3. An organization’s accounting system is part of its information and communication component of internal control.4. An
MULTIPLE-CHOICE QUESTIONS1. The quality of an organization's internal controls affects which of the following?a. Reliability of financial data.b. Ability of management to make good decisions.c. Ability of the organization to remain in business.d. Approach used by the auditor in auditing the
MULTIPLE-CHOICE QUESTIONS1. Segregation of duties is best achieved in which of the following scenarios?a. Employees perform only one job, even though they might have access to other records.b. The internal audit department performs an independent test of transactions throughout the year and reports
Why do external auditors need to understand their client’s internal control over financial reporting?
Using COSO’s updated Internal Control–Integrated Framework define internal control and describe important elements of the definition.
Refer to Exhibit. Identify the components of internal control and describe the prerequisite for designing and implementing internal control over financial reporting.
Distinguish between entity-wide and transaction controls. Which components of internal control are typically entity-wide controls? Which components of internal control are typically transaction controls?
Refer to Exhibit. List the principles representing the fundamental concepts of the control environment component.
Refer to Exhibit. For each control environment principle, provide an example of how that principle might be applied in an organization.
As part of assessing the control environment management might consider the compensation programs that the organization has in place. Why would management consider these programs?
Refer to Exhibit. List the principles representing the fundamental concepts of the risk assessment component.
Refer to Exhibit. For each risk assessment principle, provide
Refer to Exhibit. List the principles representing the fundamental concepts of the control activities component.
Refer to Exhibit. For each control activities principle, provide an example of how that principle might be applied in an organization.
Refer to Exhibit. Describe the three types of transactions subject to transaction processing risk. For each type of transaction, indicate a control activity that could be implemented to mitigate that risk.
What are the important considerations in security management related to user access?
What are general computer controls? What is the relationship between general computer controls and application controls? Why is management concerned about the effectiveness of these controls?
Brown Company provides office support services for more than 100 small clients. These services include supplying temporary personnel, providing monthly bookkeeping services, designing and printing small brochures, copying and reproduction services, and preparing tax reports. Some clients pay for
The following items represent errors that often occur in an automated environment. For each error (listed as A. through I. below), identify a control activity that would have been effective in either preventing or detecting the error.A. The selling price for all products handled by a particular
Authorization of transactions is considered a key control in most organizations. Authorizations should not be made by individuals who have incompatible functions. For each transaction (listed as A. through I. below), indicate the individual or function (e.g., the head of a particular department)
For each of the following situations (indicated A. through G. below), 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 financial statement
Cabelas is a catalog retailer emphasizing outdoor gear, with a focus on fishing and hunting equipment and clothing. It prints an annual catalog containing over 200 pages of products, as well as approximately six special sale catalogs during the year. Products range from fishing lures retailing for
Refer to Exhibit. For each information and communication principle, provide an example of how that principle might be applied in an organization.
Refer to Exhibit. For each monitoring principle, provide an example of how that principle might be applied in an organization.
What are managements responsibilities related to internal control over financial reporting?
Refer to Exhibit. What is a transaction trail? List important aspects of an electronic transaction trail. What are management’s responsibilities related to maintaining a transaction trial?
Refer to Exhibit. What are the important features of management’s report on internal control over financial reporting?
Refer to Exhibits. Describe management’s process for evaluating internal control over financial reporting. For the control environment principles, identify evidence that management might obtain to assess the operating effectiveness of the control environment.
Should management’s assessment of internal control over financial reporting consider all of the COSO components, or could it be based on the controls over the processing of transactions? Explain.
What role can internal auditors have in assisting management in evaluating the effectiveness of internal control over financial reporting?
One principle of the control environment is the organization's commitment to develop, attract, and retain competent individuals. How would management go about evaluating the competency of accounting department personnel and the competencies of those making judgments on financial reporting issues?
Assume that management had determined that its organization's audit committee is not effective. For example, Lehman Brothers, Inc., had weak directors with little financial knowledge, and those directors were not independent of management. How do the weaknesses in audit committee affect
Assume that management is gathering evidence as part of its process for assessing the effectiveness of internal control over financial reporting. The company is a manufacturing company with high-dollar specialized machines used in the medical profession. The following table identifies important
The following scenario describes PPC, a small plastics producer with $250 million in revenue and approximately 300 employees. PPC is a public company that first became listed three years ago. It has been hit hard by the recent recession, and its sales have dropped from $1,375 million to $1,250
Refer to the Professional Judgment in Context feature at the outset of the chapter, which describes the embezzlement at Chesapeake Petroleum and Supply.a. Why is internal control important to an organization?b. How does internal control help an organization achieve reliable financial reporting?c.
Locate and read the article listed below and answer the following questions.Grant, G., K. Miller, and F. Mali. 2008. The effect of IT controls on financial reporting. Managerial Auditing Journal 23 (8): 247–271.a. What is the issue being addressed in the paper?b. What are the findings of the
Locate and read the article listed below and answer the following questions.Hermanson, D., and Z. Ye. 2009. Why do some accelerated filers with SOX Section 404 material weaknesses provide early warning under Section 302? Auditing: A Journal of Practice & Theory 28 (2): 247–271.a. What is the
The following questions address issues concerning internal control.Ford 10-K and Toyota 20-Fa. Both Ford and Toyota management comment on the fact that internal control over financial reporting has “inherent limitations.” What are those inherent limitations?b. Locate the CEO certification
How does internal control benefit an organization?
How are the concepts of risk and internal control related?
List the principles representing the fundamental concepts of the information and communication component.
List the principles representing the fundamental concepts of the monitoring component.
Define the terms significant deficiency and material weakness. What factors does management consider when assessing identified control deficiencies?
In February 2012, the Wall Street Journal reported that Diamond Foods Inc. fired its CEO and CFO, and would restate financial results for two years. The restatement was required after the company found that it had wrongly accounted for crop payments to walnut growers. The investigation focused
Companies are using the power of computing to develop continuous monitoring approaches to identify control problems early and to take corrective action on a timely basis.a. Explain how the concept of continuous monitoring might be applied in a computerized application that processes sales orders
At the SEC Web site, obtain Management's Report on Internal Control provided by Powell Industries, Inc. for the year end September 30, 2011.a. Identify the material weaknesses that management described in its report on internal control.b. Why would management consider these deficiencies to be
Using the business press, identify a company that has restated it published financial statements. Describe the nature of the restatement. What types of deficiencies in internal control likely existed such that the financial statements were materially misstated? Should management now conclude that
TRUE-FALSE QUESTIONS1. Litigation costs are the largest single cost faced by audit firms.2. The expectations gap includes a misperception by shareholders that they are entitled to recover losses on investments for which the auditor provided an unqualified opinion on the financial statements.3. The
MULTIPLE-CHOICE QUESTIONS1. Which of the following is not a reason that audit firms continue to experience high levels of litigation?a. Joint and several liability statutes.b. Class action lawsuits.c. Contingent fee compensation for audit firms.d. A misunderstanding by some users that an
Describe the forces that continue to cause audit firms to experience high rates of litigation.
Compare and contrast the concepts of breach of contract, negligence, gross negligence, and fraud.
Refer to the Auditing in Practice feature “Moss Adams and the Meridian Mortgage Funds Fraud.”a. Describe why Moss Adams was sued by the trustee for the bankrupt Meridian Mortgage.b. What is the trustee going to have to prove in order for the courts to hold Moss Adams liable for damages?
What are some sanctions the SEC can bring against auditors who have violated statutory law?
How does the auditor’s liability to third parties differ under the 1933 Act and the 1934 Exchange Act? What is the importance of the Hochfelder case as it relates to the 1934 Act?
What precedent was set in the Ernst & Ernst vs. Hochfelder case described in the chapter? What actions would be necessary to change the precedent?
To expand its operations, Dark Corporation raised $4 million by making a private interstate offering of $2 million in common stock and negotiating a $2 million loan from Safe Bank. The common stock was properly offered pursuant to Rule 505 of Regulation D, which exempts the offering from the 1933
Part AThe common stock of Wilson, Incorporated is owned by twenty stockholders. Wilson's financial statements as of December 31, 2013, were audited by Doe & Company, CPAs, who rendered an unqualified opinion on the financial statements. In reliance on Wilson's financial statements, which showed
Refer to the Auditing in Practice feature “What is Professional Judgment?” Describe what is meant by the term professional judgment. Explain why documentation is critical to professional judgment.
Explain why professional skepticism is important in making professional judgments. What are the types of actions that a professionally skeptical auditor will take?
Refer to the Auditing in Practice feature What Was He Thinking? An Example of Poor Professional Judgment and Low Audit Quality.a. Briefly explain the common themes indicating poor professional judgment evident from the facts about the Prospero Minerals audit, the Cal Bay audit, and the Lit Funding
Describe utilitarian theory and how it is used to resolve an ethical dilemma. What are the weaknesses of utilitarian theory?
Describe rights theory and list the four levels of rights. In what way is rights theory particularly helpful?
Refer to the Auditing in Practice feature “A Young Auditor Makes an Ethical Mistake in Professional Judgment.”a. What was the ethical dilemma faced by Susan Birkert’s friend when that fellow auditor learned of Birkert’s ethical wrongdoing?b. What aspects of the framework for ethical
Summarize the five fundamental principles of ethics as articulated by the International Ethics Standards Board for Accountants (IESBA).
Describe the AICPA’s six principles of professional conduct.
Refer to Exhibit, which describes the AICPA’s rules of conduct. Read Rule 101 and answer the following questions.a. Are auditors of publicly traded clients required to be independent?b. Are auditors of privately held clients required to be independent?c. Rule 101 applies only to covered members.
Refer to Exhibit, which describes the AICPA’s rules of conduct. Read Rule 301 and answer the following questions.a. Distinguish between confidential information and privileged communication.b. Normally, the external auditor must keep client information confidential. Identify those circumstances
Refer to Exhibit, which describes the AICPA’s rules of conduct. Read Rule 302 and answer the following questions.a. What is a contingent fee?b. Why are external auditors not allowed to accept contingent fees?
Refer to the Professional Judgment in Context feature at the outset of the chapter, which features the litigation charges against KPMG for its audit failures during the subprime mortgage crisis.a. How does the business environment affect the litigation risk faced by audit firms?b. Should auditors
Thomas Flanagan was an audit partner and key member of management (Vice Chairman) at Deloitte LLP, based out of the firm's Chicago office. During the latter part of his career, he managed a large number of public company audit engagements. Based on knowledge obtained from key members of management
Locate and read the article listed below and answer the following questions.Rennie, M. D., L. S. Kopp, and W. M. Lemon. 2010. Exploring Trust and the Auditor-Client Relationship: Factors Influencing the Auditor’s Trust of a Client Representative. Auditing: A Journal of Practice &Theory 29 (1):
Distinguish between the developments of common law versus statutory law.
What are some remedies for a breach of contract?
Briefly explain the seven steps in the framework for professional decision making. Provide an example of a professionally oriented decision that you have recently made, and relate it to the seven steps (one example might be a decision about which apartment to rent for the next academic year, or a
Briefly explain the seven steps in the framework for ethical decision making. Provide an example of a difficult ethical decision that you have recently made, and show how you would make a decision using the seven steps (an example might be a decision to challenge a friend who has done something
Refer to Exhibit, which describes the AICPA’s rules of conduct. Read Rule 102 and answer the following questions.a. What does Rule 102 require?b. Does Rule 102 apply to just external auditors, or all CPAs?
Describe the various ways in which the AICPA’s Code is enforced.
Would a CPA violate the AICPA’s Code by serving a client both as its auditor and legal counsel? Explain your answer.
In June 2009, Deloitte agreed to pay almost $1 million to settle a class action lawsuit related to its audits of Beazer, a homebuilding company. The lawsuit claims that Deloitte should have noticed the homebuilder was issuing inaccurate financial statements as the housing market began to decline.A
In 2005, Deloitte & Touche agreed to pay a $50 million settlement concerning its failed audit of Adelphia Communications. The settlement was the largest ever to that date, with a record penalty of $25 million.Individual auditors found to be unqualified, unethical, or in willful violation of any
Locate and read the article listed below and answer the following questions.Brandon, D. M., and J.M. Mueller. 2006. The influence of client importance on juror evaluations of auditor liability. Behavioral Research in Accounting 18: 1–18.a. What is the issue being addressed in the paper?b. What
Locate and read the article listed below and answer the following questions.Johnstone, K., M. Sutton, and T. Warfield. 2008. Antecedents and consequences of independence risk: Framework for analysis. Accounting Horizons 15(1): 1–18.a. What is the issue being addressed in the paper?b. What are the
a. Review the code of ethics for senior management and the board of directors. What are the main components of these codes? Provide a critique of the components and overall message contained in the codes.b. What guidelines are provided as to how deviations from the company’s code of ethics are
TRUE-FALSE QUESTIONS1. Auditors of U.S. public companies should follow the PCAOB's auditing standards.2. There is not much commonality among the auditing standards set by the PCAOB, AICPA, and IAASB.3. The ten standards underlying the PCAOB's auditing standards fall within four different
TRUE-FALSE QUESTIONS1. Risk assessment procedures alone provide sufficient appropriate audit evidence on which to base an audit opinion.2. The auditor’s selection of audit procedures depends on the accounts and assertions being tested.3. Auditors are encouraged, but not required, to prepare audit

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