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auditing

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

TRUE-FALSE QUESTIONS1. The auditor is expected to obtain evidence about the operating effectiveness of internal control on all audits.2. When testing controls, the auditor tests only transaction controls.3. The auditor is expected to perform substantive procedures for each relevant assertion of
MULTIPLE-CHOICE QUESTIONS1. Which of the following statements is correct regarding the setting of auditing standards in the U.S.?a. The AICPA is responsible for the setting auditing standards for audits of nonpublic entities.b. The PCAOB is responsible for setting auditing standards for audits of
MULTIPLE-CHOICE QUESTIONS1. Assume that an auditor is physically examining a client's equipment. What type of audit procedure is the auditor performing?a. Inspection of documentation.b. Inspection of assets.c. External confirmation.d. Observation.2. Which of the following is a true statement
MULTIPLE-CHOICE QUESTIONS1. The auditor is testing the operating effectiveness of controls in the revenue cycle and notes the following: (a) the organization does not regularly follow its credit policies; rather it often overrides the credit policy when divisional management needs to meet its
Briefly describe the relevance of the following standard setters for auditors.a. AICPAb. PCAOBc. IAASB
Compare the ten generally accepted auditing standards currently used by the PCAOB with the AICPA’s “Principles Governing an Audit in Accordance with Generally Accepted Auditing Standards.”
What are the client responsibilities that are relevant to the auditor? How do those responsibilities affect the audit opinion formulation process?
Refer to Exhibit 5.3. List the phases of audit opinion formulation process. What are the primary activities within each of the five phases?
Professional guidance says that revenue recognition should always be considered to be high risk in planning an audit of a company’s financial statements.a. Identify the activities that affect the revenue cycle.b. Identify the financial statement accounts normally associated with the revenue cycle.
Assume that an organization asserts that it has $35 million in net account receivables. Using the assertions listed in Exhibit 5.5, describe specifically what management is asserting with respect to net accounts receivable.
What is an audit program? What information should an auditor gather before developing an audit program?
Exhibit lists types of audit procedures. Describe how you would you use those procedures to test the inventory account. For each procedure, indicate the purpose of the procedure—is it a risk assessment procedure, a test of control, or a substantive procedure?
Define the term audit documentation and provide examples.
Refer the Auditing in Practice feature, “Accepting a New Audit Engagement.” Assume that an auditor is following U.S. auditing standards. What communication must an auditor of a new client have? How does that requirement differ for auditors following international auditing standards?
How do the sources of risk of misstatement listed help the auditor plan the audit?
Refer to the Auditing in Practice feature, “Controls to Address Fraud Risk.” When assessing control design effectiveness, what types of controls would an auditor expect a client to have in place to address fraud risk? Why are these controls important?
Refer to the Auditing in Practice feature, “Weak Internal Control Design and Links to Substantive Audit Procedures.” Explain how the auditor’s preliminary assessment of control risk affects planned substantive audit procedures.
An important part of Phase II of the audit opinion formulation process is determining how to respond to identified risks of material misstatement. As indicated in Exhibit 5.8, the auditor might respond by modifying evidence decisions about the extent or nature of audit evidence. Using the box of
Refer to the Auditing in Practice feature, "Risk Assessment Procedures and Tests of Operating Effectiveness of Controls." Can risk assessment procedures be used as tests of controls? Explain.
Auditing standards indicate that if the preliminary control risk assessment is low, the auditor must gain assurance that the controls are operating effectively.a. What is meant by testing the operating effectiveness of control procedures? How does an auditor decide which controls to test?b. How is
An important principle of the control environment is the organization's commitment to ethics and integrity (COSO Principle 1). How might an auditor test the organization's commitment to ethics and integrity?
What are the external auditor testing requirements of internal controls for?a. Large, publicly held companies?b. Nonpublic companies and small, publicly held companies?
When the auditor determines that controls are not operating effectively, the auditor needs to consider the kind of misstatements that could occur, how they might occur, and how the auditor would adjust substantive audit procedures Assume that the authorization process for ordering inventory was
In analyzing the results of the tests of controls, there are two potential outcomes: (a) Deficiencies are identified (b) Deficiencies are not identified. What are alternative courses of action for the financial statement audit associated with each of these alternative outcomes?
If a company's control risk is assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls.For each of the following control activities listed as (1) - (10) below, do the following two tasks:a. Describe the test of control that the auditor would use to
Assume that you are going to test computerized controls that your client has put in place. Consider the concept related to program changes. What is the important concept for you to consider when doing that testing? What are some possible tests of controls that you could perform? What are the audit
Assume that you are planning to test a client's reconciliation. You could test by either inspecting documentation of the reconciliation or by reperforming the reconciliation. What factors would cause you to choose reperformance instead of inspection of documentation?
What are some of the key decisions that influence the substantive testing to be performed by the auditor?
Refer to the Auditing in Practice feature, “Dual-Purpose Tests.” What is a dual-purpose test, and why might an auditor choose to perform dual purpose tests?
Explain how the factors in the first column affect the auditor’s decision about substantive testing.
What substantive procedures could an auditor use to determine that all purchases debited to a fixed asset account in the current year are properly valued?
Audits of financial statements are designed determine whether account balances are materially correct. Assume that your client is a construction company that has the following assets on its balance sheet:● Construction equipment: $1,278,000● Accumulated depreciation: $386,000● Leased
The auditor provides an opinion on internal control over financial reporting for one of its public companies.a. 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
Review the external auditor's report on the integrated audit, presented in Exhibit. What are the important elements in that report related to internal control?
When testing internal controls, does the auditor test the same transactions that management and the internal auditors tested, or does the auditor test different transactions? Explain your rationale.
The auditor is evaluating the internal control of a new client. Management has prepared its assessment of internal control and has concluded that it has some deficiencies, but no significant deficiencies and no material weaknesses. However, in reviewing the work performed by management, the auditor
Refer to the Professional Judgment in Context feature at the outset of the chapter, which features details on the Ernst& Young-UK audits of Thornton Precision Components from 2004-2006.a. What is the role of auditing standards and their underlying principles in promoting a quality audit?b. How
Refer to the Professional Judgment in Context feature at the outset of the chapter, which features details on the Ernst & Young-UK audits of Thornton Precision Components from 2004-2006. Use the ethical framework presented in Chapter to analyze the judgments made by the E&Y-UK audit partner
In March 2006, General Motors (GM) announced that it needed to restate its prior year's financial statements.Excerpts from the Wall Street Journal describing the restatements include the following:● GM, which already faces an SEC probe into its accounting practices, also disclosed that its 10-K
Identify the PCAOB AS that relates to audit documentation. Review that AS and describe the characteristics of good audit documentation that are noted in that standard.
Refer to the Appendix in the chapter. Identify the IAASB ISA that relates to the terms of an audit engagement. Review the example audit engagement letter contained in the standard, and identify the key components of that letter.
Exhibit identifies the five management assertions contained in the PCAOB standards. Refer to the Appendix to this chapter. Identify the IAASB ISA that provides guidance on management assertions. List the management assertions identified in the IAASB ISA and compare and contrast the IAASB management
Locate and read the article listed below and answer the following questions.Bierstaker, J. L., J. E. Hunton, and J. C. Thibodeau. 2009.Do client-prepared internal control documentation and business process flowcharts help or hinder an auditor’s ability to identify missing controls? Auditing: A
Identify typical accounting cycles not listed in the Exhibit and list their associated accounts.
Describe how auditing standards affect the design of audit programs.
Refer to the Auditing in Practice feature, “Documenting the Auditor’s Understanding of an Organization’s Internal Controls.” What should an auditor document with respect to the design of controls? Why is this documentation important?
What controls might an auditor test related to the valuation assertion for the sales account?
Assume that you want to test an entity-wide control related to the control environment. Specifically, you want to obtain evidence that the audit committee has periodic discussions about fraud. Recall that tests of controls include inquiry, observation, inspection of documentation, and reperformance
In April 2010, the PCAOB issued a disciplinary order instituting disciplinary proceedings, making findings, and imposing sanctions in the case of Robert T. Taylor, CPA (both the firm and the individual auditor). The order can be found in PCAOB Release No. 105–2010–006 at www.pcaobus.org. Obtain
Two Auditing in Practice features in the chapter highlight audit deficiencies related to tests of controls and substantive procedures that were noted in PCAOB inspection reports. See “The Need for Performing and Considering the Results of Tests of Controls” and “Not Performing Sufficient
TRUE-FALSE QUESTIONS1. The appropriateness of audit evidence refers to its relevance and reliability.2. The sufficiency of evidence is a measure of evidence quality.3. When testing for existence, the auditor will vouch recorded transactions.4. Evidence that is obtained directly from the client is
TRUE-FALSE QUESTIONS1. Because management estimates are often subjective, the auditor does not need to test these estimates, but can rely solely on management’s work.2. When testing management estimates, the auditor should understand the process that management uses to develop its estimates.3.
MULTIPLE-CHOICE QUESTIONS1. Which of the following statements best describes what is meant by the term appropriateness of audit evidence?a. Appropriateness is a measure of the quality of audit evidence.b. Appropriateness refers to the relevance and reliability of audit evidence.c. Appropriateness
MULTIPLE-CHOICE QUESTIONS1. Which of the following procedures would an auditor typically perform first when assessing the reasonableness of management's estimate of its pension liability?a. Inspect documentation related to the pension transactions that the client has recorded.b. Develop an
Auditing standards require the auditor to gather sufficient appropriate evidence to ensure that the auditor has a reasonable basis for an opinion regarding the financial statements. What are the characteristics of (a) Sufficient audit evidence (b) Appropriate audit evidence? How are sufficiency and
Refer to Exhibit. Describe how the appropriateness and sufficiency of evidence for a specific account is influenced by the risk of material misstatement associated with that account. Contrast how appropriateness and sufficiency of evidence would be different for a high-risk and low-risk assertion.
Appropriateness of audit evidence considers what two evidence characteristics? Define these characteristics and identify factors that affect these characteristics.
Refer to Exhibit and describe the differences between vouching and tracing.
Discuss the relative reliability of internal and external documentation. Give two examples of each type of documentation.
Refer to Exhibit and identify the nine types of audit procedures. Assume that you are planning the audit of the PageDoc Company’s inventory. PageDoc manufactures a variety of office equipment. Describe how each of the nine procedures could be used in the audit of inventory and identify the
Refer to Exhibit 6.5 to identify the nine types of audit procedures used as part of the audit evidence-gathering process. Following is a list of audit procedures performed. For each procedure (listed as a. through p. below), classify the evidence gathered according to one (or more, if applicable)
Assume that an automotive company discloses the following risk factors (labeled 1. through 7. below) that might affect the financial statements.1. Continued decline in market share, and a market shift (or an increase in or acceleration of market shift) away from sales of trucks or sport utility
An auditor has to determine both the reliability and the relevance of potential audit evidence in order to determine that appropriate audit evidence is gathered.a. Explain the difference between relevance and reliability.b. How does an auditor determine the reliability of potential audit
What are the basic assumptions that must hold for an auditor to justifiably use analytical procedures as a substantive audit procedure?
Refer to the Auditing in Practice feature "Analytical Procedures are Not Client Estimates." What is the relationship between the auditor's use of an analytical procedure and a client estimate?
Assume that the auditor proposes that sales be audited by examining the relationship of sales and cost of sales to that of the previous two years, as adjusted for an increase in gross domestic product. Further, the auditor has assessed the risk of material misstatement (inherent and control risk)
Assume that an auditor wishes to use analytical procedures as a substantive procedure. Indicate how substantive analytical procedures could be used in assisting the auditor in testing the following accounts:a. Interest expense related to bonds outstanding.b. Natural gas expense for a public utility
Assume that you have finished your substantive analytical procedures in the area of revenue. You used trend analysis and a reasonableness test and conducted the procedures at a disaggregated level. You are very pleased that your expectations are almost identical to what the client has recorded.
Review Exhibit and describe how the two audit approaches presented in the Exhibit differ. What factors would lead to such a difference?
Sufficiency is a measure of the quantity of evidence. Identify factors that affect evidence sufficiency.
An auditor typically selects samples when testing controls. What are some factors that that affect the sample sizes used when testing controls?
Refer to the Auditing in Practice feature "Description of Common Types of Earnings Management Techniques." Why might it be difficult for auditors to disallow companies' preferences to decrease existing reserves? Explain the role of professional skepticism in the context of evaluating management's
Why would an auditor need to use an outside specialist when performing an audit? Identify specific accounts or assertions where a specialist might be needed.
What factors should the auditor consider when evaluating the professional qualifications of a specialist?
What is a related-party transaction? Provide examples of transactions that would be considered related-party transactions.
Review Exhibit and identify audit procedures that an auditor might use for related-party transactions.
What is audit documentation? Refer to Exhibit and identify the key components that each audit document should contain.
What is meant by the statement audit documentation ought to stand on its own? What is the importance of this concept?
What are the purposes of an audit program? Review Exhibit and identify the major items that should be included in an audit program.
The Professional Judgment in Context feature "Evidence-Related Findings in PCAOB Inspection Reports" presented at the beginning of the chapter provides excerpts of various PCAOB inspection reports issued in 2012 and 2011.Review the feature, consider the information you learned while reading this
In August 2011, the PCAOB barred two former Ernst & Young LLP (E&Y) employees from auditing public companies, alleging they provided misleading documents to PCAOB inspectors who were evaluating the audit firm's work. One partner was barred for three years, and a senior manager was barred
In May 2011, Deloitte Touche Tohmatsu (DTT) resigned as the auditor for Longtop Financial Technologies Limited (Longtop). Excerpts from DTT's resignation letter are provided here:As part of the process for auditing the Company's financial statements for the year ended 31 March 2011, we determined
On May 4, 2010, the PCAOB issued its public inspection of Deloitte & Touche, LLP, covering their inspection of audits conducted during 2009. In their summary comments, the PCAOB inspectors stated:In some cases, the conclusion that the Firm failed to perform a procedure may be based on the
Adecco 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. In lawsuits filed in the United States, shareholders alleged that the company filed false and misleading financial
Cendant Corporation, a company that sold travel and health club memberships, was the subject of an intensive fraud investigation that culminated in 1998. The company's Web site revealed the following statements contained in a report given to the SEC.● Irregular charges against merger
Entry-level auditing staff often inspects client records and documentation supporting accounting transactions in order to gain evidence about the appropriate application of the applicable financial reporting framework. One of these tasks involves comparing original client records of transactions to
Using appropriate resources, locate the financial statements of a company with which you are familiar. Identify specific account balances for which analytical procedures would be appropriate for conducting substantive tests of those balances and describe your reasoning for selecting the accounts.
Refer to the Appendix to Chapter and identify the PCAOB AS that addresses the topic of audit evidence. Obtain a copy of that AS and answer the following questions.a. What are the three alternative means of selecting items for testing?b. For each alternative, describe situations in which the
Obtain a copy of Accounting and Auditing Enforcement Release (AAER) No. 3146, issued by the SEC on June 24, 2010.a. Identify the audit evidence deficiencies described in the release.b. In what ways did the auditor fail to exhibit professional skepticism?c. What sanction did the auditor receive?
Locate and read the article listed below and answer the following questions.Kaplan, S., E. O’Donnell, and B. Arel. 2008. The influence of auditor experience on the persuasiveness of information provided by management. Auditing: A Journal of Practice and Theory 27 (1): 67–83.a. What is the issue
Locate and read the article listed below and answer the following questions.Kohlbeck, M. and B. Mayhew. 2010. Valuation of firms that disclose related party transactions. Journal of Accounting and Public Policy (29): 115–137.a. What is the issue being addressed in the paper?b. What are the
a. Consider Ford's inventory account on the balance sheet, along with the accompanying footnote. What are the most relevant assertions that management is making with regard to its inventory?b. Ford, in particular, is working to change models from SUVs to more fuel-efficient, smaller cars. How
You are auditing Pell grants provided to students at six state universities. The Pell grant program is a federal financial aid program for college students. The maximum grant a student can receive during a school year is $3,125, with a maximum of $1,041.67 per semester and summer session. The
When testing accounts that are based on management estimates, the auditor should understand the process management uses to develop those estimates. As part of obtaining that understanding, what aspects of the process should the auditor understand?
TRUE-FALSE QUESTIONS1. Material misstatements refer only to intentional misstatements that exist in a transaction or financial statement account balance.2. Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence needed.3. Detection
TRUE-FALSE QUESTIONS1. Each of the following factors would lead the auditor to assess control risk at a higher level: the company lacks personnel or expertise to deal with changes in the industry, there exist significant supply chain risks, the industry is mature and declining, and there exist
MULTIPLE-CHOICE QUESTIONS1. Which of the following statements is true regarding the concept of materiality?a. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person
MULTIPLE-CHOICE QUESTIONS1. Which of the following characteristics would lead the auditor to assess control risk at a higher level?a. It is difficult for the auditor to determine or gain access to the organization or individuals who own and/or control the entity.b. The organization has inadequate
Define the term misstatement and describe characteristics that would make a misstatement material.
Define the following terms: (a) Performance materiality,(b) Tolerable misstatement, (c) Clearly trivial.

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