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

In 2010, COSO published a study that provided a comprehensive analysis of occurrences of fraudulent financial reporting that were investigated by the SEC from 1988 through 2007. Sixty-one percent of the 347 fraud cases profiled in the study related to the improper recording of revenues. The revenue
Locate and read the article listed below and answer the following questions.Callen, J. L., S. W. G. Robb, and D. Segal. 2008. Revenue manipulation and restatements by loss firms. Auditing: A Journal of Practice & Theory 27 (2): 1-29.a. What is the issue being addressed in the paper?b. What are the
Locate and read the article listed below and answer the following questions.Caylor, M. 2010. Strategic revenue recognition to achieve earnings benchmarks. Journal of Accounting and Public Policy 29: 82-95.a. What is the issue being addressed in the paper?b. What are the findings of the paper?c. Why
Ford 10-K a. What are the key revenue cycle accounts for Ford? What accounts involve critical accounting estimates?b. What does Ford say in Footnote 2 about its use of accounting estimates?What risk do these estimates pose for the auditor?Ford 10-K and Toyota Annual Report or 20F c.
You are auditing Accounts Receivable of HUSKY Corp. as of December 31, 2013. The Accounts Receivable general ledger balance is $4,263,919.52. Access the textbook's resources on the Cengage Web site. The files are labeled "HUSKY Unpaid Invoices 2013" (the 12/31/2013 unpaid invoices), "HUSKY
Robert A. Putnam, an engagement partner for Arthur Andersen LLP, was in charge of the audit for HBOC, an Atlanta-based maker of software for the healthcare industry, during the period 1996-1999. HBOC had a fantastic earnings track record. In fact, HBOC's management was so confident of the strength
Select one of the following PCAOB Disciplinary Orders (available at www.pcaob.org).1. ORDER INSTITUTING DISCIPLINARY PROCEEDINGS, MAKING FINDINGS, AND IMPOSING SANCTIONS In the Matter of Traci Jo Anderson and Traci Jo Anderson, CPA Respondents; PCAOB Release No. 105-2010-0072. ORDER MAKING FINDINGS
In the Professional Judgment in Context feature presented in Chapter, we introduced you to 2004-2006 audits of Thornton Precision Components, Limited (TPC) performed by Ernst & Young, LLP, UK (E&Y UK). This case was based on the SEC Accounting and Auditing Enforcement Release No. 3359
Refer to Exhibit which provides examples of companies who have employed some type of revenue recognition or accounts receivable scheme. Using appropriate resources, identify a recent example of a company that employed some type of revenue recognition or accounts receivable scheme. Describe the
One of the major financial scandals of the twentieth century centered on McKesson & Robbins. The case had implications for the audit of accounts receivable. Based on appropriate research, describe the nature of the fraud related to accounts receivable that occurred at McKesson & Robbins and
TRUE-FALSE QUESTIONS1. The existence/occurrence assertion with respect to cash implies that recorded balances reflect the true underlying economic value of those assets.2. Common cash accounts include lockboxes, electronic funds transfers, cash management agreements, and compensating balances.3.
TRUE-FALSE QUESTIONS1. If the auditor observes that the company reports consistent profits over several years while cash flows are decreasing, then the auditor should assess heightened risk of fraud in cash.2. The relative percentage of substantive analytics that will be used by the auditor as
MULTIPLE-CHOICE QUESTIONS1. Which of the following assertions is relevant to whether the company has title to the cash accounts as of the balance sheet date?a. Existence or occurrence.b. Completeness.c. Rights and obligations.d. Valuation or allocation.e. All of the above.2. Which of the following
MULTIPLE-CHOICE QUESTIONS1. Which of the following is a common example of trend analysis of accounts and ratios that the auditor might consider for cash accounts?a. Compare monthly cash balances with past years and budgets.b. Identify unexpected spikes or lows in cash during the year.c. Compute
Describe the following types of cash accounts: (a) General checking accounts, (b) Cash management accounts, (c) Imprest payroll accounts, (d) Petty cash accounts.
Describe the following types of cash management techniques:(a) Lockboxes,(b) Electronic funds transfers, (c) Cash management agreements, (d) Compensating balances.
Match the following assertions with their associated description:(a) Existence or occurrence, (b) Completeness, (c) Rights and obligations, (d) Valuation or allocation, (e) Presentation and disclosure.1. Cash accounts are properly classified on the balance sheet and disclosed in the notes to the
Refer to the Professional Judgment in Context feature at the beginning of the chapter. Why is cash in general a risky asset and why was the petty cash account at Koss Corporation inherently risky?
The following are items on the inherent risk and control risk questionnaires contained in Exhibits. Categorize each item as belonging on (a) the inherent risk analysis questionnaire or the (b) control risk analysis questionnaire.1. Does the company have significant cash flow problems in meeting its
Refer to the Auditing in Practice feature "Common Fraud Schemes Relating to Cash" and describe at least three such schemes. Be prepared to discuss fraud schemes that you have learned about in your local community.
Using the following categories, define the purpose of each of the common controls over cash listed below. You may use multiple categories for each control.Categories of Purposes of Each Common Control1. To prevent theft of cash.2. To ensure complete recording of cash.3. To prevent modification of
List at least three common controls for petty cash.
Match each of the following objectives to the relevant control activities.Objectives That Controls Are Trying to Achievea. Payments received are deposited intact on a timely basis.b. Payments received are completely credited to the correct customer accounts.c. Overdue accounts are followed
This problem is designed to get you to think creatively about controls that would be effective in a real-world setting. The Canada Border Services Agency (CBSA) receives cash payments for services, fees, and taxes (for example, customs duties, excise taxes, taxes on goods and services) at various
Categorize each of the following trends or relationships as suggesting either (a) a normal trend or relationship or (b) a fraud related trend or relationship:1. The company reports consistent profits over several years, but cash flows are declining.2. Operating cash flow is consistent with sales
Describe the major components of an audit program for cash receipts and cash management controls.Provide examples of each component.
Define and illustrate kiting. What controls should the client institute to prevent it? What audit procedures should the auditor use to detect kiting?
Pembrook Company had poor internal control over its cash transactions. The following are facts about its cash position on November 30:The cash books showed a balance of $18,901.62, which included undeposited receipts.A credit of $100 on the bank statement did not appear on the company's books.The
The AICPA has developed a standard bank confirmation form to assure consistent communication with the banking community.a. Is the auditor required to send a bank confirmation to banks from which the client receives a bank cutoff statement shortly after year end? Explain.b. What additional
One of the procedures that you have been assigned to perform on the audit of Reengage Corporation is sending bank confirmations. Your audit firm has a policy of sending confirmations to all financial institutions where a banking relationship exists, although the policy acknowledges that various
What are the three major categories of marketable securities? What is the GAAP classification for such securities? What judgmental challenges do auditors face in auditing marketable securities?
Match the following assertions related to marketable securities with their associated description: (a) Existence or occurrence,(b) Completeness, (c) Rights and obligations, (d) Valuation or allocation, (e) Presentation and disclosure.1. The marketable securities balances include all securities
The following are risks relating to marketable securities.Categorize each risk as relating to either (a) inherent or fraud risk or (b) control risk.1. Management manipulation of the classification of securities to achieve preferable valuation treatment, for example, market value versus amortized
Categorize each of the following questions relating to marketable securities as being appropriate for use in (a) an inherent risk questionnaire or a (b) control risk questionnaire.1. Does the internal audit department conduct regular audits of the controls over marketable securities? If yes, review
How would the following factors affect the auditor's assessment of the internal control effectiveness for marketable securities? Assume that the company's investment in marketable securities is material to the financial statements.a. The board of directors is not actively involved in monitoring the
Refer to the Professional Judgment in Context feature at the beginning of the chapter. Additional details on PFG and Wasendorf are presented below. On July 14, 2012, Russell Wasendorf, Sr. attempted to commit suicide inside his vehicle in the parking lot of Peregrine Financial Group, Inc.'s (PFG)
Access the most recent financial statements of Yahoo and Google. Complete the following preliminary analytical procedures for both companies, and compare between the two companies:a. Analyze trends in the ending cash balance over time.b. Compute trends in interest returns on investments.c. Analyze
Refer to the Auditing in Practice feature “Weaknesses in Substantive Procedures Related to Cash: Evidence from PCAOB Disciplinary Proceedings.” Locate each of the PCAOB releases on the PCAOB’s Web site.a. Briefly summarize the other audit deficiencies outlined in these releases.b. Comment on
Refer to Appendix A in Chapter 5. Locate the relevant International Standard on Auditing (ISA) for external confirmations, then locate the actual standard on the IAASB's Web site, and answer the following questions.a. What is the number of the standard?b. Define the following key terms that are
Locate and read the article listed below and answer the following questions. Lee, L. F. 2012. Incentives to Inflate Reported Cash from Operations Using Classification and Timing.The Accounting Review 87 (1): 1-33.a. What is the issue being addressed in the paper?b. What are the findings of the
Ford 10-Ka. What are the key cash and liquid asset accounts for Ford? What types of marketable securities does Ford possess?b. What are the critical accounting policies for these accounts?c. What risks do these securities pose for Ford? What are the audit implications of those risk disclosures?Ford
Describe the fraudulent conduct that is known as (a) Lapping (b) Skimming.
In the late 1990s, Satyam Computer Services (Satyam) was a relatively unknown, family-owned information technology (IT) company located in Hyderabad, India. All that changed when Satyam was awarded a contract to establish IT architecture at the World Bank. The selection of Satyam was, at the time,
TRUE-FALSE QUESTIONS1. The existence and presentation/disclosure assertions are usually the most relevant for inventory.2. The most common concerns for inventory are that purchases are understated or ending inventory is overstated, both of which will result in lower cost of goods sold and higher
TRUE-FALSE QUESTIONS1. In terms of preliminary analytical procedures, assume that the company has introduced a new product with a low price point and significant customer demand. The auditor would expect inventory turnover to increase, and days' sales in inventory to also increase.2. A preliminary
MULTIPLE-CHOICE QUESTIONS1. Which of the following is not an activity associated with the acquisition and payment cycle?a. Receive a customer purchase order.b. Purchase of goods and services.c. Receipt of, and accounting for, goods and services.d. Approval of items for payment.2. An automated
MULTIPLE-CHOICE QUESTIONS1. Which of the following expected relationships is reasonable in terms of performing preliminary analytical procedures in the acquisition and payment cycle?a. Assume that the company's production and pricing strategies have remained the same during the past year. Gross
What is an automated purchasing system? Describe the beneficial tasks that an automated purchasing system can perform.
Match the following assertions with their associated description:(a) Existence or occurrence, (b) Completeness, (c) Rights and obligations, (d) Valuation or allocation, (e) Presentation and disclosure.1. The company has title to the inventory as of the balance sheet date.2. Inventory balances
List at least five common fraud schemes in the acquisition and payment cycle.
Refer to the Auditing in Practice feature “Fraud in the Acquisition and Payment Cycle at WorldCom and Phar-Mor.” Compare and contrast the nature of these two frauds, motivations underlying the frauds, and how management perpetrated these frauds.
Following is a list of controls in the acquisition and payment cycle for inventory and cost of goods sold. Match each control with the following activities in this cycle: (1) requisition for goods and services, (2) purchase of goods and services, (3) receipt of, and accounting for, goods and
The organizational structure of a manufacturing company includes the following departments: purchasing, receiving, inspecting, warehousing, and controllership. An auditor is assigned to audit the receiving department. During planning, the auditor determines the following information:1. A copy of
How can cross-sectional analysis performed as a preliminary analytical procedure help the auditor identify potential inventory misstatements for a multi-location retail client?
How might the auditor effectively use preliminary analytical procedures in the audit of various expense accounts, such as miscellaneous expenses? Give an example of how analytical procedures might be used in the audit of such accounts.
Describe the differences in the planned audit approaches for Clients A and B and the reasons for such differences. Discuss.
Refer to the Auditing in Practice feature "Weaknesses in Performing Substantive Analytical Procedures: The Case of Deloitte's PCAOB Inspection Report." Describe the errors that Deloitte's auditors made with regard to conducting substantive analytical procedures for inventory. Explain the potential
The following are the procedures that an auditor should complete when observing a client's physical inventory. Refer to Exhibit to list these procedures in the order in which they would be completed, from step (1) to step (7).Steps to Take When Observing a Client's Physical Inventory1. Upon
The following tasks are completed by the auditor while observing the physical inventory. For each task, state which assertion(s) is tested by the task: (1) existence or occurrence, (2) completeness, (3) rights and obligations, (4) valuation or allocation, or (5) presentation and disclosure.a. The
Describe the conditions under which it is acceptable to have the client take inventory before year end.
Determining the amount of inventory that should be written off because of obsolescence is a difficult and challenging audit task because (1) the client will usually state that most of the goods are still salable at current selling prices and (2) net realizable value is only an estimate (in other
In those audits where a heightened risk of fraud exists related to inventory and cost of goods sold, the auditor will want to consider performing certain fraud-related substantive procedures. List at least five such procedures.
The Auditing in Practice feature "Examples of Fraud in the Physical Observation of Inventory" provides examples of how clients may fraudulently manipulate inventory amounts. List at least five such examples. Explain why even a professionally skeptical auditor might fall victim to a client that is
Refer to Exhibit, which describes assertions and related auditing procedures for accounts payable. Match the following assertions with their associated auditing procedure: (a) existence or occurrence, (b) completeness, (c) rights and obligations, (d) valuation or allocation, (e) presentation and
Explain why examining a sample of cash disbursements made after the end of the year is useful in determining the completeness of recorded accounts payable at year end.
Reviewing unusual entries to expense accounts is an important audit procedure that is sometimes overlooked, or that is not conducted with professional skepticism. Refer to the Auditing in Practice feature "WorldCom and Unusual Adjusting Entries," which explains how WorldCom executives used unusual
The Northwoods Manufacturing Company has automated its production facilities dramatically during the last five years, to the extent that the number of direct-labor hours has remained steady, while production has increased fivefold. Automated equipment, such as robots, has helped increase
The auditor is always concerned whether slow-moving or potentially obsolete inventory is included in inventory, and whether inventory should be reduced to a lower market value. Identify five substantive audit procedures the auditor might use to determine the existence of obsolete goods or goods
Explain the purpose of test counts and other inventory observations that the auditor notes while a physical inventory is being taken.
The following audit procedures (labeled 1. through 8. below) are found in audit programs addressing the acquisition and payment cycle. For each audit procedure described:a. Identify the objective of the procedure or the audit assertion being tested.b. Classify the procedure as primarily a
Auditing standards require the auditor to observe the client's physical inventory. That requirement could be met by observing the client's annual physical count of inventory and, in some circumstances, by observing inventory in connection with tests of the accuracy of the client's perpetual
An auditor has been assigned to audit the accounts payable of a high risk audit client. Control risk is assessed as high, management integrity is marginal, and the company is near violation of important loan covenants, particularly one that requires the maintenance of a minimum working-capital
Paul Mincin, CPA, is the auditor of Raleigh Corporation. Mincin is considering the audit work to be performed in the accounts payable area for the current-year engagement. The prior-year documentation shows that confirmation requests were mailed to 100 of Raleigh's 1,000 suppliers. The selected
Refer to the Professional Judgment in Context feature "Thor Industries, Inc. and Mark Schwartzhoff: Fraudulent Reductions in Cost of Goods Sold Through Manipulation of Inventory Accounts." Answer the following questions.a. List the incentives and opportunities that enabled Schwartzhoff to commit
Ace Hardware is a retailer-owned cooperative, with 4,600 hardware, home center, and building materials stores. At the time of this case, Ace was a private company that was planning to go public. In September 2007, Ace Hardware said it discovered a $154 million accounting discrepancy between its
In 2009, the SEC charged VeriFone Holdings, Inc., a technology company, with falsifying the company's financial statement to improve gross margins and income.VeriFone relied on gross margin as an indicator of its financial results and provided forecasts of its quarterly gross margins to investment
On October 4, 2008, the PCAOB issued its annual inspection report of Grant Thornton LLP (PCAOB Release No. 104-2008-046). In conducting its inspections, the PCAOB focuses on audit engagements that it considers particularly risky or prone to error on the part of each audit firm. In its inspection
Cenco Medical Health Supply Corporation (CMH) was an SEC-registered company that went bankrupt after it had materially misstated its financial statements for a number of years. It inflated the reporting of its physical inventory by 50% during two years prior to its bankruptcy. The fraud was
The Auditing in Practice feature "Fraud in the Acquisition and Payment Cycle at WorldCom and Phar-Mor" introduced you to the basic facts underlying the WorldCom fraud.Use appropriate sources to answer the following questions:a. Identify the names of the following individuals at the company,
Refer to Exhibit and access the SEC filings for each of the most recent three years for the following companies: (a) Kohl's, (b) Williams Sonoma, and (c) Dollar General.a. Calculate the following ratios from Exhibit for each of the companies:● Gross margin %● Inventory turnover● Days' sales
Refer to the Auditing in Practice feature "Examples of Fraud in the Physical Observation of Inventory." The AICPA's Practice Alert described in the feature provides examples of many types of inventory frauds that have occurred. Access and read the following article that describes how to detect
Locate and read the article listed below and answer the following questions.Nigrini, M., and L. Mittermaier. 1997. The Use of Benford’s Law as an Aid in Analytical Procedures. Auditing: A Journal of Practice & Theory 16 (2): 52–67.a. What is the issue being addressed in the paper?b. What
Locate and read the article listed below and answer the following questions.Alleyne, P., N. Persaud, P. Alleyne, D. Greenidge, and P. Sealy. 2010. Perceived effectiveness of fraud detection audit procedures in a stock and warehousing cycle: Additional evidence from Barbados. Managerial Auditing
Ford 10-K, Toyota 20-Fa. What are the key acquisition and inventory cycle accounts for Ford? What are the critical accounting policies for these accounts?Ford 10-K, Toyota 20-Fb. Compare Ford and Toyota’s footnotes on inventory. Calculate the percentage of finished products that each company
List the five primary activities involved in the acquisition and payment cycle.
Explain how GAS could be used to help identify potentially obsolete inventory.
The auditor often examines some expense accounts, such as legal expenses, in detail even if the account balance is not material. Explain why. Discuss.
Refer to the Auditing in Practice feature "The Importance of Professional Skepticism in Testing the Valuation of Inventory: The PCAOB Disciplines Ibarra." Go to the PCAOB Web site and download Enforcement Release No. 2006-009. After reading the release, answer the following questions.a. Identify
TRUE-FALSE QUESTIONS1. Long-lived assets are typically immaterial for most organizations.2. Patents are an example of long-lived assets.3. The pervasiveness of management estimates is a factor that heightens the inherent risk associated with long-lived assets.4. An inherent risk associated with
TRUE-FALSE QUESTIONS1. The auditor needs to understand the client's business in order to perform meaningful preliminary analytical procedures.2. When performing preliminary analytical procedures, the auditor should not typically expect the client to use depreciable lives similar to organizations in
MULTIPLE-CHOICE QUESTIONS1. Long-lived assets include which of the following?a. Tangible assets such as equipment.b. Intangible assets such as patents.c. Natural resources.d. All of the above.2. Which of the following statements is true?a. Existence and valuation assertions related to long-lived
MULTIPLE-CHOICE QUESTIONS1. An auditor performing preliminary analytical procedures scans the repairs and maintenance accounts. Which of the following statements is consistent with what the auditor is most likely focused on?a. Expenditures for long-lived assets have not been charged to expense.b.
One of the significant and relevant accounts for this cycle is equipment. For this account, what would typically be the most relevant assertions for the auditor to consider? Why is it important for the auditor to identify the more relevant assertions?
Identify the five management assertions and describe how they are relevant to long-lived assets.
What is asset impairment, and what inherent risk factors are associated with asset impairment?
What are some inherent risks of material misstatement associated with natural resources?
A 2010 study on fraudulent financial reporting by COSO notes ways in which long-lived assets can be fraudulently overstated, including:● Fictitious assets on the books (WorldCom)● Improper and incomplete depreciation (Waste Management)● Failure to record impairment of assets, especially
Explain how a skeptical auditor might come to understand management's potential for adjusting earnings through manipulation of fixed-asset accounts.
Identify potential fraud schemes related to long-lived assets.
Consider the risks typically associated with tangible long-lived assets and identify the internal controls over these assets that you would expect a client to have in place.

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