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

Consider the risks typically associated with intangible longlived assets and identify the internal controls over these assets that you would expect a client to have in place.
Identify preliminary analytical procedures related to depreciation expense that may be effective in identifying potential material misstatements.
Identify ratios and expected relationships that might be used when performing preliminary analytical procedures related to longlived assets.
Describe the differences in the planned audit approaches for Clients A and B and the reasons for such differences. Discuss in detail.
The following questions might be addressed when an auditor is completing an internal control question. For each question (labeled as 1. through 8. below):a. Indicate the purpose of the control.b. Indicate the impact on the planned substantive audit procedures if the answer to the question indicates
Based on the following description, determine appropriate tests of controls for the company's controls over tangible long-lived assets.A corporation operates a highly automated flexible manufacturing facility. The capital-intensive nature of the corporation's operations makes internal control over
Identify tests of controls that could be used to test the controls included in the exhibit.In Exhibit Examples of Controls over Intangible Long-Lived AssetsManagement authorizations are required for intangible asset transactions.Documentation regarding intangible assets should be maintained, and
A 2010 study on fraudulent financial reporting by COSO notes the many 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 goodwill
Your audit firm has been the auditor of Cowan Industries for a number of years. The company manufactures a wide range of lawn care products and typically sells to major retailers. In recent years, the company has expanded into ancillary products, such as recreation equipment, that use some of the
The WorldCom bankruptcy is one of the largest in U.S. economic history. Much of the fraud was carried out by capitalizing operating expenses, such as payments to other companies for line rental, as fixed assets. Adjusting journal entries were made at the company's headquarters in Mississippi even
Refer to the Auditing in Practice feature "Improper Capitalization of Operating Expenses: The Case of Safety-Kleen Corporation." In addition to the information provided in the feature, consider the following information.At the close of each quarter, Safety-Kleen executives met to discuss the
In September 2012, the PCAOB issued an ORDER INSTITUTING DISCIPLINARY PROCEEDINGS, MAKING FINDINGS, AND IMPOSING SANCTIONSIn the Matter of Jewett, Schwartz, Wolfe & Associates, P.L., Respondent. See PCAOB Release No. 105-2012-004. Obtain a copy of the PCAOB release and identify and describe the
On June 20, 2012, Hans Hoogervorst, chairman of the IASB, addressed the International Association for Accounting Education & Research (IAAER) conference in Amsterdam. Obtain a copy of his speech at www.ifrs.org. What challenges are identified in that speech related to intangible assets? How do the
Locate and read the article listed below and answer the following questions.Acito, A. A., J. J. Burks, and W. B. Johnson. 2009. Materiality Decisions and the Correction of Accounting Errors. The Accounting Review 84 (3): 659-688.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.Fu, H., H. -T. Tan, and J. Zhang. 2011. Effect of Auditor Negotiation Experience and Client Negotiating Style on Auditors' Judgments in an Auditor-Client Negotiation Context. Auditing: A Journal of Practice and Theory 30
Depreciation expense is included in the exhibit. How is depreciation expense similar to depletion expense and amortization expense?
What are some inherent risks of material misstatement associated with intangible assets?
Explain why in some audit settings relating to long-lived assets auditors may choose to perform only substantive tests of details, even though controls are designed effectively.
Refer to the Professional Judgment in Context feature "Accounting Problems Related to Long-Lived Assets at Ignite Restaurant Group." Answer the following questions:a. What long-lived asset accounts at Ignite Restaurant Group (IRG) were misstated?b. What might have motivated management to materially
Select a company that has recorded impairment charges in its financial statements. For the selected company, identify:a. Company name and its principal line of business.b. Nature of financial difficulties the company is facing.c. Nature of the company's long-lived assets that were impaired.d.
Ford 10-K, Toyota 20-F 1a. What are the key long-lived asset and related expense accounts for Ford?1b. What are the critical accounting policies for these accounts?1c. Calculate and compare cycle-specific ratios (for example, property, plant, and equipment/ total assets) that you deem relevant
TRUE-FALSE QUESTIONS1. An organization typically has many debt transactions during the year, with each individual transaction being immaterial.2. Typically, the most relevant assertion related to debt obligations is completeness.3. Recording the purchases of treasury stock is straightforward and
TRUE-FALSE QUESTIONS1. The primary preliminary analytical procedure for stockholders' equity accounts is a comparison of current year account balances with prior-year account balances, after considering the auditor's expectations.2. Trend analyses would not typically be used as preliminary
MULTIPLE-CHOICE QUESTIONS1. Which of the following can be used by organizations for obtaining financing?a. Notes.b. Mortgages.c. Bonds.d. All of the above.2. Which of the following accounts would not typically be included in the audit of debt obligations?a. Interest income.b. Interest expense.c.
MULTIPLE-CHOICE QUESTIONS1. Which of the following statements is true regarding preliminary analytical procedures for debt obligations and stockholders' equity transactions?a. Because there are typically only a few stockholders' equity transactions, the auditor is not required to perform
What are the relevant accounts when auditing debt obligations, and what is the auditor's primary objective?
Describe the disclosures related to stockholders' equity provided by Papa John's International, Inc.
Identify common inherent risks associated with debt obligations.
Review Exhibit and identify inherent risks associated with typical stockholders' equity transactions.In ExhibitInherent Risks Associated with Stockholders’ Equity ActivitiesStock Sales and IssuancesAssertion Inherent RiskExistence Issuances/sales are not authorized in accordance with
Identify fraud risks associated with stockholders’ equity accounts.
Given typical inherent and fraud risks related to material misstatement of debt obligations, identify controls that an auditor would expect a client to have implemented.
Given typical inherent and fraud risks related to material misstatement of stockholders’ equity accounts, identify controls that an auditor would expect a client to have implemented.
What are typical preliminary procedures related to debt obligations?
An audit firm is engaged in the examination of the financial statements of Zeitlow Corporation for the year ended December 31, 2013. Zeitlow Corporation’s financial statements and records have never been audited. The stockholders’ equity section of Zeitlow Corporation’s balance sheet at
Review the two panels in Exhibit. Describe the two alternative approaches to auditing interest expense and the reason for the difference in approaches.Panel A: Substantive Analytical Procedures Approach to Obtaining Audit Evidence for Completeness of Interest ExpensePanel B: Substantive Analytical
Refer to Exhibit and identify typical substantive procedures for relevant assertions related to debt obligations.
Review the Auditing in Practice feature "SEC Focus on Debt Presentation and Disclosure" and identify potential audit problems related to presentation and disclosure of debt.
Identify substantive procedures that the auditor should perform related to dividends.
Retained earnings is a component of stockholders' equity. What substantive procedures will the auditor typically perform related to retained earnings?
What important items should be documented related to substantive procedures performed for debt obligations and stockholders' equity accounts?
Assume your audit client declared a 5% stock dividend. Identify the evidence you would examine to determine whether the stock dividend was accounted for properly.
The following long-term debt documentation (indexed K-l), and presented on the next page, was prepared by client personnel and audited by AA, an audit assistant, during the calendar year 2013 audit of American Widgets, Inc., a continuing audit client. The engagement supervisor is thoroughly
Refer to the Professional Judgment in Context feature “Deficiencies in Auditing Debt Obligations and Stockholders’ Equity Accounts: Insights from SEC Releases” and review the panel related to Delphi Corporation. Answer the following questions:a. What risks of material misstatement were
Refer to the Professional Judgment in Context feature "Deficiencies in Auditing Debt Obligations and Stockholders' Equity Accounts: Insights from SEC Releases" and review the panel related to Federico Quinto, Jr., CPA. Obtain a copy of the SEC Auditing and Enforcement Release related to this case
Locate and read the article listed below and answer the following questions.Menon, K. and D. D. Williams. 2010. Investor reaction to going concern audit reports. The Accounting Review (85) 6: 2075–2105.a. What is the issue being addressed in the paper?b. What are the findings of the paper?c. Why
What are the relevant accounts related to stockholders' equity transactions?
Identify common transactions affecting stockholders' equity accounts.
Identify fraud risks associated with debt obligations.
What are typical preliminary procedures related to stockholders' equity accounts?
What type of audit approach is typically planned for debt obligations? Why is this most often the most appropriate approach?
What type of audit approach is typically planned for stockholders' equity accounts?
Describe the evidence typically obtained from tests of controls when auditing debt obligations or stockholders’ equity accounts.
After all other account balances on the balance sheet have been audited, it might appear that the retained earnings figure is a balancing figure and requires no further audit procedures. Why would an auditor still choose to audit retained earnings?
Refer to the Professional Judgment in Context feature "Deficiencies in Auditing Debt Obligations and Stockholders' Equity Accounts: Insights from SEC Releases" and review the panel related to Federico Quinto, Jr., CPA. Answer the following questions:a. What risks of material misstatement were
In April 2005 the SEC announced that Deloitte & Touche had agreed to pay $50 million to settle charges stemming from its audit of Adelphia Communications Corporation's fiscal year 2000 financial statements.After performing appropriate research, address the following questions.a. Once the risks
TRUE-FALSE QUESTIONS1. The auditor should consider only quantitative factors when assessing the materiality of detected misstatements.2. The PCAOB provides guidance that auditors must consider as they decide whether management's refusal to correct a detected misstatement is indicative of
TRUE-FALSE QUESTIONS1. The going-concern evaluation is based on information obtained from normal audit procedures performed to test management's assertions; no separate procedures are required, unless the auditor believes that there is substantial doubt about the client's ability to continue as a
TRUE-FALSE QUESTIONS1. The terms engagement quality review and concurring partner review are synonymous.2. An engagement quality review is required for publicly traded companies, so engagement quality reviews for privately held company audits rarely happen.3. The auditor is required to communicate
MULTIPLE-CHOICE QUESTIONS1. The auditor discovers various errors in the client's financial statements during the audit. At the end of the audit, these misstatements are analyzed to determine if they need to be recorded and corrected. In which situation could management and the auditor decide not
MULTIPLE-CHOICE QUESTIONS1. In evaluating whether the client is a going concern, the auditor should ask which of the following questions?a. Are there indicators of going concern problems?b. Is it likely that management can mitigate the problems?c. Are disclosures about the problems adequate?d. All
MULTIPLE-CHOICE QUESTIONS1. Which of the following statements is false concerning engagement quality reviews?a. The purpose of the engagement quality review is to provide reasonable assurance that the audit and audit documentation are complete and that they support the audit opinion on the
What is an audit adjustment, and why is the resolution of such adjustments important to audit quality? What role should professional skepticism play when management disagrees with the auditor about making an audit adjustment to correct a misstatement? What types of management bias might be revealed
Why is audit firm culture important in ensuring that individual audit engagement partners resolve audit adjustments in a quality manner?
Refer to the Auditing in Practice feature, "The PCAOB Position on Management Bias in Correcting Detected Misstatements." The PCAOB guidance alerts auditors to situations in which management may resist auditor attempts to convince them to correct misstatements, including biases in which: (1)
Why should the auditor exercise heightened professional skepticism concerning accounting estimates? What key factors and assumptions should the auditor consider in evaluating the reasonableness of an estimate?
Refer to the Auditing in Practice feature, "Related Party Disclosures at OAO Gazprom." What risks do the related party transactions with the Russian government pose for PwC in its audits of the company? Why might companies without such government ownership be less sensitive about their related
What are the inherent limitations in an auditor's ability to detect material misstatements relating to the client's compliance with laws and regulations?
What are the main provisions of the Foreign Corrupt Practices Act?
Refer to the Auditing in Practice feature, "Triton Energy and Noncompliance with Laws and Regulations." How did Triton Energy violate the provisions of the Foreign Corrupt Practices Act? What are the auditor's responsibilities when they become aware of violations of law at their client?
List various factors that may indicate that a client may not remain a going concern. For each, indicate the degree of subjectivity and judgment that would be required in determining if the indicator would, in fact, result in the company going bankrupt (use the following categories: high, medium,
This is the third year audit of Green Lawns. The company has carved out a new market niche on the Web for the delivery of lawn and garden supplies, including links with local companies that provide lawn services. The company issued stock two years ago and raised sufficient capital to continue
The audit of GolfDay Company, a manufacturer of bicycle racks and golf carts, is almost finished. Krista Heiss is the most experienced auditor on this audit and is in charge of performing final analytical procedures. The company ships most of its products to a combination of distributors and
Refer to Exhibit, "Identifying Risks at Koss Corporation Using Analytical Procedures." Review the analytical procedure results and trends. Presumably, Sue Sachdeva knew that the auditors might ask pointed questions about the financial results and odd analytics apparent in the data from FYE 2004-FYE
What are the implications if management refuses to sign a management representation letter? If management signs a management representation letter, is that a good indication that all of management's statements described in the letter are actually true? What is the importance of professional
Refer to Exhibit, "Management Representation Letter Example from AU-C 580." What role does materiality play in the contents of the management representation letter? Is the same level of materiality applied to the audited financial statements as to the management representation letter?
What are the types of subsequent events the auditor should identify and evaluate as part of performing an audit? Give an example of each type of subsequent event. How should each type be handled in the financial statements?
Refer to the Auditing in Practice feature, "Deloitte, Ligand, and the PCAOB: A Case where Subsequent Events were Important." How did James Fazio fail in his duty to evaluate subsequent events? What were the implications of his failure in this regard?
What is dual dating in terms of the audit report? Assume the following facts: The original audit report is dated March 18, 2013. The company entered into a definitive agreement to discontinue a material line of business on March 22, 2013. This event is disclosed in Note 22 to the financial
What are the purposes of the engagement quality review (concurring partner review)? What procedures should the reviewer perform as part of the review process?
Consistent quality in the performance of an audit is one of the major concerns of all audit firms. However, internal inspections by audit firms themselves, along with external inspections by peer review teams and the PCAOB, point out that although effective audit policies and procedures are
Review the Professional Judgment in Context feature, “A Case of Poor Review Quality and Improper Professional Conduct.”a. Why were Nardi’s actions harmful to BDO and to the Hemispherx audit?b. What was the ethical dilemma faced by the manager?c. What alternative courses of action could Nardi
Each of the following are typical communications between the auditor and the audit committee. Explain why each is important.● Auditor's responsibility under GAAS● Overview and planned scope of the audit● Auditor independence● Significant accounting policies● Management judgments and
Describe the purpose of a management letter, and distinguish it from a management representation letter. Refer to the Auditing in Practice feature, "An Example Management Letter to a College Foundation." What are the major observations made by the auditor? What is the tone of management's
Describe how individual audit clients are both similar to and different from individual stocks in an investment portfolio.What is the difference between a client acceptance decision and a client continuance decision? In which decision-making setting does the auditor have the benefit of deeper
The following are the key types of risk that audit firms consider when they make client acceptance and continuance decisions.Provide examples of each of these types of risk.● Client entity characteristics● Independence risk factors● Third party/due diligence risk factors● Quantitative risk
Refer to the Auditing in Practice feature, "Why Might an Audit Firm Refuse to Continue Providing Services to a Client? The Case of Longtop Financial Technologies and Deloitte. Read the e-mail that Deloitte sent to Longtop management describing their reasons for resigning from the engagement.
What is audit partner rotation? What is audit firm rotation? What is the fundamental rationale for rotation of either type? What is the primary problem associated with rotation of either type?
One of the fundamental changes brought about by the Sarbanes-Oxley Act of 2002 is that the audit profession is no longer self-regulated for audits of public companies.Now, the Public Company Accounting Oversight Board (PCAOB) has the authority to assess whether audit firms are conducting quality
In July 2010, the SEC issued a complaint against senior management at Dell Inc. including the company's chairman, CEO, and CFO. The complaint includes allegations that Dell engaged in fraud during the period 2002-2006 by failing to disclose a significant relationship with its major vendor (Intel)
On February 25, 2005, Ernst & Young LLP issued the following opinion about the financial statements of Northwest Airlines:We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Northwest
Refer to Exhibit, "Management Certifications at Groupon." Comment on the fact that the certification discusses management's responsibility regarding internal controls, and yet the 8-K disclosure notifies the users of Groupon's financial statements that the company has a material weakness in its
Access the following publicly available disclosures made by IRIDEX Corporation on the SEC's Web site (www.sec.gov):● 8-K filed 8-29-2007● 10-K filed 3-30-2007● 10-K filed 4-10-2008● Def 14A (proxy) filed 4-28-2008● Def 14A (proxy) filed 5-4-2009a. Review the disclosures in the 10-K filed
1. Calculate the Altman Z-score for Ford and Toyota. What inferences do you draw from these values? What inferences do you draw from comparing the values across the two companies? (You may assume that the market value of equity for Ford and Toyota, respectively as of their 2012 fiscal year ends, is
Why might client lawyers be hesitant to disclose information to auditors?
Refer to the Auditing in Practice feature, “Guidance on Assessing the Quality, Not Just the Acceptability, of Significant Accounting Policies.” Assessing the quality of accounting policies is a matter of professional judgment. What considerations are relevant in making this judgment?
What are the three possibilities that may happen to the clients in the audit firm’s beginning-of-period client portfolio? What are the two main factors that auditors consider in making client acceptance and continuance decisions?
Refer to the Auditing in Practice feature, "KPMG and General Electric Company: A Relationship that has Lasted over 100 Years." What are the key arguments put forth by the United Brotherhood of Carpenters Pension Fund (the Fund) supporting audit firm rotation for General Electric? General Electric
Refer to the Auditing in Practice feature, "PCAOB Fines Ernst & Young for an Issue Involving Accounting Estimates."a. Auditors are required to provide reasonable assurances regarding accounting estimates. How did the Ernst & Young partners fail in this regard?b. Based on the facts in the
Access the most recently available annual report of Siemens (www.siemens.com/investor/en/financials/annual_reports.htm).Locate and read the MD&A section of the report. Comment on why the audit report does not provide assurance regarding the MD&A.
Refer to the Appendix to Chapter to identify the ISA related to disclosures of related party transactions. Locate that ISA using appropriate resources. Refer to paragraph A47 of the standard and identify under what circumstances a disclosure of related party transactions might be considered

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