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auditing
Auditing and Assurance Services A Systematic Approach 9th edition William Messier, Steven Glover, Douglas Prawitt - Solutions
Search the Internet (e. g., an entity’s website or sec.gov), and find an audit report for an entity’s audit of internal control over financial reporting. Deter-mine whether the entity used the combined or separate format.
Search the Internet ( e. g., an entity’s website or sec.gov), and find an audit report for an entity’s audit of internal control over financial reporting that expresses an adverse opinion with respect to the effectiveness of internal control.
Define audit sampling. Why do auditors sample instead of examining every transaction?
Distinguish between Type I and Type II errors. What terms are used to describe these errors when the auditor is conducting tests of controls and substantive tests? What costs are potentially incurred by auditors when such decision errors occur?
List audit evidence types that do not involve sampling and provide an example of a situation where an auditor would not use audit sampling.
Distinguish between non statistical and statistical sampling. What are the advantages and disadvantages of using statistical sampling?
Define attribute sampling. Why is this sampling technique appropriate for tests of controls?
How does the timing of controls testing affect the population definition?
List the four factors that enter into the sample size decision. What is the relationship between sample size and each of these factors?
In performing certain audit procedures, the auditor may encounter voided documents, inapplicable documents, or missing documents, or the auditor may stop testing before examining all the items selected for the sample. How should each of these situations be handled within the attribute- sampling
The auditor should evaluate the qualitative aspects of deviations found in a sampling application. What are the purposes of evaluating the qualitative aspects of deviations?
How should the results of a non statistical test of controls sample be evaluated in terms of considering sampling risk?
Audit sampling involves applying an audit procedure to less than 100 percent of the population for the purpose of evaluating some characteristic of the population. The fact that an audit involves sampling is noted in the scope paragraph of the auditor’s report, which contains the phrase “An
Match the term to the definition.a. Attribute sampling b. Desired confidence level c. Allowance for sampling risk d. Sampling risk e. Sampling population f. Nonstatistical sampling g. Tolerable deviation rate1. The possibility that the sample drawn is not representative of the population and leads
Following is a set of situations that may or may not involve sampling. 1. An auditor is examining loan receivables at a local bank. The population of loans contains two strata. One stratum is composed of 25 loans that are each greater than $ 1 million. The second stratum contains 450 loans that are
Jenny Jacobs, CPA, is planning to use attribute sampling in order to deter-mine the degree of reliance to be placed on an entity’s system of internal control over sales. Jacobs has begun to develop an outline of the main steps in the sampling plan as follows: 1. State the test objectives (for
Determine the sample size for each of the control procedures shown in the following table (assuming a largepopulation):
Using the sample sizes determined in Problem 8- 25 and the number of deviations shown here, determine the sample deviation rate, the computed upper deviation rate, and the auditor€™s conclusion (i. e., testing results do or do not support operating effectiveness of the control) for each
Determine the sample size for each of the control procedures shown in the followingtable:
Using the sample sizes determined in Problem 8- 27 and the number of deviations shown here, determine the sample deviation rate, computed upper deviation rate, and the auditor€™s conclusion (i. e., testing results do or do not support operating effectiveness of the control) for each
CalgarfClothing Company manufactures high- quality silk ties that are mar-keted under a number of trademarked names. Joe & Vandervelte LLP has been the company€™s auditors for five years. Lisa Austen, the senior-in-charge of the audit, has reviewed Calgari€™s controls over purchasing
Nathan Matthews conducted a test of controls where the tolerable deviation rate was set at 6 percent and the expected population deviation rate was 3 percent. Using a sample size of 150, Matthews performed the planned test of controls. He found six deviations in the sample, and he calculated the
Doug Iceberge, senior- in- charge of the audit of Fisher Industries, has decided to test the following two controls for Fisher€™s revenue process.1. All sales invoices are supported by proper documentation, that is, a sales order and a shipping document.2. All sales invoices are mathematically
Baker, CPA, was engaged to audit Mill Company’s financial statements for the year ended September 30. After studying Mill’s internal control, Baker decided to obtain evidence about the effectiveness of both the design and the operation of the controls that may support a low assessed level of
List the steps in a statistical sampling application for substantive testing.
How is the sampling unit defined when monetary- unit sampling is used for statistical sampling? How is the sampling unit defined when classical variables sampling is used?
How are the desired confidence level, the tolerable misstatement, and the expected misstatement related to sample size?
Identify the advantages and disadvantages of monetary-unit sampling.
How does the use of probability- proportional- to-size selection provide an increased chance of sampling larger items?
What is the decision rule for determining the acceptability of sample results when monetary- unit sampling is used?
How do the desired confidence level, risk of material misstatement, and tolerable and expected misstatements affect the sample size in a non-statistical sampling application?
Describe the two methods suggested for projecting a non-statistical sample result. How does an auditor determine which method should be used?
What are the advantages and disadvantages of classical variables sampling?
What is the decision rule for determining the acceptability of sample results when classical variables sampling is used?
Multiple Choice1 Which of the following sampling methods would be used to estimate a numeric measurement of a population, such as a dollar value?a. Random sampling.b. Numeric sampling.c. Attribute sampling.d. Variable sampling.2. A number of factors influence the sample size for a substantive test
Edwards has decided to use monetary- unit sampling in the audit of an entity’s accounts receivable balance. Few, if any, misstatements of account balance overstatement are expected.Required:a. Identify the advantages of using monetary- unit sampling over classical variables sampling.b.
The firm of Le and Lysius was conducting the audit of Coomes Molding Corporation for the fiscal year ended October 31. Michelle Le, the partner in charge of the audit, decides that MUS is the appropriate sampling technique to use in order to audit Coomes’ inventory account. The balance in
McMullen and Mulligan, CPAs, were conducting the audit of Cusick Machine Tool Company for the year ended December 31. Jim Sigmund, senior- in- charge of the audit, plans to use MUS to audit Cusick’s inventory account. The balance at December 31 was $ 9,000,000.Required:a. Based on the
The accounting firm of Johnson and Johnson has decided to design a non-statistical sample to examine the accounts receivable balance of Francisco Fragrances, Inc., at October 31. As of October 31, there were 1,500 accounts receivable accounts with a balance of $ 5.5 million. The accounts receivable
World- famous mining mogul Steve Wilsey hired the public accounting firm of Joe Wang Associates, PC, to conduct an audit of his new acquisition, Cougar Goldust, Inc. The gold inventory was scheduled to be taken on November 30. The perpetual records show only the weight of the gold in various
You are in charge of the audit of Hipp Supply Company for the year ended December 31. In prior years, your firm observed the inventory and tested compilation and pricing. Various misstatements were always found. About 10 percent of the dollar value of the inventory is usually tested.This year you
Mead, CPA, was engaged to audit Jiffy Company’s financial statements for the year ended August 31. Mead is applying sampling procedures. During the prior years’ audits Mead used classical variables sampling in performing tests of controls on Jiffy’s accounts receivable. For the current year
Doug Stevens, CPA, is interested in testing the fairness of the ending inventory balance during the audit of Morris Co. Doug has relatively little experience using statistical sampling methods and, quite frankly, doesn’t like to turn anything over to random chance— especially the selection of
Accounting standards require that revenue must be realized or realizable and earned before it can be recognized. Discuss what is meant by the terms real-ized or realizable and earned.
Describe the credit function’s duties for monitoring customer payments and handling bad debts.
When an entity does not adequately segregate duties, the possibility of cash being stolen before it is recorded is increased. If the auditor suspects that this type of defalcation is possible, what type of audit procedures can he or she use to test this possibility?
The auditor needs to understand how selected inherent risk factors affect the transactions processed by the revenue process. Discuss the potential effect that industry- related factors and misstatements detected in prior periods have on the inherent risk assessment for the revenue process.
In understanding the accounting system in the revenue process, the auditor typically performs a walkthrough to gain knowledge of the system. What knowledge should the auditor try to obtain about the accounting system?
What are the two major controls for sales returns and allowances transactions?
List four analytical procedures that can be used to test revenue- related accounts. What potential misstatements are indicated by each of these analytical procedures?
Describe how the auditor verifies the accuracy of the aged trial balance.
List and discuss the three factors mentioned in the chapter that may affect the reliability of confirmations of accounts receivable.
Distinguish between positive and negative confirmations. Under what circumstances would positive confirmations be more appropriate than negative confirmations?
Identify three other types of receivables the auditor should examine. What audit procedures would typically be used to audit other receivables?
1. For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approvea. Employee overtime wages.b. Credit granted to customers.c. Write- offs of customer accounts.d. Cash disbursements.2. Which of the following controls is most
For each of the following situations based on SAB No. 101, indicate the audit evidence that should be obtained to determine whether revenue should be recognized or not in the current period.1. Your client, Thomson Telecom, maintains an inventory of telecommunications equipment. Bayone Telephone
The Art Appreciation Society operates a museum for the benefit and enjoyment of the community. During the hours the museum is open to the public, two clerks who are positioned at the entrance collect a five- dollar admission fee from each nonmember patron. Members of the Art Appreciation Society
Assertions are expressed or implied representations by management that are reflected in the financial statement components. The auditor performs audit procedures to gather evidence to test those assertions. Required: Your client is All’s Fair Appliance Company, an appliance wholesaler. Select the
Adam Signoff- On, CPA, was auditing Defense Industries, Inc. Signoff- On sent positive accounts receivable confirmations to a number of Defense’s government customers. He received a number of returned confirmations marked “We do not confirm balances because we are on a voucher system.”
The “ Accounts Receivable— Confirmation Statistics” working paper shown on the next page was prepared by an audit assistant for the 2013 audit of Lewis County Water Company, Inc., a continuing audit client. The engagement supervisor is reviewing the working papers. Required: Describe the
During the year, Strang Corporation began to encounter cash-flow difficulties, and a cursory review by management revealed receivable collection problems. Strang’s management engaged Stanley, CPA, to perform a special investigation. Stanley studied the billing and collection process and noted the
You are engaged to audit the Ferrick Corporation for the year ended December 31, 2013. Only merchandise shipped by the Ferrick Corporation to customers up to and including December 30, 2013, has been eliminated from inventory. The inventory as determined by physical inventory count has been
SEC Accounting and Auditing Enforcement Release (AAER) No. 108 specifies certain conditions or criteria that a bill and hold transaction of a public company should meet in order to qualify for revenue recognition. The AAER also specifies certain factors that should be considered in evaluating
Friendly Furniture, Inc., a manufacturer of fine hardwood furniture, is a publicly held SEC- registered company with a December 31 year- end. During May, Friendly had a flood due to heavy rains at its major manufacturing facility that damaged about $ 525,000 of furniture. Friendly is insured for
Visit the website of a catalog retailer similar to EarthWear Clothiers and determine how it processes sales transactions, recognizes revenue, and reserves for returns.
Visit the SEC’s website (www. sec.gov) and identify a company that has been recently cited for revenue recognition problems. Prepare a memo summarizing the revenue recognition issues for the company.
Distinguish among the three categories of expenses. Provide an example of each type of expense.
What major types of transactions occur in the purchasing process? What financial statement accounts are affected by each type of transaction?
Briefly describe each of the following documents or records: purchase requisition, purchase order, receiving report, vendor invoice, and voucher. Why would an entity combine all documents related to a purchase transaction into a “voucher packet”? .
List the key segregation of duties in the purchasing process. What errors or fraud can occur if such duties are not segregated?
List two inherent risk factors that directly affect the purchasing process. Why should auditors be concerned about issues such as the supply of raw materials and the volatility of prices?
What control activities typically ensure that the occurrence, authorization, and completeness assertions are met for a purchase transaction? What tests of controls are performed for each of these assertions?
Identify two tests of controls that could be performed using computer-assisted audit techniques (CAATs) for purchase transactions.
List two substantive analytical procedures that can test accounts payable. What potential errors or fraud can be identified by each analytical procedure?
List the procedures an auditor might use to search for unrecorded liabilities.
Identify four possible disclosure issues related to the purchasing process and related accounts.
What are the differences between accounts receivable and accounts payable confirmations?
What are some of the typical procedures that might be applied to the audit of the tax provision by an auditor and/ or tax specialist?
1. In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is a. Cancelation of the supporting documents. b. Entry of the check amount in the check register. c. Entering of
You are the auditor for KPDZ Corporation. You gathered comparative information for inventory and accounts payable and calculated the days purchases in accounts payable.Required: Prepare a list of possible concerns that you might have about potential misstatements in bothaccounts.
The flowchart shown below depicts the activities relating to the purchasing, receiving, and accounts payable departments of Model Company, Inc.Required: Based only on the flowchart, describe the control activities that most likely would provide reasonable assurance that specific assertions
In 2013 Kida Company purchased more than $ 10 million worth of office equipment under its “special” ordering system, with individual orders ranging from $ 5,000 to $ 30,000. “Special” orders entail low- volume items that have been included in an authorized user’s budget. Department heads
Following are audit procedures that are normally conducted in the purchasing process and related accounts. 1. Test a sample of purchase requisitions for proper authorization. 2. Test transactions around year- end to determine if they are recorded in the proper period. 3. Review results of
Coltrane, CPA, is auditing Jang Wholesaling Company’s financial statements and is about to perform substantive audit procedures on Jang’s trade accounts payable balances. After obtaining an understanding of Jang’s internal control for accounts payable, Coltrane assessed control risk at
In obtaining evidence in support of financial statement assertions, the auditor develops specific audit procedures to access those assertions.Required: All’s Fair Appliance Company is an appliance wholesaler. Select the most appropriate audit procedure from the list below and enter the number in
You are engaged to perform an audit of the Giordani Corporation for the year ended December 31, 2013. You have decided to perform the following cutoff test for payables and accruals. Select all items greater than $ 25,000 for two business days before and after year- end from the purchases journal
Mincin, CPA, is the auditor of the Raleigh Corporation. Mincin is considering the audit work to be performed in the accounts payable area for the current year’s engagement. The prior year’s working papers show that confirmation requests were mailed to 100 of Raleigh’s 1,000 suppliers. The
Visit the website of a catalog retailer similar to EarthWear Clothiers, and determine how it processes purchase transactions and recognizes expenses.
Visit the SEC’s website (www.sec.gov), and identify a company that has been recently cited for financial reporting problems related to the recognition of expenses. Prepare a memo summarizing the expense issues for the company.
Why is the payroll system of most entities computerized?
What are the major types of transactions that occur in the payroll system? What financial statement accounts are affected by each of these types of transactions?
Briely describe each of the following documents or records: payroll register, payroll master file, and payroll master file changes report.
What duties are performed within the human resource, timekeeping, and payroll- processing functions?
List the key segregation of duties in the human resource management process. What errors or fraud can occur if such duties are not segregated?
Discuss the two control environment factors that an auditor should consider when examining the human resource management process.
What are the key authorization points in a payroll system?
Why is it important for the entity to establish control activities over the classification of payroll transactions?
List the inherent risk factors that affect the human resource management process.
What is an example of a test of control or substantive test of transactions that can be performed using CAATs for payroll transactions?
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