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auditing
Auditing and Assurance Services A Systematic Approach 9th edition William Messier, Steven Glover, Douglas Prawitt - Solutions
List two substantive analytical procedures that can be used to provide audit evidence related to the payroll expense accounts and the payroll- related liabilities.
Discuss how an auditor would audit the accrued payroll taxes account.
Identify three possible disclosure issues for payroll expense and payroll-related liabilities.
Multiple Choice1. During the year being audited, the Matthews Corporation changed from a system of recording time worked on clock cards to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll records. Because of this
You have been hired by Morris & Son, Inc., to manage its human resource department. As a first step, you want to determine personnel needs and assigned duties in order to prevent errors and fraud in the financial statements. Required: How many people would you utilize and what duties would you
A CPA’s audit documentation (working papers) contains a narrative description of a segment of the Croyden Factory, Inc., payroll system and an accompanying flowchart as follows.Narrative The internal control system with respect to the personnel department functions well and is not included
McCarthy, CPA, was engaged to audit the financial statements of Kent Company, a continuing audit client. McCarthy is about to audit Kent’s payroll transactions. Kent uses an in- house payroll department to process payroll data and to prepare and distribute payroll checks. During the planning
James, who was engaged to examine the financial statements of Talbert Corporation, is about to audit payroll. Talbert uses a computer service center to process weekly payroll as follows.Each Monday Talbert’s payroll clerk inserts data in appropriate spaces on the preprinted service center–
Service Corporation hired an independent computer programmer to develop a simplified payroll application for its newly purchased computer. The programmer developed an online database microcomputer system that minimized the level of knowledge required of the operator. It was based on typing answers
Executive compensation ballooned in the 1990s, and as highlighted in there were notable compensation abuses. The most popular form of executive compensation in the 1990s was company stock. Designers of these compensation plans argue that by compensating officers with stock, the officers will take
Search the Internet for information on labor costs in the retail catalog industry ( e. g., labor costs as a percentage of sales).
Why does inventory represent one of the more complex parts of the audit?
How does the inventory management process relate to the revenue, purchasing, and payroll processes?
Briefly describe each of the following documents or records: production schedule, materials requisition, inventory master file, production data information, and cost accumulation and variance reports.
What duties are performed within the inventory management, stores, and cost- accounting functions?
List the key segregation of duties in the inventory management process. What errors or fraud can occur if such segregation of duties is not present?
List the inherent risk factors that affect the inventory management process.
List the major steps in setting control risk in the inventory management process.
What control activities can an entity use to prevent unauthorized inventory production?
List three substantive analytical procedures that can test the fairness of inventory and related accounts.
Describe how an auditor audits standard costs.
List the procedures the auditor should perform during the count of the entity’s physical inventory.
What are some possible causes of book- to- physical inventory differences?
List five items for inventory and related accounts that may require disclosure.
Multiple Choice 1. The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that a. Independent internal verification of activity reports is established. b. Transfers to the finished goods department
Yardley, CPA, prepared the flowchart on the following page, which portrays the raw materials purchasing function of one of Yardley’s entities, a medium- size manufacturing company, from the preparation of initial documents through the vouching of invoices for payment. The flowchart represents a
Rasch is the partner-in-charge of the audit of Bonner Distributing Corporation, a wholesaler that owns one warehouse containing 80 percent of its inventory. Rasch is reviewing the working papers that were prepared to support the firm’s opinion on Bonner’s financial statements, and Rasch wants
Abbott Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse but instead uses statistical sampling to estimate the year- end inventory. Abbott maintains a perpetual inventory record of parts and supplies and believes that
Kachelmeier, CPA, is auditing the financial statements of Big Z Wholesaling, Inc., a continuing audit client, for the year ended January 31, 2013. On January 5, 2013, Kachelmeier observed the tagging and counting of Big Z’s physical inventory and made appropriate test counts. These test counts
An auditor is examining the financial statements of a wholesale cosmetics distributor with an inventory consisting of thousands of individual items. The distributor keeps its inventory in its own distribution center and in two public warehouses. An electronic inventory file is maintained on a
In obtaining evidential matter in support of financial statement assertions, the auditor develops specific audit procedures to address those assertions. Required: Hillmart is a retail department store that purchases all goods directly from wholesalers or manufacturers. Select the most appropriate
The following discussion case extends. Harris decided that the easiest way to make the Fabricator Division appear more profitable was through manipulating the inventory, which was the largest asset on the books. Harris found that by increasing inventory by 2 percent, income could be increased by 5
Using an Internet browser, search for information on inventory turnover and merchandise liquidations in the retail catalog industry.
Visit the SEC’s website (www. sec.gov) and identify a company that has been recently cited for financial reporting problems related to inventory. Prepare a memo summarizing the inventory issues for the company.
Distinguish between prepaid expenses and intangible assets. Give two examples of each.
Prepaid expenses are generally assessed to have a low inherent risk. Why would intangible assets present serious inherent risk consideration?
How does the purchasing process affect prepaid insurance and property, plant, and equipment transactions?
Describe how substantive analytical procedures may be used to provide evidence on the reasonableness of interest expense.
Confirmations of long- term debt provide evidence about which assertions?
What are the functions of the registrar, the transfer agent, and the dividend-disbursing agent?
What is the major segregation of duties that should be maintained when the entity does not use a registrar or transfer agent and sufficient personnel are available to perform the stock transactions?
List two common disclosures for stockholders’ equity and why such disclosures are necessary.
Describe common audit procedures to audit dividends and retained earnings.
List three substantive analytical procedures that the auditor might use in auditing the income statement.
Why might the auditor do an account analysis and vouch selected transactions in income statement accounts such as legal expense, travel and entertainment, and other income/ expenses?
Multiple Choice 1. Which of the following questions would an auditor most likely include on a control questionnaire for notes payable? a. Are assets that collateralize notes payable critically needed for the entity’s continued existence? b. Are two or more authorized signatures required on checks
Maslovskaya, CPA, has been engaged to examine the financial statements of Broadwall Corporation for the year ended December 31, 2013. During the year, Broadwall obtained a long- term loan from a local bank pursuant to a financing agreement that provided that 1. The loan was to be secured by the
Your audit client, The Brant Group, reported total interest expense for the year of $ 2,000. The table below provides the monthly balance of their long- term debt. Interest is paid monthly on the average daily balance during the month. The annual interest rate for the debt is 6%.Balance of long-
The long- term debt working paper on the next page was prepared by client personnel and audited by Andy Fogelman, an audit assistant, during the calendar year 2013 audit of American Widgets, Inc., a continuing audit client. The engagement supervisor is reviewing the working paper thoroughly.
Lee, CPA, the continuing auditor of Wu, Inc., is beginning to audit the common stock and treasury stock accounts. Lee has decided to design substantive procedures without relying on the company’s internal control system. Wu has no par and no stated- value common stock, and it acts as its own
On September 10, Melinda Johnson was auditing the financial statements of a new audit client, Mother Earth Foods, a health- food chain that has a June 30 year-end. The company is privately held and has just gone through a leveraged buyout with long- term financing that includes various restrictive
Diebold, Inc., a public company, is a maker of ATMs, bank security systems, and electronic voting machines. Research how Diebold accounted for liability accruals and capitalized expenses (“Division 35 and CAP 250”) to over-state income in the years 2002 to 2005. Also, research for legal actions
How do the entity’s controls over cash receipts and disbursements affect the nature and extent of the auditor’s substantive tests of cash balances?
Briefly describe each type of bank account. How does an imprest account help to improve control over cash?
Why are analytical procedures of limited use in the audit of the cash balance?
Explain why the standard bank confirmation form does not identify all information about an entity’s bank accounts or loans.
Why does an auditor obtain a cutoff bank statement when auditing a bank account? What information is examined on the canceled or substitute checks returned with the cutoff bank statement?
List three fraud- related audit procedures for cash.
What approach is used by the auditor to test for kiting?
What are the main transaction- related assertions for investments? Identify the key segregation of investment- related duties and possible errors or fraud that can occur if this segregation is not present.
Briefly describe the classification and valuation issues related to investments in debt and equity securities.
What two presentation classification issues are important for the audit of investments?
How does the fair value evidence the auditor is likely to gather differ between Level 1 and Level 3 assets?
Multiple Choice1. The tick mark most likely indicates that the amount was traced to thea. December cash disbursements journal.b. Outstanding check list of the applicable bank reconciliation.c. January cash disbursements journal.d. Year- end bank confirmations.2. The tick mark most likely indicates
Cassandra Corporation, a manufacturing company, periodically invests large sums in investment (debt and equity) securities. The investment policy is established by the investment committee of the board of directors, and the treasurer is responsible for carrying out the investment committee’s
Sevcik Company’s auditor received, directly from the banks, confirmations and cutoff statements with related checks and deposit tickets for Sevcik’s three general- purpose bank accounts. The auditor determined that the controls over cash are satisfactory and can be relied upon. The proper
The following client- prepared bank reconciliation is being examined by Zachary Kallick, CPA, during the examination of the financial statements of Simmons Company.Required:Items (a) through (e) represent items an auditor would ordinarily find on an entity-prepared bank reconciliation. The
The schedule on the following page was prepared by the controller of World Manufacturing, Inc., for use by the independent auditors during their examination of World’s year- end financial statements. All procedures performed by the audit assistant were noted in the “Legend” section; the
Phung, CPA, has been engaged to audit the financial statements of Vernon Distributors, Inc., a continuing audit client, for the year ended September 30. After obtaining an understanding of Vernon’s internal control system, Phung set control risk at the maximum level for all financial statement
To support financial statement assertions, an auditor develops specific audit procedures to satisfy or accomplish each assertion.Required:Items (a) through (c) represent assertions for investments. Select the most appropriate procedure from the following list and enter the number in the appropriate
Spencer, CPA, has been engaged to audit the fair value measurements of Christensen & Son, a high- tech company in the Midwest. During the audit, Spencer must obtain evidence that management of Christensen & Son has appropriately valued the following two accounts: 1. Available- for- Sale Stock
Both Intel (www.intel. com) and Microsoft (www.microsoft. com) have large amounts of investment securities. Visit their home pages, and review their financial statements for information on how they account for investment securities and the amounts of those securities.
Define what is meant by contingent liability. What three categories are used to classify a contingent liability? Give four examples of a contingent liability.
What information does the auditor ask the attorney to provide on pending or threatened litigation?
Provide two examples of commitments. Under what conditions do such commitments result in a decrease in Other Comprehensive Income?
What are the types of subsequent events relevant to financial statement audits? Give one example of each type of subsequent event that might materially affect the financial statements.
Under what circumstances would the auditor dual date an audit report?
Are analytical procedures required as part of the final overall review of the financial statements? What is the purpose of such analytical procedures?
Why does the auditor obtain a representation letter from management?
Describe the purposes of an independent engagement quality review by a quality review partner.
List the three overall steps in the going concern evaluation process.
What four major categories of events or conditions may indicate going concern problems? Give two examples for each category.
What items should be included in the auditor’s communication with those charged with governance (i. e., the audit committee or similar group)?
What types of events would generally require restatement of the issued financial statements? What procedures should the auditor follow when the entity refuses to cooperate and make the necessary disclosures?
Multiple Choice1. An auditor would be most likely to identify a contingent liability by obtaining a (n)a. Accounts payable confirmation.b. Bank confirmation of the entity€™s cash balance.c. Letter from the entity€™s general legal counsel.d. List of subsequent cash receipts.2.
During an audit engagement, Harper, CPA, has satisfactorily completed an examination of accounts payable and other liabilities and now plans to determine whether there are any loss contingencies arising from litigation, claims, or assessments.Required: What audit procedures should Harper follow
Cole & Cole, CPAs, are auditing the financial statements of Consolidated Industries Company for the year ended December 31, 2013. On April 2, 2014, an inquiry letter to J. J. Young, Consolidated’s outside attorney, was drafted to corroborate the information furnished to Cole by management
Namiki, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 2013. Namiki plans to complete the fieldwork and sign the auditor’s report about March 10, 2014. Namiki is concerned about events and transactions occurring after December 31, 2013, that may
For each of the following items, assume that Josh Feldstein, CPA, is expressing an opinion on Scornick Company’s financial statements for the year ended December 31, 2013; that he completed fieldwork on January 21, 2014; and that he now is preparing his opinion to accompany the financial
Arenas, an assistant accountant with the firm of Gonzales & Ramirez, CPAs, is auditing the financial statements of Tech Consolidated Industries, Inc. The firm’s audit program calls for the preparation of a written management representation letter. Required: a. In an audit of financial
During the examination of the annual financial statements of Amis Manufacturing, Inc., a nonpublic company, the company’s president, R. Heinrich, and Luddy, the auditor, reviewed the matters that were to be included in a written representation letter. Upon receipt of the following entity
Items 1 through 16 represent a series of unrelated statements, questions, excerpts, and comments taken from various parts of an auditor’s working paper file. Below is a list of the likely sources of the statements, questions, excerpts, and comments. Select, as the best answer for each item, the
In February 2014, Ceramic Crucibles of America was notified by the state of Colorado that the state was investigating the company’s Durango facility to determine if there were any violations of federal or state environ-mental laws. In formulating your opinion on the 2013 financial statements, you
Medical Products, Inc. (MPI) was created in 2011 and entered the optical equipment industry. Its made- to- order optical equipment requires large investments in research and development. To fund these needs, MPFI made a public stock offering, which was completed in 2012. Although the offering was
Wyly Waste Management. Wyly Waste Management (“WWM”) is an SEC registrant and your firm is its auditor. Overall materiality for the audit is $ 100,000. Shortly after the end of the year, WWM’s CFO is meeting with your audit partner to review the preliminary results of the audit. The
A number of companies have pending lawsuits or other contingent liabilities reported in their financial statements.Required:a. Search the EDGAR database found atwww.sec.gov/edgar/searchedgar/companysearch.html to find a company’s 10- K that reports a contingent liability. Write a paragraph
Over the past 10 years it has become quite common for an accounting firm to withdraw its opinion on a set of previously issued financial statements. Search the Internet to find a recent example of a company that has had to restate its financials and whose public accounting firm has withdrawn its
Describe what is meant when an auditor is “associated with” a set of financial statements.
Distinguish between accounting changes that affect consistency and changes that do not. To what does the word consistency refer? How is it possible for an accounting change to affect comparability but not consistency?
Give examples of a client- imposed and a condition- imposed scope limitation. Why is a client- imposed limitation generally considered more serious?
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