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auditing
Auditing and Assurance services an integrated approach 14th Edition Alvin a. arens, Randal j. elder, Mark s. Beasley - Solutions
Distinguish between management's and the auditor's responsibility for the financial statements being audited.
Distinguish between the terms errors and fraud. What is the auditor's responsibility for finding each?
Distinguish between fraudulent financial reporting and misappropriation of assets. Discuss the likely difference between these two types of fraud on the fair presentation of financial statements.
Because management operates the business on a daily basis, they know more about the company's transactions and related assets, liabilities, and equity than the auditor. For example, it is extremely difficult, if not impossible, for the auditor to evaluate the obsolescence of inventory as well as
List two major characteristics that are useful in predicting the likelihood of fraudulent financial reporting in an audit. For each of the characteristics, state two things that the auditor can do to evaluate its significance in the engagement.
Describe what is meant by the cycle approach to auditing. What are the advantages of dividing the audit into different cycles?
Identify the cycle to which each of the following general ledger accounts will ordinarily be assigned: sales, accounts payable, retained earnings, accounts receivable, inventory, and repairs and maintenance.
Why are sales, sales returns and allowances, bad debts, cash discounts, accounts receivable, and allowance for uncollectible accounts all included in the same cycle?
Define what is meant by a management assertion about financial statements. Identify the three broad categories of management assertions.
Distinguish between the general audit objectives and management assertions. Why are the general audit objectives more useful to auditors?
An acquisition of a fixed-asset repair by a construction company is recorded on the wrong date. Which transaction-related audit objective has been violated? Which transaction-related audit objective has been violated if the acquisition had been capitalized as a fixed asset rather than expensed?
Distinguish between the existence and completeness balance-related audit objectives. State the effect on the financial statements (overstatement or understatement) of a violation of each in the audit of accounts receivable.
What are specific audit objectives? Explain their relationship to the general audit objectives.
Explain how management assertions, general balance-related audit objectives, and specific balance-related audit objectives are developed for an account balance such as accounts receivable.
Identify the management assertion and presentation and disclosure-related audit objective for the specific presentation and disclosure-related audit objective: Read the fixed asset footnote disclosure to determine that the types of fixed assets, depreciation methods and useful lives are clearly
Identify the four phases of the audit. What is the relationship of the four phases to the objective of the audit of financial statements?
Multiple Choice QuestionsThe following questions concern the reasons auditors do audits.Choose the best response.a. Which of the following best describes the reason why an independent auditor reports on financial statements? (1) A misappropriation of assets may exist, and it is more likely to be
Multiple Choice QuestionsThe following questions deal with errors and fraud. Choose the best response.a. An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements.
Multiple Choice QuestionsThe following questions deal with management assertions. Choose the best response.a. An auditor reviews aged accounts receivable to assess likelihood of collection to support management's assertion about account balances of (1) Existence. (3) Valuation and allocation.(2)
The following are selected portions of the report of management from a published annual report.REPORT OF MANAGEMENT Management's Report on Internal Control over Financial ReportingThe Company's management is responsible for establishing and maintaining adequate internal control over financial
Auditors provide "reasonable assurance" that the financial statements are "fairly stated, in all material respects." Questions are often raised as to the responsibility of the auditor to detect material misstatements, including misappropriation of assets and fraudulent financial
The following general ledger accounts are included in the trial balance for an audit client, Jones Wholesale Stationery Store.Accounts payable Insurance expenseAccounts receivable Interest expenseAccrued interest expense InventoryAccrued sales salaries Loans payableAccumulated
The following are various management assertions (a through m) related to sales and accounts receivable.Management Assertiona. All sales transactions have been recorded.b. Receivables are appropriately classified as to trade and other receivables in the financial statements and are clearly
The following are specific balance-related audit objectives applied to the audit of accounts receivable (a through h) and management assertions about account balances (1 through 4). The list referred to in the specific balance-related audit objectives is the list of the accounts receivable from
The following are specific transaction-related audit objectives applied to the audit of cash disbursement transactions (a through f), management assertions about classes of transactions (1 through 5), and general transaction-related audit objectives (6 through 11).Specific Transaction-Related Audit
The following are specific presentation and disclosure-related audit objectives applied to presentation and disclosure for fixed assets (a through d) and management assertions (1 through 4).Specific Presentation and Disclosure-Related Audit Objectivea. All required disclosures regarding fixed
The following are two specific balance-related audit objectives in the audit of accounts payable. The list referred to is the list of accounts payable taken from the accounts payable master file. The total of the list equals the accounts payable balance on the general ledger.1. All accounts
The following (1 through 18) are the balance-related, transaction-related, and presentation and disclosure related audit objectives.Balance-Related Audit Objectives 1. Existence 2. Completeness 3. Accuracy 4. Classification 5. Cutoff 6. Detail tie-in 7. Realizable value 8. Rights and
Following are seven audit activities.a. Examine invoices supporting recorded fixed asset additions.b. Review industry databases to assess the risk of material misstatement in the financial statements.c. Summarize misstatements identified during testing to assess whether the overall financial
Rene Ritter opened a small grocery and related-products convenience store in 1989 with money she had saved working as an A&P store manager. She named it Ritter Dairy and Fruits. Because of the excellent location and her fine management skills, Ritter Dairy and Fruits grew to three locations by
This problem requires you to access authoritative standards to compare the objective of an audit as defined by GAAS (www.aicpa.org) and International Standards on Auditing (ISA 200) (www.iaasb.org) and the objective of an audit of internal control over financial reporting as defined by PCAOB
Discuss the similarities and differences between evidence in a legal case and evidence in an audit of financial statements.
List the four major evidence decisions that must be made on every audit.
Describe what is meant by an audit procedure. Why is it important for audit procedures to be carefully worded?
Describe what is meant by an audit program for accounts receivable. What four things should be included in an audit program?
Explain why the auditor can be persuaded only with a reasonable level of assurance, rather than convinced, that the financial statements are correct.
Identify the two factors that determine the persuasiveness of evidence. How are these two factors related to audit procedures, sample size, items to select, and timing?
Identify the six characteristics that determine the reliability of evidence. For each characteristic, provide one example of a type of evidence that is likely to be reliable.
List the eight types of audit evidence included in this chapter and give two examples of each.
What are the characteristics of a confirmation? Distinguish between a confirmation and external documentation.
Distinguish between internal documentation and external documentation as audit evidence and give three examples of each.
Explain the importance of analytical procedures as evidence in determining the fair presentation of the financial statements.
Identify the most important reasons for performing analytical procedures.
Your client, Harper Company, has a contractual commitment as a part of a bond indenture to maintain a current ratio of 2.0. If the ratio falls below that level on the balance sheet date, the entire bond becomes payable immediately. In the current year, the client's financial statements show that
Distinguish between attention-directing analytical procedures and those intended to eliminate or reduce detailed substantive procedures.
List the purposes of audit documentation and explain why each purpose is important.
For how long does the Sarbanes-Oxley Act require auditors of public companies to retain audit documentation?
Explain why it is important for audit documentation to include each of the following: identification of the name of the client, period covered, description of the contents, initials of the preparer, date of the preparation, and an index code.
Define what is meant by a permanent file, and list several types of information typically included. Why does the auditor not include the contents of the permanent file with the current year's audit file?
Distinguish between the following types of current period supporting schedules and state the purpose of each: analysis, trial balance, and tests of reasonableness.
Why is it essential that the auditor not leave questions or exceptions in the audit documentation without an adequate explanation?
Define what is meant by a tick mark. What is its purpose?
Who owns the audit files? Under what circumstances can they be used by other people?
How does the auditor read and evaluate information that is available only in machine-readable form?
Explain the purposes and benefits of audit documentation software.
Multiple Choice QuestionsThe following questions concern persuasiveness of evidence.Choose the best response.a. Which of the following types of documentary evidence should the auditor consider to be the most reliable? (1) A sales invoice issued by the client and supported by a delivery receipt from
Multiple Choice QuestionsThe following questions concern audit documentation. Choose the best response.a. Which of the following is not a primary purpose of audit documentation? (1) To coordinate the audit.(2) To assist in preparation of the audit report.(3) To support the financial statements.(4)
The following are examples of documentation typically obtained by auditors:1. Vendors' invoices2. General ledger files3. Bank statements4. Cancelled payroll checks5. Payroll time records6. Purchase requisitions7. Receiving reports (documents prepared when merchandise is received)8. Minutes of the
The following are examples of audit procedures:1. Review the accounts receivable with the credit manager to evaluate their collectibility.2. Compare a duplicate sales invoice with the sales journal for customer name and amount.3. Add the sales journal entries to determine whether they were
List two examples of audit evidence the auditor can use in support of each of the following:a. Recorded amount of entries in the acquisitions journalb. Physical existence of inventoryc. Accuracy of accounts receivabled. Ownership of fixed assetse. Liability for accounts payable f. Obsolescence of
Eight different types of evidence were discussed. The following questions concern the reliability of that evidence:Requireda. Explain why confirmations are normally more reliable evidence than inquiries of the client.b. Describe a situation in which confirmation will be considered highly reliable
As auditor of the Star Manufacturing Company, you have obtaineda. A trial balance taken from the books of Star one month before year-end:Dr. (Cr.)Cash in bank .............. $ 87,000Trade accounts receivable ......... 345,000Notes receivable ............ 125,000Inventories ..............
The following are various audit procedures performed to satisfy specific transaction-related audit objectives as discussed in Chapter 6. The general transaction-related audit objectives from Chapter 6 are also included.Audit Procedures1. Trace from receiving reports to vendors’ invoices and
The following audit procedures were performed in the audit of inventory to satisfy specific balance-related audit objectives as discussed in Chapter 6. The audit procedures assume that the auditor has obtained the inventory count sheets that list the client's inventory. The general balance-related
The following are nine situations, each containing two means of accumulating evidence:1. Confirm receivables with consumers versus confirming accounts receivable with business organizations.2. Physically examine 3-inch steel plates versus examining electronic parts.3. Examine duplicate sales
Following are 10 audit procedures with words missing and a list of several terms commonly used in audit procedures.Audit Procedures1. _____ the unit selling price times quantity on the duplicate sales invoice and compare the total to the amount on the duplicate sales invoice.2. _____ whether the
Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They range from simple comparisons to the use of complex models involving many relationships and elements of data. They involve comparisons of
You are the in-charge on the audit of Vandervoort Company and are to review the audit schedule shown above.Requireda. List the deficiencies in the audit schedule.b. For each deficiency, state how the audit schedule could be improved.c. Prepare an improved audit schedule, using an electronic
Grande Stores is a large discount catalog department store chain. The company has recently expanded from 6 to 43 stores by borrowing from several large financial institutions and from a public offering of common stock. A recent investigation has disclosed that Grande materially overstated net
The long-term debt schedule on page 207 (indexed K-1) was prepared by client personnel and audited by AA, an audit assistant, during the calendar year 2011 audit of American Widgets, Inc., a continuing audit client. The engagement supervisor is reviewing the audit documentation
This problem requires the use of ACL software, which is included in the CD attached to the text. Information about installing and using ACL and solving this problem can be found in Appendix, pages 838-842. You should read all of the reference material preceding instructions about "Quick Sort"
The use of audit software has increased dramatically in recent years. Software is now used to fulfill administrative functions in the audit environment, document audit work, and conduct data analysis. This problem requires students to visit the ACL web site (www.acl.com) to learn how auditors use
What are the benefits derived from planning audits?
Identify the eight major steps in planning audits.
What are the responsibilities of the successor and predecessor auditors when a company is changing auditors?
What factors should an auditor consider prior to accepting an engagement? Explain.
What is the purpose of an engagement letter? What subjects should be covered in such a letter?
Explain why auditors need an understanding of the client's industry.What information sources are commonly used by auditors to learn about the client's industry?
When a CPA has accepted an engagement from a new client who is a manufacturer, it is customary for the CPA to tour the client's plant facilities. Discuss the ways in which the CPA's observations made during the course of the plant tour will be of help in planning and conducting the audit.
An auditor often tries to acquire background knowledge of the client's industry as an aid to audit work. How does the acquisition of this knowledge aid the auditor in distinguishing between obsolete and current inventory?
Define what is meant by a related party. What are the auditor's responsibilities for related parties and related party transactions?
Which types of loans to executives are permitted by the Sarbanes- Oxley Act?
In recent years the stock market experienced significant declines, unprecedented since the Great Depression. Why might it be important for you to consider current economic events as part of planning an audit?
For the audit of Radline Manufacturing Company, the audit partner asks you to carefully read the new mortgage contract with the First National Bank and abstract all pertinent information. List the information in a mortgage that is likely to be relevant to the auditor.
Identify two types of information in the client's minutes of the board of directors meetings that are likely to be relevant to the auditor. Explain why it is important to read the minutes early in the engagement.
Identify the three categories of client objectives. Indicate how each objective may affect the auditor's assessment of inherent risk and need for evidence accumulation.
What is the purpose of the client's performance measurement system? How might that system be useful to the auditor? Give examples of key performance indicators for the following businesses: (1) A chain of retail clothing stores; (2) An Internet portal; (3) A hotel chain.
Define client business risk and describe several sources of client business risk. What is the auditor's primary concern when evaluating client business risk?
Describe top management controls and their relation to client business risk. Give examples of effective management and governance controls.
What are the purposes of preliminary analytical procedures? What types of comparisons are useful when performing preliminary analytical procedures?
When are analytical procedures required on an audit? What is the primary purpose of analytical procedures during the completion phase of the audit?
Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a tool in conducting audits. For several engagements, he computed the industry ratios included in publications by Standard and Poor's and compared them with industry standards. For most engagements, the client's business was
At the completion of every audit, Roger Morris, CPA, calculates a large number of ratios and trends for comparison with industry averages and prior-year calculations. He believes the calculations are worth the relatively small cost of doing them because they provide him with an excellent overview
Name the four categories of financial ratios and give an example of a ratio in each category. What is the primary information provided by each financial ratio category?
Multiple Choice QuestionsThe following questions concern the planning of the engagement. Select the best response.a. Which of the following is an effective audit planning procedure that helps prevent misunderstandings and inefficient use of audit personnel? (1) Arrange to make copies, for inclusion
Multiple Choice QuestionsThe following questions pertain to client acceptance. Choose the best response.a. In assessing whether to accept a client for an audit engagement, a CPA should considerb. When approached to perform an audit for the first time, the CPA should make inquiries of the
Multiple Choice QuestionsThe following questions concern the use of analytical procedures during an audit. Select the best response.a. Analytical procedures used in planning an audit should focus on identifying(1) Material weaknesses in internal control.(2) The predictability of financial data from
The following are various activities an auditor does during audit planning.1. Send an engagement letter to the client.2. Tour the client's plant and offices.3. Compare key ratios for the company to industry competitors.4. Review management's risk management controls and procedures.5. Review
In your audit of Canyon Outdoor Provision Company's financial statements, the following transactions came to your attention:1. Canyon Outdoor's operating lease for its main store is with York Properties, which is a real estate investment firm owned by Travis Smedes. Mr. Smedes is a member of Canyon
The minutes of the board of directors of theMeeting of March 5, 2011The meeting of the board of directors of Tetonic Metals was called to order by the James Cook, chairman of the board, at 8:30 am. The following directors were in attendance:Irene ArnoldRobert BeardsleyMary Beth CapeJames CookLarry
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