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business
auditing

Questions and Answers of Auditing

The best means of verification of cash, inventory, office equipment, and nearly all other assets is a physical count of the units; only a physical count gives the auditors complete assurance as to
What are the major purposes of obtaining representation letters from audit clients?
In deciding upon the type of evidence to be gathered in support of a given item on the financial statements, the auditors should not be influenced by the differences in cost of obtaining alternative
When auditing a client’s asset that is valued at fair value, would the auditors expect that asset to be valued at the price to purchase the asset as of the measurement date, or the price that would
What disclosures should be made in the financial statements regarding material related party transactions?
Why are the final figures from the prior year’s audit included in a working trial balance or lead schedule?
I have finished my testing of footings of the cash journals,” said the assistant auditor to the senior auditor. “Shall I state in the working papers the periods for which I verified footings, or
What is the purpose of a “second partner review”? What should be the extent of the second partner’s association with the engagement being reviewed?
In their review of audit working papers, what do managers and partners look for?
At 12 o’clock, when the plant whistle sounded, George Green, an assistant auditor, had his desk completely covered with various types of working papers. Green stopped work immediately, but not
Reply to the following questions relating to analytical procedures.a. Performing analytical procedures may help an auditor to:(1) Achieve audit objectives related to a particular assertion.(2)
What information should a CPA firm seek in its investigation of a prospective client?
State the purpose and nature of an engagement letter.
Discuss what is meant by the phrase “shopping for accounting principles.” What mechanisms have served to prevent this practice by management?
Describe the two types of misstatements due to fraud. Which one generally is of more concern to the auditors?
Many CPA firms are taking a business risk approach to audits. Define what is meant by business risk. Provide an example of a business risk that could result in a risk of material misstatement of the
Suggest some factors that might cause an audit engagement to exceed the original time estimate. Would the extra time be charged to the client?
What problems are created for a CPA firm when audit staff members underreport the amount of time spent in performing specific audit procedures?
Why is audit work usually organized around balance sheet accounts rather than income statement accounts?
Identify the general objectives of the auditors’ substantive procedures with respect to any major asset category.
What is meant by making a proper year-end cutoff? Explain the effects of errors in the cutoff of sales transactions in both the income statement and the balance sheet.
Charles Halstead, CPA, has a number of clients who desire audits at the end of the calendar year. In an effort to spread his workload more uniformly throughout the year, he is preparing a list of
Define and differentiate between a test of controls and a substantive procedure.
The audit plan, the audit program, and the time budget are three important working papers prepared early in an audit. What functions do these working papers serve in the auditors’ compliance with
Auditing standards require the auditors to have a team meeting regarding the risk of fraud for the engagement. What is the purpose of this meeting?
How can a CPA make use of the preceding year’s audit working papers in a recurring audit?
When planning an audit, the auditors should assess the levels of risk and materiality for the engagement. Explain how the auditors’ judgments about these two factors affect the auditors’ planned
Morgan, CPA, is approached by a prospective audit client who wants to engage Morgan to perform an audit for the current year. In prior years, this prospective client was audited by another CPA.
Mary Deming has been asked to accept an engagement to audit a small financial institution. Deming has not previously audited a financial institution.a. Describe the types of knowledge about the
Assume that you have been assigned to the audit of Lockyer Manufacturing Company. You have completed the procedures for gathering information about the company and its environment, including internal
A CPA has been asked to audit the financial statements of a nonpublic company for the first time. All preliminary discussions have been completed between the CPA, the company, the predecessor
Auditors should plan and perform their audits to provide reasonable assurance of detecting material misstatements in financial statements, including those resulting from fraud.a. Distinguish between
In planning every audit, the auditors are required to consider materiality for audit purposes. Described below are financial statement data from two separate companies:a. Develop an estimate of the
The auditors sometimes decide to allocate the amount of planning materiality to various financial statement accounts.a. Explain why auditors typically decide to allocate planning materiality to
John Wells, CPA, is planning the audit of CVG Services, Inc. As a result of his risk assessment procedures, Wells has identified several fraud risks.a. Explain in detail how Wells might respond to
Listed below are several of the auditors’ general objectives in performing substantive procedures on an asset account:1. Establish the existence of assets.2. Establish that the company has rights
In designing further audit procedures, the auditors should assess the risks of material misstatement of the financial statements.a. Describe the auditors’ general approach to such risk
6–34. Richard Foster, an assistant auditor, was assigned to the year-end audit work of Sipher Corporation. Sipher is a small manufacturer of language translation equipment. As his first assignment,
SEC filings of certain public companies can be accessed from EDGAR (Electronic Data Gathering, Analysis, and Retrieval system), which has the following Internet address:www.sec.gov/edgar.shtmla. Use
In every audit engagement, the auditors should identify fraud risks that may require an audit response. Described below are four circumstances or factors that may create an increased risk of material
The text of the Securities Exchange Act of 1934 may be accessed on the Internet, using the following address: www.law.uc.edu/CCL/34Act/index.html Required:a. Use the Internet to access the text of
Multiple Choice QuestionsSelect the best answer for each of the following. Explain the reasons for your selection.a. In planning and performing an audit, auditors are concerned about risk factors for
Michael Green, CPA, is considering audit risk at the financial statement level in planning the audit of National Federal Bank (NFB) Company€™s financial statements for the year ended
You are working with William Bond, CPA, and you are considering the risk of material misstatement in planning the audit of Toxic Waste Disposal (TWD) Company€™s financial statements for the
You have been hired to perform the audit of Hanmei, Inc.’s financial statements. When planning such an audit, you often may need to access the profession’s auditing standards to perform research.
Assume the following general flow of documents in an accounting system. Reply to the following questions:a. The auditors are concerned about source documents that reflect valid transactions that have
For each definition (or portion of a definition) in the first column, select the term that most closely applies. Each term may be used only once or not at all.Definition (or Portion)a. A detailed
You are invited by John Bray, the president of Cheviot Corporation, to discuss with him the possibility of your conducting an audit of the company. The corporation is a small, closely held
Precision Industries, Inc., is a manufacturer of electronic components. When a purchase order is received from a customer, a sales clerk prepares a serially numbered sales order and sends copies to
Tammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently appointed to the board of directors of a local civic organization. The chairman of the board of the civic
In a public company, what requirements must members of the board of directors satisfy in order to serve on the audit committee?
Criticize the following statement: “Throughout this audit, for all purposes, we will define a ‘material amount’ as $500,000.”
Should a separate audit program be prepared for each audit engagement, or can a standard program be used for most engagements?
An audit program is desirable when new staff members are assigned to an engagement, but an experienced auditor should be able to conduct an audit without reference to an audit program.” Do you
Describe the risk of material misstatement of an assertion. List the two components that make up this risk.
What are the purposes of the audit procedures of (a) Tracing a sample of journal entries forward to the ledgers (b) Vouching a sample of ledger entries back to the journals?
The audit plan for the audit of Keystone Computers & Networks, Inc., appears on pages 235€“242. Review each major section of the audit plan and briefly describe the purpose and content of
In the audit plan for the audit of Keystone Computers & Networks, Inc., on page 241 there is a section on significant risks. For each of the risks, identify the implications and potential responses.
In the audit plan for the audit of Keystone Computers & Networks, Inc., on page 241 there is a section on significant accounting and auditing matters. The second matter described involves
A partially completed analytical ratios working paper for Keystone Computers & Networks, Inc., is presented on page 239.a. Complete the working paper by computing the financial ratios for
What is internal control? Discuss.
Identify the four types of control activities and describe how each type contributes to effective internal control.
One basic concept of internal control is that no one employee should handle all aspects of a transaction. Assuming that a general category of transactions has been authorized by top management, how
Compare the objectives of the internal auditors with those of the independent auditors.
Describe the relationship between corporate governance and internal control.
A prospective client informs you that all officers and employees of the company are bonded, and he requests that under these circumstances you forgo a consideration of internal control in order to
What is a management letter? What is the letter’s significance?
List and describe the eight components of the COSO Enterprise Risk Management Framework.
Distinguish between the two subsections of Section 404 of the Sarbanes-Oxley Act of 2002.
List the five stages of the auditors’ overall approach in an audit of internal control performed in accordance with PCAOB requirements.
Management is responsible for designing and maintaining its organization’s internal control.In designing internal control, management must consider controls related to each of the five major
The definition of internal control as contained in COSO’s Internal Control–Integrated Frame-work and the professional standards is quite broad and comprehensive.a. Define internal control and its
Auditors may restrict substantive procedures based on the results of tests of controls.a. Discuss and contrast the concepts of the planned assessment of control risk and the revised assessment of the
The auditors’ consideration of internal control begins with obtaining an understanding of the client’s internal control.a. Describe the remaining stages of the auditors’ consideration.b.
Henry Bailey, CPA, is planning the audit of The Neighborhood Store, a local grocery cooperative. Because The Neighborhood Store is a small business operated entirely by part-time volunteer personnel,
Adherence to generally accepted auditing standards requires, among other things, a proper understanding of the existing internal control. The most common approaches to documenting the understanding
Management is responsible for establishing effective internal control for its organization, including measures to prevent, deter, and detect fraud. Appendix 7A on pages 294–296 describes antifraud
Assume that you are auditing the financial statements of Wexler, Inc. As you are reviewing the work on internal control, you become concerned about the adequacy of documentation. Describe the
During your first audit of a medium-size manufacturing company, the owner, John Bell, explains that in order to establish clear-cut lines of responsibility for various aspects of the business, he has
Internal auditing is a staff function found in virtually every large corporation. The internal audit function is also performed in many smaller companies as a part-time activity of individuals who
Randall, Inc., is a private company that manufactures heavy machinery. The company has an active audit committee and board of directors. The audit committee consists of two outside directors and
Multiple Choice QuestionsSelect the best answer for each of the following questions. Explain the reason for your selection.a. Which of the following would be least likely to be considered an
You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive (P), detective (D), or corrective (C). Explain your
Listed below are controls that have been developed by the management of Cirus Manufacturing Co.1. Management surveys customers about their satisfaction with the company’s service.2. The human
Auditors should have an understanding of the various terms that relate to their consideration of internal control of an organization.For each term presented below, select the category that most
For each term in the first column, find the closest definition (or portion of a definition) in the second column. Each definition may be used only once or not at all.Terma. Compensating controlb.
Answer the following questions relating to tests of controls and control risk.a. Tests of controls do not address:(1) How controls were applied.(2) How controls were originated.(3) The consistency
Orange Corp., a high-technology company, utilizes the following procedures for recording materials and transferring them to work in process.(1) Upon receipt of raw materials by stores, the
Island Trading Co., a client of your CPA firm, has requested your advice on the following problem. It has three clerical employees who must perform the following functions:(1) Maintain general
Prospect Corporation, your new audit client, processes its sales and cash receipts in the following manner:(1) Sales. Salesclerks prepare sales invoices in triplicate. The original and second copy
You have been asked by the board of trustees of a local church to review its accounting procedures. As part of this review you have prepared the following comments relating to the collections made at
Assume that you have been hired by Willington, CPA, as a new staff assistant. He informs you that his approach to audits has always been to assess control risk at the maximum and perform all the
How does separation of the record keeping function from custody of assets contribute to internal control?
Describe what is meant by the risk assessment component of internal control and how it contributes to internal control.
Describe the two types of monitoring and provide an example of each.
What consideration, if any, may independent auditors give to the work of a client’s internal audit staff?
What are the purposes of the consideration of internal control required by generally accepted auditing standards?
Suggest a number of sources from which you might obtain the information needed to prepare a description of internal control in the audit working papers.
“All experienced auditors would design exactly the same audit program for a particular audit engagement.” Do you agree? Explain.
You have discussed with the president of Vista Corporation several material weaknesses in internal control that have come to your attention during your audit. At the conclusion of this discussion,

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