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Auditing and Assurance services an integrated approach 14th Edition Alvin a. arens, Randal j. elder, Mark s. Beasley - Solutions

Analytical procedures are an important part of the audit process and consist of the evaluation of financial information by the study of plausible relationships among financial and nonfinancial data. Analytical procedures may be done during planning, as a substantive test, or as a part of the
You are auditing payroll for the Morehead Technologies Company for the year ended October 31, 2011. Included next are amounts from the client's trial balance, along with comparative audited information for the prior year.You have obtained the following information to help you perform preliminary
Your comparison of the gross margin percent for Jones Drugs for the years 2008 through 2011 indicates a significant decline. This is shown by the following information:A discussion with Marilyn Adams, the controller, brings to light two possible explanations. She informs you that the industry gross
In the audit of the Worldwide Wholesale Company, you did extensive ratio and trend analysis. No material exceptions were discovered except for the following:1. Commission expense as a percent of sales has stayed constant for several years but has increased significantly in the current year.
As part of the analytical procedures of Mahogany Products, Inc., you perform calculations of the following ratios:For each of the preceding ratios:Requireda. State whether there is a need to investigate the results further and, if so, the reason for further investigation.b. State the approach you
Following are the auditor's calculations of several key ratios for Cragston Star Products. The primary purpose of this information is to understand the client's business and assess the risk of financial failure, but any other relevant conclusions are also desirable.a. What major conclusions can be
The Internet has dramatically increased global e-commerce activities. Both traditional "brick and mortar" businesses and new dot-com businesses use the Internet to meet business objectives. For example, eBay successfully offers online auctions as well as goods for sale in a fixed price
Winston Black was an audit partner in the firm of Henson, Davis & Company. He was in the process of reviewing the audit files for the audit of a new client, McMullan Resources. McMullan was in the business of heavy construction. Black was conducting his first review after the audit was
Solomon is a highly successful, closely held Boston, Massachusetts, company that manufactures and assembles automobile specialty parts that are sold in auto parts stores in the East. Sales and profits have expanded rapidly in the past few years, and the prospects for future years are every bit as
The purpose of Part I is to perform preliminary analytical procedures as part of the audit planning process. You have been asked to focus your attention on two purposes of analytical procedures: obtain an understanding about the client's business and indicate where there is an increased likelihood
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. You should read all of the reference material preceding instructions about "Quick Sort" before locating the
Planning is one of the most demanding and important aspects of an audit. A carefully planned audit increases auditor efficiency and provides greater assurance that the audit team addresses the critical issues. Auditors prepare audit planning documents that summarize client and industry background
Chapter 8 introduced the eight parts of the planning phase of an audit. Which part is the evaluation of materiality and risk?
Define the meaning of the term materiality as it is used in accounting and auditing. What is the relationship between materiality and the phrase obtain reasonable assurance used in the auditor's report?
Explain why materiality is important but difficult to apply in practice.
What is meant by setting a preliminary judgment about materiality? Identify the most important factors affecting the preliminary judgment.
What is meant by using bases for setting a preliminary judgment about materiality? How will those bases differ for the audit of a manufacturing company and a government unit such as a school district?
Assume that Rosanne Madden, CPA, is using 5% of net income before taxes, current assets, or current liabilities as her major guidelines for evaluating materiality.What qualitative factors should she also consider in deciding whether misstatements may be material?
Distinguish between the terms tolerable misstatement and preliminary judgment about materiality. How are they related to each other?
Assume a company with the following balance sheet accounts:You are concerned only about overstatements of owner's equity. Set tolerable misstatement for the three relevant accounts such that the preliminary judgment about materiality does not exceed $5,000. Justify youranswer.
Explain what is meant by making an estimate of the total misstatement in a segment and in the overall financial statements. Why is it important to make these estimates? What is done with them?
How will the conduct of an audit of a medium-sized company be affected by the company's being a small part of a large conglomerate as compared with it being a separate entity?
Define the audit risk model and explain each term in the model. Also describe which two factors of the model when combined reflect the risk of material misstatement.
What is meant by planned detection risk? What is the effect on the amount of evidence the auditor must accumulate when planned detection risk is increased from medium to high?
Explain the causes of an increased or decreased planned detection risk.
Define what is meant by inherent risk. Identify four factors that make for high inherent risk in audits.
Explain why inherent risk is set for segments rather than for the overall audit. What is the effect on the amount of evidence the auditor must accumulate when inherent risk is increased from medium to high for a segment?
Explain the effect of extensive misstatements found in the prior year's audit on inherent risk, planned detection risk, and planned audit evidence.
Explain what is meant by the term acceptable audit risk. What is its relevance to evidence accumulation?
Explain the relationship between acceptable audit risk and the legal liability of auditors.
State the three categories of factors that affect acceptable audit risk and list the factors that the auditor can use to indicate the degree to which each category exists.
Auditors have not been successful in measuring the components of the audit risk model. How is it possible to use the model in a meaningful way without a precise way of measuring the risk?
Explain the circumstances when the auditor should revise the components of the audit risk model and the effect of the revisions on planned detection risk and planned evidence.
Multiple Choice QuestionsThe following questions concern audit risk. Choose the best response.a. Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as (1) Audit
Multiple Choice QuestionsThe following questions deal with audit risk and evidence. Choose the best response.a. As the acceptable level of detection risk decreases, an auditor may (1) Reduce substantive testing by relying on the assessments of inherent risk and control risk.(2) Postpone the planned
You are evaluating audit results for current assets in the audit of Quicky Plumbing Co. You set the preliminary judgment about materiality for current assets at $15,000 for overstatements and at $22,500 for understatements. The preliminary and actual estimates are shown next.Requireda. Justify a
You are evaluating audit results for assets in the audit of Roberts Manufacturing. You set the preliminary judgment about materiality at $50,000.The account balances, tolerable misstatement, and estimated overstatements in the accounts are shown next.a. Assume you tested inventory amounts totaling
On pages 279-280 are statements of earnings and financial position for Wexler Industries.Requireda. Use professional judgment in deciding on the preliminary judgment about materiality for earnings, current assets, current liabilities, and total assets. Your conclusions should be stated in terms of
The following are concepts discussed in this chapter:1. Preliminary judgment about materiality2. Control risk3. Risk of fraud4. Estimated total misstatement in a segment5. Planned detection risk6. Estimate of the combined misstatement7. Acceptable audit risk8. Tolerable misstatement9. Inherent
Describe what is meant by acceptable audit risk. Explain why each of the following statements is true:Requireda. A CPA firm should attempt to achieve the same audit risk for all audit clients when circumstances are similar.b. A CPA firm should decrease acceptable audit risk for audit clients when
Bohrer, CPA is considering the following factors in assessing audit risk at the financial statement level in planning the audit of Waste Remediation Services (WRS), Inc.'s financial statements for the year ended December 31, 2011. WRS is a privately-held company that contracts with municipal
Following are six situations that involve the audit risk model as it is used for planning audit evidence requirements. Numbers are used only to help you understand the relationships among factors in the risk model.Requireda. Explain what each of the four risks means.b. Calculate planned detection
Following are six situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit of inventory.Requireda. Explain what low, medium, and high mean for each of the four risks and planned evidence.b. Fill in the blanks for planned detection risk and
Below are ten independent risk factors:1. The client lacks sufficient working capital to continue operations.2. The client fails to detect employee theft of inventory from the warehouse because there are no restrictions on warehouse access and the client does not reconcile inventory on hand to
Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. In each of the events a to j, circle one letter for each of the three independent variables and planned evidence: I = increase, D =
Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2011. Henderson Energy is regulated by the state utility commission and because it is a publicly traded company the audited financial statements must be filed with the
Pamela Albright is the manager of the audit of Stanton Enterprises, a public company that manufactures formed steel subassemblies for other manufacturers. Albright is planning the 2011 audit and is considering an appropriate amount for planning materiality, what tolerable misstatement should be
In Part I of the case, you performed preliminary analytical procedures for Pinnacle. The purpose of Part II is to identify factors influencing risks and the relationship of risks to audit evidence.During the planning phase of the audit, you met with Pinnacle's management team and performed other
Establishing materiality and allocation of materiality to individual accounts requires considerable judgment. Access Microsoft’s 2009 financial statements at www.microsoft.com (use the “investor relations” link).Requireda. Assume that your firm’s materiality guidelines indicate that
Describe the three broad objectives management has when designing effective internal control.
Describe which of the three categories of broad objectives for internal controls are considered by the auditor in an audit of both the financial statements and internal control over financial reporting.
Section 404(a) of the Sarbanes-Oxley Act requires management to issue a report on internal control over financial reporting. Identify the specific Section 404(a) reporting requirements for management.
What two aspects of internal control must management assess when reporting on internal control to comply with Section 404 of the Sarbanes-Oxley Act?
Chapter 8 introduced the eight parts of the planning phase of audits. Which part is understanding internal control and assessing control risk? What parts precede and follow that understanding and assessing control risk?
What is the auditor's responsibility for obtaining an understanding of internal control? How does that responsibility differ for audits of public and nonpublic companies?
When performing an integrated audit of a public company, what are the auditors responsibilities related to internal control as required by PCAOB standards?
State the six transaction-related audit objectives.
Management must identify the framework used to evaluate the effectiveness of internal control over financial reporting. What framework is used by most U.S. public companies?
What are the five components of internal control in the COSO internal control framework?
What is meant by the control environment? What are the factors the auditor must evaluate to understand it?
What is the relationship among the five components of internal control?
List the types of specific control activities and provide one specific illustration of a control in the sales area for each control activity.
The separation of operational responsibility from record keeping is meant to prevent different types of misstatements than the separation of the custody of assets from accounting. Explain the difference in the purposes of these two types of separation of duties.
For each of the following, give an example of a physical control the client can use to protect the asset or record:1. Petty cash 2. Cash received by retail clerks 3. Accounts receivable records 4. Raw material inventory5. Perishable tools6. Manufacturing equipment7. Marketable securities
Explain what is meant by independent checks on performance and give five specific examples.
Describe the four phases performed by the auditor when obtaining an understanding of internal control and assessing control risk.
What two aspects of internal control must the auditor assess when performing procedures to obtain an understanding of internal control?
What is a walkthrough of internal control? What is its purpose?
Describe how the nature of evidence used to evaluate the control environment differs from the nature of evidence used to evaluate control activities.
Distinguish a significant deficiency in internal control from a material weakness in internal control. How will the presence of one significant deficiency affect an auditor's report on internal control under PCAOB standards? How will the presence of one material weakness affect an auditor's report
Frank James, a highly competent employee of Brinkwater Sales Corporation, had been responsible for accounting-related matters for two decades.His devotion to the firm and his duties had always been exceptional, and over the years, he had been given increased responsibility. Both the president of
Jeanne Maier, CPA, believes that it is appropriate to obtain an understanding of internal control about halfway through the audit, after she is familiar with the client's operations and the way the system actually works. She has found through experience that filling out internal control
Distinguish the auditor's responsibility for testing controls in an integrated audit of a public company from the responsibility to test controls in an audit of a nonpublic company.
Describe why auditors generally evaluate entity-level controls before evaluating transaction-level controls.
During the prior-year audits of McKimmon Inc., a private company, the auditor did tests of controls for all relevant financial statement assertions. Some of the related controls are manual while others are automated. Describe the extent the auditor can rely on tests of controls performed in prior
The auditor's risk assessment procedures identified several risks that the auditor deems to be significant risks. Several internal controls exist that are designed to mitigate the risks identified. Describe the auditor's responsibilities for considering those controls in the current audit.
What two conditions must be present for the auditor to issue an unqualified opinion on internal control over financial reporting? What type of condition will cause the auditor to issue a qualified or disclaimer of opinion on internal control over financial reporting?
Describe the concept of an integrated audit of the financial statements and internal control required by PCAOB standards.
Multiple Choice QuestionsThe following are general questions about internal control. Choose the best response.a. When considering internal control, an auditor must be aware of the concept of reasonable assurance, which recognizes that the (1) Employment of competent personnel provides assurance
Multiple Choice QuestionsThe following questions deal with deficiencies in internal control. Choose the best response.a. Which of the following is an example of an operation deficiency in internal control? (1) The company does not have a code of conduct for employees to consider.(2) The cashier has
Multiple Choice QuestionsThe following questions deal with assessing control risk in a financial statement audit. Choose the best response.a. The auditor's tests of controls revealed that required approvals of cash disbursements were absent for a large number of sample transactions examined. Which
Following are descriptions of ten internal controls.1. The company's computer systems track individual transactions and automatically accumulate transactions to create a trial balance.2. The company must receive university transcripts documenting all college degrees earned before an individual can
Each of the following internal controls has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in the payroll and personnel cycle.1. Approval of department head or foreman on time cards is required before preparing payroll.2. All prenumbered time
The following are misstatements that have occurred in Fresh Foods Grocery Store, a retail and wholesale grocery company:1. The incorrect price was used on sales invoices for billing shipments to customers because the wrong price was entered into the computer master file of prices.2. A vendor
The division of the following duties is meant to provide the best possible controls for the Meridian Paint Company, a small wholesale store:†1. Approve credit for customers included in the customer credit master file.†2. Input shipping and billing information to bill customers, record invoices
Lew Pherson and Vera Collier are friends who are employed by different CPA firms. One day during lunch they are discussing the importance of internal control in determining the amount of audit evidence required for an engagement. Pherson expresses the view that internal control must be evaluated
The following are partial descriptions of internal controls for companies engaged in the manufacturing business:1. When Mr. Clark orders materials, he sends a duplicate purchase order to the receiving department. During the delivery of materials, Mr. Smith, the receiving clerk, records the receipt
Anthony, CPA, prepared the flowchart (p. 330) which portrays the raw materials purchasing function of one of Anthony's clients, Medium-Sized Manufacturing Company, from the preparation of initial documents through the vouching of invoices for payment in accounts payable. Assume that all documents
The following internal controls were tested in prior audits. Evaluate each internal control independently and determine which controls must be tested in the current year's audit of the December 31, 2011 financial statements. Be sure to explain why testing is or is not required in the current
The following are independent situations for which you will recommend an appropriate audit report on internal control over financial reporting as required by PCAOB auditing standards:1. The auditor identified a material misstatement in the financial statements that was not detected by management
The following is the description of sales and cash receipts for the Lady's Fashion Fair, a retail store dealing in expensive women's clothing. Sales are for cash or credit, using the store's own billing rather than credit cards. Each salesclerk has her own sales book with prenumbered, three-copy,
In Parts I and II of this case, you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing. Your team has been assigned the responsibility of auditing the acquisition and payment cycle and one related balance sheet account,
Section 404(a) of the Sarbanes-Oxley Act requires management of a public company to issue a report on internal control over financial reporting (ICOFR) as of the end of the company's fiscal year. Many companies have reported that their ICOFR was operating effectively, while others have reported
Define fraudulent financial reporting and give two examples that illustrate fraudulent financial reporting.
Define misappropriation of assets and give two examples of misappropriation of assets.
Distinguish fraudulent financial reporting from misappropriation of assets.
What are the three conditions of fraud often referred to as "the fraud triangle?"
Give examples of risk factors for fraudulent financial reporting for each of the three fraud conditions: incentives/pressures, opportunities, and attitudes/rationalization.
Give examples of risk factors for misappropriation of assets for each of the three fraud conditions: incentives/pressures, opportunities, and attitudes/rationalization.

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