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business
auditing

Questions and Answers of Auditing

Describe the audit implications of the Check Clearing for the 21st Century Act.
During your audit of a small manufacturing firm, you find numerous checks for large amounts drawn payable to the treasurer and charged to the Miscellaneous Expense account. Does this require any
Prepare an example of lapping of cash receipts, showing actual transactions and the cash receipts journal entries.
During your reconciliation of bank accounts in an audit, you find that a number of checks for small amounts have been outstanding for more than a year. Does this situation call for any action by the
What action should be taken by the auditors when the count of cash on hand discloses a shortage?
Explain the objectives of each of the following audit procedures for cash:a. Obtain a cutoff bank statement subsequent to the balance sheet date.b. Compare paid checks returned with the bank
Explain two procedures by which auditors may verify the client’s cutoff of cash receipts.
What is the meaning of the term window dressing when used in connection with year-end financial statements? How might the term be related to the making of loans by a corporation to one or more of its
An audit client that has never before invested in securities recently acquired more than a million dollars in cash from the sale of real estate no longer used in operations. The president intends to
Salvador Corporation made an investment in Letter.com, Inc., in exchange for 100,000 options to purchase Letter.com’s stock at $20 per share. Since the stock options are not marketable,
In what ways can the audit of financial investments present special risks requiring specialized skill and knowledge?
If a security or derivative is not marketable, how do the auditors typically obtain evidence about the fair value of the instrument?
Fluid Controls, Inc., a manufacturing company, has retained you to perform an audit for the year ended December 31. Prior to the year-end, you begin to obtain an understanding of the new client’s
Henry Mills is responsible for preparing checks, recording cash disbursements, and preparing bank reconciliations for Signet Corporation. While reconciling the October bank statement, Mills noticed
During the first few months of the year, John Smith, the cashier in a small company, was engaged in lapping operations. However, he was able to restore the amount of cash “borrowed” by March 31,
An assistant auditor received the following instructions from her supervisor: “Here is a cutoff bank statement covering the first seven business days of January. Compare the paid checks returned
“When auditors are verifying a client’s bank reconciliation, they are particularly concerned with the possibility that the list of outstanding checks may include a nonexistent or fictitious
In the audit of a client with a fiscal year ending December 31, the CPAs obtain a January 10 bank statement directly from the bank. Explain how this cutoff bank statement will be used:a. In the
In the audit of Wheat, Inc., for the year ended December 31, you discover that the client had been drawing checks as creditors’ invoices became due but had not been mailing the checks immediately.
Explain how each of the following items would appear in a four-column proof of cash for the month of November. Assume the format of the proof of cash begins with bank balances and ends with the
During the current year, the management of Hanover, Inc., entered into a futures contract to hedge the price of silver that will be needed for next year’s production. The contract, which is held by
During your audit of Miles Company, you prepared the following bank transfer schedule:a. Describe the purpose of a bank transfer schedule.b. Identify those transfers that should be investigated and
You are the auditor in charge of the audit of Steffens Corporation. In the audit of investments, you have just been given the following list of securities held by Steffens Corporation at December 31,
Multiple Choice QuestionsSelect the best answer for each of the following situations and give reasons for your choice.a. Which of the following controls would most likely reduce the risk of diversion
You are working on your firm’s fifth audit of SSC. The previous audits have all resulted in standard unqualified audit reports. Read the following write-up from your audit files concerning SSC and
Items a through l represent possible errors and fraud that you suspect may be present at Rex Company. The accompanying List of Auditing Procedures represents procedures that the auditor would
Items 1 through 6 represent the items that an auditor ordinarily would find on a client-prepared bank reconciliation. The accompanying List of Auditing Procedures represents substantive auditing
For each substantive procedure below, identify its primary objective or indicate that the procedure serves no purpose.Substantive Procedures:a. Prepare a bank transfer schedule.b. Prepare a
During your audit of Carla Pang Inc. you prepared the following bank transfer schedule.Fill out the table below indicating the most likely situation as it relates to cash at year-end.Indicate the
The auditor of Cubs obtained the following client-prepared bank reconciliation:The auditor for Cubs Co. has obtained the client-prepared bank reconciliation.The following information is available:•
Following are typical questions that might appear on an internal control questionnaire for investments in marketable securities.1. Is custody of investment securities maintained by an employee who
You are the senior auditor-in-charge of the July 31, 20X0, audit of Reliable Auto Parts, Inc. Your newly hired staff assistant reports to you that she is unable to complete the four-column proof of
During the audit of Sunset Building Supply, you are given the following year-end bank reconciliation prepared by the client:SUNSET BUILDING SUPPLYBank ReconciliationDecember 31Balance per 12/31 bank
In your audit of Ginko Company, you have received a cash confirmation and a cutoff statement from the bank on Ginko’s one bank account. Prepare an audit program of substantive procedures for
Listed below are eight interbank cash transfers for Steven Smith Co., indicated by the letters a through h, for late December 20X1 and early January 20X2.For each of the transfers a through h, (1)
An improper cutoff of transactions around year-end occurs when journal entries are recorded in the wrong year. In this case, you are to determine the effects of various cutoff misstatements relating
On October 21, Rand & Brink, a CPA firm, was retained by Suncraft Appliance Corporation to perform an audit for the year ended December 31. A month later, James Minor, president of the
Today you had lunch with your friend Sarah Teasdale. Sarah has worked with Zaird & Associates, CPAs, for about two years. You’ve been with Zaird for only nine months. You discussed with her
Describe circumstances that might cause the auditors to identify understatement of assets as a significant audit risk.
It is sometimes said that audit work on cash is facilitated by the existence of two independent records of the client’s cash transactions, which are available for comparison by the auditors.
Explain how a lockbox system contributes to internal control over cash receipts.
The auditors’ work on cash may include preparing a description of controls and performing tests of controls. Which of these two steps should be performed first? What is the purpose of tests of
A well-financed audit client of your CPA firm invests large amounts in marketable securities. As part of its internal control, the company uses a monthly report of securities transactions. The report
What information should be noted by the auditors during their inspection of securities on hand?
A summary of the controls for the revenue and cash receipts cycle of Keystone Computers & Networks, Inc., appears on pages 479–492.a. For the following three controls over sales, indicate one
As indicated on the control risk assessment working paper on page 490, the auditors identified two weaknesses in internal control over the revenue cycle of KCN. Describe the implications of each of
As indicated on the working paper on page 490, the auditors decided to apply audit sampling to three controls for the revenue and cash receipts cycle.a. Describe the characteristic that a control
In Part III (Appendix 11B) of the audit case, the audit staff of Adams, Barnes & Co. identified specific revenue risks on working paper RA-12 (page 494). However, the “Summary of Audit
Assume that you have been assigned to the audit of Keystone after audit planning has occurred. Review the planning information on pages 235–242 and the audit program for the accounts receivable
Keystone Computers & Networks, Inc. (KCN), has 933 accounts receivable, with a total book value of $10,235,457. From that population, Adams, Barnes & Co. (ABC), CPAs, selected a sample of 260
Explain why the audit of revenue and receivables may present the auditors with significant audit risk.
The controller of a new client operating a medium-size manufacturing business complains to you that he believes the company has sustained significant losses on several occasions because certain sales
The accounts receivable section of the accounting department in Wind Power, Inc., maintains subsidiary ledgers that are posted from copies of the sales invoices transmitted daily from the billing
Among specific procedures that contribute to good internal control over the business processes related to accounts receivable are (a) the approval of uncollectible account write-offs and credit
Your review of notes receivable from officers, directors, stockholders, and affiliated companies discloses that several notes of small amounts were written off to the allowance for uncollectible
State briefly the audit objectives that are addressed by the following audit procedure: “Confirm accounts receivable and notes receivable by direct communication with debtors.”
Several accounts receivable confirmations have been returned with the notation, “Verification of vendors’ statements are no longer possible because of our data processing system.” What
What alternative auditing procedures may be undertaken in connection with the confirmation of accounts receivable where customers having substantial balances fail to reply after second request forms
A CPA firm wishes to test the client’s sales cutoff at June 30, 20X0. Describe the steps that the auditors should include in this test.
In your first audit of Hydro Manufacturing Company, a manufacturer of outboard motors, you discover that an unusually large number of sales transactions were recorded just before the end of the
In connection with an audit, what are the purposes of a review of sales returns and allowances subsequent to the balance sheet date?
Cite various procedures auditors employ that might lead to the detection of an inadequate allowance for doubtful accounts receivable.
You have been assigned to the audit of Processing Solutions, Inc., a privately held corporation that develops and sells computer systems. The systems are sold under one- to five-year contracts that
Listed below are audit situations that may affect the audit of receivables and revenue.a. The audit of a machinery manufacturing company that engages in bill and hold transactions.b. The audit of a
In their work on accounts receivable and elsewhere in an audit, the independent auditors often make use of confirmation requests.a. What is an audit confirmation request?b. What characteristics
During the audit of Solar Technologies, Inc., the auditors sent confirmation requests to customers whose accounts had been written off as uncollectible during the year under audit. An executive of
Walter Conn, CPA, is engaged to audit the financial statements of Bingo Wholesaling for the year ended December 31, 20X0. Conn obtained and documented an understanding of the client and its
An assistant auditor was instructed to “test the aging of accounts receivable as shown on the trial balance prepared by the client.” In making this test, the assistant traced all past-due
Hale Nelson, CPA, is engaged to audit the financial statements of Hollis Manufacturing, Inc. Hollis engages in very complex sales agreements that create issues with respect to revenue recognition.
Multiple Choice QuestionsSelect the best answer for each of the following and explain fully the reason for your selection.a. Which of the following is least likely to be considered an inherent risk
For each of the procedures described in the table below, identify the audit procedure performed and classification of the audit procedure using the following:Audit Procedures:(1) Analytical
You are involved with the audit of Jelco Company for year 1 and have been asked to consider the confirmation reply results indicated below. For each confirmation reply as to the proper action to be
An assistant on the Carter Company audit has been working in the revenue cycle and has compiled a list of possible errors and fraud that may result in the misstatement of Carter Company’s financial
The auditors have determined that each of the following objectives will be part of the audit of SSC Corporation. For each audit objective, select a substantive procedure (see the list below) that
Halston Toy Manufacturing Co. introduced a number of new products in the last quarter of the year. The company has a liberal return policy allowing retail customers to return products within 120 days
The following are typical questions that might appear on an internal control questionnaire for accounts receivable:1. Are sales invoices checked for proper pricing, terms, and clerical accuracy?2.
During your examination of the financial statements of Martin Mfg. Co., a new client, for the year ended March 31, 20X0, you note the following entry in the general journal dated March 31, 20X0:Your
You are conducting an annual audit of Granite Corporation, which has total assets of approximately $1 million and operates a wholesale merchandising business. The corporation is in good financial
The July 31, 20X0, general ledger trial balance of Aerospace Contractors, Inc., reflects the following accounts associated with receivables. Balances of the accounts are after all adjusting journal
Ming, CPA, is engaged to audit the financial statements of Wellington Sales, Inc., for the year ended December 31, 20X0. Ming obtained and documented an understanding of the client’s business and
You are an assistant auditor with Zaird & Associates, CPAs. Universal Air (UA), your fifth audit client in your eight months with Zaird, is a national airline based in your hometown. UA has continued
You have worked with Zaird & Associates, CPAs, for a little more than a year and are beginning your second audit of Universal Air (UA). This year you even have an assistant reporting to you—Jane
Explain the difference between a customer’s order and a sales order, as these terms might be used by a manufacturing company making sales on credit.
State briefly the objective of the billing process. What important document is created by the billing department?
Criticize the following quotation: “A credit memorandum should be issued only when an account receivable is determined to be uncollectible.”
In the audit of an automobile agency, you find that installment notes received from the purchasers of automobiles are promptly discounted with a bank. Would you consider it necessary to confirm these
The confirmation of accounts receivable is an important auditing procedure. Should the formal request for confirmation be made by the client or by the auditors? Should the return envelope be
In selecting accounts receivable for confirmation, the auditors discover that the client company’s records show the addresses of many individual customers to be post office boxes. What should be
In the examination of credit memoranda covering allowances to customers for goods returned, how can the auditors ascertain whether the customer actually did return merchandise in each case in which
Give an example of a type of receivable originating without arm’s-length bargaining. Comment on the presentation of such receivables in the balance sheet.
Describe a retrospective review of an accounting estimate. With respect to the audit of revenue, what is the purpose of performing this review?
During preliminary conversations with a new staff assistant, you instruct her to send out confirmation requests for both accounts receivable and notes receivable. She asks whether the confirmation
Lakeside Company has retained you to conduct an audit so that it will be able to support its application for a bank loan with audited financial statements. The president of Lakeside states that you
You have been assigned to the audit of Utopia Industries, Inc., for the year ended December 31, 20X1. The company makes components for communications and defense applications. To obtain an
An auditor’s working papers include the following narrative description of the cash receipts and billing portions of Southwest Medical Center’s internal control. Evaluate each condition following
An auditor may use confirmations of accounts receivable. Reply as to whether the following statements are correct or incorrect with respect to the confirmation process when applied to accounts
Many auditors consider the substantiation of the figure for inventory to be a more difficult and challenging task than the verification of most other items on the balance sheet. List several specific
What segregation of duties would you recommend to attain maximum internal control over purchasing activities in a manufacturing concern?
Do you believe that the normal review of purchase transactions by the auditors should include examination of receiving reports? Explain.
The client’s cost accounting system is often an important part of the CPAs’ audit of the financial statements of a manufacturing company. For what purposes do the auditors consider the cost

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