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Auditing and Assurance Services 6th edition Timothy Louwers, Robert Ramsay, David Sinason, Jerry Straws - Solutions
Cutoff tests designed to detect valid sales that occurred before the end of the year but have been recorded in the subsequent year would provide assurance about management’s assertion of a. Presentation and Disclosure. b. Completeness. c. Rights and Obligations. d. Existence.
Which of the following audit procedures probably would provide the most reliable evidence related to the entity’s assertion of rights and obligations for the inventory account? a. Trace test counts noted during physical count to the summarization of quantities. b. Inspect agreements for evidence
In auditing the accrued liabilities account on the Balance Sheet, an auditor’s procedures most likely would focus primarily on management’s assertion of a. Existence or occurrence. b. Completeness. c. Presentation and disclosure. d. Valuation or allocation.
Which of the following best describes the focus of the followingengagements?
Which of the following is a reason to obtain professional certification? a. Certification provides credibility that an individual is technically competent. b. Certification often is a necessary condition for advancement and promotion within a professional services firm. c. Obtaining certification
Following is a list of various professional services. Identify each by its apparent characteristics as audit engagement, attestation engagement, or assurance engagement. Because audits are a subset of attestation engagements, which are a subset of assurance engagements, choose the most specific
The chairman of the board of Hughes Corporation proposed that the board hire as controller a CPA who had been the manager of the team that conducted Hughes Corporation’s audit engagement. The chairman thought that hiring this person would make the annual audit unnecessary and would consequently
Complete the following chart indicating the corresponding Auditing Standards Board assertions and whether the assertion relates to transactions, balances, ordisclosures.
Your audit manager has asked you to explain the PCAOB Assertions by using an account on the balance sheet at your audit client. For the accounts receivable account, please define each of the PCAOB assertions, using the accounts receivable account as a way to illustrate each assertion.
Big-deal Corporation manufactures paper and paper products and is trying to decide whether to purchase Smalltek Company. Smalltek has developed a process for manufacturing boxes that can replace containers that use fluorocarbons for expelling a liquid product. The price may be as high as $ 45
Your neighbor Loot Starkin invited you to lunch yesterday. Sure enough, it was no “free lunch” because Loot wanted to discuss the annual report of Dodge Corporation. He owns Dodge stock and just received the annual report. Loot says, “Our auditors prepared the audited financial statements
Audits may be characterized as(a) Financial statement audits,(b) Compliance audits,(c) Economy and efficiency audits, and(d) Program results audits.The work can be done by independent (external) auditors, internal auditors, or governmental auditors (including IRS auditors and federal bank
You are engaged to examine the financial statements of Spillane Company for the year ended December 31. Assume that on November 1, Spillane borrowed $ 500,000 from Second National Bank to finance plant expansion. The long term note agreement provided for the annual payment of principal and interest
Professional Certification. Visit the website of the Institute of Internal Auditors (www.theiia.org), the Institute of Management Accountants (www.imanet. org), The Association of Certified Fraud Examiners (www.acfe. com), or the Information Systems Audit and Control Association (www.isaca.org).
The Market for Auditing Services. Refer to the mini case “KPMG: How Many Firms?” shown on page C17 and respond to question 4.
In what ways are assurance services similar to attestation services (including audits of financial statements)?
What is operational auditing? How does the AICPA view operational auditing?
What is compliance auditing?
Why is continuing education required to maintain certification?
Why do you think experience is required to become certified?
Professional Certification. Each state has unique rules for certification concerning education, work experience, and residency. Visit the website for your state board of accountancy and download a list of the requirements for becoming a CPA in your state. Although not all of the state boards of
Identify the role of the following bodies in the auditing standards- setting process: (1) the AICPA; (2) the PCAOB; (3) the SEC.
Identify and briefly describe the three fundamental principles underlying GAAS.
Identify and briefly describe the three fundamental principles underlying GAAS. Discuss.
Distinguish between independence in fact and independence in appearance. Can auditors be independent in fact yet not be perceived to be independent in appearance?
Define professional skepticism and professional judgment. During what stages of the audit are auditors required to demonstrate these characteristics?
Define reasonable assurance. Why must auditors provide reasonable (rather than absolute) assurance?
Define external, external-internal, and internal documentary evidence.
Distinguish between relevance and reliability as these concepts relate to audit evidence. How are relevance and reliability associated with the appropriateness of audit evidence?
How does the source of evidence affect its reliability?
How are the sufficiency and appropriateness of evidence related to detection risk?
What are the four types of audit opinions? What is the conclusion of each one?
What is a system of quality control? Identify the six elements of a system of quality control.
What factors should auditors consider in deciding whether to accept or continue the engagement with a particular client? What should firms do if they decide to withdraw from an engagement?
Provide examples of procedures that firms have used to monitor their quality control policies and procedures.
Which of the following categories of principles is most closely related to gathering audit evidence? a. Performance. b. Reasonable assurance. c. Reporting. d. Responsibilities.
Which of the following is not related to ethical requirements of auditors? a. Due care. b. Independence in appearance. c. Independence in fact. d. Professional judgment.
One of an accounting firm’s basic objectives is to provide professional services that con-form to professional standards. Reasonable assurance of achieving this objective can be obtained by following a. Generally accepted auditing standards. b. Standards within a system of quality control. c.
Which of the following best demonstrates the concept of professional skepticism?a. Relying more extensively on external evidence rather than internal evidence.b. Focusing on items that have a more significant quantitative effect on the entity’s financial statements.c. Critically assessing verbal
The primary purpose for obtaining an understanding of the entity’s environment (including its internal control) in a financial statement audit isa. To determine the nature, timing, and extent of substantive procedures to be performed.b. To make consulting suggestions to the entity’s
Ordinarily, what source of evidence should least affect audit conclusions?a. External documentary evidence.b. Inquiry of management.c. Documentation prepared by the audit team.d. Inquiry of entity legal counsel.
The most reliable evidence regarding the existence of newly- acquired computer equipment isa. Inquiry of management.b. Documentation prepared externally.c. Evaluation of the client’s procedures.d. Physical observation.
Which of the following procedures would provide the most reliable audit evidence?a. Inquiries of the client’s internal audit staff.b. Inspection of prenumbered client purchase orders filed in the vouchers payable department.c. Inspection of vendor sales invoices received from client personnel.d.
Breaux & Co. CPAs require that all audit documentation indicate the identity of the preparer and the reviewer. This procedure provides evidence relating to which of the following?a. Independence.b. Adequate competence and capabilities.c. Adequate planning and supervision.d. Gathering sufficient
Which of the following concepts is least related to the standard of due care?a. Independence in fact.b. Professional skepticism.c. Prudent auditor.d. Reasonable assurance.
The evidence considered most appropriate by auditors is best described asa. Internal documents such as sales invoice copies produced under conditions of strong internal control.b. Written representations made by the president of the entity.c. Documentary evidence obtained directly from independent
Auditors’ understanding of the internal control in an entity provides information fora. Determining whether members of the audit team have the required competence and capabilities to perform the audit.b. Ascertaining the independence in mental attitude of members of the audit team.c. Planning the
Which of the following elements of a system of quality control is related to firms receiving independence confirmations from its professionals with respect to clients?a. Acceptance and continuance of client relationships and specific engagements.b. Engagement performance.c. Monitoring.d. Relevant
Which of the following is most closely related to the responsibilities principle?a. The auditors’ responsibility to issue a report as a result of their examination.b. The requirement that auditors gather sufficient, appropriate evidence upon which to base an opinion on the financial statements.c.
Kramer, CPA, consulted an independent appraiser regarding the valuation of fine art for a not- for- profit museum. Consultation with the appraiser in this case woulda. Be considered as exercising proper due care.b. Be considered a failure to follow GAAS because Kramer should have known how to value
Which of the following topics is not addressed in the auditors’ report for a public entity?a. Responsibilities of the auditor and management in the financial reporting process.b. Absolute assurance regarding the fairness of the entity’s financial statements in accordance with GAAP.c. A
Which of the following recognizes that an audit conducted under generally accepted auditing standards may not detect all material misstatements?a. Absolute assurance.b. Professional judgment.c. Reliability of audit evidence.d. Reasonable assurance.
Consider the identical balls released from rest on Tracks A and B as shown. When each ball has reached the right end of its track, which will have the greater speed? Why is this question easier to answer than the similar question asked in Exercise 25 back in Chapter 2?
Which of the following is most closely related to the relevance of audit evidence?a. Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian.b. In addition to confirmations of accounts receivable, auditors perform an
Which of the following statements is not true with respect to the performance principle? a. Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits.b. Audit teams consider materiality in planning the
Which of the following is true with respect to PCAOB inspections of accounting firms?a. All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB.b. PCAOB inspections review a sample of audits conducted by firms as well as the firm’s systems of
The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known asa. Audit procedures.b. Audit standards.c. Interpretive publications.d. Statements on Auditing Standards.
Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board?a. Develop Auditing Standards for the audits of nonpublic entities.b. Develop Auditing Standards for the audits of public entities.c.
Which of the following best describes the general contents of the introductory paragraph of the auditors’ report?a. A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB.b. The auditors’ conclusion with respect to the
Which of the following opinions would be issued if auditors believed that the entity’s financial statements were not presented in conformity with GAAP?a. Adverse opinion.b. Disclaimer of opinionc. Qualified opiniond. Unmodified opinion.
Which of the following principles is most closely associated with the auditors’ conclusion as to the fair presentation of the entity’s financial statements?a. Communication principle.b. Performance principle.c. Reporting principle.d. Responsibilities principle.
The creation of the PCAOB by the Sarbanes- Oxley Act has impacted both the standards- setting process and the periodic review of the quality of an audit firm’s work. Required: a. Identify the responsibilities of the AICPA, PCAOB, and SEC in the auditing standards-setting process. b. Which
A challenge facing auditors is the wide array of professional guidance available to them in the audits of different types of entities. Required: a. Describe Statements on Auditing Standards, Interim Auditing Standards, and Auditing Standards. In your description, identify which professional body
Independence. You are meeting with executives of Cooper Cosmetics Corporation to arrange your firm’s engagement to audit the corporation’s financial statements for the year ending December 31. One executive suggests the audit work be divided among three staff members. One person would examine
Generally accepted auditing standards require auditors to be independent. Included within this standard are the concepts of independence in fact and independence in appearance. Required: a. Define independence in fact and independence in appearance. b. What two general types of relationships would
Professional Skepticism . An important principle for auditors is the need to maintain an appropriate level of professional skepticism. Required: a. Define professional skepticism. b. During which stages of the audit are auditors required to exhibit professional skepticism? c. How does each of the
Martin is considering submitting a proposal to conduct the audit examination of Phillip Inc. a manufacturer and distributor of automotive parts to the large auto-mobile manufacturers. Martin learned of this client opportunity through one of its staff accountants, who is a cousin of Phillip’s
Your public accounting practice is located in a city of 15,000 people. The majority of your work, conducted by you and two assistants, consists of compiling clients’ monthly statements and preparing income tax returns for individuals from cash data and partnership returns from books and records.
Generally accepted auditing standards (the performance principle) require auditors to gather sufficient appropriate evidence on which to base an opinion.Required:a. Briefly define the characteristics “sufficient” and “appropriate” as they relate to audit evidence.b. What are relevance and
You have accepted the engagement of auditing the financial statements of the C. Reis Company, a small manufacturing firm that has been your client for several years. Because you were busy writing the report for another engagement, you sent a staff accountant to begin the audit with the suggestion
Identify how each of the following statements relates to the performance principle by considering which element(s) of the principle are related to that statement. (A statement may be related to more than one element.) Use the following elements in providing your response: • Reasonable assurance
Respond to each of the following comments that you heard related to the audit of Swan Company, a public entity. a. “We don’t need to consider the risk of material misstatement in our work because we really can’t do anything to reduce that risk.” b. “Because the client has not implemented
The reporting principle requires auditors to express their opinion through the issuance of a written report. Required: a. What is the purpose of the auditors’ opinion and report? b. What are the major paragraph(s) in the auditor’s report on the examination of a public entity? What are the major
Ray, the owner of a small entity, asked Holmes, CPA, to conduct an audit of the entity’s records. Ray told Holmes that the audit was to be completed in time to submit audited financial statements to a bank as part of a loan application. Holmes immediately accepted the engagement and agreed to
In each of the following, identify which of the elements of the fundamental principles is most applicable. In addition, discuss what action(s) (if any) you believe auditors should take with respect to these issues.a. An entity has contacted you about performing its audit engagement. You have not
Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: a. The need for auditors to consider their financial relationships with prospective clients. b. An auditor has raised some questions with respect to
Comment upon each of the following statements you heard in a conversation between two newly- hired staff auditors. a.“Of course, I’m qualified to be assigned to this engagement. I have an accounting degree from a top university and was an honors graduate. I know some of the accounting rules
Each of the following quality control policies and procedures is typical of ones that can be found in public accounting firms’ systems of quality control. Identify each of them with one of the six elements of quality control identified by SQCS 8.a. Assign management responsibilities in such a
Firms auditing public entities are required to have periodic inspections conducted by the PCAOB. Required: a. What are the major characteristics of PCAOB inspections? b. What types of firms typically have PCAOB inspections? How frequently are these evaluations conducted?
Internet Exercise: Public Company Accounting Oversight Board Inspection Reports. Refer to the website of the Public Company Accounting Oversight Board (PCAOB) (www.pcaobus.org ) and review the information under “ Inspections” and select the most current inspection report for one of the Big Four
Define generally accepted auditing standards (GAAS). Who is responsible for developing standards for the audits of public entities? Who is responsible for developing standards for the audits of nonpublic entities?
What is due care? To what standards are auditors held with respect to due care?
What is an audit plan? During which stage of the audit is an audit plan prepared?
What is materiality? During what stages of the audit do auditors consider materiality?
For what reasons do auditors obtain an understanding of a client’s internal control?
What is the basic relationship between the effectiveness of the client’s internal control and the necessary effectiveness of substantive procedures?
What is a financial reporting framework? How is it related to the auditors’ reporting responsibilities?
How frequently are firms required to have PCAOB inspections?
What sources of information can auditors use in connection with deciding whether to accepts a new client?
Why do predecessor auditors need to obtain the client’s consent to give information to prospective auditors? What information should prospective auditors try to obtain from predecessor auditors?
What benefits are obtained by having an engagement letter? What is a termination letter?
What is the purpose of a planning memorandum?
List some items normally documented in a planning memorandum.
What must external auditors do to use the work of internal auditors in the audit of an entity’s financial statements?
What must external auditors do to use the work of audit specialists in the audit of an entity’s financial statements?
For a typical audit engagement, describe the people and skills that are normally assigned to a full- service audit team.
What is meant by material information in accounting and auditing?
How does an audit team use materiality on an audit engagement?
What are the two primary ways to conduct substantive tests? Explain how the tests are different.
Identify the four cycles in an accounting system. Identify the accounts that can be identified within each of the cycles identified.
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