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auditing

Auditing and Assurance Services 6th edition Timothy Louwers, Robert Ramsay, David Sinason, Jerry Straws - Solutions

What is meant by (a) Vouching, (b) Tracing, and (c) Scanning? What is the difference between vouching and tracing?
List and briefly explain the eight basic audit procedures.
What are the five types of general analytical procedures? List five sources of information for analytical procedures.
When planning an audit engagement, what matters should be considered about a client’s computerized processing environment?
What are the general characteristics of significant transactions that are typically computerized?
Define audit trail. How could a computerized system’s transaction audit trail in an advanced system differ from one in a simple system or a manual system?
What are CAATs?
What are some audit procedures that can be performed using CAATs?
What advantages are derived from using CAATs to (a) Perform recalculations and (b) Select samples and print confirmations?
What information would you expect to find in a permanent audit file?
What information would you expect to find in a current audit file?
What is considered the most important content of the auditor’s current audit documentation files?
What are the documentation retention requirements of AS 3?
When initiating communications with predecessor auditors, prospective auditors should expecta. To take responsibility for obtaining the client’s consent for the predecessor to give information about prior audits.b. To conduct interviews with the partner and manager in charge of the predecessor
Generally accepted auditing standards require that auditors always prepare and use a. A written planning memorandum explaining the auditors’ understanding of the client’s business. b. A written client consent to discuss audit matters with prospective auditors. c. A written audit plan. d. The
When planning an audit, which of the following is not a factor that affects auditors’ decisions about the quantity, type, and content of audit documentation?a. The auditors’ need to document compliance with generally accepted auditing standards.b. The auditors’ need to verify the existence of
Audit documentation that shows the detailed evidence and procedures regarding the balance in the accumulated depreciation account for the year under audit will be found in thea. Current file audit documentation.b. Permanent file audit documentation.c. Administrative audit documentation in the
An auditor’s permanent file audit documentation most likely will containa. Internal control analysis for the current year.b. The most recent engagement letter.c. Memoranda of conference with management.d. Excerpts of the corporate charter and bylaws.
Which of the following is not a benefit claimed for the practice of determining materiality in the initial planning stage of an audit?a. Being able to fine- tune the audit work for effectiveness and efficiency.b. Avoiding the problem of doing more work than necessary (overauditing).c. Being able to
Spreadsheet software would be most useful for which of the following audit activities?a. Testing internal controls over computerized accounting applications.b. Preparing an audit plan.c. Preparing a comparison of current- year expenses with those from the previous year.d. Drafting a planning
Which of the following is an advantage of computer- assisted audit techniques (CAATs)?a. The CAATs programs are all written in one computer language.b. The software can be used for audits of clients that use differing computer equipment and file formats.c. The use of CAATs has reduced the need for
A primary advantage of using CAATs in the audit of an advanced computerized system is that it enables the auditor to a. Substantiate the accuracy of data through self- checking digits and hash totals. b. Utilize the speed and accuracy of the computer. c. Verify the performance of machine operations
An audit engagement letter should normally include which of the following matters of agreement between the auditor and the client?a. Schedules and analyses to be prepared by the client’s employees.b. Methods of statistical sampling the auditor will use.c. Specification of litigation in progress
When auditing Vandalay Jewelry, Costanza, CPA, was not familiar with the quality and cut of the company’s precious jewel inventory. To address this shortcoming, Costanza hired Benes, an expert in jewel valuation, to assist as an audit specialist for the inventory valuation. Should Costanza refer
Which of the following engagement planning procedures would most likely assist the auditor in identifying related- party transactions before the balance- sheet date?a. Interviewing internal auditors about their reporting responsibilities.b. Reviewing accounting records for recurring transactions
Which of the following communications is most likely to be written before the balance-sheet date?a. A report to the audit committee on the results of testing of internal control over cash receipts.b. Confirmation letters to vendors confirming the amounts they owe to the client.c. An attorney’s
Which of the following procedures would most likely be performed during planning?a. Surprise counts of the client’s petty cash fund.b. Reporting internal control deficiencies to the audit committee.c. Performing a search for unrecorded liabilities.d. Identifying related parties.
Prior to accepting a new audit engagement, a public accounting firm shoulda. Attempt to contact the predecessor auditors.b. Evaluate the integrity of management.c. Assess the firm’s resources to ensure that they are sufficient to permit the firm to accept the engagement.d. All of the above.
An audit plan containsa. Specifications of audit standards relevant to the financial statements being audited.b. Specifications of procedures the auditors believe appropriate for the financial statements under audit.c. Documentation of the assertions under audit, the evidence obtained, and the
The revenue cycle of a company generally includes which accounts? a. Inventory, accounts payable, and general expenses. b. Inventory, general expenses, and payroll. c. Cash, accounts receivable, and sales. d. Cash, notes payable, and capital stock.
When auditing the existence assertion for an asset, auditors proceed from the a. Financial statement amounts back to the potentially unrecorded items. b. Potentially unrecorded items forward to the financial statement amounts. c. General ledger back to the supporting original transaction documents.
Confirmations of accounts receivable provide evidence primarily about which two assertions? a. Completeness and valuation. b. Valuation and rights and obligations. c. Existence and rights and obligations. d. Existence and completeness.
With respect to the concept of materiality, which of the following statements is correct? a. Materiality depends only on the dollar amount of an item relative to other items in the financial statements. b. Materiality depends on the nature of a transaction rather than the dollar amount of the
When evaluating whether accounting estimates made by management are reasonable, the audit team would be most interested in which of the following? a. Key factors that are consistent with prior periods. b. Assumptions that are similar to industry guidelines. c. Measurements that are objective and
Which of the following would be considered an analytical procedure?a. Testing purchasing, shipping, and receiving cutoff activities.b. Comparing inventory balances to recent sales activities.c. Projecting the deviation rate of a statistical sample to the population.d. Reconciling physical counts to
Which of the following procedures would a CPA most likely perform in planning a financial statement audit? a. Make inquiries of the client’s lawyer concerning pending litigation. b. Perform cutoff tests of cash receipts and disbursements. c. Compare financial information with nonfinancial
Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?a. They often replace the tests of controls that are performed to assess control risk.b. They typically use financial and nonfinancial data aggregated at a high level.c. They usually
The company being audited has an internal auditor who is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor maya. Allow the internal auditor to perform tests of internal controls.b.
Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?a. Staff will need to be rescheduled to cover this new client.b. There will be a client- imposed scope limitation.c. The firm will have to hire a specialist in one audit area.d. The
The eight general audit procedures produce evidence about the principal management assertions in financial statements. However, some procedures are useful for producing evidence about certain assertions, and other procedures are useful for producing evidence about other assertions. The assertion
Audit Procedures. Auditors use different types of audit procedures to gather the evidence necessary to conclude that the risk of material misstatement for each relevant assertion has been reduced to an acceptably low level. List eight different types of procedures auditors can use during an audit
A CPA accumulates various types of evidence on which to base the opinion on financial statements. Among this evidence are confirmations from third parties.Required: a. What is an audit confirmation? b. What characteristics of the confirmation process and the recipient are important if a CPA is to
Audit Documentation. The preparation of audit documentation is an integral part of an auditor’s examination of financial statements. On a recurring engagement, auditors review the audit plans and audit documentation from the prior audit while planning the current audit to determine their
Assume that Smith & Smith, CPAs, audited Apollo Shoes Inc., last year. Now CEO Larry Lancaster wishes to engage Anderson, Olds, and Watershed, CPAs (AOW) to audit its annual financial statements. Lancaster is generally pleased with the services provided by Smith & Smith, but he thinks the audit
The president of Allpurpose Loan Company had a genuine dislike for external auditors. Almost any conflict generated a towering rage. Consequently, the company changed auditors often. The firm of Wells & Ratley (W& R), CPAs, was recently hired to audit the 2014 financial statements. W& R succeeded
You are a CPA in a regional public accounting firm that has 10 offices in three states. Mr. Shine has approached you with a request for an audit. He is president of Hitech Software and Games Inc., a five- year- old company that has recently grown to $ 500 million in sales and $ 200 million in total
North, CPA, is planning an independent audit of the financial statements of General Company. In determining the nature, timing, and extent of the audit procedures, North is considering General’s internal audit function, which is staffed by Tyler. Required: a. In what ways can the internal
AMI International is a large office products company. Headquar-ters management imposed pressure on operating division managers to meet profit fore-casts. The division managers met these profit goals using several accounting manipulations involving the record- keeping system that maintained all
For each of the general audit procedures of(a) Recalculation,(b) Observation,(c) Confirmation (accounts receivable, securities, or other assets),(d) Inquiry,(e) Inspection of internal documents,(f) Reperformance, and(g) Analytical proceduresDiscuss one way the procedure could be misapplied or the
Why do auditors need to be aware of their clients’ business risks?
What are the defining characteristics of (a) white- collar crime, (b) Employee fraud, (c) Embezzlement, (d) Larceny, (e) Defalcation, (f) Management fraud, and (g) Errors?
What types of conditions provide opportunities for financial statement fraud?
Define audit risk.
What are the components of the risk of material misstatement (RMM)? Audit risk?
How is the audit risk model used to plan the audit?
What is meant by the terms nature, timing, and extent of further audit procedures?
What is meant by the nature of the company?
Why should auditors understand their clients’ performance measures?
What is the major concern with evidence obtained from related parties?
What are some types of knowledge and understanding about a client’s business and industry that an auditor is expected to obtain? What are some of the methods and sources of information for understanding a client’s business and industry?
What is the purpose of performing preliminary analytical procedures in audit planning?
What are the five steps involved with the use of preliminary analytical procedures?
What are some of the ratios that can be used in preliminary analytical procedures?
When are analytical procedures required, and when are they optional?
How do the professional audit standards differ for (a) errors, (b) frauds, (c) direct- effect noncompliance, and (d) indirect- effect noncompliance?
What is the purpose of an audit strategy memorandum? What information should it contain?
Enterprise risk management is the responsibility of:a. Company management.b. The external auditors.c. The company’s insurance providers.d. All of the above.
Failure to meet company objectives is a result ofa. Information risk.b. Audit risk.c. Business risk.d. Inherent risk.
Auditing standards do not require auditors of financial statements to a. Understand the nature of errors and frauds. b. Assess the risk of occurrence of errors and frauds. c. Design audits to provide reasonable assurance of detecting errors and frauds. d. Report all errors and frauds found to
If sales were overstated by recording a false credit sale at the end of the year, where could you find the false “dangling debit”? a. Inventory. b. Cost of goods sold. c. Bad debt expense. d. Accounts receivable.
One of the typical characteristics of management fraud is a. Falsification of documents in order to misappropriate funds from an employer. b. Victimization of investors through the use of materially misleading financial statements. c. Illegal acts committed by management to evade laws and
Which of the following circumstances would most likely cause an audit team to perform extended procedures? a. Supporting documents are produced when requested. b. The client made several large adjustments at or near year- end. c. The company has recently hired a new chief financial officer after
The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client’s internal control is referred to as a. Inherent risk. b. Control risk. c. Detection risk. d. Risk of material misstatement.
The risk of material misstatement is composed of which audit risk components? a. Inherent risk and control risk. b. Control risk and detection risk. c. Inherent risk and detection risk. d. Inherent risk, control risk, and detection risk.
The risk that the auditors’ own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist isa. Audit risk.b. Inherent risk.c. Control risk.d. Detection risk.
The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for planning the remainder of the audit work? a.
If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely toa. Change from 0.1 to 0.04.b. Change from 0.2 to 0.3.c. Change
Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions? a. Exercising more professional skepticism. b. Carefully avoiding conducting interviews with people in areas that are most susceptible
Analytical procedures are generally used to produce evidence from a. Confirmations mailed directly to the auditors by client customers. b. Physical observation of inventories. c. Relationships among current financial balances and prior balances, forecasts, and nonfinancial data.d. Detailed
Which of the following relationships between types of analytical procedures and sources of information are most logical?Type of Analytical Procedure Source of
Analytical procedures can be used in which of the following ways? a. As a means of overall review near the end of the audit. b. As “attention- directing” methods when planning an audit at the beginning. c. As substantive audit procedures to obtain evidence during an audit. d. All of the above
Analytical procedures used when planning an audit should concentrate on a. Weaknesses in the company’s internal control activities. b. Predictability of account balances based on individual significant transactions. c. Management assertions in financial statements. d. Accounts and relationships
When a company that sells its products with a positive gross profit increases its sales by 15 percent and its cost of goods sold by 7 percent, the cost of goods sold ratio will a. Increase. b. Decrease. c. Remain unchanged. d. Not be able to be determined with the information provided.
Auditors are not responsible for accounting estimates with respect to a. Making the estimates. b. Determining the reasonableness of estimates. c. Determining that estimates are presented in conformity with GAAP. d. Determining that estimates are adequately disclosed in the financial statements.
An audit strategy memorandum contains a. Specifications of auditing standards relevant to the financial statements being audited. b. Specifications of procedures the auditors believe appropriate for the financial statements under audit. c. Documentation of the assertions under audit, the evidence
It is acceptable under generally accepted auditing standards for an audit team to a. Assess risk of material misstatement at high and achieve an acceptably low audit risk by performing extensive substantive tests. b. Assess control risk at zero and perform a minimum of detection work. c. Assess
Under the Private Securities Litigation Reform Act (the Act), independent auditors are required to first a. Report in writing all instances of noncompliance with the Act to the client’s board of directors. b. Report to the SEC all instances of noncompliance with the Act they believe have a
When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following? a. Key factors that are consistent with prior periods. b. Assumptions that are similar to industry guidelines. c. Measurements that are objective and not
An audit committee isa. Composed of internal auditors.b. Composed of members of the audit team.c. Composed of members of a company’s board of directors who are not involved in the day- to- day operations of the company.d. A committee composed of persons not associating in any way with the client
When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is toa. Recommend remedial actions to the audit committee.b. Evaluate the effect of the
Which of the following statements best describes auditors’ responsibility for detecting a client’s noncompliance with a law or regulation? a. The responsibility for detecting noncompliance exactly parallels the responsibility for errors and fraud. b. Auditors must design tests to detect all
Auditors perform analytical procedures in the planning stage of an audit for the purpose of a. Deciding the matters to cover in an engagement letter. b. Identifying unusual conditions that deserve more auditing effort. c. Determining which of the financial statement assertions are the most
A primary objective of analytical procedures used in the final review stage of an audit is to a. Identify account balances that represent specific risks relevant to the audit. b. Gather evidence from tests of details to corroborate financial statement assertions. c. Detect fraud that may cause the
An auditor’s analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by a. An error in recording amortization of the excess of the investor’s cost over the invest-ment’s underlying book value. b. The
Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? a. Inherent. b. Control. c. Detection. d. Sampling.
Which of the following matters relating to an entity’s operations would an auditor most likely consider as an inherent risk factor in planning an audit? a. The entity’s fiscal year ends on June 30. b. The entity enters into significant derivative transactions as hedges. c. The entity’s
What is the primary objective of the fraud brainstorming session? a. Determine audit risk and materiality. b. Identify whether analytical procedures should be applied to the revenue accounts. c. Assess the potential for material misstatement due to fraud. d. Determine whether the planned procedures
Weyman Z. Wannamaker is the chief financial officer of Cogburn Company. He prides himself on being able to manage the company’s cash resources to minimize the interest expense. Consequently, on the second business day of each month, Weyman pays down or draws cash on Cogburn’s revolving line of
Johnson & Company, CPAs, audited Guaranteed Savings & Loan Company. M. Johnson had the assignment of evaluating the collectability of real estate loans. Johnson was working on two particular loans: (1) A $ 4 million loan secured by Smith Street Apartments and (2) A $ 5.5 million construction loan
An auditor must identify the relevant assertions about each significant financial statement account and disclosure and the gather evidence to conclude about whether a material misstatement exists for each assertion. The nature of each financial statement account and disclosure contributes to the

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