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business
auditing

Questions and Answers of Auditing

L. King, CPA, is auditing the financial statements of Cycle Company, a client that has receivables from customers arising from the sale of goods in the normal course of business. King is aware that
In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these
This case is designed like the ones in the chapter. Your assignment is to write the “audit approach” portion of the case, organized around these sections:Objective. Express the objective in terms
You are using computer audit soft-ware to prepare accounts receivable confirmations during the annual audit of the Eastern Sunrise Services Club. The company has the following data files:Master
Your firm has audited the Rock Island Quarry Company for several years. Rock Island’s main revenue comes from selling crushed rock to construction companies from several quarries owned by the
You are the director of internal auditing of a large municipal hospital. You receive monthly financial reports prepared by the accounting department and your review of them has shown that total
The study and evaluation of management risk mitigation control is not easy. First, auditors must determine the risks and the controls subject to audit. Then they must find a standard by which
The following narrative description of a company’s cash receipts and billing system is in the auditors’ audit files: Rural Building Supplies Inc. is a single- store retailer that sells a variety
The following four questions are taken from an internal control questionnaire. For each question, state (a) One test of controls procedure you could use to find out whether the control technique was
The following article was published in Newsday on February 9, 2009: Call for Probe of Ticket Sales Bruce Springsteen fans were victims of a “classic bait and switch” scam by the nation’s
Kaplan CPA Exam Simulation: Adjusting Entry Required: Go to the Kaplan website link at www. mhhe. com/ louwers6e , click on Chester Co. ( Adjust-ing Entry) AUD TBS and complete your answers.
Mini- Case: Confirmations. Refer to the mini- case “Something Went Sour at Parmalat” on page C20 and respond to Question 2.2. What additional steps should the auditors have taken when they
Why do you think companies use revenue recognition as a primary means for inflating profits?
Why is the audit of revenue recognition riskier for a new company?
What controls should be implemented to safeguard accounts receivable files?
Why is it important to emphasize the existence assertion when auditing accounts receivable?
Distinguish between positive and negative confirmations. Under what conditions would you expect each type of confirmation to be appropriate?
In the case of The Canny Cashier, name one control that could have revealed signs of the embezzlement.
What feature(s) could SEI have installed in its cash receipts internal controls that would have been expected to prevent the cash receipts journal and recorded cash sales from reflecting more than
With reference to the case of Thank Goodness It’s Friday, what contribution could an understanding of the business and the management reporting system have made to discovery of the open cash
What is a voucher?
Where could an auditor look to find evidence of(a) Losses on purchase commitments or(b) Unrecorded liabilities to vendors?
List the management reports and computer files that can be used for audit evidence. What information in them can be useful to auditors?
What primary functions should be separated in the acquisition and expenditure cycle?
What feature of the acquisition and expenditure control would be expected to prevent an employee’s embezzling cash through creation of fictitious vouchers?
How would substantive procedures for accounts payable be affected by(a) A low risk of material misstatement or(b) A high risk of material misstatement?
Describe the purpose and give examples of audit procedures in the search for unrecorded liabilities.
What items could indicate a significant risk of fraud in the acquisition and expenditure cycle ( i. e., be red flags)?
Which of the following accounts does not appear in the acquisition and expenditure cycle?a. Cash.b. Purchases returns.c. Sales returns.d. Prepaid insurance.
For which of the following accounts would the matching concept be the most appropriate?a. Cost of goods sold.b. Research and development.c. Depreciation expense.d. Sales.
Which of the following would not overstate current- period net income? a. Capitalizing an expenditure that should be expensed. b. Failing to record a liability as an expense. c. Failing to record a
A client’s purchasing system ends with the recording of a liability and its eventual payment. Which of the following best describes auditors’ primary concern with respect to liabilities resulting
Which of the following is an internal control activity that could prevent a paid disbursement voucher from being presented for payment a second time? a. Vouchers should be prepared by individuals who
Budd, the purchasing agent of Lake Hardware Wholesalers, has a relative who owns a retail hardware store. Budd arranged for hardware to be delivered by manufacturers to the retail store on a cash-
Which of the following is the best audit procedure for determining the existence of unre-corded liabilities? a. Examine confirmation requests returned by creditors whose accounts are on a subsidiary
Which of the following procedures is least likely to be performed before the balance- sheet date? a. Observation of inventory. b. Review of internal control over cash disbursements. c. Search for
To determine whether accounts payable are complete, auditors perform a test to verify that all merchandise received has been recorded. The population for this test consists of all a. Vendors’
When verifying debits to the perpetual inventory records of a nonmanufacturing company, auditors would be most interested in examining a sample of purchase a. Approvals. b. Requisitions. c. Invoices.
A furniture company ordered 84 tables from a supplier. The supplier accidentally sent only 48 tables, but the receiving department at the furniture company accepted the tables. The invoice was
Curtis, a maintenance supervisor, submitted maintenance invoices from a phony repair company and received the checks at a post office box. This should have been prevented bya. Comparison of the
An audit team would most likely examine the detail support for charges to which of the following accounts?a. Payroll expense.b. Cost of goods sold.c. Supplies expense.d. Legal expense.
Which of the following accounts would most likely be audited in connection with a related balance- sheet account?a. Property Tax Expense.b. Payroll Expense.c. Research and Development.d. Legal
When auditing account balances of liabilities, auditors are most concerned with management’s assertion about a. Existence. b. Rights and obligations. c. Completeness. d. Valuation and allocation.
In a test of controls, auditors may trace receiving reports to vouchers recorded in the voucher register. This is a test fora. Occurrence.b. Completeness.c. Classification.d. Cutoff.
A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows:Employee ResponsibilityClerk 1 ...........Reviews vendor invoices
Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?a. Examining reported purchase returns that appear too low.b.
Payable ICQ Items: Assertions, Tests of Controls, and Possible Errors or Frauds. Following is a selection of items from internal control questionnaires. 1. Are purchase orders above a certain level
You are in the final stages of your audit of the financial statements of Ozine Corporation for the year ended December 31, 2014, when the corporation’s president consults you. The president
Accounts Payable Confirmations. Partners Clark and Kent, both CPAs, are preparing their audit plan for the audit of accounts payable on Marlboro Corporation’s annual audit. Saturday afternoon
Marsh, CPA, is the independent auditor for Compufast Corporation (Compufast), which sells personal computers, peripheral equipment (printers, data storage), and a wide variety of programs for
The following cases are designed like the ones in the chapter. Your assignment is to write the audit approach portion of the cases organized around these sections: Objective. Express the objective in
Maine Construction builds office buildings. The buildings generally cost between $ 5 million and $ 8 million to build, and the plumbing can cost between $ 300,000 and $ 600,000 depending on the
This case is designed like the ones in the chapter. Your assignment is to write the “audit approach” portion of the case organized around these sections: Objective. Express the objective in terms
Audit the PP& E and Depreciation Schedule. Bart’s Company has prepared the PP& E and depreciation schedule shown in Exhibit 8.48.1. The following information is available (assume the
This question contains three items that are management assertions about property and equipment. Following them are several substantive procedures for obtaining evidence about management’s
Following are the four assertions about account balances that can be applied to the audit of a company’s PP& E, including assets the company has constructed itself: existence, rights and
You are supervising the audit fieldwork of Sparta Springs Company and need certain information from Sparta’s equipment records, which are maintained on a computer file. The particular information
Search for Unrecorded Liabilities. The list of vouchers payable for Potter's Magic Shoppe at December 31 is as follows:Required:a. Prepare an audit plan for the audit of unrecorded liabilities for
Kaplan CPA Exam Simulation: Unrecorded LiabilitiesRequiredGo to the Kaplan website link at www. mhhe.com/ louwers6e, click on Client’s Check Register (Unrecorded Liabilities) AUD TBS, and complete
What are the short- term effects and the long- term effects of improperly capitalizing expenditures on the financial statements?
How can purchasing managers use their position to defraud the company? What can be done to prevent it?
Why is a “blind” purchase order used as a receiving report document?
How do audit procedures for prepaid expenses and accrued liabilities also provide audit evidence about related expense accounts?
What assertions found in PP& E, investments, and intangibles accounts are of interest to an auditor during the examination of the expenditure and acquisition cycle?
What items in a client’s PP& E and depreciation schedule give auditors points of departure ( assertions) for audit procedures?
What four methods are used to audit other expense accounts?
Describe the purpose and give examples of specific fraud detection procedures in the acquisition and expenditure cycle.
Are these specific fraud detection procedures designed to detect fraudulent financial reporting or misappropriation of assets? Explain.
What key control concept was missing at Argus Productions?
What evidence could the verbal inquiry audit procedure provide in “ Printing ( Copying) Money”?
If Lee had not been seen taking employees out in a limousine, how else could she have been caught?
How would a policy of mandatory vacations have helped discover the Beta fraud?
Describe a walkthrough of a production transaction from receiving production orders to making an entry in the finished goods perpetual inventory records. What document copies would be collected? What
Describe how the functions of (a) Authorization of production transactions, (b) Recording of these transactions, and (c) Physical custody of inventories can be separated among the production,
From what population of documents would an auditor sample to determine whether (a) All authorized production was completed and placed in inventory or recorded as scrap and (b) Finished goods
What characteristics do auditors consider in reviewing a client’s inventory- taking instructions?
Explain dual- direction sampling in the context of inventory test counts.
What inventory information should auditors document?
What analytical procedures might reveal obsolete or slow- moving inventory?
Which of the following methods for determining inventory cost is not allowed by GAAP?a. Average cost.b. FIFO.c. LIFO.d. Standard cost
Which cycle is not directly linked to the production cycle? a. Acquisition and expenditure cycle. b. Payroll cycle. c. Revenue and collection cycle. d. Finance and investment cycle.
To determine the client’s planned amount and timing of production of a product, the auditor reviews the a. Sales forecast. b. Inventory reports. c. Production plan. d. Purchases journal.
An auditor reviews job cost sheets to test which transaction assertion? a. Occurrence. b. Completeness. c. Accuracy. d. Classification.
Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? a. Supplies of relatively little value are expensed
To make a year- to- year comparison of inventory turnover most meaningful, the auditor per-forms the analysis a. For the company as a whole. b. By division. c. By product. d. All of the above.
Which of the following procedures would best prevent or detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $ 1 to $ 10 and a few items
An auditor usually traces the details of the test counts made during the observation of physical inventory counts to a final inventory compilation. This audit procedure is undertaken to provide
A retailer’s physical count of inventory was higher than that shown by the perpetual records. Which of the following could explain the difference? a. Inventory items had been counted but the tags
From the auditors’ point of view, inventory counts are more acceptable prior to the year- end when a. Internal control is weak. b. Accurate perpetual inventory records are maintained. c. Inventory
Which of the following internal control activities most likely addresses the completeness assertion for inventory? a. The work- in- process account is periodically reconciled with subsidiary
When auditing inventories, an auditor would least likely verify that a. All inventory owned by the client is on hand at the time of the count. b. The client has used proper inventory pricing. c. The
A client maintains perpetual inventory records in quantities and in dollars. If the assessed control risk is high, an auditor would probably a. Apply gross profit tests to ascertain the
An auditor selected items for test counts while observing a client’s physical inventory count. The auditor then traced the test counts to the client’s inventory listing. This procedure most
Which of the following auditing procedures probably would provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventories? a. Trace test counts
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s balance assertions about a. Existence. b. Rights and obligations. c. Completeness. d.
An auditor would vouch inventory on the inventory status report to the vendor’s invoice to obtain evidence concerning management’s balance assertions about a. Existence. b. Rights and
When evaluating inventory controls, an auditor would be least likely to a. Inspect documents. b. Make inquiries. c. Observe procedures. d. Consider policy and procedure manuals.
When testing a company’s cost accounting system, the auditor uses procedures that are primarily designed to determine that a. Quantities on hand have been computed based on acceptable cost
The auditor tests the quantity of materials charged to work- in- process by vouching these quantities to a. Cost ledgers. b. Perpetual inventory records. c. Receiving reports. d. Material
Your client counts inventory three months before the end of the fiscal year because controls over inventory are excellent. Which procedure is not necessary for the roll- forward? a. Check that

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