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auditing

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

Risk Capital Limited, a Delaware corporation, was considering the purchase of a substantial investment in Florida Sunshine Corporation, a closely held corporation. Initial discussions with the Florida Sunshine Corporation began late in 2014. Wilson and Wyatt, Florida Sunshine’s auditor, regularly
Smith, CPA, is the auditor for Juniper Manufacturing Corporation, a nonpublic entity that has a June 30 fiscal year. Juniper arranged for a substantial bank loan, which depended on the bank receiving audited financial statements showing a debt- to- equity ratio of no more than 2 to 1. The bank’s
Flacco, CPA, conducted the audit of Raven Company and issued an unmodified opinion that concluded that the financial statements presented its financial condition, results of operations, and cash flows according to GAAP. As part of the preaudit conference, Flacco was informed by Raven’s
Madeoff is a small, nonpublic retailer seeking capital for expansion. To obtain necessary capital, Madeoff engaged Allen, CPAs to audit is annual financial statements. In discussing the engagement, Madeoff explicitly informed Allen that the purpose of the audit was to obtain additional financing
Mason & Dilworth (M& D), CPAs, were auditors for Hotshot Company, a closely held corporation owned by 30 residents of the area. Hotshot had previously engaged M& D to perform some compilation and tax work. Bubba Crass, Hotshot’s president and holder of 15 percent of the stock, said he needed
Orange is a public entity whose shares are traded on a national exchange. A Public Company Accounting Oversight Board inspection revealed a deficiency in audits conducted by Orange’s auditor, LeGrow. LeGrow had failed to perform important auditing procedures; after performing these procedures in
Jones, CPA, audits a number of public-companies. During the past year, some deficiencies with respect to audits conducted for two of Jones’s clients in the software industry (SoftWare and ExternalDrive) were identified. These deficiencies related to Jones’s audit procedures used to evaluate the
In the United States, it has become common to seek recovery of financial losses from other parties, often even if that other party is not at fault. Frequently, this occurs by means of a class action lawsuit. Required: a. What is a class action lawsuit? b. What advantages does a class action lawsuit
Butler Manufacturing Corporation raised capital for a plant expansion by borrowing from a bank and making a stock offering. Butler engaged Weaver, CPA, to audit its December 2014 financial statements. Butler told Weaver that the financial statements would be given to Union Bank and certain other
One of your firm’s clients, Fancy Fashions Inc., is a highly successful, rapidly expanding entity. It is owned predominantly by the Munster family and key corporate officials. Although additional funds would be available on a short-term basis from its bankers, they would represent only a
Liability Exposure. Chriswell Corporation decided to raise additional long- term capital by issuing $ 20 million of 12 percent subordinated debentures to the public. May, Clark & Company, CPAs, the company’s auditors, were engaged to examine the June 30, 2015, financial statements, which were
Rule 10(b) - 5 Liability under the Securities Exchange Act of 1934. Gordon & Groton (G& G), CPAs, were auditors of Bank & Company, a brokerage firm and member of a national stock exchange. G& G examined and reported on the financial statements of Bank, which were filed with the Securities and
Anderson, Olds, and Watershed (AOW) have been the independent auditors for Accord Corporation since 1990. Accord is a public entity obligated to file periodic reports under the Securities Exchange Act of 1934.Beginning in January 2014, the AOW litigation support consulting division performed a
Adam, an Illinois resident, was interested in purchasing stock in Joshua Foods Inc. Joshua Foods has corporate head-quarters in Fond du Lac, Wisconsin, and is incorporated in Delaware. Adam e-mailed Joshua Foods’ Investor Relations Department and requested its 2014 annual report including the
Mini- Case: Ethics. Refer to the mini- case “Andersen: An Obstruction of Justice?” on page C1 and respond to questions 1, 2, 3, 4, 5, and 7.On page C11. Look up the term corrupt in the dictionary. What is its definition? Was corrupt appropriately applied to the actions of Arthur Andersen?2. The
Describe the due diligence and causation defenses available to auditors under the Securities Act.
What liability exposure for auditors is found in the Securities Act in (a) section 17 and ( b) section
What are the criminal penalties associated with violations of the Securities Exchange Act?
What is the difference between joint and several liability and proportionate liability?
What new requirement was enacted in the Securities Litigation Uniform Standards Act that affected class action lawsuits?
What auditing services do internal auditors provide?
What auditing services do governmental auditors provide?
What difficulties do auditors find when conducting a performance audit?
How can governmental and internal auditors try to achieve objectivity when developing conclusions about economy, efficiency, or program results?
What scope of practice do GAGAS suggest or require?
What audit fieldwork requirements do GAGAS and the Single Audit Act of 1984 impose that AICPA generally accepted auditing standards do not?
What are the major differences between independent auditors’ reports on financial statements and internal and governmental reports on efficiency, economy, and program results audits?
Compare and contrast the type of work performed by external auditors (auditing financial statements to render an opinion) and fraud examiners.
Internal auditors have one of the highest incidents of fraud detection (higher then external auditors). Why might this be true? To what extent would you think internal auditors include fraud detection responsibility in their normal audit assignments?
Why might fraud examiners’ attitudes about control systems and materiality differ from that of other auditors?
Why do fraud examiners handle information in a different manner than auditors? Why is this important?
Which of the following would be considered in determining whether an internal audit department is independent? a. The organizational level of the chief audit officer and the objectivity of the audit staff. b. A requirement for the auditors to report to the audit committee and for the composition of
Which of the following would be considered the most significant problem for internal audit if the chief audit executive reports to the controller? a. The controller would amend the audit schedule so more audit time was spent on accounting issues. b. The controller may have no training as an
Which of the following is not an internal audit objective designed to add value to a purchas-ing department? a. A review of the bidding process indicates that a vendor company may be operating under two different names and therefore purchasing is not getting the three independent bids required by
In an internal auditor’s report, audit findings would include all of the following except a. The effect of audit finding on the auditee or the company. b. The cause of the audit finding. c. The relevance of the audit finding on the audit. d. The recommendation to correct the audit finding.
Governmental auditors’ independence and objectivity are enhanced when they report the results of an audit assignment directly to a. Managers of the government agency under audit and in which the auditors are employed. b. The audit committee of directors of the agency under audit. c. Political
In all audits of governmental units performed according to GAGAS, the most important work is a. Compliance auditing. b. Obtaining a sufficient understanding of internal control. c. Documentation of the audit. d. Exit interviews with managers in the governmental unit.
Which of the following is considered different and more limited in objectives than the others? a. Operational auditing. b. Performance auditing. c. Management auditing. d. Financial statement auditing.
A typical objective of an operational audit is for the auditor to a. Determine whether the financial statements fairly present the company’s operations. b. Evaluate the feasibility of attaining the company’s operational objectives. c. Make recommendations for achieving company objectives. d.
A governmental auditor assigned to audit the financial statements of the state highway department would not be considered independent if the auditor a. Also held a position as a project manager in the highway department. b. Was the state audit official elected in a general statewide election with
Governmental auditing can extend beyond audits of financial statements to include audits of an agency’s efficient and economical use of resources and a. Constitutionality of laws and regulations governing the agency. b. Evaluation of the personal managerial skills shown by the agency’s
Which of the following best describes how the detailed audit plan of a financial statement auditor compares with the audit client’s comprehensive internal audit plan? a. The comprehensive internal audit plan covers areas that an external auditor would normally not review. b. The comprehensive
Which of the following is usually not part of an internal audit department’s audit charter? a. A commitment from management to ensure the independence of the internal audit department. b. A definition of the scope of the audit department’s activities. c. The organizational structure of the
Which of the following would you not expect to see in an auditor’s report(s) on the financial statements of an independent government agency? a. A statement that the audit was conducted in accordance with generally accepted government audit standards. b. A report on the agency’s compliance
The federal Single Audit Act of 1984 requires auditors to determine and report several things about state and local governments that receive federal funds. Which of the following is not normally required to be reported? a. An opinion on the fair presentation of the financial statements in
The Government Accountability Office (GAO) describes expanded- scope governmental auditing to include all of the following except a. Financial statement audits. b. Attestation engagements. c. Compliance audits. d. Performance audits.
In government and internal performance auditing, which of the following is the least important consideration when performing the fieldwork? a. Determining the applicable generally accepted government accounting principles pronounced by the GASB. b. Defining problem areas or opportunities for
Compliance auditing performed under the Single Audit Act of 1984 in accordance with GAGAS is necessary for an auditor’s a. Report on the auditee’s internal control, including reportable conditions and material weaknesses. b. Opinion on the auditee’s observance, or lack thereof, of applicable
Which two of the following characterize the work of fraud examiners? a. Analysis of control weaknesses for determination of acceptable fraud risk. b. Analysis of control strengths as a basis for planning other audit procedures. c. Determination of a materiality amount that represents a significant
When auditing with “fraud awareness,” auditors should especially notice and review employee activities under which of these conditions? a. The company always estimates the inventory but never takes a complete physical count. b. The petty cash box is always locked in the desk of the custodian.
The best way to enact a broad fraud prevention program is to a. Install airtight control systems of checks and supervision. b. Name an ethics officer who is responsible for receiving and acting upon fraud tips. c. Place dedicated hotline telephones on walls around the workplace with direct
A reason to believe that a fraud has occurred is called a. Deliberation. b. Forensics. c. Predication. d. Restitution
In a fraud examination, original documents must be protected from damage and tampering to a. Establish motive. b. Develop documentation for employee dismissal. c. Protect the chain of custody. d. Ensure that suspects are unaware of an investigation in progress
An environmental audit might include all of following except a. Determining that proper tracking of waste material is being maintained by the organization. b. Reviewing the liability account established for pending environmental claims against the company. c. Reviewing the environmental history of
Audits may be characterized as (a) Financial statement audits, (b) Compliance audits, (c) Economy and efficiency audits, and (d) Program audits. The work can be done by independent (external) auditors, internal auditors, or governmental auditors (including IRS auditors and federal bank examiners).
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 accounts receivable from patients has steadily and rapidly increased over the past eight months. Other
The study and evaluation of management risk control in a governmental or internal audit is not easy. First, auditors must determine the risks and the controls subject to audit. Then they must find a standard by which performance of the control can be evaluated. Next they must specify procedures to
External auditors usually calculate inventory turnover (cost of goods sold for the year divided by average inventory) and use the ratio as a broad indication of inventory age, obsolescence, or overstocking. External auditors are interested in evidence relating to the material accuracy of the
Internal auditors perform risk- based audits that go beyond the risks of the financial statements. Assume you are on the internal audit staff of McDonald’s.Required:a. Identify the risks in the fast- food industry associated with1. Competition.2. Customer preference.3. The economy.4.
A public accounting firm has been engaged to audit a local food distribution program funded by the U. S. Department of Agriculture. The engagement is to encompass both financial and performance audits that constitute the expanded scope of a GAGAS audit and is to be conducted in accordance with the
The following lettered items are some “suspicions,” and you have been requested to select some effective procedures designed to con-firm or repudiate the suspicions.a. The custodian of the petty cash fund may be removing cash on Friday afternoon to pay for weekend activities.b. A manager
A fraud examiner was called into a business because of a suspicion of fraud. An assistant manager in a bookstore is taking books off the shelf, bringing them to the return book area, completing a customer return form, and pocketing the money. This is done late in the day when few other employees
The following problem is based on an actual program and situation.The Office of Economic Opportunity (OEO) designed special programs to have a major impact on unemployment, dependency, and community tensions in urban areas with large concentrations of low- income residents or in rural areas having
Danny Deck, the director of internal auditing for Rice Department Stores, was working in his office one Thursday when Chris McMurray, president of the company, burst in to tell Deck about a problem. According to McMurray, “Customer complaints about delays in getting credit for merchandise returns
The GAO reporting standards for performance audits state that each report should include “recommendations for action to correct the problem areas and to improve operations.” For example, an audit of the Washington Metropolitan Area Transit Authority found management decision deficiencies
The U. S. Postal Service (USPS) advertises prompt delivery schedules for express mail (overnight delivery) and priority mail (two- to– three- day delivery). The USPS knows various risks that may arise to thwart a timely (as advertised) delivery but believes that systems and controls are in place
Embezzlers often try to cover up by removing canceled checks they made payable to themselves or endorsed on the back with their own names. Missing canceled checks are a signal (red flag). However, people who reconcile bank accounts may not notice missing checks if the bank reconciliation is
Many companies outsource their internal audit function to CPA firms. Required: a. What benefits might be gained from having a CPA firm provide its internal audit services? b. What benefits might be gained from having an in- house internal audit department? c. What concerns might arise from having a
Wen-Li is an internal auditor for Main Electrical Supply in Springfield, Illinois. During her audit, she came across the invoice shown in Exhibit D. 60.1.The invoice is in almost pristine condition with few marks and no creases. The invoice was properly filed in a vendor folder marked Best Office
a quality audit, defining the measurement criteria is often difficult and time consuming. You have been a student at a college or university for several years and should have a basic understanding of its academic operations. You have been engaged to perform a quality audit of your
Go to the website of the town where you reside and find the Comprehensive Annual Financial Report (CAFR). Find and print the auditor’s report. Warning: Be careful! CAFRs can be more than 100 pages, so make certain you’re printing only the auditor’s report.Required:a. Who audited the financial
How can internal auditors achieve practical independence?
Why do GAGAS require a review for compliance with laws and regulations in conjunction with financial audits?
Why do you think GAGAS reporting standards permit performance audit reports to include the views of responsible officials concerning the auditors’ findings, conclusions, and recommendations?
Why is prosecution of fraud perpetrators generally a good idea?
How is sampling risk controlled?
What are the seven major steps involved with sampling?
Briefly identify and explain the four methods used to select sample items.
What methods of sample selection are appropriate to use with a statistical sampling plan? Why?
Define the terms precision ( allowance for sampling risk), reliability ( confidence), and precision interval.
Describe the basic procedure used to evaluate sample results.
What are the two sampling risks associated with attributes sampling? What types of losses are associated with each of these risks?
What are the two sampling risks associated with variables sampling? What types of losses are associated with these risks?
What factors affect the sample size used in an attributes sampling application? How do these factors affect sample size?
What factors affect the sample size used in a variables sampling application? How do these factors affect sample size?
In an audit sampling application, an auditor a. Performs procedures on all items in a balance and makes a conclusion about the entire balance. b. Performs procedures on less than 100 percent of the items in a balance and formulates a conclusion about the entire balance. c. Performs procedures on
Auditors consider statistical sampling to be characterized by the following: a. Representative sample selection and nonmathematical evaluation of the results. b. Carefully biased sample selection and mathematical evaluation of the results. c. Representative sample selection and mathematical
In which of the following scenarios would the use of sampling be most appropriate? a. The population consists of a relatively small number of items. b. The need for precise information about the population is not important. c. The decision to be made is relatively critical. d. The costs associated
The risk that the decision made based on the sample will differ from the decision made based on the entire population is referred to as a. Audit risk. b. Examination risk. c. Sampling risk. d. Non-sampling risk
Which of the following is not a method that auditors use to control their exposure to sampling risk during the examination? a. Determining an appropriate sample size. b. Performing the appropriate audit procedure. c. Ensuring that all items have an equal opportunity to be selected. d. Evaluating
Which of the following is an advantage of non-statistical sampling? a. It measures the audit team’s exposure to sampling risk. b. It is required by generally accepted auditing standards. c. It ensures that samples are randomly selected. d. It is typically less complex than statistical sampling.
Selecting a sample using a series of random numbers to identify sample items is referred to as a. Block selection. b. Haphazard selection. c. Systematic random selection. d. Unrestricted random selection.
If systematic selection is used with a starting point of 10, a population size of 100, and a necessary sample size of 20, the first three items selected for examination would be a. 10, 110, 210. b. 110, 210, 310. c. 10, 15, 20. d. 15, 20, 25.
A limitation of systematic random selection is that this method a. Has a relatively low likelihood of yielding a representative sample. b. Results in a larger sample size than other selection methods. c. Can result in bypassing a number of items having similar characteristics. d. Cannot be used
Which of the following is appropriately used for statistical sampling applications?
Which of the following pairs of selection methods could appropriately be used in statistical sampling applications? a. Unrestricted random selection, block selection. b. Block selection, haphazard selection. c. Systematic random selection, haphazard selection. d. Unrestricted random selection,
The distance from the sample estimate that has a certain likelihood (equal to reliability) of including the true population value is known as the a. Confidence. b. Mean. c. Precision. d. Precision interval.
The likelihood that an identified precision interval contains the true (but unknown) population value is the a. Confidence. b. Mean. c. Precision. d. Sampling risk
Which of the following statements is not true if the precision interval for a sampling risk of 10 percent ranges from 60 to 70? a. A 10 percent probability exists that the true population value is less than 60 or more than 70. b. A 90 percent probability exists that the true population value is

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