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auditing
Auditing An International Approach 6th edition Wally J. Smieliauskas, Kathryn Bewley - Solutions
What kinds of conditions provide opportunities for employee fraud and financial statement fraud?
Give some examples of some rationalizations to excuse fraud. Would you be able to use them?
Give some examples of control omissions that would make it easy to “think like a crook” and see opportunities for fraud.
What three general descriptions can be given to manipulations that produce materially misleading financial statements?
If a false SIN for a new employee is entered in the payroll system and the employee receives a paycheque, what control in the system is not being used?
Is there anything odd about these situations?(1) Auditors performed a surprise payroll distribution, and J. Jones, S. Smith, and D. Douglas were absent from work. (2) A cheque to Larson Lectric Supply was endorsed with Larson Lectric above the signature of Eloise Garfunkle. (3) Numerous cheques
What might happen if the inventory warehouse manager also had responsibility for making the physical inventory observation and reconciling discrepancies to the perpetual inventory records?
What three oddities might indicate fictitious employees on a payroll?
This is an exercise concerning financial reporting misstatements, not employee theft.Required:Give an example of an error or fraud that would misstate financial statements to affect the accounts as follows, taken one case at a time. a. Overstate an asset, under state another asset.b. Overstate an
Oak Industries, a manufacturer of radio and cable TV equipment and an operator of subscription TV systems, had a multitude of problems. Subscription services in a market area, for which $12 million cost had been deferred, were being terminated, and the customers were not paying on time ($4 million
Below are some “suspicions.” You have been requested to select some effective extended procedures designed to confirm or deny the suspicions.Required:Write out the procedure you would suggest for each case so that another person would know what to do.a. The custodian of the petty cash fund may
Horizontal analysis refers to changes in financial statement numbers and ratios across two or more years. Vertical analysis refers to financial statement amounts expressed each year as proportions of a base, such as sales for the income statement accounts, and total assets for the balance sheet
Given the successful prosecution of CEOs in Worldcom, Tyco, and Adelphia through 2006, do a Web search on one of these cases and answer the following:a. How was the fraud detected?b. How was the fraud perpetrated? Was it a financial statement fraud?c. What was the weakness in internal control or
Play Green Inc. (PGI), is a public company that operates a number of sports facilities across Canada. Your friend Gildan is a junior auditor with the public accounting firm that has audited PGI for many years. Gildan is auditing the cash balance, and has found some discrepancies between the bank
Elizabeth (Liz) Lake lives in a million-dollar mansion in Don Mills. She spends time with her three children at an 1134-square-metre waterfront “cottage” in central Ontario. The attractive widow also gets about $22,600 a month—or $270,000 a year—to maintain those properties and cover living
List six audit techniques used to gather evidence and the types of evidence related to them.
What can auditors do to improve the effectiveness of confirmation requests?
Differentiate between authoritative and ordinary externally produced documents.
What is meant by each: vouching, tracing, and scanning?
What does analysis consist of?
What are three stages in an audit engagement when analysis is used?
What sources of information are useful for performing analysis?
List several types of audit work (initial events, audit procedures), and discuss their likely effectiveness for identifying financial statement misstatements.
What are some of the methods and sources of information the auditor can use to understand an auditee’s business?
How is an auditor’s professional judgment applied in assessing the appropriateness of audit evidence?
How external, external-internal, and internal documentary evidence are generally defined?
What information is summarized in the audit planning document or memorandum? How does it relate to the preparation of audit programs?
What are the kinds of audit programs, and what is the purpose of each?
What is meant by the terms nature, timing, and extent of audit procedures?
Why do audit firms and auditing standards require auditors to prepare and retain specific documentation of their audit work?
What information would you expect to find in a permanent audit file and how would auditors use this information?
What audit administration working papers are included in the current audit evidence working paper files?
What techniques can auditors use to improve the quality of working paper documentation?
How can software be used to prepare audit working papers?
What are the strengths and limitations of recalculation-based audit evidence?
What are the strengths and limitations of observation-based audit evidence?
If analysis is used to provide substantive audit evidence, what steps must be taken regarding the source information used in the analysis?
Discuss the effectiveness of analysis for discovering misstatements.
In auditors’ experience, is there any pattern in finding overstatements and understatements in accounts?
When does an auditor need to use the work of an expert? What additional requirements must the auditor meet to use an expert’s work as evidence?
What factors determine whether audit evidence is appropriate? What types of audit evidence are most reliable? Least reliable?
What is considered the most important content of the current audit working papers?
What is the purpose of indexing and cross-referencing audit working papers?
Auditors frequently refer to the terms standards and procedures. Standards deal with measures of the quality of performance. Standards specifically refer to the generally accepted auditing standards expressed in the CASs. Procedures specifically refer to the methods or techniques used by auditors
A PA accumulates various kinds 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 PA is to
Identify one or more types of procedures being employed in each situation described below (vouching, tracing, recalculation, observation, and so on):1. An auditor uses audit software to select vendors’ accounts payable with debit balances and compares amounts and computation with cash
The six general audit procedures produce evidence about the principal management assertions in financial statements. However, some procedures are useful for producing evidence about certain assertions, while other procedures are useful for producing evidence about other assertions. The assertion
Generally accepted standards of audit field work require that auditors obtain sufficient appropriate evidential matter to afford a reasonable basis for an opinion regarding the financial statements under examination. In considering what constitutes sufficient appropriate evidential matter, a
1. Classify the following evidential items by type (direct knowledge, external, and so on), and rank them in order of appropriateness:a. Amounts shown on monthly statements from creditorsb. Amounts shown on “paid on account” in the accounts payable registerc. Amount of “discounts lost
The preparation of working papers is an integral part of a PA’s audit of financial statements. On a recurring engagement, PAs review their audit programs and working papers from their prior audit while planning the current audit to determine usefulness for the current-year work.Required:a. (1)
You are performing the audit of the JZ Limited (JZ) financial statements for its year ended September 30, 20X2. JZ is a private company that provides computer network repair services to businesses in the Greater Toronto Area (GTA). JZ’s audited financial statements are used mainly by its bank
You were engaged to examine the financial statements of Kingston Company for the year ended December 31.Assume that on November 1, Kingston borrowed $500,000 from North Country Bank to finance plant expansion. The long-term note agreement provided for the annual payment of principal and interest
You were engaged to audit the financial statements of Karachi Company for the year ended December 31, 20X1.On June 1, 20X1, Karachi initiated a product warranty program to help it stay competitive with other companies in its industry. The warranty covers parts, labor, and shipping to repair any
Johnson & Company, PAs, audited the Guaranteed Trust 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 the Smith Street Apartments and (2) A $5.5 million construction loan
Kindness Home (KH) is a not-for-profit organization that operates a nursing home in a town near a major city. You are auditing the revenue and receivables at KH. The nursing home has a reputation for delivering excellent patient services, but its accounting department is understaffed and does not
The schedule in Exhibit DC8€“5 was prepared by the controller of World Manufacturing Inc. for use by the independent auditors during their examination of World€™s financial statements. All procedures performed by the audit assistant were noted in the bottom
You have been assigned to the audit of the financial statements of Equality Coffee Roasters Limited (ECR) for its year ending December 31, 20X2. The company started five years ago and is in the business of obtaining coffee beans from around the world under a fair trade policy, roasting the beans
List the responsibilities of management regarding their organization’s internal control.
Why does management have to trade off between costs and benefits of internal controls?
How does management’s cost–benefit trade-off decision affect control risk?
Why do internal controls provide reasonable but not absolute assurance that control objectives are met?
Why is being involved in designing internal controls considered a risk to auditor independence?
How do external auditors help managers meet their responsibilities for internal control?
Why does the auditor evaluate the auditee’s internal controls?
Explain how using dual-purpose tests can lower audit costs.
Can control risk be high for one assertion and low for another assertion for the same account balance? Explain.
What is a key control? Give a specific example.
What is a non-key control? Give a specific example.
What risks are addressed by controlled access?
Give some examples of periodic comparisons a company can perform. How do they control the accuracy of its financial records?
Which duties should be segregated within the information system? Why?
What is an audit internal control questionnaire?
What is the purpose of an internal control systems flow chart? How does it differ from a narrative?
What is a walk-through, and why is this procedure used in an audit?
Why is it not necessary to test control weaknesses? What action does the auditor need to take when control evaluation work indicates a control weakness?
Why are an auditee’s privacy controls relevant to the audit?
Explain the difference between manual controls and IT controls. Give an example of each.
Why are the control objectives the same regardless of whether manual or IT controls procedures are used?
How does the degree of control reliance relate to the auditor’s control risk assessment?
What two parts are important in writing out a control test for an audit program?
How does the direction of a control test relate to control objectives?
How are control procedures with no documentary evidence tested?
What is the auditor’s responsibility for detecting and communicating misstatements?
What findings are auditors required to communicate to management? to the audit committee or board of directors?
How does control risk relate to the risk of material misstatement?
How can management’s cost–benefit judgments lead to internal control deficiencies?
Define control risk and list seven general categories of misstatements that controls are intended to prevent, detect, and correct.
Why does an inventory of Rolex watches have a high inherent risk, and why does the auditor expect management to have strong controls over this inventory?
Describe the two extreme cases of control risk assessment that an auditor could encounter in practice.
What is the impact on audit work of a “clean” audit as compared with a “dirty” audit?
Why can it be efficient for the auditor to rely on internal controls?
If internal controls are weak, in what situations could an audit still be done, and in what situations would it not be possible to do an audit?
What does it mean if an overall audit plan is said to be cost effective? How do auditors develop a cost-effective overall audit plan?
If the auditee’s revenue transactions for the year are material but the auditor assesses the risk of material misstatement to be low, why do the audit standards require the auditor to design and perform substantive procedures for these transactions regardless of the low risk assessment?
What procedures are auditors required to perform related to the financial statement closing process? Why are these procedures required? What can they find? If the auditor assessed the risk of material misstatement to be low, why would these procedures still be required?
How does the auditor’s control risk assessment affect the preliminary audit program?
What audit planning activities are performed to lead up to the control risk evaluation?
Give two reasons why controls would be tested.
In what situation(s) would controls not be tested?
List the control objectives and the misstatement risk that each one relates to.
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