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business
auditing

Questions and Answers of Auditing

What is cheque kiting? How might auditors detect kiting?
In the Audit 11.2 case, what information might have been obtained from each of the following: enquiries, detail test of controls procedures, observations, and confirmations?
Why is controlled access to computer programs and master files (such as credit files and price lists) important in a control environment?
Why is it a control weakness if the same employee can authorize inventory transfers and record accounts receivable entries? Is it easier to send the cash and cheques to the accountants so that they
What accounting records and files could an auditor examine to find evidence of unrecorded sales, inadequate credit checks, and incorrect product unit prices?
What account balances are included in the revenues, receivables, and receipts process?
What are the two important characteristics of a control test? What actions are typically used to perform control tests?
Distinguish between confirmation response rate and confirmation detection rate.
What are some of the justifications for not using confirmations of accounts receivable on a particular audit?
In the Audit 11.1 case, name one bank reconciliation control procedure that could have revealed signs of embezzlement.
What feature(s) of a cash receipts internal control system would be expected to prevent the cash receipts journal and recorded cash sales from reflecting more than the amount shown on the daily
With reference to the Audit 11.3 case, how would an understanding of the business and management reporting system have contributed to discovery of the open cash receipts journal cutoff error?
Prepare a table similar to Exhibit 11â€“4 on (internal control objectives) for cashreceipts.
The following auditee-prepared bank reconciliation is being examined by you during an audit of the financial statements of Cynthia Company:Required:Indicate one or more audit procedures that should
a. You wish to test Houston Corporation’s sales cutoff at June 30. Describe the steps you should include in this test.b. You obtain a July 10 bank statement directly from the bank. Explain how this
Several accounts receivable confirmations have been returned with the notation “verification of vendor statements is no longer possible because our data processing system does not accumulate each
During the audit of the December 31, 20X5, financial statements, the auditor identifies cash amounts received subsequent to December 31, 20X5, and traces these amounts to the cash account in the
The auditor is considering confirming zero-balance accounts from the auditee’s accounts receivable sub-ledger to provide evidence concerning the completeness assertion for accounts receivables and
a. Complete the following continuity schedule indicating how the movements in the allowance for doubtful accounts tie into other amounts in the financial statements.b. Prepare an audit program
Velma Inc. is a very modern company that strives to be paperless in all its administrative functions.Velma has arranged with its bank to receive all its banking transaction information online,
Taylor, a PA, has been engaged to audit the financial statements of University Books Incorporated. University Books maintains a large, revolving cash fund exclusively for the purpose of buying used
You are the in-charge auditor examining the financial statements of the Gutzler Company for the year ended December 31. During late October, with the help of Gutzler’s controller, you completed an
The Pottstown Art League operates a museum for the benefit and enjoyment of the community. During hours when the museum is open to the public, two volunteer clerks positioned at the entrance collect
Ajax Inc. recently implemented a new accounting system to process the shipping, billing, and accounts receivable records more efficiently. During the interim work of Ajax’s auditors, an assistant
The Patrick Company had poor internal control over its cash transactions. Facts about its cash position at November 30 were the following:The cash books showed a balance of $18,901.62, which included
The ABC Appliance Company, a manufacturer of small electrical appliances, deals exclusively with 20 distributors situated throughout the country. At December 31 (the balance sheet date), receivables
You were engaged to conduct an audit of the financial statements of Clayton Realty Corporation for the year ending January 31.The examination of the annual rent reconciliation is a vital portion of
Rosella is the senior in charge of the current-year audit of Harrier Limited, a company that designs and manufactures highly sophisticated machines used to make precision plastic parts and
The auditor of a stock brokerage company, Roller Securities Inc., sends out negative confirmations of account details for a sample of about 50% of the stock brokerage’s customers, selected at
Parts Inc. sells electrical components to large department stores and also has a few cash sales to electricians.Sales invoices are prepared for all sales. Cash sales are recorded to the cash receipts
Case Description:In the audit of a municipal government, the auditors discovered that receivables for property taxes were overstated because the tax assessor stole some taxpayers’ payments.J. R.
It is Monday, September 13, 2010. You, a PA, work at Fife & Richardson LLP, a PA firm. Ken Simpson, one of the partners, approaches you mid-morning regarding Brennan & Sons Limited (BSL), a private
What is a purchase requisition?
What assertion is affected if duplicate payments are made from the same supporting documents? How can this type of error be prevented?
Where could an auditor look to find evidence of losses on purchase commitments? On unrecorded liabilities to suppliers?
List the main supporting source documents used in a purchases, payables, and payments process.
What are the functions that should be segregated in the purchases, payables, and payments process?
Describe the two general characteristics of a control test.
What information would be included in a continuity schedule for an accrued liability?
What key items on the continuity schedule would be vouched to supporting documentation?
What procedures are followed to audit inventory when the physical inventory is taken on a cyclical basis or on a statistical plan but never as a complete count on a single date?
What is the purpose of a continuity schedule for PPE and intangibles in audit working papers?
Give some examples of receiving departments in the audit application cases above.
Why is professional skepticism important for auditors? Give two case examples.
What evidence could the verbal enquiry audit procedure produce in Audits 12.1, 12.2, and 12.3?
List the management reports that can be used for audit evidence. What information in them can be useful to auditors?
What are some controls that might prevent the embezzling of cash by creation of fictitious supplier invoices?
How could an auditor determine if the purchasing agent had practiced purchase order splitting?
How is the information from the shipping department, receiving department, and warehouse used to update perpetual inventory records?
In fixed asset management and accounting, which functional responsibilities should be delegated to separate departments or management levels?
In what situations would auditors send confirmation letters to creditors to audit accounts payable?
List key substantive audit procedures used to address the inventory valuation assertion.
How is information collected during the auditor’s attendance at the physical inventory count used in the audit of the inventory balance?
What cutoff misstatements can arise if the FOB terms for sales shipped are not properly accounted for? What about for inventory received?
Describe the purpose of and give examples of audit procedures in the search for unrecorded liabilities.
Explain the difference in approach between confirmation of accounts receivable and confirmation of accounts payable.
In substantive auditing, why is the emphasis on the completeness assertion for liabilities instead of on the existence assertion as in the audit of assets?
In the review of an auditee’s inventory-taking instructions, what characteristics are the auditors looking for?
Explain dual-direction sampling in the context of inventory test counts.
Explain why the valuation assertion often has a high risk of misstatement for PPE and intangible assets.
In Audits 12.1 and 12.3, frauds involving fictitious people, businesses, and locations occurred. Where can auditors obtain information showing whether people, businesses, and locations are real or
The essential characteristic of the liabilities control system is to separate the authorization and approval to initiate a transaction from the responsibility for recordkeeping.Required:What would
The use of pre-numbered documents is an important feature for control to ensure that all valid transactions are recorded and none are omitted.Required:How could auditors gather evidence that the
Two “automatic transactions” can be produced in a computerized accounting system: (1) Cheque printing and signature and (2) Purchase order at a preprogrammed stock reorder point. Required:
Why should auditors be concerned with the adequacy of casualty insurance coverage of an auditee’s physical property?
What evidence regarding inventories and cost of sales can the auditor typically obtain from enquiry?
Auditors plan their audit procedures to gather evidence about management’s assertions in the financial statements. In addition to the broad assertions, such as existence and completeness, specific
Why the repairs and maintenance expense account should be audited at the same time as the fixed asset accounts?
Describe how each procedure may be used to gather evidence on fixed assets and which broad financial statement assertion(s) (existence, completeness, ownership [rights], valuation [allocation], and
Listed below is a selection of items from the internal control questionnaire on payables shown in Appendix 12A.1. Are invoices, receiving reports, and purchase orders reviewed by the cheque signer?2.
Li was assigned to work on the audit of A1 Clothing Ltd., because she has been auditing similar companies for three years and is considered to be knowledgeable about the clothing retailing industry
You are performing the audit of the XX Limited (CXX) financial statements for its year ended September 30, 20X0.CXX is a private company and operates a grocery distribution business in the Greater
Alvin is auditing Demure Fashions Inc., a chain of women’s clothing stores. Demure operates six stores in shopping malls across the Toronto area and has been an audit client of Alvin’s firm for
Consider the following examples of inventories in various businesses:1. Pharmaceuticals in a drug company2. Fine chemical compounds in a biotechnology company3. Software in an information technology
Long, PA, has been engaged to examine and report on the financial statements of Maylou Corporation. During the review phase of the study of Maylou€™s system of internal control over
The Runge Controls Corporation manufactures and markets electrical control systems: temperature controls, machine controls, burglar alarms, and the like. Electrical and semiconductor parts are
You were in the final stages of your audit of the financial statements of Ozine Corporation for the year ended December 31, 20X2, when you were consulted by the corporation’s president. The
Clark and his partner, Kent, both PAs, are planning their audit program for the audit of accounts payable on the LeClair Corporation’s annual audit. Saturday afternoon, they reviewed the thick file
Cindy Li is the partner in charge of the audit of Blue Distributing Corporation, a wholesaler that owns one warehouse containing 80% of its inventory. Cindy is reviewing the working papers that were
Your auditee took a complete physical inventory count under your observation as of December 15 and adjusted the inventory control account (perpetual inventory method) to agree with the physical
Ace Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse but, instead, uses statistical sampling to estimate the year-end
You are conducting an audit of the financial statements of a wholesale cosmetics distributor with an inventory consisting of thousands of individual items. The distributor keeps its inventory in its
In connection with a recurring examination of the financial statements of the Louis Manufacturing Company for the year ended December 31, you have been assigned the audit of the fixed assets accounts
Peacock Company is a wholesaler of soft goods. The inventory is composed of approximately 3500 different items. The company employs a computerized batch processing system to maintain its perpetual
During the audit of Mason Company Inc., for the calendar year 20X2, you noticed that the company produces aluminum cans at the rate of about 40 million units annually. On the plant tour, you noticed
Deake Corporation is a medium-sized, diversified manufacturing company. Recently, Jack Richards was promoted to manager of the property accounting section. Richards is having difficulty responding to
On January 11, at the beginning of your annual audit of the Grover Manufacturing Company’s financial statements for the year just ended December 31, the company president confides to you that an
You are the auditor of Bittern Inc. Bittern’s long standing policy is to capitalize all repairs and maintenance payments that exceed $10,000, without assessing the nature of the expenditure. Many
White Ice Mines Inc. is a mining company. During 20X4, White Ice acquired a diamond mine located in the far north for $800 million from Albatross Inc. The purchase price is based on the mine’s
TheShoppingMall.com (TSM) is an Internet business that provides a website with links to a variety of online shopping sites with which TSM has established “marketing partnerships.” TSM also
On The Road Inc. (OTR) is a tour company owned by Joy Kerouak. OTR offers organized tours three weeks to six-months long, targeted to early retirees 55-years old and over. OTR is in its third year of
Case Description Beta Magnetic, a large company, experienced a fraud in the cash payments processed for employees’ supplementary medical benefit claims. Fictitious benefit claims were paid by the
Integrated Measurement Systems Inc. (IMS) is a Canadian public company that manufactures high-end measuring devices used primarily in the oil and natural gas industries. In 20X3, it had sales of $100
a. What is your assessment the risk of material misstatement at the assertion level for the BSL inventory? Make reference to case facts to support your conclusions.b. Describe the substantive
List the main risks auditors will be concerned with in assessing risk in the production and payroll processes of a typical manufacturing business.
What are the functions normally associated with the production process? Why is an understanding of the production process, including the related data processing and cost accounting, important to
Describe a walk-through of a production transaction from production orders to entry in the finished goods perpetual inventory records. What document copies would be collected? What controls noted?
Describe how the separation of (1) authorization of production transactions, (2) recording of these transactions, and (3) physical custody of inventories can be specified among the production,
What features of the cost accounting system would be expected to prevent the omission of recording materials used in production? Discuss.
When auditors want to use an auditee’s sales forecast for general familiarity with the production process or for evaluation of slow-moving inventory, what kind of work should be done on the

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