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business
auditing

Questions and Answers of Auditing

What items in an auditee’s production asset and amortization schedule can auditors use for designing audit procedures? Describe these audit procedures.
What are the primary functions that should be segregated in the production process?
Evaluate the following statement made by an auditing student: “I do not understand cost accounting; therefore, I want to get a job with an auditing firm where I will only have to know financial
Which population of documents or records would an auditor sample to determine whether (a) all authorized production was completed and placed in inventory or written off as scrap? and (b) finished
Explain how the auditor’s risk assessment affects the design of the substantive audit program.
In the audit of inventory, what is the purpose of the analytical procedure that compares gross profit margin by month for the last two fiscal periods?
What substantive tests of details of transactions and balances are used to verify the pricing of manufactured inventory items? Which assertion do these procedures mainly address?
Describe a walk-through of the payroll transaction flow from hiring authorization to payroll cheque disbursement. What document copies would be collected?
What features of a payroll system can be expected to prevent or detect (a) Payment to a fictitious employee? (b) Omission of payment to an employee?
What is important about background checks using the employment applications submitted by prospective employees?
What payroll documentation supports the validity and accuracy of payroll transactions?
Which government tax returns can be reconciled in total with employees’ year-to-date earnings records? Reconciled in total but not in detail?
What are common errors and fraud in the payroll process? Which control characteristics are auditors looking for to prevent or detect these errors and fraud?
Why is it unwise for an auditor to stand by the plant gate and time clock to observe employees checking in for work shifts?
Why might an auditor conduct a surprise observation of a payroll distribution? What should be observed?
Describe a control test using generalized audit software that can be performed in a computerized payroll system.
Describe analytical procedures that can be used for payroll transactions and balances.
Explain how government forms and reports can be used in the audit of payroll transactions and balances.
How can an auditor find out whether payroll control procedures were followed by company personnel?
If the actual sales for the year are substantially lower than the sales forecast at the beginning of the year, what potential valuation problems may arise in the production cycle accounts?
What production documentation supports the valuation of manufactured finished goods inventory?
How does the production order document or record provide a control over the quantity of materials used in production?
What functional responsibilities are associated with the payroll process?
In a payroll system, which duties should be separated?
What important information can be found in employees’ personnel files?
What is the purpose of examining endorsements on the back of payroll cheques?
How can an auditor determine whether the amount of labour cost charged to production was actually paid to employees?
In a production situation similar to the Audit 13.1 case, what substantive audit work should be done on a sample of completed production orders (cost reports) recorded as cost of goods sold?
Is there anything wrong with auditors helping auditees obtain bank loans to pay their accounting firm’s fees?
Refer to the internal control questionnaire (Appendix 13A, Exhibit 13A€“1), and assume the answer to each question is €œno.€ Prepare a table matching questions to
Each of the following control test procedures may be performed during the audit of the controls in the production process.Required:For each procedure (a) identify the internal control procedure
The diagram in Exhibit EP13-3 describes several cost accounting test of control procedures. It shows the direction of the tests, leading from samples of cost accounting analyses, management reports,
Give some examples of payroll control omissions that would make it easy to “think like a crook” and see opportunities for errors and frauds.
Peterson Electronics manufactures radio equipment. Its manufacturing plant and warehouse are located in the same building. When parts are received at the warehouse, the receiver compares the type of
Refer to the internal control questionnaire on a payroll system (Exhibit 13A€“2 in Appendix 13A) and assume the answer to each question is €œno.€Required:Prepare a
Listed below is a selection of items from the payroll processing internal control questionnaire in Exhibit 13A€“2.1. Are names of terminated employees reported in writing to the payroll
Required:Prepare a schedule of the major risks in the payroll process.Identify the control objectives and financial statement assertions related to each. Lay out a three- column schedule asfollows:
The diagram in Exhibit EP13-11 describes several payroll test of control procedures. It shows the direction of the tests, leading from samples of time cards, payrolls, and cumulative year-to-date
Assume an auditor finds the following errors while performing tests of controls for work-in- process inventory in a custom machinery manufacturing business.Required:For each finding, state which
Assume that you are the audit senior conducting a review of the payroll system of a new auditee. While you are in the process of interviewing the payroll department manager, she makes the following
The Brown Printing Company accounts for the services it performs on a job-cost basis. Most jobs take a week or less to complete and involve two or more of Brown’s five operating departments. Actual
Bartâ€™s Company has prepared the fixed asset and depreciation schedule shown in Exhibit DC13-2. The following information is available:â€¢ The land was purchased eight years ago when
Thermox Inc. manufactures heating elements and devices. One of its main raw material components is steel tubing. During the current year, Thermox’s new raw material buyer began purchasing steel
During his examination of the inventories and related accounts of Consumer Electronics Inc., a manufacturer and distributor of small appliances, an auditor encountered the following:a. Several trucks
Desai Developments Limited (DDL) is in the business of buying undeveloped land in the regions outside of Calgary and holding it until it has development permits and market conditions are favorable
The Generous Loan Company has 100 branch loan offices. Each office has a manager and four or five subordinates who are employed by the manager. Branch managers prepare the weekly payroll, including
A PA€™s audit working papers contain a narrative description of a segment of the Croyden Factory Inc. payroll system and an accompanying flow chart (Exhibit DC13-7) as follows:The internal
The Vane Corporation is a manufacturing concern that has been in business for the past 18 years. During this period, the company has grown from a very small family-owned operation to a medium-sized
Case Description The case involves overpayment of wages to employees making false claims for hours worked. A temporary personnel agency assigned Nurse Jane to work at Municipal Hospital. The
Sun-house Solar Inc. (SHS) is a medium-sized private company that is develops solar energy systems for sale and installation in private residences. It is privately owned, with the majority of the
When a management carefully crafts a lease agreement to barely fail the tests for lease capitalization and liability recognition, should the auditor insist on capitalization anyway?
What information about share capital could be confirmed with outside parties? How could auditors corroborate this information?
What would constitute the authorization for loans payable? What documentation is evidence of this authorization?
What features of a client’s share capital are important in the audit?
When a company has produced an estimate of an investment valuation based on a nonmonetary exchange, what source of comparative information can an auditor use?
If a company does not monitor notes and loans payable for due dates and interest payment dates in relation to financial statement dates, what misstatements can appear in the financial statements?
What procedures do auditors employ to obtain evidence of the cost of investments? Investment gains and losses? Investment income?
Why are auditors interested in substantial investment losses occurring early in the period following year-end?
What is the single most significant control consideration in connection with clever accounting and fraud in finance and investment accounts? Explain.
Which is more likely to exist in the finance and investment cycle accounts: (1) fraud against the company or (2) fraud by the company in financial or tax reporting?
What should an auditor do when violation of securities laws is suspected?
Give five examples of off-balance-sheet information. Why should auditors be concerned with such items?
How can auditors verify the names of the issuers, the number of shares held, certificate numbers, maturity value, and interest and dividend rates in an audit of investment securities?
Describe the procedures and documentation of a controlled count of client’s investment securities.
What is a compensating control for the finance and investment process? Give some examples for finance and investment accounts.
What are some of the specific, relevant aspects of management’s control over the production of accounting estimates? What are some enquiries auditors can make?
Generally, how much emphasis is placed on adequate internal control in the audit of each of long-term debt, share capital, contributed surplus, and retained earnings?
What are some of the typical assertions found in owners’ equity descriptions and account balances?
How can confirmations be used in auditing shareholder capital accounts? Auditing notes payable? Loans and bonds payable?
What are some of the typical assertions found in long-term liability accounts?
What is the concept of “substance versus form” in relation to financing and investment transactions and balances?
What are some of the trouble spots for auditors in the audits of investments and intangibles?
What is the danger for auditors when company officials engage in undisclosed related-party transactions?
Cassandra Corporation, a manufacturing company, periodically invests large sums in marketable equity securities. The investment policy is established by the investment committee of the board of
You are auditing the financial statements of Bass Corporation for the year ended December 31, and you are about to begin an audit of the noncurrent investment securities. Bass’s records indicate
You are in charge of the audit of the financial statements of the Demot Corporation for the year ended December 31. The corporation has had the policy of investing its surplus funds in marketable
You were engaged to examine the financial statements of Ronlyn Corporation for the year ended June 30. On May 1, the corporation borrowed $500,000 from the Second National Bank to finance plant
The Hertle Engineering Company depends on new product development to maintain its position in the market for drilling tool equipment. The company conducts an extensive research and development
Sorenson Manufacturing was incorporated on January 3, 20X1. The corporationâ€™s financial statements for its first yearâ€™s operations were not examined by a PA. You have been engaged to
You were engaged to examine the financial statements of Ronlyn Corporation for the year ended June 30. On May 1 the corporation borrowed $500,000 from the Second National Bank to finance plant
You have been engaged to audit the financial statements of Broadwall Corporation for the year ended December 31, 20X2. During the year, Broadwall obtained a long-term loan from a local bank pursuant
The following covenants are extracted from the indenture of a bond issue. Failure to comply with its terms in any respect automatically advances the due date of the loan to the date of noncompliance
You are a PA examining the financial statements of Pate Corporation for the year ended December 31. The financial statements and records of Pate Corporation have not been audited by a PA in prior
You have been engaged to audit the financial statements of Hardy Hardware Distributors Inc., as of December 31. In your review of the corporate nonfinancial records, you have found that Hardy
Problem: Gulwest Industries, a public company, used a contrived amount of goodwill to overstate assets and disguise a loss on discontinued operations. The company had decided to discontinue its
In Plane ViewProblem: Whiz Corporation overstated the value of shares given in exchange for an airplane and, thereby, understated its loss on disposition of the shares. Income was overstated. Whiz
In Note 12 of its December 2001 consolidated financial statements, Bell Canada reported long-term debt outstanding totaling $9075 million. This amount is made up of 35 separate debentures, with
The long-term debt working paper in Exhibit DC14-5 was prepared by client personnel and audited by AA, an audit staff assistant, during the calendar year 20X2 audit of Canadian Widgets Inc., a
Clark, PA, has been engaged to perform the audit of Kent Ltd.’s financial statements for the current year. Clark is about to commence auditing Kent’s employee pension expense. Her preliminary
What is the role of the company’s board of directors in controlling management’s activities? Why is this particularly important in the financing and investing cycle? How does the board exercise
Barrick Gold, a Canadian public corporation, has operations in six main countries. Barrick produces and sells gold, its primary product, as well as byproducts such as silver and copper. These
Audit of Finance Transactions: Internet Business. City Search Inc. (CSI) is a technology company providing local search engine services in the Greater Toronto Area (GTA). CSI combines online search
As indicated in the box in this chapter, Lehman attempted to structure end-of-quarter transactions as sales of financial instruments when in substance it turned out be temporary borrowing of cash.
Certain revenue and expense accounts usually are audited in conjunction with related balance sheet accounts. List the most likely related balance sheet accounts for these revenue and expense
How might usual revenue transactions cause significant audit evidence and reporting problems?
The following was included in a letter auditors received from the auditee’s lawyers, in response to a letter sent to them that was similar to Exhibit 15–4:“Several agreements and contracts to
Why might companies and auditors experience difficulty making appropriate disclosures about litigation contingencies?
What treatment is given stock dividends and splits occurring after the balance sheet date but before the audit report is issued? Explain.
What is the purpose of a management representation letter?
Why are written management representations and lawyers’ letters obtained at the final stage of the audit and dated as close as possible to the audit report date?

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