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business
auditing

Questions and Answers of Auditing

How can related-party transaction affect the financial statements?
Why should auditors always select the auditee’s adjusting journal entries for detail audit?
Why are many of the revenue and expense accounts audited by analytical procedures only?
What procedures can be applied to audit minor expense accounts?
How are analytical procedures used for overall evaluation of the financial statements at the final stage of the audit? How does the use of analysis at this stage differ from its use at the risk
What procedures can be used to verify the accuracy of the information presented in the cash flow statement?
In addition to the lawyer’s letter, what other procedures can be used to gather evidence regarding contingencies?
What are the two types of subsequent events? How are they treated differently in the financial statements?
What representations would you request that management make in the representation letter with respect to related parties? Receivables? Inventories? Minutes of meetings? Subsequent events?
What is the purpose of to-do lists in the audit documentation? What is a good reason for keeping the to-do lists in the audit working paper files?
Describe an engagement quality review. Who performs it and what is its purpose?
What red flag is raised when a company has an unbilled contract revenue account in its general ledger?
In connection with your audit, you request that management provide you with a letter containing certain representations, such as the following:1. The auditee has satisfactory title to all assets.2.
The two major written understandings between an auditor and management, in connection with an audit of financial statements, are the engagement letter and the management representation
Crankwell Inc. is preparing its annual financial statements and report to shareholders. Management wants to be sure that all of the necessary and proper disclosures are incorporated into the
Auditors are required to obtain representation letters from the auditee’s lawyer to elicit information on claims and possible claims that may affect the financial statements.Required:a. Discuss the
Refer to the example of a written management representation letter illustrated in Exhibit 15€“5.Required:a. What are the assumptions about the audit engagement in this management
In 2009, Jay Inc. and Vee Ltd., both Canadian manufacturing companies, decided to form a joint venture to build and operate a manufacturing plant in Asia. Their joint venture would have lower
The final review stage of the audit involves taking an overall view of the financial statements and assessing how fairly they reflect the underlying economic events and conditions that occurred in
During the audit of the annual financial statements of Amis Manufacturing Inc., the company’s president, Vance Molar, and Wayne Dweebins, the engagement partner, reviewed matters that were
You are in the process of winding up the field work on Top Stove Corporation, a company that manufactures and sells kerosene space heating stoves. To date, there has been every indication that the
The following events occurred in independent cases, but in each instance the event happened after the close of the fiscal year under audit but before all members of the audit team had left the office
In connection with your examination of the financial statements of Olars Manufacturing Corp. for the year ended December 31, your post-balance sheet audit procedures disclosed the following items:1.
The controller of Kim Engineering Ltd. (KEL) sent a legal representation letter to KEL’s law firm at the request of the company’s auditors. The controller told the auditors that there are no
Assume that you are the financial statement auditor in the following independent cases, and you are completing your audit in February 20X2.1. During January 20X2, the company’s management decided
You are an auditor with ZZ, a PA firm. Your firm has just accepted a new engagement to audit the annual financial statements of Chestnut Limited, a medium-sized restaurant business. Chestnut
Omega Corporation is involved in a lawsuit brought by a competitor for patent infringement. The competitor is asking $14 million actual damages for lost profits and unspecified punitive damages. The
While performing analytical procedures as part of her audit of the revenue and expense accounts at Galloway Inc., PA notes that Galloway’s sales revenues in the current year have increased by 20%
Town & Country Cable Inc. (TCC) is a cable television provider servicing customers in small towns and rural areas. Its shares are privately held, but it issued a 20-year bond eight years ago to the
What is the overall objective of an audit of an organization’s financial statements, and how does an auditor achieve this objective?
What are uncorrected misstatements, and what role do they play in forming the audit opinion on the financial statements?
Outline the auditor’s considerations at the end of the audit to form the opinion, especially referring to those requiring professional judgment.
List the four types of financial reporting frameworks for financial statements set out in CAS 200. Explain which type of framework IFRS and ASPE would be classified as.
What requirements must be met for a financial reporting framework to be considered to provide fair presentation?
Describe the four main types of modified opinions and the reasons each would be used in an audit report.
What is the purpose of dual dating an audit report?
What is the difference between a subsequent event that occurs between the balance sheet date and the audit report date and the discovery after the audit report date of facts that existed at the
If, subsequent to issuing a report, the auditor discovers information that existed at the report date and materially affects the financial statements, what actions should the auditor take if the
After the audit report has been issued, someone discovers that the auditee had a material, unrecorded bank loan outstanding at year-end. There was no confirmation requested from that bank as the
What is the purpose of the auditor’s communication with those charged with governance at the completion of the audit? What are some important matters that this communication should include?
Why must the auditor communicate significant findings with those charged with governance prior to dating the audit report?
What information would the auditor communicate to management and to those charged with governance regarding internal control deficiencies discovered during the audit?
How does consultation facilitate good professional judgment at the conclusion of the audit?
Why are auditors’ drafts of adjusting entries and note disclosures near the end of the audit always labelled “proposed”?
What impact can related-party transactions have in some cases of asset valuation?
For the following findings, indicate the income statement and balance sheet accounts that are affected and whether these accounts are over or understated, and provide an adjusting entry to correct
Professional judgment is essential to auditors and the quality of audits.Required:a. Explain professional judgment in the context of an audit, giving three examples of situations in the audit process
Requirements set out in the auditing standard CAS 260 require an auditor to communicate certain issues and information to those charged with governance of the auditee entity as a financial statement
At the end of her audit of Jolie Angelique Inc., Emma concludes that there are material misstatements affecting many accounts, with the result that the financial statements as a whole are
Courtney Heart is completing the audit of Profile Framing Ltd. The framing business is seasonal and very competitive. She discovers that a major long-term debt in the draft financial statements is
Breton Inc. manufactures industrial lighting fixtures with two main product lines: interior and exterior fixtures. The fixtures are sold with a one-year warranty on parts and labor. During 20X0,
During the current year, Karabakh Ltd. sold off all the heating and air conditioning equipment in one of its buildings because it was being converted from an assembly plant to a warehouse. It was
The auditors of the CRX Inc. (CRX) financial statements for the year ended December 31, 20X7, have decided that there is substantial doubt that CRX can continue to exist as a going concern, because
Yue is auditing the accounts receivable for Slawson & Slawson, LLP, a large law partnership. The managing partner of the law firm has prohibited the auditor from confirming any of the law firm’s
Refer to the application case and analysis at the end of the chapter. Assume that, instead of withdrawing from the engagement, the auditors in this case had issued a clean audit report on all the
Goal Products Limited (GPL) is the official manufacturer and distributor of soccer balls for the North American League Soccer (NALS), a professional soccer association. GPL was founded 15 years ago
Explain what led to the creation of review and compilation standards.
When interim information is presented in a note to annual financial statements, under what circumstances would an audit report on the annual financial statements be modified with respect to the
What three types of engagements can produce an auditor’s written internal control report intended for external use? Describe the reports in general terms.
What considerations should a successor accountant make in accepting a new engagement?
How should a public accountant disclose misleading statements detected during a compilation engagement?
What is the difference between a review engagement and a compilation engagement regarding historical financial statements? Compare both with an audit engagement.
Must interim financial information required to be presented for annual financial statements be in conformity with GAAP?
In what ways is a review of the interim financial information similar to a review of the unaudited annual financial statements?
What reports on control and other matters are auditors required to give to a company’s management, board of directors, or audit committee?
Jimmy operates a large service station, garage, and truck stop on Highway 95 near Plainview. His brother, Bill, has recently joined as a partner, even though he still keeps a small PA practice. One
A PA states in the report on a review services engagement the following: Based on my review, I am not aware of any material modifications that should be made to the accompanying financial statements
Two PAs are discussing review engagements.A: As I see it, in a review we are providing a lower level of assurance, so we don’t need the same extent of knowledge of the client’s business and
You have recently been hired as a junior accountant for a local PA firm. The firm’s main practice involves reviews, compilations, and tax return preparation for small to medium business clients.
The PA has compiled the annual financial statements for her sister’s pharmacy business since it started four years ago. The financial statements are attached to the pharmacy’s corporate tax
Assume the role of the predecessor auditor, and state what you would include in your communication with the successor auditor in the following independent situations.a. You resigned from the audit
The PA is the auditor of Shire Corp., a public company, and has also been engaged to review Shire’s third-quarter interim financial statements. Shire’s third-quarter financial statements will
Do a class survey of internal control reports by auditors in 2013 at www.sec.gov. What is the most common criterion used to evaluate internal controls? Discuss.
Should there be a relationship between audit reports on internal control statements and audit reports of financial statements? Discuss.
What ethical responsibilities do members of the provincial associations/institutes have for acts of nonmembers who are under their supervision (e.g., recent university graduates who are not yet PAs)?
What organizations and agencies have rules of conduct that must be observed when practicing public accounting? Internal auditing? Management accounting? Fraud examination?
What penalties can be imposed on PAs by their provincial accounting body in their “self-regulation” of ethical code violators?
Is an incorporated accounting practice substantially different from an accounting practice organized in the form of a partnership? in the form of a limited liability partnership?
Define the term contingency fee, explaining how such fees apply to PAs. Do you feel a change is necessary to rules for contingency fees in Canada?
What penalties can be imposed by the CPAB on PAs who violate rules of professional conduct?
Knowledge of the rules of conduct, interpretations thereof, and resolutions of Council related to general and technical standards will help you respond to the following cases.Required:For each case,
Knowledge of the rules of conduct and interpretations thereof on confidential client information and contingent fees will help you respond to the following cases.Required:For each case, state whether
Knowledge of the rules of conduct and interpretations thereof regarding various other responsibilities and practices will help you respond to the following cases.Required:For each case, state whether
You and Laura Cooper are the two partners of a PA firm in Ottawa. After your two-week Caribbean vacation, you return to the office to discover that your secretary is busily preparing to mail some
Jon Williams, PA, has found himself in the middle of the real-life soap opera “Taxing Days of Our Lives.” The cast of characters:Oneway Corporation is Jon’s audit and tax client. The three
PA has been engaged by Pinto Inc. for several years. His work involves compiling the monthly financial reports for Pinto’s management and providing advice to Pinto’s president on cost controls,
The issue of ethical conduct is becoming more and more important in the professional practice of PAs.Required:a. Identify the sequence of steps that have been proposed for an auditor to follow in
You are an audit manager with the firm of Wu, Potter and McKinley, PAs. You and Ray St. Claire, a manager with another PA firm, are having a discussion about auditor independence. Ray says, “On the
Smith and Mulberry (S&M) were asked by Behometh Ltd. to submit a proposal for its audit. This involved a 30-minute presentation to the board of directors and a written submission. The submission
The Canada Revenue Agency was recently granted the power to impose new “preparer penalties” on individuals who have received payment for preparing a tax return in which the taxpayer is found to
PA provides assurance on a forecast income statement included in a the prospectus for a public offering of shares of Mustang Inc. PA’s engagement letter with Mustang states that the fee for the
Three forms of organization for public accountants are unlimited liability partnership, limited liability partnership, or limited liability professional corporation.Required:What are the pros and
A and B, two 40-something PAs, are raising a few glasses at the local pub to celebrate their 15 years in partnership, and are taking the opportunity to reflect over their choice of career.A: All in
Explain how the independence principle can be derived from the critical thinking framework.
Explain how insufficient reasons in audit documentation can lead to a fraudulent audit opinion.
Use classical problems in moral theory to illustrate why, even with critical thinking; it may not always be possible to come up with good reasons for all actions.
Use the critical thinking framework to explain why serving the public interest should be the most important principle for PAs.
Why is the going-concern assumption of financial reporting important for auditors?
Why might “opinion shopping” be suspect? Beneficial? (See Appendix 4B.)
Why do you have to be a good accountant in order to be a good auditor?

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