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auditing
Auditing and Assurance Services Understanding the Integrated Audit 1st edition Karen L. Hooks - Solutions
For each audit, what must audit documentation show about:(a) PCAOB standards?(b) Audit conclusions?(c) The company's accounting records?
What methods are often used for documenting an accounting system and ICFR? Under what conditions is each method most effective? Is any method required?
What are the three categories of entity-level controls described in AS 5? Why is analyzing an entity-level control in this manner useful?
Are all assertions relevant for all accounts? Why not?
What is quantitative materiality? Qualitative materiality?
What is a likely source of misstatement, and why does the auditor care about likely sources of misstatement?
Why are application controls not likely to be effective if general controls are not?
How can social engineering cause the breakdown of good ITGC?
Why is it important for a company to have IT-performance-related controls over the acquisition of software, hardware and network technology?
What controls are most important when a company develops or changes computer software?
How do access controls affect data security?
Why are different data security methods needed for different methods of data collection and processing?
What different types of backup procedures can be performed, and when are the various procedures appropriate?
Why are human resources policies on hiring, training, and termination important ITGC?
What controls over the physical IT facility are considered ITGC?
Why is the auditor concerned about whether a company has controls over the development or changes it makes to computer software? What impact do these controls have over the auditor’s conclusions for the ICFR audit? The financial statement audit?
What concerns does the auditor have over access controls and their impact on data security? What impact would a problem with access controls have on the auditor’s conclusions in an ICFR audit of a company with an extensive IT system? Do you think management could assert that the financial
If all of a company’s ITGC are effective except its contingency controls, would the auditor be able to conclude that the ICFR is effective? What if other controls are lacking but contingency controls are effective? How would the auditor modify plans for the financial statement audit if the
If the head of the IT department and the CFO have complete access to all aspects of the IT system and the ability to input, change and delete transactions, is this a weakness in ICFR? If so, how important is it? Would this situation have any impact on the audit procedures of the financial statement
AS 2, paragraph 11 defines preventive controls as having, “.the objective of preventing errors or fraud from occurring in the first place that could result in a misstatement of the financial statements.” Detective controls, “have the objective of detecting errors or fraud that have already
If a company owns many business locations (for example, many store locations), and in the aggregate they could cause material misstatements to the financial statements, the auditor would need to obtain sufficient audit evidence for all the locations to conclude on ICFR effectiveness. Assume the
Jessica Chatman is a staff auditor assigned the task of performing tests of internal controls for the JC Automotive Parts engagement. Before she begins testing, Jessica must first determine the timing of her tests. Because JC Automotive is a very small engagement, all controls are manual. In
Assume that you are assigned the task of testing internal controls over financial reporting for the Van Jacobs Corporation year 2011 audit. Van Jacobs Corporation has a December 31 fiscal year end. Due to poor controls that existed previously, Van Jacobs implemented a new internal control system
While performing tests of controls for the cash-in-vault account ($50,000 total as of the Balance Sheet date) of P-Town Hotel, you realize that – contrary to the company’s written controls description and your earlier walk through evidence – the Front-Desk manager has access via a vault key,
C. Ronaldo is an auditor working on the ICFR audit for the Manchester Corporation. Interest expense is an account that could produce a material misstatement on the financial statements, so it is tested in the ICFR audit. After performing a walkthrough the senior determines that the controls over
Jaime, the senior auditor on the audit of the Boston Brewery Co., a public company, is responsible for initial planning of the integrated audit. She is responsible for the supervision and review of two staff accountants performing both controls tests and tests of details of balances. After the
Sea Duds is retail clothing store specializing in resort clothing. The company purchases finished goods – apparel and accessories, and its other payments are typical operating costs such as rent, utilities, and payroll. When bills are received and input to be paid the software of the computer
Assume that management of a company with a December 31 fiscal year end began its assessment of ICFR early in the fiscal year. Based on its procedures, management concluded deficiencies existed in ICFR and made major changes to the accounting information system that were completed by June 30. The
You are a new auditor for B&O LLP, a large public accounting firm with many publicly traded audit clients. You have just been assigned to perform controls testing for the integrated audit on one of B&O’s largest clients. One of the steps specified in your audit program is to test the
Jose is a senior auditor in charge of testing controls over financial reporting. Step four of the audit procedures require that Jose “maintain professional skepticism in assessing controls for fraud risk.” In the course of his testing, Jose finds a transaction that occurred on January 5th at
Kim is a senior auditor at Wing CPA firm. She is in charge of formulating the audit plan for several key controls and accounts. Her manager has determined that if the account is misstated by $20,000 the misstatement is material. The account includes some unusual and significant transactions that
Gloria is a new hire at a local accounting firm. She is given the task of performing a control test on the ICFR portion of the integrated audit for one of her firm’s larger clients. Gloria conducts her test and finds no control deviations. She concludes that the control she tested is effective.
Your audit firm uses the Audit Risk Model to plan detection risk and audit procedures for tests of details. The audit you are working on is a high profile client. Therefore, for risk assessment and planning your firm uses an audit risk of 3% for this engagement. In assessing the receivable
Sonia started working for Martin & Thomas, CPAs in June, after her graduation from State University. She attends staff training school and was then assigned to the Young Industries audit. Her first assignment was to recalculate the inventory compilation, using audit test counts and audit unit
You are considering an audit engagement with a new, privately-held entrepreneurial company (Moxy, Inc.) headed by Ryan Morris, a charming CEO. The company specializes in chemical lawn treatments. Ryan indicates that his business has really taken off and he shows you last year€™s financial
Dottie Martin is the CEO of Martin Industries. She seeks your advice as to how to assign the functions among her three clerical employees in order to achieve the highest degree of internal control.Below are the 8 functions performed by these clerks?(a) Maintains disbursement (payments) journal.(b)
At Genuine Products, Inc., time cards of 550 employees are collected weekly by the plant foreman and delivered to the IS department. There, the cards are sorted and the hours worked are entered into the computer. These records are used to prepare individual payroll records, paychecks, and labor
Gordon is a new staff auditor on the Fine Dining of London Co. engagement and is responsible for conducting some of the ICFR controls tests on the engagement. In the course of his audit work, Gordon finds instances where a control he is testing has numerous deviations from the prescribed
Use the audit risk model as a framework to explain the following independent situations and to decide if the auditor’s conclusion is appropriate.Jan Morris, CPA, is finishing an audit of Night Time Manufacturing and completed an extensive evaluation of internal controls. She thinks that control
How does the way a control failure is defined affect the audit evidence that is needed?
What is benchmarking? Discuss.
If the client changes the accounting information system during the year, what impact does this have on the auditor’s tests of ICFR? Do controls have to be tested before and after the change? Why or why not? What impact might this have on the financial statement audit?
Why does a manual control require more tests of operating effectiveness than an automated control?
What happens when the auditor becomes aware of possible illegal acts that have an indirect effect on the financial statements?
What are the audit concerns about related party transactions? How do these concerns affect the testing of operations of controls?
What is the risk that an auditor concludes a control is functioning when it is not more important to the audit than concluding that a control is not function when it is?
What are the sources of non sampling risk? How are these controlled and reduced?
What components of risk are independent of the audit? Which components may be set by the auditor? What is the basis for setting them? Which components are estimated? Which component may be calculated based on the others?
Why do audit work papers need to be indexed and cross referenced? Why do auditors need to use tick marks?
What are the next steps when audit tests indicate a problem with the operating effectiveness of a control? What are the criteria for evaluating the seriousness of a control deficiency?
How much reliance can the auditor place on experience with people and conditions found in a company in prior-year audits?
Why doesn’t the auditor need to test the operating effectiveness of all preventive and detective controls?
How does the result of the ICFR audit tests affect the financial statement audit?
How does the definition of general controls differ from that of entity-wide controls and application controls? Explain the relationship of the three concepts.
Why is it difficult for the function of application controls to be effective when the design or operation of general controls is not?
What types of processing controls might an auditor test using test data? Explain what processing controls do.
What is the benefit of an integrated test facility? What is the risk to the client’s records?
How can software utilizing Benford’s law assist the auditor with procedures to detect fraud?
Ivan is an auditor on the Optical Illusions Corp audit. Upon examining the audit program, he sees that he was given the task of performing analytical procedures on several balance sheet accounts. Ivan’s manager asked that he make sure that all of his documentation was in accordance with the
What is the difference between the target of controls tests and the target of substantive procedures?
How do tests of details of balances and analytical procedures interact in affecting detection risk?
Why might an auditor divide an account balance into more than one segment before performing audit procedures?
What steps are followed when performing tests of details of balances and drawing conclusions using a sample?
How does the auditor form a conclusion about the fair presentation of an entire account balance based on the results of tests of details of balances performed on a sample?
How do the working trial balance, lead schedules, and detailed work papers articulate?
To what extent is the auditor responsible for illegal acts that do not have a material, direct impact on the financial statements? Does the auditor’s responsibility for material financial statement misstatements differ if they result from fraud, error, or illegal acts?
How do disclosures required by GAAP affect the auditor’s responsibilities for related party and related party transaction information? Why is the auditor concerned if management makes disclosures indicating that non routine related party transactions are at arms length?
What is substantial doubt about going concern? For what period of time after the close of the fiscal year does the auditor need to assess going concern? From what sources does the auditor get information about going concern?
List and briefly explain the typical audit steps for the following financial statement accounts: cash, receivables, inventory, investment securities, prepaid assts, property-plant-and-equipment, current payables, long-term debt, owners’ equity, revenues, expenses.
Medco Hospital Buyers Group (MHBG) processes a significant number of intercompany transactions each month, mainly transferring cash between business units to meet the needs of operating cash flows. None of MHBG’s intercompany transactions are material on an individual basis. The intercompany
Scrubs Unlimited sells surgical scrub apparel and surgical drape materials to hospitals. Typically the entire package is sold as an individual transaction. Consequently, individual transactions are often material to Scrubs Unlimited. The company has a standard sales contract, but it is often
Flex Bandage Inc. manufactures surgical wraps which it distributes to hospitals and clinics around the country. Flex Bandage uses primarily trade accounts when dealing with its customers and bases its accounts receivable valuation at year end on an aging schedule and prior history of overall
For each of the following situations decide whether proper controls relating to the segregation of duties have been implemented. If not, recommend any improvements that could be made.a. A catering company prices each job separately based on the size, kind of food, and other variables. Currently,
Sarah works in a clothing boutique whose return policy requires a manager to authorize any returns or exchanges. While auditing the boutique you interview Sarah and learn that the weekend manager has given Sarah and several other employees the authorization code to process returns and exchanges so
For each of the following (a-c) determine which audit objective is being met by the following control. In addition, list a test that an auditor would do to provide assurance that the control was effective.a. All sales orders are matched to shipping to documents on a weekly basis to determine
Your client, Cars Unlimited, Inc., is currently the largest client for the local office of the audit firm. Cars Unlimited, Inc. is a large car dealership that sells over 15,000 cars a year. You have been on this engagement for 3 years already but this is your first time as the senior associate.
For each of the following errors identify an audit procedure the auditor could have used to detect it.a. The allowance for doubtful accounts estimated by management is too small.b. Cash in payment of an account receivable is deposited in the bank in the current period but is not posted to the
You are responsible for performing substantive analytical procedures on services revenue for MD Cosmetics, a company that employees and provides administrative services (billing, collections, supplies purchasing, etc.) for a group of plastic surgeons in the Orange County area of California. MD
Your client, General Hospital, provides a wide range of healthcare services to “qualified” patients. In order to be a “qualified” patient, an individual must provide the hospital with a valid form of identification and a current insurance card. Before a patient can receive services, the
Nile.com is an online retailer of electronics, music, books, DVDs, and a variety of other consumer goods. All sales are made on the basis of FOB Destination Prepaid; the shipping costs are paid by the customer. During the last week of the year, Nile.com had a large year-end sale of all merchandise
You are on an engagement to provide an integrated audit on the financial statements of Carson’s Orthopedic Shoes. This company is a small-size online retailer that sells custom shoes to the public. All orders are processed, packaged, and shipped by company employees at a small warehouse. At the
Understanding the management assertions related to a specific control is an important factor in preparing the tests of controls. Using the assertions provided below, select the management assertion(s) that relates to the purpose of the controls in table. (A management assertion may be selected
Over the year, the Jackson Sports Supplies Company received multiple complaints from customers that there payments were incorrectly posted. While the total amount of payments received equaled the customers’ total payments, the amounts were broken up in multiple entries at different dates.
Denice Williams, CPA is the in-charge auditor for Midwest Health Solutions, Inc. She requested an aging analysis of accounts receivable as of 12/31/11, the company€™s year-end. Below is the information she received:The controller for Midwest said that the percentage have been used
You are the auditor for Johnson Products, a medical supply company. They ship wholesale products to clinics and hospitals and some retail products to drug stores.When flowcharting the revenue cycle, you discover the following information:All sales are made on open account via 1/10, net/30 credit
Daniel Martin, CPA is the auditor for HMO Health Systems. He requests that the client’s bank cutoff statement be sent directly to him at his CPA office. In tracing reconciling items to the cutoff statement, he lists the following:A deposit in transit (dated 12/31/10) cleared the bank on
You are conducting an audit of the financial statements of Medical Complex Rentals, Inc. for the year ending March 31, 2010.You are assigned to examine the annual rent reconciliation (below) prepared by the controller of the company. Medical Complex Rentals, Inc.Rent ReconciliationFor the Year
You are auditing Riverview Medical Center for its fiscal year ending December 31, 2010. During your tests of account balances you noted the following:1. The November revenue journal indicates that patients were billed $150,000 and this amount was posted as a debit to Accounts Receivable and a
You are auditing Seaside Hospital and Medical Complex. You complete a walkthrough with the help of Seaside€™s controller. The following comments relative to cash receipts are outlined in your memo describing Seaside€™s accounting procedures.1. Cash receipts are sent directly to
Go to the Web site for Mednax, Inc. at www.mednax.com. Click through the menu tabs for investors, SEC filings, and 10K. (a) Explain what Mednax does. Who works for Mednax?(b) Explain its billing collection, and reimbursement activities as described by Mednax.(c) Who are the third-party payers for
Go to the Web site for Best Buy at www.bestbuy.com. Scroll to the bottom and select “For our Investors.” Select SEC filings and the most recent 10K. Find Note 1 to the (c) below explain in your own words:The company’s revenue recognition policies.How the company determines what to
Access the SEC case of Serological Corporation, Inc. at www.sec.gov/litigation/admin/34-45852.htm.Required:(a) Briefly describe the way that Serological Corporation improperly recognized revenue with its largest clients.(b) While the practice of bill and hold is not fraudulent, what are some of the
What is the difference between a sales and collection cycle and a revenue cycle?
Why is proper billing especially important in the health-care provider setting?
What transaction is captured by a Contractual Discount account? What type of account is a Contractual Discount account?
What is the difference between a fee-for-service and a capitation agreement?
What is the difference between the business of a wholesale distributor and that of a retailer?
Why is the shipping function more important for an online retailer than for many traditional retailers?
What can cause revenue to be overstated?
Why is it important that all sales transactions are recorded and that the amounts recorded are correct?
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