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auditing
Auditing and Assurance Services Understanding the Integrated Audit 1st edition Karen L. Hooks - Solutions
What activities make up personnel functions? Payroll functions?
For what reasons do businesses withhold funds from their employees’ pay?
What functions does a human resources or personnel department perform when a new employee is hired?
What functions does an engagement management program perform? What information does it use and from what source is the information captured?
What are management’s objectives related to payroll?
What information needs to be authorized or documented when a new person is hired?
What information is contained in the payroll master file? How and by whom is it updated when information changes?
How does an imprest payroll account work? What are the advantages of using an imprest account for payroll?
What segregation of duties is necessary and appropriate for payroll?
What types of authorization and verification should occur before an employee is paid?
What payroll services are typically included in those outsourced to an outside service provider?
What functions does the user company need to perform when payroll processing is outsourced?
What information must the user organization submit to the service provider? By what means can the information be input and submitted?
What outputs are produced by the service provider related to paying employees?
What controls should a user organization have in place for the information and activities related to an outside service provider for payroll?
What is a SAS 70 report? What is its purpose? Who has access to it?
What is the difference between a Type 1 and Type II report? What conditions might cause the auditor to decide that more evidence is needed beyond a Type II report?
What evidence about the human resources cycle can be obtained through substantive analytical procedures?
What tests of details can be applied to individual amounts and account balances?
What liability accounts are related to payroll?
Briefly explain why an auditor of clients in the Land Development and Home Building industry needs a thorough understanding of the following accounting standards and methods. How do they impact the audit of inventory? a. Allocation methodsb. Asset impairmentc. Variable interest entitiesd.
Why are controls in the purchasing, payroll and sales cycles important to the audit of inventory?
Exhibit presents various ways inventory accounts have been used to perpetrate financial statement fraud. Explain how the following inventory misstatements would cause the financial statements to also be misstated, and what audit procedures might be used to catch these misstatements. a. Overstate
Explain how auditing inventory of a company with a standard cost system requires an audit of estimates. What are the estimates? What procedures would the auditor performs related to variances produced by the system at year end? Why?
What estimates are included in the cost of inventory in the land development and home building industry? Specifically, what past costs are allocated? What future amounts must be predicted? What future amounts must be predicted and allocated? Distinguish between revenue amounts and costs.
What are the steps an auditor follows for estimates such as those described in number 14-23?
How does the auditor investigate the client’s application of SFAS 144 on asset impairment to inventory in the land development and home building industry? Would the audit procedures be different for auditing impairment issues related to a company’s fixed assets?
The following audit procedures relate to tests of details of balances for inventory:For raw materials inventory or finished goods inventory that is purchased in final form, select a sample of inventory items from inventory files and examine underlying supporting documents from the purchasing
The following audit steps are to test ownership of inventory.Review consignment contracts and scan inventory records for inclusion of amounts for any consigned items not owned.Review sales contracts for bill-and-hold agreements; determine proper accounting based on terms of the agreements and
Golden Manufacturing, Inc. is a large public company that manufactures and distributes a variety of handheld electronic devices. The company purchases a large quantity of raw materials in advance because it receives substantial volume discounts from its suppliers. Upon delivery of the raw
Your client, Carson Electronics, Inc., is a wholesaler that distributes computer chips to major retailers around the world. Since the gross profit margin is normally low in this industry, the company makes large discounted purchases of every item in their inventory. Additionally, it is normal for
Tests of account balances are intended to obtain audit evidence about the fairness of the inventory accounts or, alternatively, identify material misstatements in the amounts presented. Audit procedures can only be selected after the auditor determines specific audit objectives related to
Your client, Cardinal Homes Corp., is a large residential real estate developer that currently has over 100 projects in process across the southeast of the United States. Similar to most companies in the land development and home building industry, the Company must make many estimates in
Each of the following audit procedures is being used in the audit of Morgan Fabricated Homes, Inc. to test the production and conversion cycle.Required:For each of these procedures use the following template to: (a) Identify the strength of the internal control procedure being tested (b) Identify
Each of the following audit procedures is being used in the audit of Newport Homebuilders, Inc. to test the production and conversion cycle.Required:For each of these procedures use the following template to: (a) Identify the strength of the internal control procedure being tested (b) Identify the
Each of the following audit procedures is being used in the audit of Rockport Homes, Inc. to test the production and conversion cycle.Required:For each of these procedures use the following template to: (a) Identify the strength of the internal control procedure being tested and (b) identify the
Coral Springs Foods, Inc. is diversifying its operations through the sale of snack vending equipment. The plans call for the purchase of 350 machines, which will be located at 70 different sites within the regional area and one warehouse to store snack inventory.Management has hired an inventory
Don Martin, the in-charge auditor, is observing the year-end inventory procedures for Haverson Fabricated Buildings, Inc. Don notes the following issues when observing Haverson employees involved in this process:Inventory tags are prenumbered and show the description and quantity of inventory.
Review the Problem scenario, regarding the inventory taking observation by Don Martin in the course of an audit of Haverson Fabricated Buildings to answer the following question.Required: List any additional substantive audit procedures that you would recommend to test Haverson’s inventories.
Jackson Brown, CPA, has two clients, Tarpan Financial, Inc. and Oscar Industries. During his most recent audit of Oscar, he discovered a potential overstatement of inventories because customer returns and scrap were often counted as in good condition. Because the plant supervisor assured Jackson
Ballpark Distributors, Inc. is a large public company with a calendar year-end that distributes sports memorabilia to various retailers. Ballpark conducted an inventory count on November 30 of the year being audited. Instead of conducting another inventory count at year-end, the company decided to
Dayton Publishers performs services on a job-cost basis. Most jobs take a week or less to complete. These typically involve at least two of Dayton’s five departments. Actual costs are accumulated by job, but the company prepares sales invoices based on cost estimates in order to assure timely
Use the information given in the Dayton Publisher scenario from Problem 14-37 to answer the following requirement.Required:Discuss at the least three common aspects of control with which the departmental labor cost report proposal does not comply, giving examples from the case to support each.
Why is it fairly easy for large home building companies to use job order and specific identification costing methods?
What is the relative area method for allocating common costs in the home building industry, and when is it appropriate?
What is the appropriate way for inventory in the home building industry to be written down if its fair value permanently drops below cost? What is the applicable accounting standard?
When is the percentage of completion method used in the residential home building industry and why?
What additional issues must manufacturers address regarding inventory that do not affect other types of businesses?
What is the purpose of a cost accounting system? What different types of information can be used in different businesses?
In what ways might inventory recordkeeping differ when the purpose is for operating management versus the preparation of financial statements for external users?
How does job order costing differ from process costing?
What controls are effective for the movement of inventory?
How and why are controls in the other cycles important to the inventory cycle?
What kinds of information about inventory can be obtained through substantive analytical procedures?
At what times during the financial accounting cycle do companies perform physical counts of inventory, and why might it be different for different companies?
How has inventory fraud been used to misstate financial statements?
What items related to inventory may need to be estimated?
What does the auditor need to consider in assessing accounting estimates?
What does the auditor consider in concluding on whether management’s underlying assumptions for estimates are appropriate?
What internal controls and other policies should management implement and follow relating to estimates?
What are the important aspects of disclosure for inventory that need to be assessed by the auditor?
Why is the auditor concerned about proper matching of revenues and costs of sales for houses that are sold shortly before the fiscal year end?
What steps does the auditor follow for estimates of future sales values and costs?
In an integrated audit the auditor must issue an opinion on ICFR effectiveness only at management’s report date which is typically at year end. Yet if ICFR is to be relied upon for the financial statement audit, the ICFR effectiveness must be tested for the entire year. Is long term debt an area
Discuss an auditor’s objectives in the audit of equity accounts. Describe appropriate analytical procedures an auditor may apply to equity accounts.
Why is it more important for an auditor to perform a search for unrecorded notes payable than for unrecorded notes receivable? Discuss some audit procedures the auditor may use to uncover any unrecorded notes payable.
What are the major controls over owner’s equity? What are management’s key assertions over the equity accounts?
Variable interest entities were discussed in the chapter, including an Auditing in Action Exhibit for Ford Motor Company. Why does consolidating the VIEs for which Ford Motor Company owns or controls less than a 50% interest seem to be an accounting treatment that differs from the typical treatment
Kyle is a staff auditor on the annual audit of Goodhue & Company, a major electronics retailer. In examining Goodhue & Company’s accounts, he found an account entitled “restricted cash.”Required:a. What is included in “restricted cash?”b. How can Kyle audit restricted cash? List
Assume the role of a staff auditor assigned to audit the financing cycle for Pear Computer’s annual audit. During the course of the audit, you discover a footnote revealing that “for many assets and liabilities, we have adopted the Fair Value Option in accordance with SFAS 159.” Required:a.
In performing tests for the appropriateness of the SFAS 159 fair value option for the financial assets and liabilities introduced in Problem 29, you ask Pear Computer’s accountant for a detailed list of the items that that the company decided to carry at fair value in accordance with SFAS 159.
Andrew is in charge of auditing internal controls over the investments section on the year-end Gotham City Defense Company audit. In the course of his testing, Andrew comes across an internal control that requires securities to be kept in a vault or safe deposit box or with an outside financial
Assume you are the senior auditor in a large public accounting firm in charge of auditing the pension account of a large multi-national corporation based in the United States. You ask the company for support regarding its pension expense for its defined benefit pension plan. The company gives you a
Veronica is an experienced staff auditor in charge of performing tests over equity accounts. According to the audit program, Veronica is supposed to utilize analytical procedures over the equity balances using various financial ratios.Required:a. Which equity and related accounts should Veronica
Near cash is a term used to identify very liquid items that a company uses to hold cash that will be needed in the very short term.Required: Construct a chart with relevant management assertions for near cash as column 1. Column 2 is documentation that can provide the auditor evidence related to
First Issue of Long-term Debt: In early May 2009, the 34-year old Microsoft Corp. issued its first ever long-term debt. The company took advantage of its AAA rating and low rates to issue $3.75 billion of 5-year, 10-year, and 30-year bonds. Now, for the first time ever, auditors of Microsoft Corp.
Find the Auditing in Action in the chapter that presents the cases of debt covenant waivers at MGM and Pilgrim's Pride.Required:a. State why debt covenant violations are important to auditors? If the violation is "cured" so that the company is no longer in violation at the financial statement date
Jon Hampton, president and CEO of Plastics, Inc., is living a life-style beyond his means. He has several short positions to cover with his stock brokers. His creditors are becoming especially aggressive in collecting his debts. Unable to cut back his spending, he borrowed the needed funds from the
Winton Marx, a producer of motorcycle parts, has experienced poor income, due to foreign competition. In a move to try to undercut a possible proxy fight with dissident stockholders, Geoff Daniels, the company’s CEO, formed a shell company known as Turbo Repair Shops, Inc. The company was
Using the information given in the Problem 40 scenario, identify several additional substantive auditing procedures that Jocelyn Morris should consider applying in her audit of Rogers’ investments.
Bartel and James formed a corporation called Financial Magic Services, Inc. In the corporation, Stan Bartel is a CPA (audits and tax services) and Morgan James is a casualty insurance underwriter. Bartel accepted an audit engagement with Ralston Company. Ralston had total assets of $750,000 and
Find the financial statement note for cash for American Eagle Outfitters and compare it to the cash note disclosure for Host Hotels and Resorts shown in the chapter. How do the two note disclosures compare? Why do you think Host Hotels and Resorts needs to provide so much more disclosure on cash?
Find the debt description in the financial statement notes and management discussion and analysis (MD&A) in the 10K of The Boeing Corporation. How many paragraphs or pages is the debt-related disclosure in the MD&A? In the financial statements? List the types of information included in the two
Continuing with the 10K The Boeing Corporation, look for disclosure on leases. Does Boeing have operating leases? Capital leases? For what?
Discuss an auditor’s objectives in the audit of long-term liabilities. Describe appropriate analytical procedures an auditor may apply to long-term liabilities.
It is common practice to audit the balance in notes payable in conjunction with the audit of interest expense and interest payable. Why? What are the advantages of this strategy?
Jillian is on the Gotham City Defense Company’s audit with Andrew but has been assigned the task performing tests of details of balances for the investment account. She has never audited investments before and asks Andrew for some advice. Andrew tells her that she needs to review which management
For the year ended 2010, Jocelyn Morris, CPA, has been engaged to audit Rogers, Inc, who is a continuing client. Jocelyn has assessed the control risk for the company at the maximum for all financial statement assertions involving investments. Jocelyn determines that Rogers is unable to exercise
You have been engaged to audit the financial statements of Quinn Corporation for the year ended December 31, 2010.During the year Quinn obtained a long-term loan from a local bank. The finance terms are as follows:1. The loan is secured by inventory and accounts receivable of the company.2. The
Go to the 10K for Tiffany and Co. and find information related to hedging for foreign currency. What audit steps would be performed on these accounts and disclosures?
How important is the valuation assertion for cash equivalents? Why?
What procedures does the auditor perform to audit the consolidation process? When do these audit procedures occur?
Why does the auditor have to be concerned about variable interest annuities when auditing the consolidation process?
What are the primary audit concerns for debt and debt-related account balances and disclosures?
What is a waiver related to debt covenants, and how does it affect the auditor’s work?
How does the going concern status of a company relate to the violation of debt covenants?
Why does the auditor undertake procedures to identify any debt covenant violations that occurred throughout the year and at year end?
What is the difference between a defined benefit and a defined contribution pension plan? What does it mean when a plan is “funded”?
During what period of time are pension and postretirement benefits expensed?
What is the auditor supposed to understand when a specialist is involved with an audit? What other audit steps are appropriate related to the specialist?
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