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business
auditing

Questions and Answers of Auditing

Regarding the effectiveness of internal controls over financial reporting, when does the auditor issue an unqualified opinion? Under what circumstances does the auditor issue an adverse opinion and a
What role do internal controls play in the corporate governance process?
1. As part of understanding internal control, an auditor is not required toa. Consider factors that affect the risk of material misstatement. b. Ascertain whether internal control policies and
The chapter described a cash internal control system for BCS, Inc. Can you suggest some improvements to the current system?
What does it mean to say that it is possible to have perfect internal controls and materially incorrect financial statements?
The chapter described an audit by Stuart and Steigler for Mystery Bookstore. Refer to this example.a. Describe how you might test the controls identified in the chapter. Think about the relevant
Go to the campus bookstore and buy something. Pay for your purchase and keep the receipt to bring to class.a. Consider the assets of value in the bookstore. Identify these assets and describe the
Stan Stuart from Stuart and Steigler LLP has been assigned to audit the local college bookstore. One of the first things he does to plan the evaluation of the company’s internal control is to tour
Refer to Management’s Report on Internal Control over Financial Reporting in Exhibit 3-7 for Goodyear Tire &Rubber Co.a. Describe the steps taken by management to assess the company’s
Refer to Exhibit 3-9 for the Report of Independent Registered Public Accounting Firm for Hewlett Packard Company.a. What type of opinion did the auditor issue regarding management’s assessment of
Refer to Exhibit 3-10 for the Report of Independent Registered Public Accounting Firm for Hecla Mining Company.a. What type of opinion did the auditor give Hecla Mining for its internal controls over
In June 2005, Dennis Kozlowski, former CEO of Tyco, was convicted of charges involving grand larceny, conspiracy, securities fraud, and falsifying business records. He was sentenced to ten years in
In September 2002, the SEC opened an informal investigation into the retirement packages General Electric had offered to former CEO Jack Welch, who retired in 2001. 7 The compensation package,
In July 2004, John Rigas, the founder and former CEO of Adelphia and his son Timothy Rigas, former chief financial officer of the company, were convicted of fraud and conspiracy for looting more than
Prepare the journal entries to record the transactions in the revenue process. Identify the balance sheet and income statements accounts included in the process.
What is the aged trial balance for accounts receivable? How could the auditor use it in the audit process?
Describe the rules of the applicable financial accounting framework for recognizing revenue. Are these rules easy for the client to apply
Describe two ways that a client could misstate revenue. Which of these two methods could be harder for the auditor to catch?
Describe the assertions made by management regarding the accounts in the revenue process.
How does the auditor test the presentation and disclosure assertions for the revenue process?
1. A key internal control in the revenue process is the separation of duties between cash handling and record keeping. The objective most directly associated with this control is to verify thata.
Review the list of controls that could be present in the revenue process and determine the audit procedures that could be performed to test the control. For each procedure, indicate the management
The auditor performs preliminary analytical procedures to plan the audit. Results from the analytical procedures for the revenue process follow. In addition to the below questions, for each result,
The auditor performs substantive tests of transactions for sales revenue to determine that the sales revenue reported on the income statements is not materially misstated. For each procedure
The auditor has documented the following internal control procedures used by the client. For each procedure, explain the test you would perform to determine whether the control was working and the
The following audit steps are part of the audit program for the revenue process. Indicate the assertion supported by the evidence gathered in performing each procedure.a. Select a sample of sales
The following audit steps are part of the revenue process audit program. Indicate the assertion supported by the evidence gathered in performing each procedure.a. Select a sample of customers’
Accounting systems typically implement controls to prevent misstatements in processing transactions. For each of the following controls described, (1) Indicate the misstatement that could occur if
Two auditors are discussing the audit procedures for sales revenue. Stacy Mendoza believes that the best way to test sales revenue is to select a random sample of recorded sales and to trace these
While performing a sales cutoff test for your audit client, you review all shipping documents for five days before and five days after year-end. All sales are on credit and are sent FOB shipping
You have been asked to audit the revenue from member-ship fees for the Orange County Master Gardeners Club. Your spouse is a member of the club.a. What questions would you ask the club treasurer to
Sales cutoff tests are performed to determine that sales are recorded in the correct time period according to the revenue recognition rules of the applicable financial reporting framework.a. What is
Refer to Appendix A for five replies from customers of BCS Inc. in response to the receivables confirmation conducted by Stuart & Cram, the BCS auditor and a copy of two letters for which replies
See Appendix B for the aged receivables trial balance for BCS. Review it and explain what the information in each column represents.a. Use this information to calculate a bad debt provision for BCS
An auditor could use the procedures listed after the following lettered items to evaluate management’s assertions for the revenue process.a. Identify the procedure as a test of controls or
The misstatements that you found during your audit of the year-end accounts receivable balance are listed after the following lettered items.a. For each item, indicate the audit procedures that
Auditing has been defined as a process of determining the degree to which assertions correspond to the rules. Explain this statement by discussing the assertions and the rules for the revenue process.
In July 2002, Qwest, a telecommunications company based in Denver, Colorado, acknowledged that it had improperly recorded revenue for 2000, 2001, and 2002. The company restated its financial results
Bristol-Myers produces and distributes medicines and health care products. In 2002, the company experienced one of its worst years in its 100-year history. Three of its top- selling drugs lost patent
In July 2002, the SEC reviewed revenue transactions by the America Online (AOL) unit of Time Warner to determine whether the company used “unconventional” ad deals to increase revenue to meet
Xerox Corporation, a company based in Stamford, Connecticut, is involved in the production and management of documents in the form of copy machines, fax machines, and commercial printing equipment.
KPMG and Gemstar, publisher of TV Guide magazine, agreed to pay the SEC a $10 million fine as a penalty for overstating revenue from 1999 to 2002. The over statements involved improperly reporting
Describe the business process approach to auditing. Why is it useful?
How does the auditor’s responsibility for gathering evidence differ between the balance sheet and income statement accounts?
What is the purpose of prelisting cash receipts? Do you think it is worth the extra time it takes?
What is inherent risk in the revenue process? Explain when it would be high for an audit client. Explain when it could be low for an audit client.
When does the auditor test internal controls?
Explain how the auditor uses accounts receivable confirmations to gather evidence regarding the account balance.
How does the auditor evaluate the allowance for doubtful accounts?
What is audit evidence? How is it used in the audit process?
How does the auditor evaluate the sufficiency and appropriateness of the evidence gathered?
What is the purpose of the fraud discussion in an audit engagement?
Describe the audit procedures the auditor uses to obtain evidence.
Describe management’s assertions. How does the auditor use these assertions in the evidence process?
Describe the Auditing Standards Board’s documentation requirements.
Describe how management prepares fraudulent financial statements and misappropriates assets.
Is the auditor responsible for reporting fraud to outsiders? Explain your answer.
1. Which of the following presumptions is correct about the reliability of evidential matter?a. Information obtained indirectly from outside sources is the most reliable evidential matter.b. To be
Assume that you have been assigned to the audit of Italian Home Stores, which sells Italian furniture and home furnishings in two retail shops and on a website for online sales. Italian Home
You are planning the audit for Sole Comfort, a high-end shoe store selling imported shoes to men and women.a. Describe how you will use evidence to evaluate the accounts associated with the revenue
Assume that you are responsible for designing the audit procedures to detect fraud at Alberto’s Grocery Store.a. Describe how you would identify risk factors for a small independent grocery store.
You have been assigned to supervise Jason, a new audit hire. He doesn’t understand why auditors gather so much evidence and wants to know why they do not simply talk to the client and then make a
Your roommate, a history major, doesn’t understand what auditors do or how they make their decisions.a. Describe the audit process including a discussion of the role of evidence in this process. b.
Your audit client wants to disclose in a press release that net income for the year increased because of management’s efforts. You know that net income increased because the client’s pension
Refer to the description in the text of the revenue recognition procedures used by Merck-Medco. Merck recognized revenue for the prescription drug copayments paid to the pharmacy.a. Why did Merck
Many companies have used pro forma earnings disclosures to report favorable earnings in the newspapers. In 2001, the SEC issued a statement limiting the use of pro forma earnings. The SEC requested
The WorldCom fraud described in the text is one of the simplest frauds committed. Company executives simply took expenses and made them into assets. They did this with a simple adjusting entry: debit
Consider the “round-trip” transactions recorded by Time Warner described in the chapter.a. Describe how the company committed fraud. b. What type of fraud did it commit? c. What was the
The Tyco fraud described in the text has been referred to as one of the worst examples of executives who “feed at the corporate trough.”a. Describe the fraud committed at Tyco. b. What type of
Review the information presented in the chapter in the discussion of “swap” transactions between Global Crossing and Qwest.a. What type of fraud did the companies commit? b. Consider the fraud
Consider the information presented in the chapter regarding the audit of U.S. Foodservices (USF).a. Describe how the auditors failed to gather “sufficient appropriate evidence” in the audit. b.
The chapter describes a fraud at Adelphia Communications and the failure of Deloitte & Touche to detect the fraud.a. What does it mean to identify a client as being “high risk”? How did the
Describe the activities in the acquisition and expenditure business process. Write journal entries that would be used to record these transactions.
What is the most important account in this process? Describe the misstatement that is most likely to occur for this account.
List the main documents used in the acquisition and expenditure business process. Describe the purpose of each document and whether it is prepared by the firm or originates outside the firm.
Identify the misstatements that are likely to occur in this process. Explain how the auditor considers the risk of fraud in it.
Describe management’s assertions for the acquisition and expenditure process. Which assertion is the most important? Explain why this is so.
Describe key internal controls for this process.
What substantive tests of transactions are typically performed for this process?
Describe the search for unrecorded liabilities. Explain why this is an important test for this business process.
Explain how the accounts from this process have an impact on the financial statements. What are the presentation and disclosure issues associated with this process?
What are accrued liabilities? How does the auditor determine that the amount recorded in accrued liabilities is accurate?
Describe how property, plant, and equipment are audited.
1. Which of the following comparisons would an auditor most likely make in evaluating an entity€™s costs and expenses?a. The current year€™s accounts receivable with the prior
The following questions are part of an internal control questionnaire for the acquisition and expenditure process. For each question:a. Describe the misstatement in the financial statements that
An important control in the acquisition and expenditure process is the accounts payable clerk’s comparison of the vendor invoices with the purchase orders and the receiving reports for dates,
The following questions are part of an internal control questionnaire for the acquisition and expenditure process. The client has been asked to answer the questions for the acquisition and
Massarra’s Photos sells memory cards for digital cameras on the Internet, by catalog, and in numerous retail stores. The items are sold with a 90-day money-back guarantee. The customer can return
The Wellness Center is a nonprofit residential treatment center for mentally disturbed teenagers. You have been assigned to review the travel and entertainment account for this client. During your
Consider the audit procedure referred to as the “search for unrecorded liabilities.”a. How does the auditor perform it?b. When does the auditor perform it?c. What is its purpose?d. Describe the
During your audit of several expense accounts in the acquisition and expenditure process, you notice several credit entries to them.a. Identify several questions that you should ask of management
The fixed asset schedule for BCS Manufacturing at December 31, 2011, follows.Buildings are depreciated over thirty years. Factory equipment is depreciated over eight years, and trucks are depreciated
Review the description of the Rite-Aid accounting fraud described in the chapter.a. Describe the audit procedures that could have discovered the misstatements and explain why these procedures might
Refer to the information regarding the Rent-Way fraud in the chapter. Matthew Marini, its controller, described his accounting manipulations as merely “pushing the accounting rules.” Do you think
The WorldCom fraud described in the chapter involved a simple earnings manipulation through which the company capitalized expenses to increase net income. This transaction was recorded by a journal
The Fleming fraud involved an expense manipulation designed to increase net income.a. Describe a substantive audit procedure that an auditor could use to determine whether financial statements are
Refer to the facts described in the chapter relating to the fraud case involving Adelphia Communications.a. What assertion did Adelphia violate? Explain how Adelphia prepared financial statements
Consider the case of backdated stock options as reported in the chapter for UnitedHealth.a. What happens to the financial statements when options are backdated and the company fails to record
Explain the accounting rules applicable to accounts in the expenditure and acquisitions process including:a. Liability b. Expense
Are understatement errors or overstatement errors more likely to occur in the expenditure and acquisition process? Explain why.

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