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auditing
Auditing and Assurance Services An Applied Approach 1st edition Iris Stuart - Solutions
How does the auditor assess control risk for the acquisition and expenditure process? Is the auditor likely to test internal controls for this process? Explain your answer.
Describe the audit procedures used by the auditor to test internal controls.
Describe the substantive tests of balances that are conducted for the acquisition and expenditure process. Identify the assertions associated with the tests.
Describe the activities in the inventory process. Write journal entries that would be used to record the transactions in the process.
List the main documents used in the inventory process. Describe the purpose of each document and whether it is prepared by the company or originates outside it.
Identify the misstatements that are likely to occur in this process. Explain how the auditor considers the risk of fraud in the process.
Describe management’s assertions for the inventory process. Which assertion is the most important for this process? Explain why this is so.
How does the auditor assess control risk for the inventory process? Is the auditor likely to test internal controls for this process? Explain your answer.
What analytical procedures are typically done for the inventory process?
Describe the substantive tests of balances that are done for the inventory process.Identify the assertions associated with each test.
Describe the process used to count inventory. Once the inventory is counted, how does the client price it? How does the auditor test the inventory pricing?
Explain the process of valuing inventory at year-end.
Describe how the accounts from the inventory process impact the financial statements. What are the presentation and disclosure issues associated with this process?
1. In a comparison of 2011 to 2012, Neir Co’s inventory turnover ratio increased substantially even though sales and inventory accounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?a. Cost of goods sold decreased. b. Accounts
The following questions are part of an internal control questionnaire for the inventory process. For each question:a. Describe the misstatement in the financial statements that could occur if the question if the client answered “no.”b. Explain how you would design a substantive test to
The book inventory at year-end is $10,258,329. After counting and pricing the inventory according to FIFO, the cost assigned to the inventory is $9,438,637. The cost of the inventory according to LIFO pricing is $8,571,284. Answer the following questions regarding the inventory.a. Describe three
The inventory for BCS, Inc. at the beginning of the year was $158,752,000. During the year, the company purchased $5,731,600,300 of inventory. At the year-end, the value of inventory, after adjustment, was $102,003,250.a. What was cost of goods sold during the year? b. Calculate the inventory
As the partner in charge of the yearly audit of BCS, you are reviewing the audit work papers for inventory. Before you sign off on the audit, you need to determine that sufficient audit work was done to determine that inventory is not materially misstated. Inventory is a material account, and if
Lynn’s Photos sells memory cards for digital cameras on the Internet, by catalog, and in numerous retail stores. The items are sold with a 30-day money-back guarantee. A new model becomes available at least every six months, making the previous model more difficult to sell.a. Describe the risks
Consider the audit procedure referred to as the “physical inventory count.”a. How does the client perform this procedure? What are the auditor’s responsibilities for it? b. When is it done? c. What is the purpose of the physical inventory count? d. Describe the assertions associated with the
During your audit of the inventory account, you notice several adjustments made to the inventory account at the year-end.a. Identify several questions that you should ask of management regarding the entries. b. Describe three possible scenarios to explain the entries that involve adjustments
Review the discussion of the Sonali accounting fraud described in the chapter.a. Describe the audit procedures that could have discovered the misstatements and explain why they could be effective. b. In your opinion, do the audit procedures used by CPA firms have “big flaws that someone can take
The Dell fraud described in the chapter involved an exclusive relationship with Intel that agreed to pay rebates on the purchase of computer chips in exchange for the right to sell computer chips to Dell.a. What is the auditor’s responsibility to disclose this relationship? Were outsiders harmed
Review the discussion of the Ahold/U.S. Foodservice accounting fraud described in the chapter.a. Is it wrong for a company to receive rebates on inventory purchases? Explain your answer. b. What did Ahold do to cause the SEC to charge it with filing false and misleading financial statements? c.
Refer to the facts described in the chapter relating to the fraud case involving 3Com.a. What financial statement assertion did 3Com violate? Explain how it violated this management assertion. b. Describe how the auditor could design substantive audit procedures to examine “nonrecurring gains and
Consider the failure to apply the lower-of-cost-or-market valuation to year-end inventory as reported in the chapter for American Tissue.a. What happens to the financial statements when inventory is overstated? Do outsiders receive information that is relevant and reliable? b. What management
What is the most important account in the inventory process? Describe the misstatement that is most likely with this account.
Explain the accounting rules applicable to inventory accounts at year-end.
Jeffrey Conway, the CFO of Rent-Way, told Matthew Marini, the controller, to do whatever he needed to meet analyst forecasts but not tell Conway about them so he could maintain “plausible deniability.” In today’s accounting environment, is it possible for a CFO to maintain “plausible
Explain how sampling is used in the audit process.
What is sampling risk?
What does the auditor know after testing internal controls? How is this evidence used?
What is the population for an internal control test of the financial statements? What is the population for an internal control test of the financial reporting process?
When does an auditor use dual-purpose testing? What evidence does a dual- purpose test provide the auditor?
Explain how a sample differs from the population. What is the purpose of an audit sample?
How does the auditor control sampling risk and nonsampling risk?
How does statistical sampling differ from nonstatistical sampling? Explain how the auditor decides to use one method rather than the other.
In an internal control test, describe the test objective and the deviation condition.
Describe the three methods that auditors use to select sample items. How does the auditor decide which method to use?
How does the auditor evaluate the results from an internal control test? What conclusions could the auditor reach after conducting the test?
Define tolerable deviation rate and actual deviation rate. How are these terms used in an internal control test?
Describe how to use sequential sampling to perform tests of controls.
Multiple Choice Questions1. Which of the following is a step in an auditor’s decision to assess control risk below the maximum?a. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that could indicate weak controls. b. Perform tests of details of
ABC Company requires the amount and part number on the sales order and shipping document to be compared to the sales invoice before the invoice is mailed. An accounting clerk in billing performs the control and initials the company’s copy of the invoice, indicating that the comparison has been
Employees at Stuart Consulting Services prepare monthly time sheets allocating their work hours to various client projects. Time sheets are prepared online and sent to the supervisor for approval. The supervisor checks a box indicating approval of the hours and routes the time sheet to the payroll
Tron Lumber prepares monthly reconciliations of the cash balance in its bank account with the cash balance on the books. An account ing clerk who does not deposit cash in the account or write checks makes this reconciliation and initials the monthly reconciliation, indicating that the balances
The following questions are part of an internal con trol questionnaire for the long-term debt and owners' equity process. Answer the fol lowing internal control questions for the long-term debt and owners' equity process:a. Did the board of directors authorize direct borrowings on notes payable? b.
You are responsible for developing and presenting training material on internal control sampling for staff auditors. After presenting it, you receive several questions from staff auditors. Explain how you would answer each question.a. If population size has little impact on sample size for internal
During your audit of the inventory account, you notice several journal entries at the end of the year. Assume that the controller reviews all adjusting entries and initials the entry form indicating his or her review and approval.a. You decide to test this control. Explain why you believe it should
The WorldCom fraud has been described in this book. A brief summary follows: In 2005, Bernard Ebbers, the former chief executive of WorldCom, was con victed of conspiracy and securities fraud and sentenced to 25 years in prison for his role in directing the fraud. The fraud, which overstated
Time Warner inflated its revenue in 2000 and 2001 by entering into "round-trip" transactions with customers with which it had business relationships. Time Warner provided customers with funds to pay for online advertising. The customers entered into an agreement with Time Warner to purchase online
Former Tyco Chief Executive Dennis Kozlowski was sentenced to 25 years in prison for stealing hundreds of millions of dollars from the company. He took advantage of the company's prosperity to help himself to massive sums of money at the expense of shareholders. Business writers referred to his
The U.S. Congress investigated the telecommunications industry in 2002 because of its practice of recognizing revenue by swapping fiber-optic capacity. Companies such as Qwest and Global Crossing exchanged equal amounts of line capacity. Each company recognized revenue for the exchange and recorded
Kevin Hall and Rosemary Meyer (KPMG partner and manager, respectively) were investigated by the SEC for improper professional conduct on the U.S. Foodser vice (USF) audit. Hall and Meyer found numerous examples showing that USF recognized revenue that it should not have. Although Hall and Meyer
Describe variables sampling and how to use it to gather evidence in the audit process.
What sampling methods can the auditor use to select a sample for a substantive test?
Identify the factors that impact sample size. Does the population size have an impact on the number of items sampled?
Between 1999 and 2001, Merck-Medco recorded $12.4 billion of revenue that it will never collect. During this time, Merck included as part of revenue the copay ments collected by pharmacies from patients even though it does not receive these funds. These copayments accounted for nearly 10 percent of
What are sampling risk and nonsampling risk for variables sampling?
What are the differences between performing a statistical substantive test and per forming a nonstatistical substantive test?
List the steps in a sampling plan for performing substantive tests of balances and transactions.
How do the auditors determine sample size for a substantive test?
How do the auditors evaluate misstatements in a substantive test?
What are tolerable misstatements, known misstatements, projected misstatements, and likely misstatements? How are they used in substantive sampling?
Multiple Choice Questions1. While performing a test of details during an audit, the auditors determined that the sample results supported the conclusion that the recorded account balance was materially misstated. This situation indicates the risk ofa. Incorrect rejection.b. Incorrect acceptance.c.
The auditors plan to perform a test of inventory pricing to verify that the client has correctly deter mined the lower -of -cost -or -market value of the inventory.a. What assertion are the auditors testing?b. Prepare a sampling plan to perform the test. The desired level of assurance is 90% (10%
Auditors typically attend the client's year -end inventory count and make tests counts then to gather evidence regarding the ending inventory.a. What assertion are the auditors testing for inventory?b. Prepare a sampling plan to perform the test. The desired level of assurance is 95% (5% risk of
The following schedule shows accounts receivable balances for the audit client at year end. As a staff accountant, you have been assigned to select accounts receivable balances to confirm.a. What assertion do auditors test when confirming account balances?b. Prepare a sampling plan to perform the
Tron Lumber had 20 additions to the fixed asset equipment account during the past year. Describe how you could perform a substantive test to audit these additions whose amounts are material.a. What assertion are you testing for this asset account?b. Prepare a sampling plan to perform the test. The
Your audit client has a substantial portfolio of marketable securities that it holds at the end of the year.The detail for the marketable securities accounts follows. Your client purchased 100 securities as trading securities during the year and sold 75 of them. In the held-to-maturity category, it
You are responsible for developing training material for staff auditors on substantive sampling. After presenting it, staff auditors ask you several questions. Explain how you would answer them.a. Is it always better to sample more items than fewer items? b. When should I stratify a sample? c. How
During your audit of the financial reporting process, you notice several adjusting journal entries recorded in the accounts at the end of each quarter and the end of the year. You decide to test them.a. Prepare a sampling plan for the adjusting journal entries. The desired level of assurance is 90%
The OfficeMax accounting fraud previously described in the book is summarized briefly here: The third largest office supply store in the United States, OfficeMax restated earnings for the first three quarters of 2004 because of problems related to its employees' fabrication of vendor payments.
The SEC fined Gemstar-TV Guide International $10 million for overstating its revenue by $250 million from 1999 through 2002. Gemstar improperly recorded revenue for expired, disputed, or nonexistent contracts, accelerated the recognition of revenue under long-term agreements, used round-trip
Deloitte and Touche LLP was censured in April 2005 for the failed audit of Just for Feet (JFF), a Birmingham, Alabama, shoe store. JFF issued fraudulent financial statements by recognizing fictitious revenue from its vendors and by failing to write off worthless inventory. The SEC noted that
In July 2005, Deloitte & Touche LLP dropped WPT Enterprises as an audit client because the audit risk was too high for the Internet gambling client. WPT is a U.S. company offering online poker through its website. The Federal Wire Act passed in 1961 prohibits Americans from placing bets over the
Describe the activities in the cash and investment business processes. Write journal entries to record the transactions in each process.
List the main documents used in these processes. Describe the purpose of each document and whether the firm or an outsider prepares it.
Explain the accounting rules applicable to investment accounts at year-end.
Identify the misstatements that are likely to occur in these processes. Explain how the auditors consider the risk of fraud in the processes.
Describe management's assertions for the cash and investment processes. Which are the most important for these processes? Explain why this is so.
Describe key internal controls for these processes.
What substantive tests of transactions are typically done for the investment process?
Describe the substantive tests of balances for the cash process. Identify the assertions associated with each test.
Describe the substantive tests of balances for the investment process. Identify the assertions associated with each test.
Describe the purpose of bank confirmations, bank reconciliations, and the bank transfer schedule. What evidence do the auditors gain from these documents?
Describe how the accounts from this business process impact the financial statements. What are the presentation and disclosure issues associated with these processes?
Multiple Choice Questions1. The best evidence regarding year-end bank balances is documented in thea. Cutoff bank statement. b. Bank reconciliations. c. Interbank transfer schedule. d. Bank deposit lead schedule. 2. Which of the following sets of information does an auditor usually confirm on one
The following questions are part of an internal control questionnaire for the investment process. For each question:a. Describe the misstatement in the financial statements that could occur if the client answered "no" to the question. b. Explain how you would design a substantive test to evaluate
The balance in the available-for-sale investment account at year-end is $10,400,600. After reviewing the confirmations from the trustee, the auditors determine that the cost assigned to the investment account is $9,438,637. The investments' market value is $8,200,350, and the balance in the
BCS, Inc. has trading and held-to maturity securities on its books. It has bought and sold investments every month during the year. The ending balance in the accounts for the current year and the prior year follow.a. Assume that $3,000,000 of trading securities and $4,000,000 of held-to-maturity
Refer to the bank reconciliation for BCS, Inc. in the chapter. Answer the following questions about this document.a. If this is the only cash account, what amount of cash should appear on the balance sheet for December 31, 2011? b. How will the auditors determine whether the balance per the bank
As the partner in charge of the yearly audit for CWS, you are reviewing the audit work papers for the cash and investment accounts. Before you sign off on the audit, you need to determine that sufficient audit work was done to determine whether cash and investments are materially misstated at
General Office Machines has investments in available-for-sale, trading, and held-to maturity securities. It buys and sells investments in each investment category each year.a. Describe the risks associated with the audit of investment securities for General Office Machines at year-end.b. What
Consider the audit procedure referred to as “confirm cash balances at year-end.”a. How does the auditor perform this procedure? What are the auditors’ responsibilities for this procedure? b. When is the procedure performed? c. What is the purpose of external bank confirmations? d. Describe
During your audit of the cash and investment accounts, you notice several adjusting entries in the accounts at year-end.a. Identify several questions that you should ask management regarding the entries. b. Describe three possible scenarios to explain the entries that involve adjustments associated
Review the discussion of the Parmalat fraud described in the chapter.a. Describe the audit procedures that could have discovered the misstatements and explain why they could have been effective. b. Why might a company set up a subsidiary to hide fraudulent transactions? Was it easier for fraud to
Richard Schrushy, the CEO of HealthSouth, denied knowing about the fraud at his company. He says that executives working under him kept knowledge of the fraud from him.a. Is this a possible explanation for his involvement in the HealthSouth fraud described in the chapter? If this is the case, how
Are understatement errors or overstatement errors more likely to occur in the cash and investment processes? Explain why.
How do the auditors assess control risk for the investment process?
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