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auditing
Principles of Auditing and Other Assurance Services 19th edition Ray Whittington, Kurt Pany - Solutions
Describe the audit procedures the auditors use to test internal controls.
Describe the activities in the long-term debt and owners' equity process. Write journal entries to record the transactions in the process.
List the main documents used in this process. Describe the purpose of each and whether it is prepared by or outside the firm.
Explain the accounting rules applicable to long-term debt accounts.
Explain how auditors consider the risk of fraud in this business process.
Describe management's assertions for the long-term debt and owners' equity process. Which assertions are the most important for it? Explain why this is so.
How do the auditors assess control risk for the long-term debt and owners' equity process? Are they likely to test internal controls for this process? Explain your answer.
Describe key internal controls for this process. Discuss.
What substantive tests of transactions are typically performed for this business process?
Describe the substantive tests of balances that are used for the long-term debtand owners' equity process. Identify the assertions associated with them.
Multiple Choice Questions1. An auditor’s program to audit long-term debt should include steps that requirea. Examining bond trust indentures. b. Inspecting the accounts payable subsidiary ledger. c. Investigating credits to the bond interest income account. d. Verifying the existence of the
The following questions are part of an internal control questionnaire for the long-term debt and owners’ equity process. For each question:a. Describe the misstatement in the financial statements that could occur if the client answered the question “no.” b. Explain how you would design a
The balance in the Bonds Payable account at year-end is $200,000,000. After reviewing the confirmation from the trustee, the auditors determine that the correct balance is $225,000,000. Answer the following questions regarding the bonds payable.a. Describe two errors and two fraudulent actions that
Atlas Company has long-term debt on its books. It has issued new debt and made payments on the outstanding debt every year. The ending balance in the accounts for the current year and the prior year follow.a. Assume that $3,000,000 of new long-term notes payable was issued in 2012.What is the
As the partner in charge of the yearly audit for Custom Manufacturing, you are reviewing the audit work papers for the Long-Term Debt and Owners' Equity accounts. Before you sign off on the audit, you need to determine that sufficient appropriate audit evidence was gathered to determine whether
JPS has notes payable and bonds payable in its long-term debt accounts. It makes payments on notes each year and issues new debt when it needs moneys to expand the business.a. Describe the risks associated with the audit of the long-term debt accounts for JPS at year-end.b. What evidence should the
Consider the audit procedure to confirm outstanding balances, terms, conditions, and compliance with covenants with the grantor or trustee of the debt at year-end.a. How does the auditor perform this procedure? What are the auditors’ responsibilities for it? b. When is the procedure performed? c.
During your audit of the Long-Term Debt and Owners’ Equity accounts, you notice several adjusting journal entries in them at year-end.a. Identify several questions that you should ask management regarding the entries. b. Describe two possible scenarios to explain the entries that involve
John Rigas, founder of Adelphia Communications, said that he was sorry for the problems at his company, but he didn’t think he deserved to be jailed. The judge rejected Rigas’ argument, indicating that he had engaged in a blatant fraud by using shareholder money for his personal use.a. The
Review the discussion of the Parmalat fraud in the chapter.a. Why was the SEC upset about the missing debt on Parmalat’s financial statements? b. If you had owned stock in Parmalat, would you have been happy with the Tanzi family’s expenditures? Explain your answer. c. What fraud risk factor
Enron engaged in a neat trick to improve its financial statements. It simply removed debt from them and transferred it to partnerships. The company remained liable for the debt, however, and when the partnerships failed to pay the debt, Enron became liable for it.a. Why is it a problem for a
Review the discussion of the stock option fraud at Brocade Communications in the chapter.a. According to the accounting standards, is backdating stock options wrong? b. What is the auditors' concern when the company backdates stock options? c. What assertions are important in auditing backdated
What are the most important accounts in this process? Describe the misstatement that is most likely with them.
Describe the audit procedures the auditors use to test internal controls. Discuss.
Describe how the accounts in this process impact the financial statements. What are the presentation and disclosure issues associated with it?
Review the discussion of the Xerox fraud described in the chapter.a. Why would auditors consider performance-based compensation and stock options to be a risk factor in an audit? b. Did KPMG consider these compensation methods to be risk factors in the Xerox audit?
Describe the activities involved in completing the audit.
Describe the two types of subsequent events. How is each type accounted for in the financial statements? Provide an example of each type of subsequent event.
Explain the audit procedures for related parties. Who are an audit client's related parties?
How do the auditors consider the laws and regulations related to an audit client during the audit process?
What is the going concern assumption? What is the auditors' responsibility related to it?
What are the documentation requirements for an audit? How are work papers reviewed at the end of the audit?
Describe the requirements of the auditing standards for determining whether the financial statements are materially misstated.
Describe the auditors' responsibility for reviewing the footnotes and other material found in the annual report.
1. A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties should reach an understanding on the limits of materiality for this
The following events occurred between the end of the year, December 31, 2012, and the date of the audit report, March 1, 2013. Assume that the impact of each of these events on the financial statements is material.• A warehouse owned by the company you are auditing burned down on February 15,
Subsequent events after issuance of audit report. Assume that the audit report for your client has been signed and distributed to outsiders. What is your responsibility related to new information that comes to your attention? Are you required to search for new information all year? Provide an
During the audit of contingent liabilities, your audit client provides the following information regarding potential liabilities:• Your client has agreed to guarantee a loan in the amount of $5,000,000 for a related party and will be liable to repay the loan if the related party cannot do so.•
Before you sign off on the audit, you need to determine that sufficient audit work has been done to determine whether contingent liabilities and subsequent events have been recorded in accordance with the applicable financial reporting framework at year-end.a. Describe the audit evidence the
Footnote disclosure. Your audit client believes that disclosing everything is the safest action to take today. Management believes that if the company tells outsiders everything it is required to tell them as well as additional information, they will not complain that they did not have sufficient
Consider the audit procedure to obtain a representation letter from the client at the end of the audit. The staff accountant on the engagement questions the necessity for this procedure, saying, "Isn't this procedure silly? I give the client a copy of the representation letter and ask them to type
Your audit client will disclose information only that you force it to disclose.a. What is the basic requirement for disclosure in an annual report? b. The client believes that any events that do not affect the financial statements can be ignored in the footnotes. Is this correct? Explain your
In its 2005 annual report, IBM disclosed the following subsequent events:• On February 15, 2006, the company completed the acquisition of Micromuse for approximately $875 million. Micromuse is a publicly traded software com pany that provides network management software. The acquisition will be
ThyssenKrupp issued the following footnote in the interim financial statements for the first quarter ending December 31, 2007: On the basis of the authorization granted by the Annual Stockholders' Meeting on January 18, 2008, the Executive Board of ThyssenKrupp AG resolved on January 31, 2008 to
ThyssenKrupp, in interim financial statements for the first quarter ending Decem ber 31, 2007 (a company with a year-end of September 30), disclosed a possible contingent liability related to payments received from the Italian government related to a special price for electricity purchase by the
TUI AG issued the following subsequent event footnote in its 2006 annual report. Its auditors, PricewaterhouseCoopers, signed the report on March 5, 2007. The integration of CP Ships into Hapag-Lloyd changed the primary economic environment of the companies operating in the shipping division to
What are contingent liabilities? What audit procedures are used to gather evidence related to them?
What is the representation letter? How is it used during the audit?
Describe the auditing standard for reporting.
Is an audit report with an explanatory paragraph a clean opinion? Explain your answer.
When is an adverse audit report issued? What level of assurance does it provide users of financial statements?
What is the audit report on internal control over the financial reporting process? When is this report issued? What are auditors’ responsibilities in preparing it?
Describe the circumstances in which an auditor would issue an unqualified report on management’s assessment of controls and an adverse report on internal controls over financial reporting.
What is a standard unmodified audit report? When is it issued? What level of assurance does it provide users of financial statements?
How are explanatory paragraphs used in an audit report? Provide several examples that could be added to an audit report.
When is a modified audit report issued? What level of assurance does it provide users of financial statements?
When is a disclaimer of opinion audit report used? What level of assurance does it provide users of financial statements?
Discuss auditors’ various reporting responsibilities. Why are they important to the audit report?
What situations would cause auditors to modify the audit report on internal controls over the financial reporting process?
Multiple Choice Questions1. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements?a. Preparing financial statements that fairly present a company's financial posi tion, results of operations, and cash flows
Assume that auditors encounter the following situations during an audit. Describe what opinion they should issue in each case and any explanatory paragraphs or modifications to the standard report that could be necessary. If more than one opinion is possible, describe the two that could be used and
You are auditing a company with major production facilities outside the United States. The company has 50% of its inventory in a country with civil unrest. The firm is unable to confirm whether the inventory still exists, and you are unable to visit this country to verify that the inventory is
Reporting responsibility for internal controls over the financial reporting process. Explain auditors' reporting responsibility for internal controls over the financial reporting process. What types of audit reports can the auditors issue related to this process? What is the report's significance?
Report modifications to the opinion on internal controls over the financial reporting process. What causes auditors to modify a report on internal controls over financial reporting?
Review versus audit. What is the difference between reviewing financial information and auditing financial information? Is the difference important? What information is likely to be reviewed? What information will be audited? Are outsiders likely to understand the difference? What are the
Review the annual report for Dell Computers in the chapter.a. What audit opinion did the auditor give Dell on the financial statements? b. What was the audit report on the effectiveness of internal control over finan cial reporting? c. Why is the same auditor required to issue reports on the
Review the audit reports for General Mills found in the chapter.a. How do the General Mills reports differ from those for Dell Computers? b. What audit opinion did General Mills receive on the financial statements? c. Describe the explanatory paragraphs in the General Mills report. Why are they
Describe the AICPA Code of Professional Conduct.
Describe the rule sections of this code of professional conduct including a description of each of the rules.
Describe the SEC’s authority in the accounting regulatory environment.
What role do state CPA societies serve in regulating the accounting profession?
Anne Sorenson, an auditor for Stuart and Cram, is currently assigned to the audit of Amgen, Inc., a biotechnology company based in Thousand Oaks, California. The audit has gone well, but today Sorenson over heard a very exciting piece of information. Amgen has just completed a series of tests with
Explain the purpose of the principles of the AICPA Code of Professional Conduct.
What role does the PCAOB play in regulating the accounting profession?
Describe several limitations of current audit methodology.
What are pressures on management that could have an impact on the financial statements? How can these pressures affect an auditor’s job?
Does the auditor face pressure in the current audit environment? Explain your answer.
Describe the legal liability the auditor faces when performing an audit.
Explain how the Sarbanes-Oxley Act of 2002 has had a major impact on the accounting profession.
1. Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?a. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts. b. Ethical
Based on the requirements of the AICPA Code of Professional Conduct, determine whether independence is impaired in the following situations.a. During the time of the audit, the auditor's spouse has a direct interest in the client. b. During the time of the audit, the auditor has a material indirect
A recent article in The Wall Street Journal reported a study 1 done by accounting researchers. They argued that over the last 20 years, auditors have changed their audit approaches and these changes make it less likely that auditors will discover misstatements by business executives. In the older
According to an article in a mid western newspaper, stealing $2.3 million from the Dakota Credit Union was simple. Joe Kramer, who lost the money gambling, was the credit union's only full-time employee. Kramer said he began gambling to make the payments on a $50,000 loan to a friend because the
When you prepare a bid for a new client, you always low ball the bid to get the client. You know that the fee is almost always adjusted at the end of the audit due to nonperformance on the part of the client, so you are not concerned that you will be unable to make a profit on the initial bid.a.
A client contacts a public accountant about representing it regarding a hearing for a tax dispute with the IRS. In discussion with the client, the accountant stresses her extensive experience with the IRS. Because of this experience, she explains to the potential client that she will be able to
A former audit client calls and asks for a recommendation for someone to install a new accounting software package. You provide a referral for the service. Under what conditions can you charge a fee for the referral?
An article in The Wall Street Journal 2 indicated that the big four audit firms earn approximately 20% of their total revenue from tax preparation. The article reported that big four accounting firms typically use temporary workers and part-time employees to prepare tax returns in the tax season,
The Baptist Foundation Arthur Andersen LLP agreed to pay $217 million to settle a lawsuit over its audits for the Baptist Foundation of Arizona. At the time, this was the second largest settlement ever agreed to by a major accounting firm. The lawsuit alleged that Andersen accountants failed to
Ernst & Young Refer to the information on the Ernst & Young ethics code violation for its audit of PeopleSoft.a. Evaluate the statement made by Ernst & Young that it did nothing wrong because no one was harmed. Is this an appropriate defense against a claim of lack of independence? b. Can you
Ernst & Young The Securities and Exchange Commission determined that Ernst & Young violated accounting rules in its audit of Cendant. 6 According to SEC records, Ernst & Young proposed a "value bank" that gave Cendant a reduction in audit fees in return for consulting work.a. Does this arrangement
The SEC settled an independence case with PricewaterhouseCoopers (PWC) in July 2002. 7 The case found that from 1996 to 2001, PWC engaged in contingent fee arrangements with 14 public companies. In each instance, the client hired the audit firm's investment bankers to perform financial advisory
Multiple Choice Questions1. A key determinant as to whether, under Circular A-133, a program is considered major or non-major isa. The overall size of the program, as measured by total revenues, regardless of sourceb. The overall size of the program, as measured by total assetsc. The amount of
Kevin Watkins is a manager of a CPA firm. At the recommendation of the partner in charge, he applied and was accepted for membership on the Accounting Standards Committee of the Government Finance Officers Association. Committee members are selected on their individual qualifications. In
In June 2013 Jason King completed his audit of a 2012 grant that a city made to Field of Dreams, a private, not-for-profit organization that sponsors recreational programs for disadvantaged teens. In the course of his testing, King discovered that material disbursements that were made in 2013 were
What is the most common type of attest engagement? What is most frequently being “asserted” made by management on this type on engagement?
What relationship exists between AICPA generally accepted auditing standards (GAAS) and the statements on Auditing standards (SASs)?
What is meant by the term ethical dilemma? Describe an ethical dilemma that you have faced. Discuss.
What is the basic purpose of a code of ethics for a profession?
How does the AICPA code of professional conduct relate, if at all, to these 10 generally accepted auditing standards?
“Since internal auditors are employees, they have no ethical responsibilities to others beyond their employers.” Comment on this statement.
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