Auditing Fundamentals 1st Edition Marlene Davies, John Aston - Solutions

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As a result of highly profitable operations over a number of years, Eastern Manufacturing Corporation accumulated a substantial investment portfolio. In his examination of the financial statements for the year ended December 31, 19X0, the following information came to the attention of the
In connection with his examination of the financial statements of Belasco Chemicals, Inc., Kenneth Mack, CPA, is considering the necessity of inspecting marketable securities on the balance sheet date, May $31,19 X 1$ or at some other date. The marketable securities held by Belasco include
As part of his examination of the financial statements of the Marlborough Corporation for the year ended March 31, 19X1, Marion Romito, CPA, is reviewing the balance-sheet presentation of a $\$ 1.2$ million advance to Franklin Olds, Marlborough's president. The advance, which represents 50
You were engaged to examine the financial statements of Ronlyn Corporation for the year ended June 30.On May 1, the Co poration borrowed $\$ 500,000$ from Second National Bank to finance plant expansion. The long-term note agreement provided for the annual payment of principal and interest over
The following transactions and events relate to financing cycle transactions:1. Declare cash dividend on common stock.2. Issue bonds.3. Pay bond interest.4. Purchase 500 shares of treasury stock.5. Pay cash dividend declared in 1 above.6 . Issue additional common stock for cash.7. Accrue bond
In an examination of the Marco Corporation as at December 31, 19X2, you have learned that the following situations exist. No entries in respect thereto have been made in the accounting records.1. The Marco Corporation has guaranteed the payment of interest on the ten-year, first-mortgage bonds of
The following covenants are extracted from the indenture of a bond issue. The indenture provides that failure to comply with its terms in any respect automatically advances the due date of the loan to the date of noncompliance (the regular due date is twenty years hence):1. "The debtor company
You have been assigned to the examination of the capital stock of $A$ Company. As a result of your review of changes in the account for the year, you have identified the following transactions:1. Cancellation of treasury stock.2. Issuance of a 5 percent stock dividend.3. Issuance of capital stock
The Eaton Company was incorporated July 10, 19X0, with an authorized capital as follows:1. Common stock, Class A, 20,000 shares, par value $\$ 25$ per share.2. Common stock, Class $B, 100,000$ shares, par value $\$ 5$ per share.The capital stock account in the general ledger is credited with
You are engaged in doing the audit of a corporation whose records have not previously been audited by you. The corporation has both an independent transfer agent and a registrar for its capital stock. The transfer agent maintains the record of stockholders and the registrar checks that there is no
You are a CPA engaged in an examination of the financial statements of Pate Corporation for the year ended December 31, 19X3. The financial statements and records of Pate Corporation have not been audited by a CPA in prior years.The stockholders'. equity section of Pate Corporation's balance sheet
The Jones Company, located in Chicago, has been your client for many years. The company manufactures light machinery and has a calendar year closing. At December 31, 19X1 and 19X0 the following items appeared in the accounts applicable to marketable and investment securities. All investments in
Evaluate revenue and expense balances in regard to materiality and audit risk.
Indicate the specific applicability of the audit objectives to revenue and expense balances.
Identify the steps involved in the auditor's approach to verifying income statement balances.
Indicate the circumstances that may necessitate direct testing of income statement balances.
What procedures are useful in verifying the adequacy of required disclosures of segment information?
What are the two types of activities that pertain to completing the audit?
a. What is meant by the term subsequent events?b. Identify the two types of subsequent events and the criteria used in distinguishing between them.
a. What is the auditor's responsibility for subsequent events?b. How does he discharge this responsibility?
What specific procedures should be performed to ascertain the existence of subsequent events?
What information should the auditor obtain about litigation, claims, and assessments (LCA)?
What procedures may be used by the auditor to (a) discover LCA and (b) obtain corroborating evidence about LCA?
a. What objectives are met by a client representation letterb. What effect may a "rep" letter have on the auditor's examination and audit report?
Identify four items that may be included in a representation letter.
a. What factors should be emphasized in making an overall analytical review?b. What purpose is served by an overall analytical review?
The auditor must audit other information in documents containing audited financial statements. Do you agree? Why or why not?
Who are the principal recipients of the auditor's required communication of material weaknesses in internal accounting control?
Indicate the limitation of the auditor's conclusions on internal accounting control and the manner in which the conclusions are expressed.
a. What purpose is served by management letters?b. List the types of data that may be included in management letters?
What is the auditor's responsibility for subsequent events occurring after completion of field work but before issuance of his audit report.
What is meant by dual dating an audit report?
a. What responsibility does the auditor have for the post audit discovery of facts existing at the date of his report?b. Identify the steps the auditor should take when the client refuses to make disclosure of the newly discovered facts.
In auditing the financial statements of a manufacturing company that were prepared from data processed by electronic data processing equipment, the CPA has found that his traditional "audit trail" has been obscured. As a result the CPA may place increased emphasis upon overall checks of the data
During an audit engagement an auditor is expected to communicate with lawyers concerning claims, litigation, and assessments. Listed below are five situations regarding LCA. The last clause or sentence of each case states a conclusion:1 If the client's lawyer is silent on certain aspects of an
During an audit engagement Harper, CPA, has satisfactorily completed an examination of accounts payable and other liabilities and now plans to determine whether there are any loss contingencies arising from litigation, claims, or assessments Required:What are the audit procedures that Harper should
In your audit of the Learned Corporation you request a management "rep" letter. You are particularly interested in management's representations on 1. Irregularities involving management or employees.2. Minutes of directors' meetings.3. Compliance with laws and regulations.4. Completeness of the
Michael, CPA, is examining the financial statements of the Diannah Corporation as of and for the period ended September 30, 19X0. Michael plans to complete the field work and sign the auditor's report on November 15, 19X0. Michael's audit work is primarily designed to obtain evidence that will
In connection with your examination of the financial statements of Olars Manufacturing Corporation for the year ended December 31, 19X0, your post-balance-sheet-date review disclosed the following items:1. January 3, 19X1. The state government approved a plan for the construction of an express
The fiscal year of the Eddy Company ends on December 31. Your audit report, dated February 26, is to be delivered to the client on March 9. Listed below are events that occur or are discovered from the date of the balance sheet to June 30 of the following year:1. Jan. 15 Inventory is sold at a
The major result of a financial audit conducted by an independent accountant is the expression of an opinion by the auditor on the fairness of the financial statements. While the auditor's report containing the opinion is the best known report issued by the independent auditor, other reports are
The working papers pertaining to the auditor's study of internal accounting control include the following preliminary evaluation:Up to the point at which the prenumbered sales invoices are prepared, controls are very weak (ineffective). The weaknesses are:1. Orders are verbally transmitted from the
Tuloak Manufacturing Company is a small manufacturer of oak porch swings. It was organized as a proprietorship by its current president and majority stockholder, Samuel Lawten. Tuloak was incorporated in 19X0 when growth of the company necessitated the raising of additional capital.The accounting
After completing the interim examination of the accounts of B. Ltd, a Canadian company CA (Chartered Accountant) sent a letter to the controller, commenting on several matters which he felt required improvement.The controller discussed the comments with his staff, then sent a reply rejecting all of
a. What are the basic similarities and differences between administrative control and accounting control?b. What is the relationship between the two types of controls?
What are the four specific objectives of internal accounting control?
Britfly describe the meaning of the terms (a) safeguarding of assets, (b) reliability of the financial records, and (c) transactions as these terms relate to internal accounting control.
Identify the four basic concepts of internal accounting control.
Enumerate the factors that pertain to the internal control environment.
Identify the six basic principles of internal control and the accounting control objective(s) applicable to each principle.
When is the assignment of duties among personnel deemed to be compatible? Incompatible?
Distinguish between general and specific authorizations and give an example of each.
What conditions are important in independent internal verification.
a. State the second standard of field work.b. Indicate the scope and objectives of this standard.
What are the primary objectives of (a) the review of the system, (b) a transaction walk-through review, (c) a preliminary evaluation, (d) tests of compliance, and (e) evaluation of the system?
Contrast the advantages and disadvantages of using (a) questionnaires and(b) flowcharts in reviewing the system.
Why may an auditor decide not to rely on a prescribed procedure?
a. Define a material weakness.b. What are the auditor's responsibilities when a material weakness exists?
Indicate the steps involved in making a preliminary evaluation of accounting controls.
Indicate the three questions that are of concern in performing compliance tests and the auditing procedures used in these tests.
When may the procedure of reperformance be considered a cumpliance test? A substantive test?
Identify the GAAS to which compliance tests and substantive tests of transactions relate.
"Compliance tests are normally performed during both interim and yearend work." Evaluate the accuracy of this statement with reference to the extent and timing of these tests.
What is meant by dual purpose testing?
a. What are the two risks that the auditor should consider in determining the extent to which other auditing procedures are to be restricted?b. How does the auditor attempt to reduce each of the risks identified above?
a. How, if at all, may the independent auditor utilize the ability of the internal auditor in (a) studying and (b) evaluating internal control?b. What responsibilities do independent auditors have when they use the work of internal auditors in their study of internal control?
An important procedure in the CPA's audit programs is his review of the client's system of internal control.Required:a. Distinguish between accounting controls and administrative controls in a properly coordinated system of internal control.b. What bearing do these controls have on the work of the
A number of importani parts of internal accounting control are listed below:1. Internal auditing.2. Reasonable assurance.3. Segregation of functions.4. Organization structure.5 . Documentation procedures.6. Limitations.7. Independent internal verification.8. Personnel.9. Physical controls.10.
Dyag Instruments manufactures and assembles diagnostic instruments for the medical profession. The operations manager is responsible for Dyag's two production departments: Manufacturing and Subassembly, and Final Assembly. About 50 percent of the component parts of every diagnostic instrument is
Six principles of internal accounting control are identified in the chapter. Listed below are specific control procedures:1. Use of cash registers for over-the-counter cash receipts.2. Different individuals approve the payroll, write the payroll checks, and distribute the checks.3. Checks are
The Richmond Company, a client of your firm, has come to you with the following problem: It has three clerical employees who must perform the following functions:1. Maintain general ledger.2. Maintain accounts payable ledger.3. Maintain accounts receivable ledger.4. Prepare checks for signature.5.
Adherence to GAAS requires, among other things, a proper study and evaluation of the existing internal control. The most common approaches to reviewing the system of internal control include the use of a questionnaire, preparation of a written description, preparation of a flowchart, and
A company's system of internal control (which consists of accounting and administrative controls) is strengthened by including in the system procedures that have specific functions or purposes. For example, the system of internal control may include a voucher system that provides for all invoices
For each of the following questions appearing on an internal accounting control questionnaire, assume that a "No" answer is given:1. Is there separation of duties between the journalizing of transactions and posting to subsidiary ledgers?2. Aie cash registers used for cash receipts?3. Is voucher
In your capacity as a staff assistant, you have worked on a number of audits during the year. Listed below are a list of possible internal control weaknesses that you have noted in your working papers:1. Cash is deposited intact every second day.2. The cashier makes bank deposits, records cash
The control procedures of the Kary Company include the following:1. Credit department authorization for all credit sales.2. Billing department matching of sales order and shipping documents before preparing invoices.3. Internal verification by accounts payable clerks of the mathematical accuracy of
The following errors and irregularities were discovered in the audit of the Trusty Company:1. Cash was stolen from the cashier's desk.2. Bad debt losses were high because credit was approved by salespersons.3. Several checks were not recorded in the check register.4. Many sales invoices contained
The following is a list of prescribed accounting control procedures:1. After the treasurer of the Ardent Company signs disbursement checks, the supporting data are returned to the accounting department, and the checks are given to his secretary for mailing.2. The ticket-taker of a theater is
Listed below are a number of audit procedures that are applied to supporting documentation together with an indication of the purpose of the procedure:1. A sales order is examined for evidence of a signature indicating credit approval.2. A voucher is examined to see that all supporting
At the Main Street Theater, the cashier, located in a box office at the entrance, receives cash from customers and operates a machine which ejects serially numbered tickets. To gain admission to the theater, a customer hands the ticket to a doorman stationed some 50 feet from the box office at the
A description of some of the operating procedures of the Greystone Manufacturing Corporation is given in the succeeding paragraphs:1. When materials are ordered, a duplicate of the purchase order is sent to the receiving department. When the materials are received, the receiving clerk records the
Harlan, Inc., is a large, highly diversified organization engaged in feed and flour milling, the manufacture of plastic products, the manufacture of highly specialized machinery, and the operation of poultry hatcheries, farms, and processing nlants. The company's facilities are located throughout
What are the purpose and objectives of both external and internal audit, and what kind of service do they supply to management?
As part of their review, external auditors must comment on the reliance and effectiveness of internal audit. Discuss how they will go about doing this.
What is the role of the Auditing Practices Board in the UK regulatory framework? Discuss whether it has been successful in achieving its objectives.
Cox and Sherlock are an established firm of accountants who carry out audit duties. They have a portfolio of over 100 clients and the largest client provides 8% of their fee income. It is company policy when issuing the audit management letter to recommend that any system weaknesses be improved by
Is the UK system of corporate governance more effective than the Sarbanes-Oxley Act in preventing company fraud?
Paul Taylor has recently purchased a brand new, top-of-the-range Mercedes car. He works as a junior cashier receiving cash, cheque and credit payments for a retail furniture store. Recently a large sum of money awaiting collection by the cash-handling agents went missing. This is believed to be in
You are required to lead a small audit team carrying out a full audit of a medium sized construction company that specializes in housebuilding projects. The audit will last for 6 weeks and you have five people in your team including yourself.You are required to prepare an operational plan that
What are the advantages and disadvantages of outsourcing the internal audit function?
Compare and contrast the differences between compliance, substantive and weakness testing.
You are required to carry out a systems-based audit for the organisation’s payroll. Prepare six systems control objectives linked to key controls which you would expect to find in place as part of your audit.
Your company has a number of capital construction contracts, some of which have started and others that are about to start. Outline the different stages of the capital contract process the auditor would expect to find in place.
Critically evaluate the different approaches to sampling that the auditor would be prepared to adopt.
Should external auditors carry out non-audit duties as part of their ongoing audit service?
You are required to carry out a verification audit of a company’s freehold land and buildings, investments and debtors. Prepare your plan highlighting your approach to the audit.
Prepare an audit plan to test the reliability and accuracy of the creditors figure in the balance sheet.
The going concern assumption is a fundamental principle in the preparation of the financial statements. Discuss why it is of importance to both senior management and the auditor.
Provide examples of qualified audit reports which the auditor could use as part of the reporting process.
Critically analyse how the external audit in the public sector differs from that in the private sector.

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