Auditing Theory And Practice 2nd Edition John Dunn - Solutions

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The Wyetown branch of XZ Ltd has forty administrative staff and more than 200 manufacturing staff. Internal audit staff are visiting each branch in order to evaluate the effectiveness of the debtors’ ledger systems. The following notes have been prepared on the Wyetown system:(a) There are three
The chief accountant at XZ’s head office requests an audit investigation at the Wyetown branch. Shortly after the receipt of your report on the Wyetown system, it had been noticed that the turnover of debtors was slowing down rapidly. This was unexpected because the company had started to grant a
If inefficient companies are liable to be taken over, do shareholders really require management audits?
To what extent could a management auditor base the evaluation of economy and efficiency or effectiveness upon statistics obtained from the published financial statements of similar companies?
Should the cost-effectiveness of a value for money audit department be measured in terms of the cost savings which it generates?
Discuss the relative merits of the different methods described in 16. 4 for the publication of the results of a management audit report.Data from 16. 4Management audits were introduced in the public sector to compensate for the lack of a profit motive to spur managers. This problem might not seem
The managing director of Trendy plc always watches a business affairs programme on television. The latest edition contained an item about management auditing. This prompted discussion at the next board meeting and it was agreed that the external auditor should be commissioned to conduct a review of
Compare and contrast the difficulties of measuring the efficiency and effectiveness of the personnel management function with that of public relations.
It has been argued that environmental auditing is merely a passing fad, and that soon auditors will be turning their attention to some other fashionable topic. Will environmental audit exist in twenty years’ time?
Some companies have carried out an environmental audit, but have not produced or implemented any action plan as a result. Is there a danger that the environmental audit is being used as a marketing tool?
Is the accounting profession the best source of environmental auditors?
In Belgium, certain companies have a statutory requirement to produce specific environmental reports, disclosing details of production processes and emission levels. Should this become a statutory requirement in the United Kingdom?
In 1994, of the Financial Times top 100 companies, thirty-four published environmental reports, and six obtained independent verification of their contents. Is this good or bad news?
Devise an audit programme for a comprehensive environmental performance review of a small hotel.
Interim confirmations of debtors and creditors cost more because of the need to audit transactions recorded during the period from the confirmation date to the year end. They also provide poorer quality evidence because of the additional reliance on documents which have been prepared by the
Should the auditor have a statutory right to demand responses to confirmation requests?
Discuss the advantages and possible dangers of conducting compliance and substantive tests simultaneously using the same sample of items.
Should an auditor state the extent to which it has proved necessary to rely on the assistance of independent experts in the identification of specialised fixed assets or stocks during physical inspections?
What aspects of a report prepared by an independent surveyor should the auditor examine if the amount stated in it is to be included in the balance sheet?
The directors of a company have increased the value of the bank balance from an average level of £300 to the sum of £47,000 as at the year end.Within ten days of the start of the new financial year, the balance had slumped to £450. How could the auditor justify the need for a note to the
YTR Ltd build houses and factories. During the year the company’s own staff erected a new office building on a piece of land immediately beside their existing offices. This new building was required because of expansion which had taken place during the year. The costs incurred were as shown in
Your client has a substantial balance deposited with the First National Bank of Mordovia.This balance is denominated in the local currency. Draft an audit program for the audit of this balance, suggesting how the approach taken differs from that which would be applied to the audit of a balance in a
You are the auditor of JHG Ltd, a manufacturing company. This company maintains records of all stock issued and received, valued at standard cost. The computerised accounting system identifies the standard quantities and prices of each component contained in each item sold during the year and
The directors of LKJ Ltd prepared a forecast of expected profits and dividends and another of acquisitions and disposals of fixed assets in order to support their decision to treat ACT recoverable as an asset and to justify the inclusion of a very small liability in respect of deferred taxation.
In 1990, the APC published an Auditing Guideline entitled Guidance for Internal Auditors. This would appear to support most of the arguments developed in the IIA standards. Why would the APC wish to publish a document which is intended to improve the quality of internal audit work?
The APB has made its standards mandatory. Discuss the difficulties associated with publishing a mandatory set of standards for internal auditing.
Many organisations deliberately recruit newly qualified accountants from professional firms to join their internal audit departments. These appointments are viewed as a means of giving staff a broad overview of the systems.They are expected to move into managerial positions after two years or
Should the external auditor be encouraged to use staff seconded from internal audit to conduct detailed audit testing? What precautions should be taken?
The importance of audit sampling is underlined by the fact that this was one of the first topics covered by an SAS. Despite this, the standard does little more than define terms and lay down broad guidance at a very high level (e.g. that the effects of errors should be evaluated). Describe the
It would appear that the quantification of materiality levels and the residual risk which is to be dealt with by substantive testing are the most difficult aspects of designing a statistical sample. Given the developments of expert systems, discuss the benefits which could be obtained from
Leslie suggested that the company’s audit committee should be involved in the setting of the tolerable error. Discuss the merits of this proposal.
Discuss the assertion that the failure to use statistical sampling techniques during an audit is indicative of negligence.
You are an audit manager employed by the accounting firm of Misconceive and Bluff. You are discussing statistical sampling with the senior partner of the firm. He makes the following comments:(a) ‘Look at this conclusion on-the audit of purchases. “I am 95 per cent certain that the purchases
You are about to commence the audit of the wages figure produced by a computerised payroll system. Within the payroll files, each disbursement is flagged with a single digit which states the nature of the payment. The following code is in use:The tolerable error is 60,000. You are required to
Understatement tests are usually difficult to design because of the problems of identifying an appropriate reciprocal population. This is demonstrated in the audit of sales. Should auditors abandon the concept of directional testing because of this?
How can accounting firms overcome the dangers associated with interrelated aspects of the audit being completed in isolation?
Is it dishonest for an auditor to suggest improvements to a client’s credit control system if he is doing so to reduce the level of audit risk and not out of a desire to reduce the cost of bad debt for the company?
You are auditing the rental income of a car hire company. Suggest the types of inherent and control risk which would be encountered in this type of audit and describe the analytical review and substantive procedures which you would undertake.
You are the auditor of a mail order company which sells clothes on an approval basis through a large number of customers spread across the country. Customers are given 30 days to pay for goods after they have been despatched. They are also allowed to return the goods within this period. All
You are the audit manager in charge of the audit of THI Ltd. One of the audit juniors was responsible for the audit of debtors and has filed the following comments on the audit approach taken.(a) ‘A great deal of time was saved by asking the company’s staff to type out the confirmation requests
A company’s major customers are in a specialised line of business which complicates the recording of invoices for purchases. The auditor attempted to confirm several of their balances by means of a positive request and received a 15 per cent response rate.The audit senior contacted the debtors by
Compare and contrast the nature of the evidence used by an auditor with that which would be considered by the jury in a criminal court case.
What problems would be created if the shareholders’ understanding of audit evidence differed from that of the auditor? How are these problems to be overcome? What further work is necessary?
To what extent does a lack of usable evidence pose problems for the auditor?
To what extent is the decision to collect more evidence a commercial one?
Reconcile the detailed audit objectives contained in the Auditing Guideline on audit evidence with the rules of thumb for the identification of audit objectives. Are the rules complete or do they have to be supplemented in any way?
Evaluate the quality of the following pieces of audit evidence, suggesting how each could be used during an audit.(a) A written assurance from the client’s managing director.(b) An analysis of standard versus actual costs, prepared by the client's staff.(c) A report on the value of land and
You are the audit senior in charge of the audit of a medium-sized manufacturing company. You have asked the company secretary for the minutes of all board meetings held since the conclusion of last year’s audit work. The company secretary, who has only recently been appointed, refuses to give you
You are a training manager in charge of a course for new audit staff. You have just completed a discussion on the topic of directional testing. One member of the class raises the following questions:(a) ‘If you only test debits for overstatement and credits for understatement, surely you are only
You have been asked to audit the accounts of your friend’s squash club. The income and expense account shows income from the following sources:Expenses consist of:The club has no material assets or liabilities.State how you would go about the audit of the income and expenses of the club, making
Why is an examination of the system a vital part of the risk-based audit approach, as implied by the US requirement that the auditor should obtain an understanding of the company’s control environment?
Why should an auditor conduct compliance tests every year, even if the company’s system has always worked perfectly in the past?
If the company’s staff are more familiar with the system than the auditor and can more easily identify compensating controls for weaknesses highlighted by the internal control evaluations, would it be more efficient for the auditor to ask the staff to complete these documents for him?
Why do auditors insist on sending management letters if managers do not find them useful?
The owner of a small school of motoring has come to you for advice. She has a number of other business interests which make it impossible for her to spend more than one day of each week at the school’s offices. She is concerned that the accounting records may not be properly maintained by the
A large company which manufactures pharmaceutical products has recently opened a chain of chemists’ shops across the country. This was to enable the company to sell its own brands of proprietary medicines to the public and also to diversify into the retailing industry.Other manufacturers’
A company has approximately 250 vending machines which sell childrens’ toys and novelties. The machines are equipped with animated puppets which move and play tunes whenever coins amounting to the standard price are inserted into the slot. The gift is then delivered in a small plastic sphere.The
To what extent should companies consult their auditors before acquiring or updating their computer systems? Consider the implications of such consultation for audit risk and independence.
The use of CAATs requires the active cooperation of the company’s staff.This may mean that the company’s management can learn a great deal about the general approach to the types of test conducted by the auditor, materiality levels, and so on. Describe the problems which this could create for
If the auditor can reduce the time taken to complete the audit then the level of the audit fee will be reduced accordingly. Is it wise for accountants to invest in audit software packages and portable microcomputers?
The ICAEW’s discussion paper IT and the Future of the Audit points out that the auditor can use CAATs to conduct very detailed substantive tests at relatively low cost. The amount of evidence collected in this manner could reduce the need for any investigation of internal control.The discussion
It is possible that traditional financial statements will be replaced by the interrogation of company accounting systems by shareholders using their own personal computer systems. Discuss the possible effects of this innovation on the role of the auditor.
When the payroll system of DPE Ltd was first installed it was decided that the possibility of overpayments should be avoided by programming the system to produce a print-out of every employee whose wages exceeded £100 in any given week and everyone who claimed to have worked for more than
Mr Dickens is a partner in Quill, Penn and Co., a firm of accountants. The firm has recently been appointed as auditors of IT Ltd, a company which maintains its accounting records on a mainframe computer. This is Mr Dickens’ first experience of auditing in a computer environment. None of his
Do you believe that the auditor should be responsible to users other than the shareholder?
Does the auditor require a codified definition of ‘reasonable care and skill’, or should this be left to professional judgement?
Why should the accountancy profession be unwilling to take full responsibility for the detection of fraud during the annual audit?
Discuss the proposition that the expectation gap has arisen because of the public’s ignorance and should, therefore, be resolved by the public themselves.
Should a system of peer review be introduced in the United Kingdom? What would be the advantages and disadvantages?
Why are firms of accountants reluctant to contest charges of negligence in court? Is such an attitude in the best interests of the profession as a whole?
Shortly after the House of Lords ruling, the chief executive of Caparo Industries was quoted in the press as saying that investors should be warned not to rely on audited accounts. ‘One way would be for them to carry a “health warning” saying the auditor does not accept responsibility for the
The cashier of ABC plc has recently been driving to work in an expensive car. He has also started to take holidays in exotic resorts. The cashier has been an employee of the company for several years. In the past, he has always seemed to enjoy a much more modest lifestyle.The directors of ABC plc
Gand Co. are a firm of Chartered Accountants. The firm acts as auditors to HI] (Cash and Carry) Ltd, a small wholesaling company which imports electronic consumer goods for sale to the retail trade. The company has been owned and managed for many years by Mr Conn. The closing stock figure of HlJ is
Substantial expectation gaps arise within countries. How is the problem likely to be affected by the increasing use of audited financial statements by foreign nationals?
Should the auditor of a group of companies be allowed to state the names and nationalities of the auditors of those group members which have been audited by overseas firms in the audit report? How would this affect the reader of the report?
Many countries do not require small companies to appoint an independent accountant as auditor but demand that one or more shareholders be appointed to conduct a review of the statements. Should this practice be adopted in Britain?
In some countries the audit requirement extends to partnerships and even sole proprietorships which exceed a certain size. Should similar regulations be implemented in Britain?
What economic consequences would arise if auditors in Britain were required to report on the possibility of claims against the company because of acts or omissions by the directors, as is the case in Sweden?
Is there any point in the IAPC issuing IAGs if it cannot monitor compliance?
You are the auditor of International Conglomerates plc. The company has several major overseas subsidiaries. Describe the matters which should be covered in a questionnaire for the auditors of these subsidiaries. Should this questionnaire be sent only to those auditors who do not belong to your
Compare and contrast the auditing standards of France and Japan with those of the United Kingdom. What differences appear to exist in the fundamental role of the auditor in each of these countries?
It would appear that capital markets can adjust for the effects of different accounting practices. If this is so, is there any need for the main financial statements to give a true and fair view, provided they are accompanied with detailed notes of accounting policies and other supporting
There is a great deal of flexibility inherent in the interpretation of the statutory and professional rules relating to accounting. To what extent does this create dangers for the auditor?
It has been suggested that more attention would be paid to the audit report if the standard presentation was abandoned and auditors were encouraged to vary their format and wording. Discuss the advantages and disadvantages of this.
The following audit report has been drafted by one of your juniors:List the errors in the form and content of this report. AUDIT REPORT ON THE FINANCIAL STATEMENTS OF B LTD. We have audited the financial statements of B Ltd in accordance with our standard audit procedures. We encountered the
In the absence of a more coherent test, truth and fairness can only really be measured by using the formal requirements contained in the Companies Act 1985 and the FRSs and SSAPs as a series of checklists. Select one or more of the accounting standards and read through it thoroughly. Try to
Before the publication of SAS 600, the standard audit report read as follows:Compare and contrast this report with the current version. Do you consider the differences to be significant? Which version do you prefer? AUDITOR'S REPORT TO THE MEMBERS OF XYZ LIMITED We have audited the financial
If auditors are always uncertain about the validity of their opinions, does this undermine the value of audit reports?
Discuss the relationship between the materiality decision and the auditor’s perceived duty of care to third parties.
If the auditor is forced to disclaim opinion, should the shareholders regard the audit fee as a waste of money?
Given the variety of different problems that the auditor could encounter, should he be limited to such a short list of standard forms of qualification?
Before the publication of SAS 600, auditors were required to qualify their opinions in respect of all material uncertainty whether or not there was adequate disclosure in the financial statements. Discuss the possible advantages and disadvantages of doing so.
How could the relationship between the auditor and management change if conclusive proof emerged that a qualified audit report had adverse implications?
Many investors rely on highlights from the annual report as provided by online and CD-ROM-based information services and do not read the reports themselves. These services do not contain the text of the audit report and frequently do not even flag any qualifications in the report. What are the
You are the external auditor of ZYX plc. The company has a year end of 31 December 1988. On reading the minutes of board meetings, you discovered the following:(a) On 26 june 1988, an employee was seriously injured by a defective piece of machinery. The fault in this machine had been brought to the
Discuss the extent to which it is desirable for all accounting firms to adopt similar audit approaches. Does this simply restrict the company’s freedom to choose an appropriate type of audit?
Auditors have been aware of the concept of inherent risk for many years and have also made heavy use of analytical review for quite some time. The reduction of detailed testing in response to these reviews is, however, a relatively recent development. Is the ‘risk-based’ approach simply an
If the inherent risks associated with a company’s audit have been considered lower than normal in previous years, would an auditor be justified in assuming that the inherent risks continue to be low without any further review?
If an audit is a means of lending credibility to statements prepared by company directors by means of an independent examination, discuss the proposition that a letter of representation is a worthless document.
The directors of a company are of the opinion that their auditor’s current files might contain a great deal of useful management information. They write to the auditor after the conclusion of the audit and ask for access to the files. How should the auditor respond?

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Auditing Theory And Practice 2nd Edition John Dunn - Solutions

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