Questions and Answers of Auditing A Practical Approach

Unifactor provides equipment to the construction industry. The following is an extract of its unaudited 2019 financial report in relation to the property, plant and equipment (PPE) account:The
Blue Ltd is in the computer sales business. Blue’s auditor has conducted an analysis of the unaudited figures in preparation for setting the audit strategy. The calculations reveal that inventories
Identify the audit risks associated with the installation of the new IT system for patient revenue.Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with a large range
Comment on the audit strategy likely to be adopted for the audit of patient revenue for Gardens Nursing Home.Chan and Partners Chartered Accountants is a successful mid-tier accounting firm with a
In chapter 3, you were required to research the key market forces, as they relate to Cloud 9’s operations. The topics you researched included the general and industry-specific economic trends and
Obtain the latest annual report of a large, multinational Australian company (for example, one of the large banks or mining companies).Required(a) What information is given in the annual report about
Which is generally the most persuasive form of evidence?(a) Internally generated evidence.(b) All types of evidence are equally persuasive.(c) Externally generated evidence held by the client.(d)
If an expert is engaged to assist with the audit:(a) ASIC must be contacted and permission obtained before the expert starts work.(b) it means the auditor should not have taken on the audit because
A client has a material balance in property, plant and equipment. The discussions with management indicate that there is a risk the client will capitalise all repair costs to minimise the impact on
The auditor is planning for the audit of a car accessories retail business. Inventory is material, and items range in value from $1 to over $500. The nature of the store means that many items are
Dinitha is working on the audit of a client’s accounts receivable. During the last few weeks she has conducted interviews with the accounts receivable manager, the chief financial officer and staff
The audit team is preparing for audit of accounts payable at a continuing client, Springs Ltd. Springs has grown rapidly this year and introduced new products into its business. The new products are
Ali is responsible for preparing bank reconciliation statements at Broad Ltd. Broad Ltd has many bank accounts, including separate accounts for each major branch, imprest accounts for salaries and
Conversations between the board of directors of Binny Ltd and the engagement partner of the financial audit, Seppe Del Santo, have revealed that Binny uses three legal firms. Ball and Partners
The audit partner for Kumar Ltd is assessing the resources required to complete the audit. The partner is aware that Kumar Ltd has a material balance in specialised machinery and decides that an
Yellow Aviation is an existing client of PPP Partners. The auditors are aware that the impacts on airlines of the recent terrorist attacks and the global recession have been severe, with predictions
Sunny Days is a start-up company in the renewable energy sector. The founder of Sunny Days, Fritz Herzberg, has developed cutting-edge technology to convert the energy in the sun’s rays to
Max Crowe is a junior auditor who has just started with the team conducting the audit of a new client in the construction industry. Susan Wong is trying to teach Max about the benefits of getting to
MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associates (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures high-tech armour-plated
Discuss the strength and weaknesses of debtor confirmations as audit evidence for MSHG.Chan and Partners Chartered Accountants are a successful mid-tier accounting firm with a large range of clients
Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case
Is it possible for Chan and Partners to use debtor confirmations only as audit evidence?Chan and Partners Chartered Accountants are a successful mid-tier accounting firm with a large range of clients
Recent reports have warned of climate change impacts on Australian coasts, including a rise in sea levels, more frequent storms, flooding and coastal erosion.9 Assume you are a member of senior
Auditors are interested in an entity’s information systems:(a) Only if they are not purely manual systems.(b) Because they affect managers’ ability to maintain accountability for related assets,
Segregation of incompatible duties:(a) Is a guarantee that fraud cannot occur.(b) Is the same as performance review by a supervisor.(c) Usually increases the risk of fraud unless a supervisor is
A management letter:(a) is written by management to the auditor at the start of the audit.(b) lists only the material weaknesses discovered during the audit.(c) contains recommendations for improving
Explain each of the seven generally accepted objectives of internal control activities.
Explain the importance of segregation of incompatible duties. What sort of duties would be segregated within the sales process? Why?
Several approaches to internal control documentation are discussed in the chapter. Assess the advantages and disadvantages of each. How would documentation assist the auditor to identify strengths
Abbott & Partners audit firm has audited Pretty Valley Shire council for two years, performing both a statutory audit of the financial reports and a compliance audit for the government department in
Elecnet is an electricity distribution company based in a large capital city. Its business is to manage the electricity assets, including poles, wires and other equipment, that are used to deliver
Cheetah Airways became a client of an audit firm for the first time this year. Soon after taking the engagement in September last year, Cheetah Airways was under investigation by the Australian
Bear Transport’s accounting policy for maintenance on its fleet of cargo planes is to capitalise the cost of major airframe and engine maintenance checks and depreciate over the shorter of the
North State Computers has premises in the main street of a large regional city. The business is owned by Bob and Mary Winters, who purchased it three years ago. Mary has an extensive background in IT
Red Minerals is being audited by your firm for the first time in 2015. In 2010, Red Minerals invested in a mining joint venture in Bangaloo, a country which recently experienced significant currency
Leopard Airways is a new client of your audit firm. Its accounting policy for revenue is to credit to revenue received in advance, and subsequently transfer to revenue in the income statement when
Donna MacIntosh runs Emerald Spa, a business providing women-only hairdressing, beauty, relaxation massage and counselling services in a small tourist town. Ninety per cent of the clients using the
Lisa Curtis is documenting the purchasing and cash payments processes at Hardies Wholesaling. Hardies Wholesaling imports garden and landscaping items such as pots, furniture, fountains, mirrors
(a) Explain how the internal control components are usually adjusted to meet the needs of small entities.What advantages and disadvantages does this bring?(b) Assess the internal controls at Dolphin.
Write a management letter to Justin and Sarah Morris.Dolphin Surf & Leisure Holidays Pty Ltd (Dolphin) is a resort company based on the Great Barrier Reef. Its operations include boating, surfing,
MaxSecurity Limited (MaxSecurity) has been an audit client of Smith & Associates (S&A) for the past 15 years. MaxSecurity is based in Wollongong, where it manufactures high-tech armour-plated
Discuss the implications of the sales bonus system for the control environment within MSHG. What special factors would management have to have to consider?
With reference to the ‘control activities’ component of internal control, formulate one question that each of internal audit and external audit will ask regarding the switch-over of the patient
Answer the following questions based on the information for Cloud 9 presented in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case
The difference between statistical and non-statistical sampling is that:(a) Non-statistical sampling leads to non-sampling risk and statistical sampling does not.(b) Non-statistical sampling is when
When an auditor selects items for a sample on the basis of the auditor’s belief that they should be included, this is an example of which selection method?(a) Block(b) Random(c) Systematic(d)
Discuss the appropriate method of sampling PPE for the planned tests of depreciation. Define the population. What assertions are most at risk?Fabrication Holdings Ltd (FH) has been a client of K&F
What conclusion would you draw about ‘valuation and allocation’ of PPE from the above information? Justify your conclusion.Fabrication Holdings Ltd (FH) has been a client of K&F for many years.
For each of the test results for Gardens Nursing Home:(a) Identify whether this is a test of controls or a substantive test of detail.(b) Determine the key assertion addressed by the test
(a) Identify the key account balance at risk because of the sales team remuneration at Shady Oaks. Also identify and explain the key assertion at risk.(b) Identify the key account balance and key
Tolerable error:(a) Relates only to control testing.(b) Is positively related to sample size.(c) Is an amount prescribed by ASA 530.(d) Is the maximum error an auditor is willing to accept within the
The working papers for a client contain both a permanent and a current file. The difference between the two files is that:(a) The permanent file must be sent to ASIC and the current file is not.(b)
Explain the difference between the two types of sampling risk for controls: the risk that the auditor concludes that the client’s system of internal controls is effective when it is ineffective and
What action does an auditor take if the rate of deviation found when testing internal controls is greater than the tolerable rate of deviation?
Explain the difference between tests of controls and substantive procedures.
How are the results of tests of controls related to decisions about the nature, timing and extent of substantive procedures?
Thanh is working on the plan for an audit of a manufacturing firm and is considering the section of the plan relating to substantive testing of purchase invoices. Thanh has to decide how to select
Julie is a junior auditor on the audit team for Wonderful Wildlife Parks Ltd (WWP). The same audit firm has been WWP’s auditor for the past two years. During this time, the auditors have completed
Jenny Sharp has been appointed as senior audit manager of the accounts receivable area in the statutory audit of Holiday Cruises, a company operating leisure cruises from ports on the eastern
CFMUU is a regional credit union with 10 branches across the state. CFMUU leases its premises and buys furniture, such as waiting-area chairs and back-office desks, through a central asset purchasing
Frank Brown is auditing cash payments for Woldi, a large supermarket. Woldi deals with several very large corporate suppliers who expect payment by electronic funds transfer within three business
Alice Pang is planning the control testing of the accounts payable function in the hardware retailer Koch and Gilbert. Alice is attempting to determine the appropriate sample size for her tests and
Jennifer Jones is reading the documents prepared by the members of the team working on the audit of receivables for a large client. Jennifer is the senior manager assisting the engagement partner,
Which of the following is not a factor that the auditor considers when deciding which controls to test?(a) The type of control(b) The risk of detection(c) The frequency of the control being
Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case
Explain the differences between an audit of internal controls as required by section 404 of the US Sarbanes–Oxley Act 2002 and the testing of internal controls for the purposes of expressing an
Washington Cleaning has more than 50 employees and has several contracts to clean offices in the central business district. In order to keep disruption to a minimum, the teams of cleaners do not
You are testing the controls over bank accounts for your audit client, Orleans Ltd. You note that the responsibility for bank reconciliations has changed due to a corporate reorganisation halfway
Nebraska Industries manufactures and wholesales small tools. It sells the tools to a large group of regular customers and makes most sales by telephone to this group. Additionally, it receives orders
Denver Drapers supplies custom-fitted curtains and blinds to retail customers. It has recently expanded to offer a wide variety of home decorating products through its six stores across the state.
In relation to the new manufacturing costing system, describe two automated application controls that MaxSecurity could be using.MaxSecurity Limited (MaxSecurity) has been an audit client of Smith &
Discuss the implications of finding evidence that the controls identified in question 8.31 are(a) Effective,(b) Not effective.MaxSecurity Limited (MaxSecurity) has been an audit client of Smith &
Amy Adams, the audit senior, is reviewing the working papers written by the audit assistant on the audit of Virginia Creepers, a garden nursery and retailer of garden accessories. Amy reads the
The sales transactions at Colorado Park, a new audit client, are handled by a software application that is not supported by very detailed documentation. The audit partner requests the team to
For each of the accounts for Shady Oaks (1 and 2 above) identified to be a significant risk:(a) Determine the key assertion at risk(b) Describe a practical prevent internal control that would
The audit senior on the audit of Frankel Factors is preparing the audit plan for the year ended 30 June 2017. The following notes relate to the payroll application system that went live on 1 January
Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case
(a) Identify the key assertion at risk for payables in relation to payments made prior to receipt of goods.(b) For the control procedures (1) to (5) above for payables:i. Identify the key
Designing substantive procedures responds to the risk of:(a) Material misstatement at the entity level.(b) All types of misstatements at the entity level.(c) Material misstatement at the assertion
Which of the following statements about the reliability of data used for analytical procedures is correct?(a) Inflation does not affect data reliability.(b) Data reliability affects the
Which of the following is a correct statement about misstatements?(a) They are documented in the audit working papers.(b) They can be categorised as errors or judgemental misstatements.(c) They must
Explain how decisions about when and how much substantive testing is performed relate to the overall risk assessment for the item being tested.
Jenny has been asked to join the team responsible for designing the audit program for a new client, Sangekar Industries Ltd (Sangekar), a manufacturing and wholesaling firm. Sangekar recently went
Boris Johnson suggests the following audit procedure should be included in the audit program to gather evidence on the cut-off assertion for the revenue account:Select a sample of sales from the
Boris Johnson has another suggestion for the audit program for the revenue account. This time he suggests:Select a sample of sales from the sales journal and agree the details in the journal to the
Seb Coe and Boris Johnson are discussing the audit program for the revenue account. Seb and Boris disagree about whether they should use procedure A or B below to test the occurrence assertion for
Peter has the task of designing the audit program for the payroll area. There have been no recent changes to the payroll system, or its interface with the general ledger. Among other tests, Peter is
Brian has the task of reviewing the evidence from analytical procedures conducted by the audit assistants on the audit of Smalley Services Ltd. The audit assistants have reported the results of these
Melissa is the recently appointed engagement partner of the audit of Brumby Ltd. Melissa has just taken over the audit from Ken Leo, who rotated off the audit after a five-year period as the
(a) Identify two key account balances likely to be affected by The above information.(b) For each account balance identified in (a) above, identify and explain the key assertions most at risk.(c) For
Your assurance services manager has requested you use substantive analytical procedures to calculateShady Oaks’ estimated revenue for patients staying in the hospital, excluding medical procedures
Inventory of various medical supplies and drugs is a material account on the Shady Oaks Hospital audit engagement. You are planning to adopt a combined audit approach for existence of inventory and
Answer the following questions based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case
Review your answers to the previous questions. Comment on the persuasiveness of evidence from each test. Explain any factors that would affect your assessment.Chan & Partners Chartered Accountants is
Management applies accounting standards in the preparation of financial reports and auditors assess the fair application of those accounting standards. During 2008 and 2009, several changes were made
Why does an auditor compare remittance advices or lists of cash receipts with entries in the cash receipts transaction file and compare entries in the cash receipts transaction file with the
A debtor’s positive confirmation:(a) Is not as useful as a negative confirmation.(b) Provides evidence that the debt will be collected.(c) Provides evidence about the existence of the debt.(d)
Auditing payables usually focuses most heavily on:(a) Existence.(b) Rights and obligations.(c) Existence, and rights and obligations.(d) Completeness, and valuation and allocation.
Why is an auditor interested in the repairs and maintenance expense account when auditing the PPE asset account? Explain your answer with reference to the assertions at risk.
Explain why completeness is a more critical assertion for liabilities than for assets. What procedures are primarily designed to address the completeness assertion for payables?

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