Auditing Assurance And Risk 3rd Edition W. Robert Knechel, Steve Salterio, Brian Ballou - Solutions

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. What method of processing involves individual transactions being entered directly into a computer as they occur and generating batch control totals?(a) Batch entry/batch processing.(b) On-line entry/on-line processing.(c) On-line entry/batch processing.(d) None of the above.Choose the best answer.
Internal control is ineffective when computer department personnel:(a) provide physical security for program files.(b) originate changes in master files.(c) design documentation for computerised systems.(d) participate in computer software acquisition decisions.Choose the best answer.
Most application systems have an ID that allows unlimited access to all parts of the system. In relation to a stand-alone purchases system, who would be the best person to have the ID allowing unlimited access?(a) The purchase ledger manager.(b) The purchasing clerk.(c) The systems
Which of the following most likely constitutes a weakness in internal control in a computer environment?(a) The application programmer identifies programs required by the systems design and flow charts the logic of these programs.(b) The control clerk establishes control over data received by the
One of the steps in assessing control risk in computer processing is identifying necessary controls to prevent data from being lost, added to, duplicated or altered during processing. An example of this type of control is the:(a) use of control totals, limit and reasonableness tests and sequence
An auditor may decide not to perform tests of control related to the control procedures within the computerised portion of the entity’s accounting system. Which of the following would not be a valid reason for choosing to omit tests of controls?(a) The controls duplicate operative controls
What would be the most reliable source of evidence available to ensure that a key computer program has not changed since the prior year’s audit?(a) A report showing computer hardware maintenance schedules.b) A verbal statement from the responsible programmer.(c) Written representation from the
When an auditor tests a computerised accounting system, which of the following is true of the test data approach?(a) Several transactions of each type must be tested.(b) Test data must consist of all possible valid and invalid conditions.(c) The program tested is different from the program used
A primary advantage of using generalised audit software packages to audit the financial information of an entity that uses computer processing is that the auditor may:(a) access information stored on computer files while having a limited understanding of the entity’s hardware and software
The introduction of electronic data interchange and electronic funds transfer in the purchasing system of a bookstore is most likely to:(a) tighten the cash flow.b) lengthen the purchasing cycle time.c) increase the number of suppliers dealt with.d) increase the stock levels.Choose the best answer.
Your firm is the auditor of Motor Components Ltd, which manufactures electrical components it then sells to car manufacturers and retailers. It has a number of factories, at different geographical locations, which manufacture the components, and all accounting information is kept on a mainframe
Your client McDuck Ltd holds a large portfolio in shares of other entities - approximately 80 per cent of them are listed on the stock exchange. Approximately 800 parcels of shares are held. The following data on each share parcel are maintained on the computer system:• date purchased;• number
What were some of the reasons for the growth in demand for auditing in the 19th century?
How did the audit function evolve in the UK?
Discuss what is meant by auditing having a ‘shifting paradigm’. How has this affected the objectives of the external company audit?
Describe the three main levels of audit services. What is the most common service?Why?
Discuss the influence of the two accountancy bodies in setting standards and regulating professional activities.
What role do supervisory bodies have in the regulation of auditors?
Discuss and differentiate between the types of audit activity that an auditor may perform.
Discuss the different types of non-attest services.
How does the profession/government ensure that external company audits are performed at an appropriate level of quality?
What was the predominant objective of an ‘audit’ before 1900?(a) To ensure that the financial statements were free from all material errors.(b) To detect fraud.(c) To ensure that all internal controls were operating effectively.(d) To check all transactions of the company.Choose the best answer.
What would not be described as part of the conformance role of auditing?(a) Evaluate reasonableness of business plans.(b) Check that the organisation complies with statutory matters.(c) Ensure the organisation conforms with policies and procedures correctly.(d) Ensure that all material errors have
What is the main concern of the accounting profession in relation to an increase in the level of assurance required for audits?(a) Their time budgets will become tighter.(b) It will increase their exposure to liability.(c) It is not what an audit is designed to achieve.(d) It will not sufficiently
What provides the highest level of assurance?(a) Audit.(b) Agreed-upon procedures.(c) Review.(d) It depends on the nature of the engagement.Choose the best answer.
What has been the primary growth area in recent years for the public accounting profession?(a) Auditing services.(b) Consulting services.(c) Taxation services.(d) Insolvency services.Choose the best answer.
The primary objective of a financial statement audit is to:a) ensure that the company is free from all fraud.b) provide assurance about the future viability of the company.c) express an opinion on the truth and fairness of the accounts.(d) ensure the company complies with all aspects of the
When hiring a new auditor, what should the firm consider to comply with SAS 240?(a) The person should have a broad range of interests to ensure that they become ‘well-rounded’ employees.(b) The person should have adequate qualifications.(c) The person should have proven skills in working within
You have obtained employment in the accounting firm of Dickens and Partners as an Audit Assistant. You have heard that the firm is not very modern in its approach. On the first day at work, Mr Dickens calls you into his office and hands you a copy of Auditing: A Practical Manual for Auditors by
After performing an audit, the auditor determines that:1. The Department of Transport is in violation of an established government employment practice.2. The supervisor is not carrying out the responsibilities that have been assigned.3. The accounts clerk has not been stealing from the company.4.
Fred is an enthusiastic young auditor working for a large accounting firm. On his first assignment he discovers that there is a discrepancy between the bank deposit slips and the cash receipt details for the company. On his return to the office, he mentions this to the audit partner. The audit
Mtr Skate is one of the partners of a small firm of public accountants, and is responsible for the audits within the firm. He received a phone call from the Managing Director of Slick Software Ltd., Ms Jones. Ms Jones said that her company would like an audit performed within a month because the
What factors underlie the need for financial statement audits?
Explain the economic benefits of a financial statement audit.
Discuss the main limitations of a financial statement audit.
Contrast accounting and auditing in relation to methodology and objectives.
In what ways could an audit committee enhance auditor independence?
What do Auditing Standards contain? Will they absolve the auditors from legal problems if they are followed correctly?
Identify the key words and phrases in the auditors’ report that describe the character of the audit.
Describe the circumstances that are required for use of each of the two different types of qualified auditors’ reports.
Which of the following relates to the auditing function in the financial reporting process?(a) Analyse events and transactions.(b) Distribute auditors’ report to shareholders in the annual report.(c) Obtain and evaluate evidence concerning the financial statements.(d) Prepare financial statements
Even if there were no statutory requirement for an audit, some people suggest that self-interest would still impel management to engage auditors to audit the financial statements. What theory of auditing is this predominantly based on?(a) Information hypothesis.(b) Agency theory.(c) Insurance
An external audit provides a number of benefits to the company because it:(a) assures the readers of financial statements that all fraud has been detected.(b) confirms the accuracy of management’s financial representations.(c) guarantees that financial information is true and fair.(d) lends
Who is responsible for the appointment of the auditors to a company?(a) The managing director of the company.(b) The members of the company.(c) The audit committee of the company.(d) The Registrar of Companies.Choose the best answer.
What would be a valid reason for the company to remove its auditors?(a) Evidence that the auditors did not perform a proper review of the company’s fixed assets.(b) A disagreement between the auditors and management — resulting in a very poor working relationship.(c) An increase in the audit
What is the meaning of the principle that requires the auditors to be independent?(a) The auditors must be without bias with respect to the client under audit.(b) The auditors must adopt a critical attitude during the audit.(c) The auditors’ sole responsibility is to third parties.(d) The
Which of the below is a prime objective of Auditing Standards?(a) To provide guidance on all procedural matters to be followed during an audit.(b) To give assurance to auditors that they are performing the audit appropriately so they will not be subject to litigation.(c) To ensure that the auditors
The external auditors’ primary reporting responsibility is to:(a) members of the board of directors.(b) Companies House.(c) creditors of the entity.(d) members of the entity.Choose the best answer.
Footnotes are important in determining whether the financial statements give a true and fair view. Following are two sets of statements concerning footnotes.1. Auditor A says that the primary responsibility for the adequacy of disclosure in the financial statements and footnotes rests with the
Several years ago, Tim O’Callaghan decided to build an Irish pub in Leicester. This pub was to cater for the 25 to 40-year-old market. Tim’s first pub, Blooms, was very popular because the range of drinks and the quality of the service were excellent. The pub was attractive, yet modest, and the
Manchester Company is a publicly held corporation that manufactures a line of home appliances. The comments below were included in Manchester’s 20X2 annual report to its shareholders:The integrity of the financial information reported by Manchester Company is the responsibility of Manchester’s
Explain the essence of the term ‘professional ethics’.
Why should it be necessary for the accounting profession to have a written code of ethics?
List and discuss the fundamental principles of professional conduct applicable to members of the accounting profession.
The professional bodies have separate guidelines on fees, personal and business relationships, and the preparation of books. What are the main elements of these guidelines?
Outline the procedures to be followed in the event of allegations of unprofessional conduct being made by a member of the profession.
What are the main ways the profession ensures quality of audit services and that the public’s perception of what constitutes a quality audit service is pitched at a satisfactory level?
What are some factors that would make an auditor increase his or her assessment of the potential risk of irregularities for an audit client?
What should differentiate a ‘professional’ from a ‘non-professional’ culture?(a) Professionals generally earn higher salaries.(b) Non-professionals do not have community sanction or ethical codes.(c) A professional provides a service to society as a social good to benefit the community.(d)
Which of the following best describes why the accounting profession issued a Code of Professional Conduct and established means for ensuring its observance?(a) A requirement for a profession is the establishment of ethical standards that stress primarily a responsibility to clients and
Which of the following is most likely to be ethically unacceptable?(a) Sending a brochure to all managing directors of the top 50 firms in your local region advertising your services.(b) Earning a large commission for recommending life insurance services to a client.(c) Receiving a bonus for
Which of the following would be deemed acceptable by the accounting profession in evaluating whether a firm was maintaining independence?(a) Ownership of shares by auditors of a firm in their audit clients.(b) The son of a partner within the firm having a material beneficial interest in the audit
An audit independence issue might be raised by auditors’ participation in management advisory services engagements. Which of the following statements is most consistent with the profession’s attitude towards this issue?(a) Information obtained as a result of a management advisory services
How are auditors normally appointed to audit a public company?(a) By directors on behalf of the shareholders.(b) By acommittee of shareholders.(c) By being selected by the Financial Controller from a number of tenders submitted.(d) By being selected by the largest shareholder.Choose the best answer.
What does a signed audit report mean with respect to the ‘possibility’ of fraud within a company?(a) There is a reasonable expectation that material irregularities due to fraud have been detected.(b) It is unlikely that immaterial irregularities have been detected; however, all material
You are the auditor for a company. In discussion with one of the company’s accounts department employees, you are advised as follows:“You accountants think you are something special calling yourself ‘professionals’. I do not think it is appropriate. There have been so many cases recently
The following situations involve Sarah Scruples, an audit senior with the accounting firm of Fobel & Hirst. She is involved with the audit of Freelance Ferries Ltd (Freelance).1. The accounts clerk of Freelance resigned two months ago and has not been replaced.As a result, Freelance’s
You are a partner in an auditing firm. You have just received notification that one of your audit clients is suing your firm for negligence. It has discovered that its sales ledger clerk has been misappropriating funds received from customers for the past year. Although it was a substantial amount
You are an audit supervisor at Flack Mitchell, a large, reputable accounting firm with offices across the UK. Your client is Newbuild Limited, a large and diversified group operating in the housing sector. Your firm recently won a competitive tender to provide extensive internal auditing services
Specify the matters that must be proved by a plaintiff to the satisfaction of the court before a claim for negligence can succeed.
Discuss the key principles of law in relation to the ‘due care’ required from an auditor that arose from the cases of Kingston Cotton Mill and London and General Bank.
What is the relationship between Auditing Standards and the courts’ determination of negligence in the performance of an audit?
Discuss what factors the court should consider in determining the level of damages to be paid by an auditor to a successful plaintiff.
Explain the contribution of the cases of Candler (1951), Hedley Byrne (1963) and Caparo (1990), with respect to the auditor’s duty of care to third parties.
What steps should an auditor take to minimise the risks of litigation?
Discuss the legal reforms in relation to audit legal liability that have been implemented in the UK to date.
What most appropriately describes the implications of the Kingston Cotton Mill(1896) and London and General Bank (1895) cases?(a) The auditor has a responsibility to the shareholders and all interested users of the financial statements.(b) The auditor has a responsibility to exercise the skill and
In which of the following situations is it least likely that the auditors would have been negligent in failing to detect a material misstatement of stock?(a) The auditors relied on a certificate provided by an independent expert.(b) | The audit programme is drawn up by an experienced auditor and
In which of the following situations would failure to detect a fraud constitute grounds for a claim of negligence?(a) The fraud was perpetrated by a senior management override of internal controls which had been relied upon in reducing the extent of detailed testing.(b) The auditors reported
In which of the following situations might a claim arise under privity of contract?(a) A bank makes a loan to a company on the strength of a report commissioned by the bank.(b) A bank makes a loan to a company on the strength of a report commissioned by the company for that specific purpose.(c) The
The decision in the Caparo case (1990) restricted the duty of care of auditors to:(a) all users known to the auditors.(b) all users that ought reasonably to have been known to the auditors.(c) the shareholders as a group.(d) all users of the financial statements, except for investors.Choose the
Would an investor who requests a copy of the audited financial statements of the company from company management before the audit is completed be able to rely on the work of the auditors?(a) Yes.b) Yes, provided the auditors knew.(c) No.(d) No, unless this information induced the investor to behave
What type of reform is being implemented by the UK government to alleviate audit liability?(a) Limiting audit liability (liability cap).b) Proportionate liability.(c) Allowing accounting firms to incorporate.(d) None of the above.Choose the best answer.
Consider the purchases function of a manufacturing company. To overcome a downward profitability trend, management recently instituted a "just-in-time" system of acquiring raw materials for its manufacturing operations. Under this system, raw materials are inventoried in real time-through a
Explain how creating a process map and internal threat analysis helps in determining the extent to which substantive testing is to be performed on the accounts associated with the supply chain and production management process.
The following are routine procedures for the audit of the purchases process. For each procedure, (1) state whether it is a test of controls or a substantive test of transactions or balances, (2) state which management assertion the procedure is designed to fulfill, and (3) state the type of
Examine the process activities and transactions for the supply chain and production management process shown in Figure 12-3.a. Using the example transactions listed in the same figure, describe which transactions or estimates are impacted by the different activities listed in the process.b.
Testing for unrecorded liabilities involves vouching a sample of disbursements made after fiscal year end to determine whether the underlying liabilities for the disbursements were recorded at the balance sheet date.a. Discuss some sampling strategies for the test of unrecorded liabilities.b. How
In your audit of Faye Co., management gives you the following (partial) list of internal controls over accounts payable:- The check approving and preparation duties are performed by separate individuals.- Checks of more than $\$ 1,000$ require the treasurer's signature whereas those for less are
Examine the inherent risk, impact of controls, and residual risk plots in Figure 12-8 for the supply chain and production management process. Based on this plot, what conclusions should an auditor reach for each of the risks regarding whether to test controls and the extent to which substantive
Figure 12-9 contains a listing of tests of operating effectiveness for internal controls related to the supply chain and production management process. For each type of control activity (performance reviews and overall process management, information processing controls, physical controls, and
In her audit of disbursements at a recycling operation, Trudy Jackson, CPA, performs the following procedures. Prior to testing, she had assessed audit risk as high and control risk and inherent risk as low; therefore, she appropriately established a high level of detection risk by her choices of
For each of the following internal controls in the conversion/warehousing process of a consumer goods wholesaling firm, state the management assertion that the control helps meet and suggest a test of controls that would give the auditor some assurance that the control procedure was effectively
Describe the similarities and differences between periodic and perpetual inventory accounting information systems. Include in your discussion the impacts on the types of tests performed and audit evidence gathered to test management assertions about transactions and accounts.
The CEO of Textrala Petroleum, a crude oil wholesaler, is on an incentive compensation plan that weighs accounting net income heavily when awarding compensation. For 2003, Textrala has done so well that the CEO's bonus has reached its maximum under the compensation contract. Shortly before year
Describe why using confirmations for testing completeness of accounts payable is more challenging than using confirmations for testing existence of accounts receivable? How can auditors address this challenge (e.g., what is a search for unrecorded liabilities)?
Observing the client's physical inventory is required for all audits in which inventory is a material item. Using Figure 12-15 as a guide, describe why the auditor's key responsibilities for inspecting inventory are important for auditing inventory related transactions and accounts (e.g., what
Examine the following questions from an internal control questionnaire for the assembly process of a yacht manufacturer. Assume that the answer to each of these is "no" (which means that the control is weak in that area). For each of the questions, identify the accounts that might be affected,
The following are routine procedures for auditors of the supply chain management and production processes to perform. For each procedure, state whether it is a test of controls or a substantive test of transactions, state which management assertion the procedure is designed to fulfill, and state
Describe the inventory price test, explicitly separating how the auditor collects evidence to support that the appropriate cost of inventory and to support the appropriate market value of inventory. Argue why you believe this to be one of the more or less difficult substantive tests of balances

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Auditing Assurance And Risk 3rd Edition W. Robert Knechel, Steve Salterio, Brian Ballou - Solutions

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