Questions and Answers of Auditing Assurance Services

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
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
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
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
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.,
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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)
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
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
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
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)
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
Consider the following two independent situations:a. Company Alpha supplies women's clothes from its seven regional warehouses to small retail stores in shopping malls and roadside mini-malls
Many organizations are implementing production process innovations designed to move more to a just-in-time (JIT) systems emphasizing lean manufacturing. One of the goals of this process is to
United States accounting rules (Accounting Research Bulletin No. 43) require that inventory be carried on the financial statements at the lower of its cost or market value with the market value of
Consider Figure 12-13, where a substantive analysis of inventory turnover was performed during the audit of Jones Manufacturing Company to determine whether inventory should be written down due to
What key accounts and transactions are affected by the supply chain and production process? Discuss and illustrate with examples.
For each of the following internal controls in the payables department, state the management assertion that the control helps meet. Then describe a test of controls to obtain assurance that each
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 each of the following
The property management process is important for gasoline retailers like Chevron. Access Chevron's web site and research the descriptions of its service stations through its learning center link. Use
Examine the process activities and transactions for the property management process shown in Figure 13-2.a. Using the example transactions listed in the same figure, describe which transactions or
Site selection and property development is an important property management subprocess for many organizations. Consider The Home Depot, which opened at least 100 stores per year for more than 15
Examine the process activities and transactions for the financial management process shown in Figure 13-6.a. Using the example transactions listed in the same figure, describe which transactions or
Consider an internal threat analysis for the property management of a food chain specializing in donuts and coffee (e.g., Dunkin' Donuts, Tim Horton's, etc.). Using Figure \(13-3\) as a guide:a.
The internal threat analysis shown in Figure 13-3 contains a listing of controls linked to risks related to the property management process. For each process risk, describe the impact on the audit
Organizations often will utilize third parties to perform their resource management processes. For example, organizations can utilize investment banks to perform financial asset management to conduct
The internal threat analysis shown in Figure 13-7 contains a listing of controls linked to risks related to the financial resource management process. For each process risk, describe the impact on
Consider an internal threat analysis for the loan management process for the commercial bank segment of a large financial banking institution (e.g., Bank of America, Deutsche Bank, etc.). Using
The financial management process is important for auditors because of its role in helping to form expectations about financial statement results. To illustrate this concept, explain how an
Following are some routine procedures for the audit of payroll (discussed in the Appendix). For each procedure, (1) state whether it is a test of controls or a substantive test, (2) state which
After an analysis of the borrowed funds portion of the financial management process, an auditor might choose not to perform many tests of controls but will instead concentrate on substantive tests of
Consider Manny Corp., our military outfitting operation from Chapter 10.Its financial data is reprinted here for convenience.a. If you were the auditor assigned to perform substantive analytical
Based on this chapter and the result of answering the previous questions, offer an explanation for why performing a detailed analysis of resource management is an important part of the auditing
The controller of Mingus \& Mingus Inc., a construction company, provides you with the following schedule of additions and disposals to fixed assets for the past year:The following account
The disclosure objective for the equity portion of the audit is said to be critical. Examine the partial balance sheet of Barron Co., a large, diversified financial services firm with 22,000
Consider the following information gathered by several auditors on the same engagement team performing an audit of the financial statements of a home improvement center.Suppose the audit team
Aggregating audit evidence across business processes is an important auditing issue that has received relatively little emphasis by auditing standard setters and auditing researchers (other than to
Consider the following financial statement line items reported from three subsidiary locations of a manufacturer:Assume the following exchange rates:1 U.S. dollar \(=0.57\) British pounds 1 U.S.
Consider the following analytical procedures performed as of the end of the audit:Suppose the working papers include a summary document indicating that - Sales have increased because of an increase

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