Questions and Answers of Auditing Assurance Services

Why should auditors be diligent in ensuring that different business segments' financial statements properly reconcile to the consolidated financial statements? As part of your answer, describe
Final analytical review is required by auditing standards for all auditing engagements and, in practice, generally is performed by the partner on the engagement. What is the purpose of conducting a
Consider the department store example provided in the chapter regarding gross margin percentages under different inventory methods:How might an auditor approach developing a pro forma version of this
What is meant by business measurement analysis as described in this chapter? How should the auditor perform such an analysis? If performed properly, why should it help address the limitations
Financial performance measures have traditionally been used to assess the reasonableness of the overall financial statements. Financial ratios and comparisons with other organizations in the same
Consider the following information about an international luxury hotel chain:Based on this information, what are some general, relative expectations that can be inferred from this information for
The Balanced Scorecard is a business measurement tool that enables an auditor to better understand whether financial measures reported by an organization are consistent with measures about the
This chapter argues that nonfinancial measures are useful in assessing whether reported financial results are reasonable. Offer an explanation for why this argument should be valid for most auditing
Describe what is meant by a balanced scorecard approach for business measurement analysis. As part of your explanation, describe each of the four perspectives utilized in this chapter (see Figure
Consider the following measures taken from product design and development, customer sales and service, production management, and human resource management business processes for the manufacturer of
As part of the audit evidence aggregation process, auditors should consider the relationship across business processes performance. Describe how an auditor could assess the overall reasonableness of
The Altman Z-score predicts bankruptcy using commonly available financial accounting information (e.g., EBIT and total assets). Suppose you are studying a company (whose primary business is produce
Why do you believe that auditors must assess the risk of an organization being able to continue as a going concern, given that auditors perform no other procedures regarding future performance of an
This chapter uses the Balanced Scorecard as an mechansim for conducting business measurement analysis. An increasingly used approach for tracking performance measurement is the use of dashboard
Describe signals of financial distress offered in the chapter for assessing asset composition, debt levels, cost structure, and equity levels. What are the strengths and weaknesses associated with
Contingent liabilities often are one of the most serious issues for an auditor to audit because a single contingent liability can be highly material. Further, clients are hesitant to establish
Consider the following letter from the managing partner of Cooney \& Associates, CPAs, to the legal counsel for their client, The Chartreuse Catfish Restaurant Group, requesting information on
Determining whether a subsequent event requires an adjustment to the financial statements is difficult in many circumstances. Discuss the primary difference between subsequent events that require
For each of the following events concerning disclosure of events that took place after year end, discuss the manner in which it should be disclosed in the financial statements or the audit report.
Argue whether you agree or not that a representation letter is a critical part of an audit engagement. Consider in your argument that the letter itself can only serve as minimal evidence because it
Each of the following techniques for managing earnings was described in the chapter:- "Big Bath" charges- Write-off of acquired assets- "Cookie Jar" reserves- Abuse of materiality- Questionable
Many auditors rely on a disclosure checklist when evaluating presentation and disclosure assertions. Describe the benefits of using a checklist to help in performing this evaluation. In addition,
For each of the following scenarios, indicate whether earnings quality is likely to be high, moderate, or low. Based on your assessment, how might an auditor adjust the nature or extent of audit
Describe the difference between a known and a likely misstatement. As part of your explanation, describe the roles of each of the following:- Materiality- Degree of objectivity- Impact on financial
For each of the following situations that require an audit report: (1) determine what type of audit report is called for and (2) for reports other than standard unqualified, state where in the audit
Describe how a client with high quality of earnings likely should appear under each of the following circumstances:- Correlation with underlying economic activity- Permanence and sustainability-
Public accounting firms and regulators have long been concerned with the notion of the "expectations gap," which describes an accounting firm's understanding of the assertions provided in an
A study of the Los Angeles police department by management consultants (as reported in The Wall Street Journal, June 11, 1996) uncovered numerous practices that tended to decrease the efficiency and
In your audit of the Strangelove Group, a privately-held company based in Great Britain, you encountered the following situations:a. The internal control plans in the payables processing area are
Auditors typically are not responsible for evaluating the performance of an organization or its prospects for future performance; however, they are required to include an explanatory paragraph when
Consider the following summary of unadjusted audit differences for Avni Co., a privately-held importer of fine wines with total assets of $\$ 1.5$ million.a. Which items do you think management
In practice, auditors who are unable to convince clients to adjust for known or likely misstatements often resign from an engagement instead of issuing a qualified or adverse opinion. Argue for or
Consider the following auditor's report that refers to a shared engagement of a privatelyheld organization:Discuss the deficiencies with this audit report. Independent Auditor's Report To the Board
Compare and contrast the reporting requirements for the presence of a significant deficiency and material weakness under an integrated audit under AS 2.Why, in your opinion, do these reporting
For each of the following situations, indicate which type of audit report you would issue if you were the partner in charge of the engagement and explain why.a. Although the audit of Coltrane
Sampling risk is the probability that a misstatement exists in the population but is not selected in an auditor's sample. Non-sampling risk is the probability that a misstatement exists in an
You are the senior partner of a large, local audit firm. In reviewing the work of a junior staff member on a compilation engagement for Greasemonkey's Delight Inc., a local autoparts store (in which
You have been assigned to audit the accounts payable of Slamtastic, a small recording company specializing in alternative music. Following is a portion of their accounts payable journal for the month
Compare and contrast statistical and non-statistical (judgmental) sampling. Include in your discussion conditions that might make one approach to sampling more desirable than the other.
Consider the data from the previous problem. For each of the sampling methods named:a. Compute the total amount of the transactions sampled and the proportion of the cumulative total the sample
The chapter discussed three issues to consider when obtaining evidence using a sample-based audit procedure:a. The number of transactions or items to examineb. The actual transactions or items to
For each of the five sampling techniques commonly used by auditors, discuss an audit test using the sampling technique that should enable to auditor to conduct an effective and efficient audit test.-
Suppose you are the audit manager on the audit of a large computer peripherals Internet business and you are attempting to test the controls of its processes. Members of the audit staff have brought
Suppose that an auditor chooses to use a random sampling technique to test additions to fixed assets for the fiscal year for manufacturing company. Walk through the key steps the auditor should
In your audit of the accounts payable function of Gorgon Inc., you notice the following:a. Several checks do not bear the appropriate signature for the nature or amount of the payment.b. The prices
Suppose that an auditor is interested in stratifying a sample of accounts receivable customers and then using a judgmental sampling approach. Suggest a strategy for stratifying the sample of accounts
For the sample size calculation described in Figure 16-4, explain the following statements:a. The required sample sizes are larger (all else held equal) the lower the tolerable deviation rate
Consider the formula for selecting a sample size when performing attribute sampling:\[ n=R / P \]where: $n=$ sample size$R=$ Risk factor based on ARO and the expected number of errors\(P=T D R-E
You are auditing the sales order processing department at Joe Henderson \& Co., a highend book publisher. You are attempting to determine whether you can rely on the control procedure that stipulates
Consider the example provided in the chapter for selecting a sample for dollar unit sampling application, where sample size is computed as\(n=\frac{\mathrm{BV}^{*} \mathrm{R} *
You are conducting dollar unit sampling (DUS) of the accounts receivable balances of an agricultural co-op. You are willing to accept a 5 percent risk of incorrect acceptance, the book value of the
Compare and contrast the implications of deviations found when testing process controls and misstatements found when performing substantive tests. Include in your discussion the rationale behind the
Regarding the facts in problem 8 :a. If your tolerable error limit (TEL) is $\$ 250,000$ (10 percent of the account balance), are you satisfied that accounts receivable are fairly stated? Why or
Consider the following findings from the test of accounts receivable using DUS:An auditor determines that the most likely error based on a sample is 4 percent of the total accounts receivable
Typically, sampling for tests of transactions occur when the client stores transaction files from which the auditor selects a sample. For some automated systems (e.g., electronic data interchange,
For each of the common errors in sampling provided below, describe steps that the auditor can take to avoid the errors whenever possible.- Sample size is too small given reliance placed on the sample
For each of the following routine audit decisions, use Figure $17-2$ as a guide and apply each step of the decision process to the audit decision.a. The business process that will require the most
For each of the following audit judgments, provide one example of a behavior that you believe would be unethical.- Client acceptance- Establishing materiality- Evaluating the effectiveness of
Consider the following example of ethical misconduct:An audit staff member is asked to work extra hours on an engagement and not report the hours worked so that the engagement will report being
Although the use of heuristics may lead to biased audit decisions in some cases, all humans make use of them. However, it is important to recognize when an auditor is employing a heuristic so that he
Consider each of the five examples provided in the chapter for why auditors might demonstrate mistakes in professional judgment:- Auditors may not be able to define their decision problem clearly-
Auditors employ numerous methods to alleviate the potential biases that may result from the use of judgment heuristics. These include- Improving expertise- Debiasing techniques- Framing and
Audit decisions sometimes come down to a trade-off between satisfying one set of stakeholders at the expense of others. In the example in Figure 17-4 and 17-5, an auditor is forced to choose between
Evidence from audit research shows that the anchoring and adjustment heuristic occurs when auditors begin their audit of a financial statement account assertions by first obtaining the unaudited
Below are common techniques generally used by an audit firm to reduce the chance that ethical dilemmas will result in auditors making poor decisions. For each technique, describe how you think that
Answer each of the following independent questions, based on your understanding of the AICPA Code of Professional Conduct or IFAC Code of Ethics for Professional ACcountants. Cite support for your
Compare and contrast the concepts of independence in fact and independence in appearance. Explain why you agree or disagree with the notion that independence in appearance is equally as important as
Auditors typically rely on the following legal defenses when parties bring suit against them:- No responsibility to plaintiff- Lack of reliance by the plaintiff- Auditor exercise of due diligence-
For each of the following threats to independence discussed in the chapter, provide an example of a breakdown of independence in fact or appearance to illustrate why auditors should take the threat
Five common auditor defenses when charges of negilence are brought against auditors include- No responsibility to plaintiff- Lack of reliance by the plaintiff- Auditor exercise of due diligence- Lack
The U.S. SEC Acts of 1933 and 1934 established the SEC, in part, to help prevent the business practices, including financial reporting, that worsened the impact of the 1929 depression in the United
Auditors must maintain both the fact and appearance of independence if they are to maintain their respected role in the business community. Consider each of the following independent situations.
Consider the following situation. A group of investors who specialize in investing in high-technology IPOs files suit against the auditors of one of those firms when the stock loses 50 percent of its
Consider the following situation. The board of directors of a major airline promotes one of its marketing vice presidents to the position of president and CEO. Included in the compensation package is
Answer each of the following independent questions, based on your understanding of the AICPA Code of Professional Conduct or IFAC Code of Ethics for Professional Accountants. Justify your answer.a.
Compare and contrast the different levels of assurance provided by assurers who conduct reviews, compilation engagements, and agreed-upon procedures engagements. As part of your answer, describe why
Assertions are amenable to attestation when the measures used to make them are objective and the data to support the assertion are available. In that light, consider the following assertions:a. Nine
Why do you believe that the SEC requires that quarterly financial statements be issued and subject to a review? Describe the procedures that an auditor performs when conducting a review of interim
In reviewing the interim financial statements of Lady Day Enterprises, a publicly traded electronic components wholesaler, your audit firm (which also conducts the annual audit) performs the
Given that a compilation does not involve providing any assurance and the auditor does not need to be independent to conduct the engagement, why do you believe that auditing standards (for example,
Your audit firm has been called in to examine the financial forecasts of Martin Corp., a multinational commercial building contractor. Toward that end, your firm conducted the following procedures:-
Assume that a hotel audit client owned by a consortium of investors is not satisfied with the hotel management company that performs most of its operations. The hotel hires a public accounting firm
As part of your audit engagement of Walter's Bank N.A., you have been asked to provide a letter assuring the Office of the Comptroller of the Currency (OCC) that the bank has maintained adequate
Describe why you believe that many auditors are reluctant to issue reports on prospective information and financial forecasts. How do the restrictions associated with these reports help address these
Flappers, a restaurant located in Birmingville, has hired their auditors, Bud's Accounting Firm, to attest to the following assertion: "Our chicken wings are world famous!" Bud's Accounting Firm
What are some risks and barriers associated with providing independent assurance for corporate sustainability reports? What are the possible ramifications of not providing assurance for these
Barbara and Bill Hoehn have engaged A. Local Accounting Firm to conduct an audit of the cash accounts of their diamond mining business. The mines are not publicly owned, so a full-fledged audit is
Compare and contrast an attestation engagement and an audit of financial statements. Provide examples of attestation engagements that are not audits of financial statements and describe how they are
The Buddy Guy Co., a moving and storage firm with operations throughout the Midwest, has contracted with the Memphis Slim Accounting and Consulting Group to evaluate the adequacy of the controls
Public accounting firms are sometimes called on to perform operational audits, where the operational effectiveness and efficiency of some process of an organization is studied. Consider the following
Assume the same facts as in the preceding problem except that your junior staff auditors performed a review, instead of a compilation. The rough draft of the engagement report looks like this:Discuss
The chapter describes five principles that are evaluated during a WebTrust ${ }^{5 M}$ engagement:- Availability- Security- Processing Integrity- Privacy- Confidentiality Suppose that you are
The risk model from the chapter can be restated as follows:\[ \mathrm{DR}=\frac{\mathrm{AR}}{(\mathrm{IR} \times \mathrm{CR})} \]where $\quad \mathrm{DR}=$ detection risk$\mathrm{IR}=$ inherent
In 1999, the U.S. Securities and Exchange Commission issued SAB 99-3, which essentially established that no level of materiality is acceptable for intentional misstatements involving any registered
Explain the benefit of setting tolerable misstatement for individual accounts. Argue for or against using the same level of tolerable misstatement for each account.
Misstatements that are not corrected in a given year because they are not deemed material likely will affect the financial statements in the following year. This impact might be in the form of a
Consider each of the qualitative considerations in setting materiality listed below. For each, describe why it could lead to users being more impacted by smaller levels of misstatements (i.e., why it
Three of the most important decisions that auditors make concern the nature, timing, and extent of evidence. Describe each of these decisions, carefully describing how each decision impacts the other
Describe how residual business process risks impact management assertions about transactions and accounts. As part of your answer, consider the risk that management fails to properly store and label
Consider the factors described in Figure 10-6 that affect the risk of assertions being materially misstated. For each of the following factors from that table, describe how the high-risk condition

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