Auditing Cases An Interactive Learning Approach 5th edition Mark S. Beasley, Frank A. Buckless, Steven M. Glover, Douglas F. Prawitt - Solutions

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Integrity and ethical values are important factors in ensuring that internal control, including the control environment, is effective in reducing risk and in helping management to achieve objectives. Do you think that these are just meaningless words or are they really important in the business
You have recently become auditor of a small trading entity whose system is based on a series of networked microcomputers using bought-in software for basic accounting functions. During the initial meeting with management, the managing director told you that he is really scared of all ‘this
Figure 8.1 showed there are two broad levels of regulation and control relating to both external and internal environment. You are the auditor of an entity providing advice to clients on financial matters. You are aware that there have been serious reductions in the value of shares quoted on stock
As organizations have become more dependent on reliability of information systems, they have become more aware of the need to maintain quality of systems and the data/information derived from them. If you were asked to set up a quality standards group, what role do you think it should have and what
Segregation of duties is a basic requirement of a good control system. Explain what is meant by this statement and show how segregation of duties in a modern computer system might differ from that in a manual system.
The existence of a quality standards group within an entity’s control system, like the internal audit function, is a vital element of the control environment. Discuss.
Audit staff have to be skilled and experienced enough to understand the complexities of modern control systems. Discuss how this might be achieved.
Consider the following statements and explain why they may be true or false:(a) ICQs are questionnaires used to record the system in use.(b) ICQs are questionnaires used to evaluate the system in use.(c) ICEQs are questionnaires used to record the system in use.(d) The basic requirement of an
Assume that Ann Paterson, an established customer, has telephoned asking to be supplied with three recently published books.She speaks to a sales clerk who deals with her order. Suggest controls that should be in force before her order is accepted.
Assuming that the order is accepted and that the books will be supplied on credit, explain what records will be affected by the transaction and the information/audit trail details that should be recorded.
In Table 9.2 we provided you with key and subsidiary questions in a sales system. Two key questions in a purchases system are:(a) Are all requisitions for goods and services initiated and approved by authorized responsible officials?(b) Are all purchase orders based on valid, authorized
Set out in Figure 9.6 is a systems flowchart for a production payroll system. Explain what is happening in the two routines‘transactions file update’ and ‘salary run’.In addition, explain the kinds of control, programmed or manual, that should be in force to ensure that the payroll is
Describe the nature of an extranet and explain why it might be a useful means of achieving business objectives. You are auditor of an entity carrying on business using an extranet. Explain what controls you would expect to be in force to protect it.
Where a client company fully integrates business systems with e-commerce conducted through the Internet, particular problems arise for the auditor. Explain why this is so.
Audit firms should train auditors to become IT experts in the auditing field, rather than expecting IT experts to become auditors. Discuss.
Consider the following situations:(a) Assume that you are a partner in a two partner practice with total practice income of £250 000. One of your clients(a private limited company with a turnover of £10 million and with some 80 employees) pays ongoing fees to you amounting in total to £35 000.
Now that you have read the IFAC Code and the FRC Ethical Standard do you think that they have been influenced by prior work on auditing theory? Justify a Yes or No answer.
You have been asked by your audit partner to be senior in charge of the audit of a small public limited company. Unbeknown to the partner, you hold 1000 of the 100 000 shares in the company. Do you think that you could remain unbiased in relation to this client?
You have just been telephoned by the chief accountant of a listed company client, Randerston plc, to tell you that there has been a computer breakdown and that some parts of the data concerning construction contracts has been lost. He asks if two senior members of the firm’s engagement team could
In Table 3.3 we suggested pressures against independence in respect of small audit firms and small auditees. To what extent do you believe that the IFAC Code and FRC Ethical Standard have been successful in dealing with the special circumstances of small audit firms and small entities? TABLE 3.3
Discuss the arguments for and against requiring the mandatory rotation of auditors.
The following question is taken from the June 2011 F8 Paper – Audit and Assurance of the ACCA. We are only asking you to consider requirement (a) of the question.You are an audit manager in NAB & Co., a large audit firm which specializes in the audit of retailers. The firm currently audits Goofy
The problem with ‘independence’ is that it is an intangible quality. Do you think that the IFAC Code and the FRC Ethical Standard have succeeded in making it less of a problem for the auditing profession? Discuss why perception of independence is as important as actual independence.
Figure 3.3 on page 86 is very useful in helping people to understand how objectivity and independence issues might be managed. Discuss. FIGURE 3.3 Audit firm's control environment and elements to enhance ethical behaviour in a firm providing audit and other assurance services Notes 1 Leadership
The IFAC Code and the FRC Ethical Standard contain many requirements and much advice on how auditors should behave. How should the professional bodies ensure that they are adhered to?
Consider the following statements and explain why they might be true or false:(a) The directors may not appoint the first auditor, neither may they appoint an auditor to fill a vacancy caused by the death of the incumbent auditor.(b) The remuneration of auditors is not always fixed by the company
Janet Helmsley is auditor of Skiplam Ltd for the year ended 30 September 2018. She and her staff are examining the inventory figure in the accounts and have become concerned that the inventory count sheets are inaccurate because the test counts they had made at the year end did not agree with the
You are auditor of a small building contractor with two partners, Thomas Murton and Ezra Byland. Neither of them has much accounting knowledge, although both are very good craftsmen. They have asked to see you because they believe they should consider forming a limited company, which they have
Consider the following statements and indicate if they are true or false:(a) Auditors have the right of access at any time to any accounting records of the company they are auditing.(b) The directors may not tell deliberate falsehoods to the auditor, but they are allowed to withhold the facts if
Assume you are the senior partner in an audit firm which is considering submitting a tender for the audit of a large company.Outline what information you might want to collect about the company before making a final decision about whether to submit a tender.
A major criticism of the regulatory regime in the past was that it lacked independence from the accounting profession. Discuss the extent to which that criticism is still valid for the new regulatory regime introduced in 2012 as amended by SATCAR.
We noted in the chapter that often the directors of a company exerted a considerable influence, more so when there is no audit committee, in determining which firm of auditors should be appointed. Give reasons why this is not an ideal state of affairs and describe how this power might be reduced.
Describe the regulatory structure for monitoring audit quality in the UK.
Discuss the need for a different regulatory regime for small companies from that which applies to listed companies.
In this era of globalization it is no longer possible for there to be national regulation.For any regulation to be effective it must be done on a global basis. Discuss.
Discuss the problems that might be involved in measuring the effectiveness of the FRC as the audit regulator.
Identify the five sections of The UK Corporate Governance Code and explain why each area of guidance, if properly implemented, will contribute to good corporate governance.Can you illustrate the impact of corporate governance failure in any of these areas with examples from the financial press?
Moorfoot plc You are the auditor of Duddingston Limited, a subsidiary of Moorfoot plc. Duddingston is engaged in the production and selling of pharmaceutical products. The managing director of Moorfoot has been talking to you about the issue of internal control and has asked you for advice on the
You are auditing a listed company that manufactures high quality engineering products with numerous components, manufactured and assembled by the company. During your audit of inventory valuation you are told that you cannot see the costings of certain new products because they had been kept on
‘Board appointments must always be made on merit, with the best qualified person getting the job. But, given the long record of women achieving the highest qualifications and leadership positions in many walks of life, the poor representation of women on boards, relative to their male
The directors of Big Pharma Ltd have been in discussion with their legal and financial advisers, in addition to representatives of the London Stock Exchange. These discussions have been arranged because the directors of Big Pharma feel that it is now an appropriate time to seek capital expansion
In 2014, Lord Myners set out the need to reform the Cooperative Group after near ruinous failure at the bank, describing ‘a dysfunctional board in which some directors did not know the difference between debits and credits’ and [were] ‘clearly out of their depth when financial concepts and
Explain why you believe auditors have been reluctant to report on the directors’ reviews of the effectiveness of internal controls.
Discuss how corporate governance mechanisms will impact on audit quality and the audit expectations gap.
Discuss what are likely to be the main limitations a company faces in establishing an effective audit committee.
Good corporate governance is more likely to exist in companies where there are large institutional shareholders holding a substantial proportion of the shares than in companies where the shares are held by many individual investors. Discuss.
Why do you think it is important to have NEDs on the board?
In January 2018, Carillion, a major UK multinational construction and facilities management company, suddenly collapsed, leaving in its wake almost £7 billion of liabilities and only £29 million in cash. Astonishingly, in 2016, Carillion’s senior executives received large performance bonuses
WalkRight plc is a retailer for a wide range of value priced fashion brand shoes.WalkRight plc sells all types of footwear, including sandals, boots, training shoes, dress and casual shoes. Their target market captures all potential customers, of any age, who are interested in buying fashion
Establish if Rolls-Royce complies with the main principles of Section A: Leadership.
Assess whether the board of directors captures an appropriate balance of skills, experience, independence and knowledge. Can you suggest any improvements?
Looking at disclosures about the audit committee, identify: the main functions of the audit committee; the membership of the committee; and the issues that the audit committee has focused on during the reporting year. Can you suggest any improvements?
How does Rolls-Royce determine the directors’ remuneration? Evaluate the following:(a) Has the company avoided paying more than is necessary to attract, retain and motivate directors?(b) To what extent are directors’ rewards linked to company and individual performance?(c) Who is involved in
Outline the procedures undertaken by the company to ensure effective communication with shareholders.
Who are the auditors of Rolls-Royce and did they carry out any non-audit work?What procedures does the company have in force to maintain the independence of its auditors?
Evaluate the usefulness of the information in the corporate governance disclosure published in the annual report and accounts of Rolls-Royce.
In this question we are taking you through various scenarios and will ask you to perform a number of activities in a case study.You are engaged in the audit of Fine Faces plc, a cosmetics company that manufactures and sells a range of lipsticks, deodorants, after-shave lotions and perfumes. The
Consider the following statements and whether they might be true or false. Provide explanations with your answers.(a) The directors of the client company sign the audit engagement letter.(b) The auditor must always discover fraud and other irregularities.(c) Fees of the auditor are based on the
The audit firm consists of a collection of individuals with varying degrees of experience and expertise. Briefly describe the role that individual staff members play in achieving audit objectives.
You are the senior in charge of the audit of a local newspaper and have been asked by your audit assistant to explain what kinds of income and expenditure can be expected to arise in the company. She is also anxious to know if there are any particular problems that might be faced by management and,
Discuss briefly the following statements(in doing this, try to go beyond the text of this chapter and use your imagination to explore the statement):(a) Audit risk is the risk that control systems will not detect material misstatements in the financial statements subject to audit.(b) Cumulative
Care has to be taken in applying the principle of prudence. Discuss.
Take another look at both The County Hotel and Fine Faces and discuss the proposition that auditors are so willing to help management that they might forget that their primary duty is to form an opinion on the financial statements issued to and used by third parties.
What are the main practical differences between the audit risk approach and the business risk approach to auditing?
‘It is very easy to apply the audit risk model.All you have to do is to multiply figures together to determine the amount of testing you have to do’. Discuss this statement.
Explain to your assistant what is meant by audit judgement and give examples of its application. How certain can you be that your judgement has produced the right answer?
Discuss the major factors that might influence managers in engaging in earnings management. Consider audit procedures that might be appropriate where earnings management is suspected.
The exercise of judgement is key to attaining audit objectives. Discuss.
The business risk approach endangers the independence of the auditor.
Which of the following people do you think would be suitable to be the auditor of a limited company in your local town?(a) the chief accountant of the company, a member of ACCA(b) a shareholder owning 10 per cent of the ordinary shares(c) a shareholder owning 1 per cent of the ordinary shares(d) a
Which of the following people do you think would wish to be certain that the financial statements of a major public company had been properly prepared?(a) the ordinary shareholders(b) the employees(c) people thinking of buying shares in the company(d) the Inspector of Taxes responsible for the tax
If Erin and Lee in our simple case had said that motor expenses amounted to £4000, suggest:(a) What kinds of expenditure would probably be included in the heading ‘motor expenses’?(b) How you would satisfy yourself that the amount of each expenditure heading was reasonably accurate?
Why do you consider that audit might be seen to be necessary in the case of an engineering company whose employees operate dangerous machinery? Suggest appropriate audit objectives, but do not restrict yourself just to financial audit.
Why do you think that the auditors will need a letter from management saying that they have provided them with all the books and records of the company? Try to think of a scenario where management might try to understate cash receipts for their own benefit.
We have not discussed this at length yet, but can you at this stage suggest what benefits society should derive from a competent, independent and effective audit function?
WorldCom tried to maintain profit levels by treating revenue costs (over $3.8 billion) as capital expenditure. Explain what the impact would be if revenue costs (such as repairs to plant and machinery) were to be treated as capital assets. What do you think the auditor should have done to discover
The Erin and Lee Case Study is a good introduction to the principles of auditing.Discuss. Erin and Lee, Part 1 On 1 May 2017 Erin and Lee, two old friends in their early thirties, had recently been declared redundant, each having received 10 000 in redundancy pay. Lee said that he felt like using
Auditing is a complex activity. Discuss.
Identification of management assertions in respect of figures in the financial statements is a vital part of the audit process. State whether you agree with this statement, giving practical examples.
Explain what is meant by the principle of auditor integrity. How do you think we should ensure that the principle is adhered to?
Auditors are expected to approach their work with thoroughness and with an attitude of professional scepticism. What do you think that professional scepticism means in practice? You may refer to the paper on Toward Enhanced Professional Skepticism: Observations of the IAASBIAESB-IESBA Professional
You are auditing a company that shows a loss for the year of £700 000. This figure is after charging impairment of property, plant and equipment of £1 500 000. As a part of your work you note that in the directors’ report a profit of £800 000 is quoted as profit for the year. What are your
Explain why an understanding of audit theory and concepts helps us to explain audit practice. In answering this question you may review the titles of the IFAC standards on ethical, audit and education, which contain the advice/requirements on auditor behaviour and practice.
Explain the concept of audit quality and how it is achieved.
Explain how auditing theory might give useful insights into the practice of auditing. Your answer should make reference to the postulates and concepts of auditing.
Why do you think that the collapse of Enron and other scandals affecting large companies may have resulted in a widening of the audit expectations gap? You may want to refer to contemporary reports and media articles emerging relating to the collapse of Carillion in the UK.
Explain why the civil society is just as interested in the way that large companies, including banks, behave as are the shareholders of those companies. What do you think is meant by the public interest?
The trade payables figure in most companies is normally material in the context of the financial statements taken as a whole. What assertions do you think that management is implicitly making about the trade payables figure? Suggest one audit step for each assertion which you might take to prove
New rules have been introduced by the European Parliament, and it is anticipated that these new rules will lead to considerable improvements in audit quality. Evaluate the extent to which new legislation can contribute towards improving audit quality.
The audit function is vital to society.Discuss.
Do you think that most auditors are interested in a philosophical approach to their work? If not, why not ?
Based on the results of the analytical procedure, how likely is it that 2011 interest income is materially misstated? 20% 40% 100% 0% 10% Definitely not 30% 50% 60% 70% 80% 90% Definitely Misstated Misstated
For each of the business risk factors identified in question 1 above, indicate how each risk factor might impact the risk of material misstatements in specific financial statement accounts or disclosures?
A 2002 editorial in Business Week raised issues with compensation received by corporate executives even when the company does not perform well. In 1980 corporate executive compensation was 42 times the average worker compensation while in 2000 it was 531 times the average worker compensation.(a) Do
What aspects of the current manual sales accounting system create risks that increase the likelihood of material misstatements in the financial statements? Specifically identify each risk and how it might lead to a misstatement. For example, don't just put "Risk: Sales tickets are manually prepared
What features, if any, of the proposed IT-based sales accounting system will help minimize the risks identified in question 1? If a deficiency exists that is expected to persist under the new system, indicate that "no computer controls reduce this risk."
Describes deficiencies in the Collins Harp IT system development and program change process?
Review the audit documentation prepared by Green and Brown, LLP, related to TRS’s Notes Payable and list deficiencies on the enclosed schedules?
What do you believe were the three most serious control deficiencies at Société Générale? For each deficiency listed, indicate whether the deficiency related to poor design or poor operating effectiveness. Describe how you would remediate or fix each of the deficiencies listed.
Research the SysTrust and WebTrust services from the information on the following web page (or search the Internet or within the AICPA’s Information Technology Center Web site for “Trust Services”): http://www.webtrust.org. Describe how WebTrust services differ from SysTrust services.

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Auditing Cases An Interactive Learning Approach 5th edition Mark S. Beasley, Frank A. Buckless, Steven M. Glover, Douglas F. Prawitt - Solutions

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