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auditing international approach
Auditing An Assertions Approach 7th Edition G. William Glezen, Donald H. Taylor - Solutions
As a condition for a public offering of securities by your largest and most important audit client, the underwriter requires a comfort letter containing the following items.1. An unequivocal statement that you are independent with respect to your client within the meaning of the Securities Act of
Keith Sellers, a new CPA, is establishing an accounting practice and has decided to specialize in performing compilations. He stated, "Because CPAs provide no assurance in compilation reports, they have no legal liability." Evaluate his position.
Becky Maupin, CPA, has been asked to compile the financial statements of George's Diner, a nonpublic company, for the year ended April 30, 19X5.a. What understanding should Maupin establish with George before accepting the engagement? Must this understanding be in writing?b. Under what conditions
The following report was drafted on October 25, 19X0, by Major, CPA, at the completion of the engagement to compile the financial statements of Ajax Company for the year ended September 30, 19X0. Ajax is a nonpublic entity in which Major's child has an immaterial direct financial interest. Ajax
Steve White, CPA, has completed the compilation of the financial statements of the Elbow Macaroni Factory, a nonpublic entity, and is now considering the form of report that he should issue.a. Discuss the general form of a compilation report.b. If White performed additional procedures such as a
Easecom Company is a manufacturer of highly specialized products for networking videoconferencing equipment. Production of specialized units is, to a large extent, performed under contract, with standard units manufactured to marketing projections. With the recent downturn in the computer industry,
Slow Burn Candle, Inc., a public company, asked its CPA, Parker Granger, to assist it in preparing footnotes for unaudited financial statements as of June 30, 19X5. Granger has previously audited the company's annual financial statements as of December 31, 19X4.a. If Granger assisted in drafting
Atlas Company is a small refinery owned by several individuals who are not active in its management. To supply them with reliable information about the company's operations for the year, you are requested to prepare a report on accompanying information in connection with this year's audit. You are
Differentiate between financial and operational auditing.
What is the purpose of a compliance audit?
How do government auditing standards differ from generally accepted auditing standards?
If an auditor finds no reportable conditions during an audit of a government entity, how is this reported under Government Auditing Standards?
What governmental entities are subject to the Single Audit Act?
Name and describe the general requirements that are tested for compliance in a single audit.
What specific requirements applicable to major programs are tested for compliance in a single audit?
What types of expenditures are classified as questioned costs in a compliance audit?
An operational auditor is most likely to be concerned with whether a transaction wasa. Necessary.b. Reasonable.c. Properly approved.d. Properly supported with documentation.
When planning an operational audit, the auditor should consider the risk ofa. Misleading financial statements.b. Inadequate internal controls.c. Inefficient operations.d. Lawsuits for inadequate auditing.
When performing a preliminary survey an auditor woulda. Assess control risk.b. Review flowcharts of operations.c. Compute sample sizes for tests of operations.d. Prepare a draft of the audit report.
Which of the following deviations from company policy would an operational auditor consider to be the most critical?a. Several late payments to vendors resulted in loss of discounts.b. The sales manager bribed customers to obtain their business.c. An employee was found to have been paid at the
The benefits of an operational audit generally include all of the following excepta. Increased revenue.b. Increased reliability of the financial statements.e. Increased productivity.d. Decreased costs.
An operational audit report is not likely to be addressed to thea. Department supervisors.b. Audit committee.c. Stockholders.d. Top management.
In an operational audit of the tax department, you found that certain officers were abusing some of their executive perquisites and that this abuse may have a tax effect for the company. The tax department manager took strong exception to this finding, stating that these matters were of minor
In a compliance audit, an auditor is concerned with whether an entity's transactions are in conformance witha. Management objectives.b. Board of director directives.c. Laws and regulations.d. Accepted business practices.
Organizations that issue standards affecting government audits include all of the following except thea. OMB.b. AICPA.c. SEC.d. GAO.
Government auditing standards require external quality reviews toa. Demonstrate independence.b. Assure investors of audit competence.c. Increase competition among accounting firms.d. Assure that audit quality is maintained.
When engaged to audit a government entity in accordance with Government Auditing Standards, an auditor prepares a written report on internal controla. In all audits, regardless of circumstances.b. Only when the auditor has noted reportable conditions.c. Only when requested by the government entity
Reporting on internal control under Government Auditing Standards differs from reporting under generally accepted auditing standards in that Government Auditing Standards requires aa. Written report describing the entity's internal control procedures specifically designed to prevent fraud, abuse,
All of the following are general requirements for compliance with laws and regulations excepta. Civil rights.b. Political activity.c. Freedom of information.d. Cash management.
When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor should prepare a written report on the auditor'sa. Identification of the causes of performance problems and recommendations for actions to improve operations.b. Understanding of internal
Wolf is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program. Wolf's report on compliance should expressa.
An auditor performing a single audit would issue all the following reports excepta. Opinion on the financial statements.b. Report on management objectives.c. Report on internal controls over federal financial assistance.d. Opinion on compliance with specific requirements applicable to major federal
Operational auditors use measures to evaluate performance, to identify and correct problems, and to discover opportunities. To assist in measuring achievement, a number of performance measures are available. To present a more complete picture of performance, it is strongly recommended that several
Brock Company is a manufacturer of children's toys and games. The company has been experiencing declining profit margins and is looking for ways to increase operating income. Because of the competitive nature of the industry, Brock is unable to raise its selling prices and must either cut costs or
Avery Research is a department of Northern Valley Hospital that is affiliated with a leading university. Avery operates on a project basis and consists of a pool of highly respected scientists and technicians who can be called upon to participate in a given project. Assignments are made for the
You have been assigned to perform an operational audit of the Palmer Division. The division management had recently been told to implement a management by objectives (MBO) system and to increase profits by 15 percent. However, profits have actually declined, and you have been assigned to determine
You have just received the following draft audit report that was prepared by one of your staff auditors. 1 Audit of the purchasing department 2 Introduction 3 The purchasing department is responsible for 4 all procurements except those involving 5 executive approval. During the past months, 6
Your audit of a United Fund agency that received a grant of federal funds included tests of transactions for compliance with applicable laws and regulations. Indicate whether or not and why you would question the following grant expenditures.a. Cost of newspaper ad for secretarial assistance.b.
Toxic Waste Disposal Company, Inc. (TWD) is a not-for-profit organization that receives grants and fees from various state and municipal governments as well as grants from several federal government agencies.TWD engaged Hall \& Hall, CPAs, to audit its financial statements for the year ended July
You have completed your audit of State College. As required by GAS, you tested compliance with laws and regulations that could have a material effect on the financial statements. You found no material instances of noncompliance, but you did find some immaterial instances of noncompliance. Draft the
Modern Widgets, Inc. manufactures various types of widgets in its Ames, Iowa, plant. Management recently completed an expansion that will permit the manufacture of super widgets, for which a large demand is anticipated.Recently, top management has become concerned about problems in the purchasing
Which of the following questions would an auditor ask while auditing accounts receivable to add value to an audit?a. Are accounts receivable pledged?b. Are customers satisfied with your billing procedures?c. Are any accounts receivable due from related parties?d. Is there a separation of duties
What are some inquiries an auditor can make when examining the long-term debt account to add value to the audit?
Beta, Inc., is an affiliate of an audit client and is audited by another firm of auditors. Which of the following is most likely to be used by the auditor to obtain assurance that all guarantees of the affiliate's indebtedness have been detected?a. Examine supporting documents for all entries in
Briefly describe six reasons why the auditor's approach to obtaining an understanding of internal control is different when a computer is used rather than manual processing.
In obtaining an understanding of the control environment that affects computer processing, the auditor will often consider several matters. Briefly describe these matters.
What is batch processing?
What function is performed by an edit program?
What is online processing?
What is the difference between a minicomputer and a microcomputer?
What three methods or audit techniques are used to obtain an understanding of the computerized elements of an accounting system?
Define each of the general controls.
Define each of the application controls.
Describe the three most common types of batch totals.
Describe five potential control problems in an independent minicomputer or microcomputer system
Describe six controls that an auditor should look for in an independent minicomputer or microcomputer system.
Name two factors that determine the extent of knowledge that auditors need to obtain about computer control procedures.
Why might an auditor use a primarily substantive approach for the operation illustrated in Figure 11.3 ? FIGURE 11.3 Use of Microcomputer in a Partial Computer System The sales representative prepares daily sales orders. The sales orders are reviewed and approved by the manager. The warehouse
Which of the following is a systems flowchart?a. A description of the sequence of operations and logic in a computer program.b. A description of the sequence of major processing operations and the data flow to and from the files used in processing.c. A performance of tests of the data on the
Which of the following is not an application control?a. Input controls.b. Processing controls.c. Output controls.d. Organization and operation controls.
Which of the following procedures would not improve internal control in a computer system?a. One computer operator running all programs.b. Limited access to computer programs.c. Programmers not operating the computers.d. Programs documented with flowcharts.
Which of the following is not a batch control?a. Control total.b. Hash total.c. Record count.d. Parity check.
Which of the following best describes a fundamental control weakness often associated with computer systems?a. Computer processing equipment is more subject to systems error than manual processing is subject to human error.b. Computer processing equipment processes and records similar transactions
Matthews Corporation has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computer system automatically updates all payroll records. Because of this changea. A generalized computer audit
Internal control procedures are ineffective when computer department personnela. Participate in computer software acquisition decisions.b. Design documentation for computerized systems.c. Originate changes in master files.d. Provide physical security for program files.
Which of the following is an example of application controls in computer processing systems?a. Hardware controls.b. Input controls.c. Documentation procedures.d. Controls over access to equipment and data files.
Which of the following would most likely be a weakness in internal control of a client that utilizes microcomputers rather than a larger computer systema. Employee collusion possibilities are increased because microcomputers from one vendor can process the programs of a system from a different
Some computer processing internal control procedures relate to all computer activities (general controls), and some relate to specific tasks (application controls). General controls includea. Controls designed to ascertain that all data submitted to the computer system for processing have been
Program controls in a computer processing system are used as substitutes for human controls in a manual system. Which of the following is an example of a program control?a. Dual read.b. Echo check.c. Limit and reasonableness tests.d. Key verification.
Which of the following employees normally would be assigned the operating responsibility for designing a computer processing installation, including flowcharts of data processing routines?a. Computer programmer.b. Systems analyst.c. Data processing manager.d. Internal auditor.
When an online computer system is in use, internal control can be strengthened bya. Providing for the separation of duties between data input and error listing operations.b. Attaching plastic file protection rings to reels of magnetic tape before new data can be entered on the file.c. Making a
When erroneous data are detected by computer program controls, such data may be excluded from processing and printed on an error report. The error report should probably be reviewed and followed up by thea. Supervisor of computer operations.b. Systems analyst.c. Computer programmer.d. Control group.
Which of the following would increase control risk in a computer processing system?a. The custodian of computer records maintains custody of computer program instructions and detailed listings.b. The control group is solely responsible for the distribution of all computer output.c. Computer
The computer system most likely to be used by a large savings bank for customers' accounts would bea. A batch processing system.b. An online system.c. A generalized utility system.d. A direct-access database system.
Which of the following would an auditor most likely use in obtaining an understanding of internal control?a. Systems flowcharts.b. Record counts.c. Program listings.d. Record layouts.
Which of the following is not a characteristic of a batch processing computer system?a. The collection of like transactions that are sorted and processed sequentially against a master file.b. Keying of transactions, followed by machine processing.c. The posting of a transaction, as it occurs, to
If a control total were to be computed on each of the following data items, which would best be identified as a hash total for a payroll computer application?a. Department numbers.b. Net pay.c. Hours worked.d. Total debits and total credits.
When computer programs or files can be accessed from terminals, users should be required to enter a (an)a. Parity check.b. Personal identification code.c. Self-diagnosis test.d. Echo check.
Misstatements in a batch computer system caused by incorrect programs or data may not be detected immediately becausea. Errors in some transactions may cause rejection of other transactions in the batch.b. The identification of errors in input data typically is not part of the program.c. There are
Which of the following controls is a processing control designed to ensure the reliability and accuracy of data processing? Limit test Validity check test Yes Yes b. No No C. No Yes d. Yes No
For a number of years, the Keep Company had used a computer batch processing system for its credit sales transactions. As clerks made credit sales, a copy of the sales invoice was given to the customer and another copy was placed in the register drawer. At the end of each day, these sales invoice
Talbert Corporation hired an independent computer programmer to develop a simplified payroll application for its newly purchased computer. The programmer developed an online, data-based microcomputer system that minimized the level of knowledge required by the operator. It was based on typing
Examine Figure 11.3 and describe as many control problems as you think exist. (Use the diagram and any other logical assumptions from the diagram.) Classify the controls according to the following:a. Organization controls.b. Documentation controls.c. Access controls.d. Input controls.e.
Examine the systems flowchart shown and write a detailed narrative of the procedures shown in the flowchart.
Examine the program flowchart on pages 348-349 and write a narrative description of the computer processing shown. Include in your narrative a general description of the error messages. In the flowchart a transaction code one is a credit sale, a transaction code two is a cash receipt, and a
Ineffective internal control may allow errors or fraud to occur. For each of the following situations, indicate the error or fraud that could occur.a. The computer operator, who has some knowledge of programming, is allowed unlimited access to programs.b. The control totals are forwarded to the
Mr. A. O. Steady, a programmer for One Corporation, had been employed in his job for a number of years. He was the only programmer. There was a separate computer operator and input data operator.The computer system provides for data from purchase invoices to be entered at a terminal, The data are
George Beemster, CPA, is auditing the financial statements of the Louisville Sales Corporation, which recently installed a new computer. The following comments have been extracted from Mr. Beemster's notes on computer operations and the processing and control of shipping notices and customers
You are reviewing audit work papers containing a narrative description of the Tenney Corporation's factory payroll system. A portion of that narrative is as follows:Factory employees punch time cards each day when entering or leaving the shop. At the end of each week, the timekeeping department
When auditing a computer accounting system, the independent auditor should understand how the use of computers affects the various characteristics of internal control. The indepen dent auditor should be aware of those control procedures that are commonly referred to as "general" controls and those
Smaller Company is a manufacturer of plastic golf balls. Since the company was organized, it has used central processing for all of its computerized accounting operations. Early this year management decided to use microcomputers to process inventory transactions and maintain inventory records in
What is meant by "through the computer approaches" to performing tests of controls?
Contrast the purpose of and the methods of per- forming the four following tests of controls in a computer system.a. Test data.b. Integrated test facilityc. Online audit monitor.d. Parallel simulation.
What are some of the limitations of using test data?
Describe the advantages and disadvantages of using online audit monitoring.
Describe the use of parallel simulation to test the client's computer program.
Describe the guidelines for assessing control risk.
What are computer-assisted audit programs?
Give five examples of functions that can be performed by a computer-assisted audit program.
Name four types of spreadsheet working papers that can be produced with microcomputers.
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