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auditing international approach
Auditing An Assertions Approach 7th Edition G. William Glezen, Donald H. Taylor - Solutions
On what procedures does the auditor place heavy reliance in the audit of revenue and expense?
What are the purposes of the review of operations?
Name four ratio tests that may be applied in the audit of revenue and expense.
Describe an overall test of revenue for reasonableness.
Give two reasons for analyzing an expense account.
List four expense accounts that would usually be analyzed and indicate the reasons.
Why is an auditor concerned with a client's revenue recognition policies?
What are some inquiries an auditor can make when examining revenue and expense to add value to the audit?
List seven examples of matters of interest to an auditor that may be found in a review of minutes of meetings of stockholders and board of directors.
Why should the auditor be concerned with commitments and contingencies, since no amounts are shown for them in the financial statements?
State the objectives of the audit of commitments and contingencies.
What analytical procedures may be applied to commitments and contingencies?
List four audit procedures that are specifically designed to detect contingencies.
What are some inquiries an auditor can make when examining contingencies to add value to the audit?
What are the two types of subsequent events that may require adjustment to, or disclosure in, the financial statements? Give an example of each.
List the four general groups of audit procedures applied to subsequent events.
State the objectives of the audit of subsequent events.
Name eight documents or records that would be examined in the review of subsequent events. For what period would the review be conducted?
List eleven matters that would be discussed with management in connection with the audit of subsequent events.
What are the purposes of management representations?
List and explain nine types of representations that may be obtained from management.
Which client personnel normally sign the representation letter to the auditor?
What information is a company's legal counsel requested to confirm to the auditor?
An auditor compares \(19 \times 5\) revenues and expenses with those of the prior year and investigates all changes exceeding 10 percent. By this procedure, the auditor would be most likely to learn thata. An increase in property tax rates has not been recognized in the client's accrual.b.
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?a. Accounts payable.b. Payroll expense.c. Accounts receivable.d. Advertising expense.
Which of the following ratios would be most useful in the audit of revenue and expense?a. Current ratio.b. Ratio of selling expense to sales.c. Ratio of net income to sales.d. Debt-to-equity ratio.
Auditors sometimes use comparisons of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?a. Merchandise purchases being charged to selling and general expenseb. Unrecorded purchases.c. Unrecorded
As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditor shoulda. Require a footnote emphasizing the decline for full disclosure.b. Consider the possibility of an
Legal expense is understated because legal fees related to an unexpected lawsuit brought by a minoritv stockholder have not been billed br the law firm or accrued bv the client. Which of the following audit procedures is most likely to detect this misstatement?a. Analysis of charges in the legal
An auditor would most likely identify a contingent liability by obtaining a(an)a. Related party transaction confirmation.b. Accounts payable confirmation.c. Confirmation of open letters of credit from a bank.d. Transfer agent confirmation.
In the audit of contingent liabilities, which of the following procedures would be least effective?a. Standard bank confirmation.b. Analytical procedures.c. Inquiry of management.d. Confirmation with legal counsel.
An auditor is concerned with completing various phases of the audit after the balance sheet date. This "subsequent period" extends to the date of thea. Auditor's report.b. Final review of the audit working papers.c. Delivery of the auditor's report to the client.d. Public issuance of the financial
Which of the following events occurring during the subsequent period is most likely to result in adjustment to the financial statements?a. A worker is injured in a plant accident.b. A large customer declares bankruptcy.c. A significant subsidiary is sold.d. The U.S. Justice Department brings
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?a. Determine that changes in employee pay rates after year end were properly authorized.b. Re compute depreciation charges for plant assets sold after year end.c. Inquire about
After an audit report containing an unqualified opinion on a nonpublic client's financial statements was issued, the client decided to sell the shares of a subsidiary that accounts for 30 percent of its revenue and 25 percent of its net income. The auditor shoulda. Take no action because the
A purpose of a management representation letter is to reducea. Audit risk to an aggregate level of misstatement that could be considered material.b. An auditor's responsibility to detect material misstatements only to the extent that the letter is relied on.c. The possibility of a misunderstanding
Which of the following statements ordinarily is included among the written client representations obtained by the auditor?a. Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.b. Management acknowledges responsibility for illegal actions
To which of the following matters would materiality limits not apply in obtaining written management representations?a. The availability of minutes of stockholders' and directors' meetings.b. Losses from purchase commitments at prices in excess of market value.c. The disclosure of compensating
The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor witha. The probable outcome of asserted claims and pending or threatened litigation.b. Corroboration of the information furnished by management about litigation, claims, and
Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?a. Obtain assurance from management that it has disclosed all unasserted claims that the lawyer has advised are probable of assertion and must be disclosed.b.
Match the assertion that relates to each substantive test. Each assertion may be used once, more than once, or not at all. Substantive test 1. Compare sales for the period with prior-year audited amounts and current-year budgeted amounts. 2. Compare expenses for the period with prior-year audited
The primary source of information to be reported about litigation, claims, and assessments is thea. Client's lawyer.b. Court records.c. Client's management.d. Independent auditor.
During your audit of Fraudulent Fabrics, you note that the company's gross profit ratio increased to 25 percent this year from 20 percent last year. List the possible causes of this increase and the audit procedures you would employ or expand to investigate each possible cause.
In your audit of June Company, you are investigating an increase in sales during the current year and have made inquiry of the sales manager, who tells you the increase is due to a sales price increase during the year. When you ask to see a current price list to verify the increase, the sales
As auditor of Royal Radio Broadcasting Company, you have learned from past audit experience, familiarity with broadcasting industry practice, and a review of Royal's contracts and agreements the following information regarding Royal's operations.a. Local advertising accounts for about 70 percent
When examining documentation supporting costs and expenses, an auditor must consider its availability and its reliability. Discuss the reliability and adequacy of documentation you would expect for the following expenses.a. Purchase of stationery and supplies.b. Officer travel expenses.c. Rental
Young, CPA, is considering the procedures to be applied concerning a client's loss contingencies relating to litigation, claims, and assessments.Required:What substantive audit procedures should Young apply when testing for loss contingencies relating to litigation, claims, and assessments?
Commitments and contingencies can take many forms, including the following.a. Guarantee of the debt of an affiliated company.b. Contract with a builder to construct a plant.c. Maintenance of an unrecorded bank account for illegal political contributions.d. Discriminatory hiring practices.e.
In general, a lease will be considered a capital lease if it meets any one of the following criteria.a. The lease transfers ownership of the property to the lessee by the end of the lease term.b. The lease contains an option to purchase the property at a bargain price.c. The lease term is equal to
Green, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 19X9. Green plans to complete the fieldwork and sign the auditor's report about May 10, 19X0. Green is concerned about events and transactions occurring after December 31, 19X9 that may affect the
During the audit of the financial statements of Amis Manufacturing, Inc., the company's president, R. Alderman, and Luddy, the auditor, reviewed matters that were supposed to be included in a written representation letter. On receipt of the following client representation letter, Luddy contacted
The fieldwork for the December 31, 19X8 audit of Bypass Manufacturing Company was completed on February 20, 19X9, and the audit report was delivered to the client on March 1, 19X9. The following material transactions and events came to the auditor's attention subsequent to December 31, 19X8.
In connection with her audit of Flowmeter, Inc., for the year ended December 31, 19X8, Hirsch, CPA, is aware that certain events and transactions that took place after December 31, 19X8, but before she issues her report dated February 28, 19X9, may affect the company's financial statements.The
Barge Construction Company constructs large oil barges, each requiring from six to nine months to build. The company follows the percentage-of-completion method of recording construction revenue for financial statement purposes. At the audit date, two barges were under construction (one estimated
Caldwell and Douglas, CPA, are completing the audit of Carmel Corporation for the year ended December 31, 19X4. While performing a review of subsequent events, they note the following situations.1. Because of political developments in the Middle East, the possibility of expropriation of one of the
During his review of subsequent events in connection with the audit of Jordan Match Company, Ron Gray, CPA, was informed by the corporate secretary that, although there had been two meetings of the board of directors subsequent to the audit date, no minutes had been prepared. The corporate
During an audit of Miller Carpet Company, Kelley, CPA, learned that the company had been charged with discriminatory hiring policies and that lawsuits totaling \(\$ 10\) million had been brought against it because of this alleged practice. Kelley discussed the matter with the company's legal
Windek, CPA, is nearing the completion of an audit of the financial statements of Jubilee, Inc. Windek is currently concerned with ascertaining the occurrence of subsequent events that may require adjustment or disclosure essential to a fair presentation in conformity with generally accepted
Cole \& Cole, CPAs, are auditing the financial statements of Consolidated Industries Co. for the year ended December 31, 19X2. On April 2, 19X3, an inquiry letter to J.J.Young, Consolidated's outside attorney, was drafted to corroborate the information furnished to Cole by management concerning
The following misstatements could affect revenue and expense, commitments and contingencies, and subsequent events. Devise one audit procedure that will provide reasonable assurance of detecting each misstatement.a. Sales for the first few days of the subsequent year are recorded in the current
Lambert Skull recently graduated from an accounting program at a local university and accepted a position on the audit staff of Look and Look, CPAs. He was assigned to the audit of Grand Toys, a manufacturer of innovative children's toys, including a plastic gun that shoots rubber arrows at other
List the important concepts of the four standards of reporting.
State what each paragraph in the standard audit report is called and the information each conveys.
To whom should the audit report normally be addressed?
Because much of an auditor's work involves an audit of various client financial records, why does the auditor's report state that he or she has audited the financial statements rather than the financial records?
How does the auditor explain in the audit report his or her responsibility for the detection of errors and fraud?
What is the significance of the phrase "in our opinion" in the audit report?
Define the word "fairly" as used within the context of the auditor's report.
Can financial statements not be fair and yet be in conformity with generally accepted accounting principles? Explain.
List the conditions specified in SAS No. 69 for financial statements to "present fairly."
What are the rule-making bodies whose pronouncements have been designated as generally accepted accounting principles by the AICPA?
Describe the GAAP hierarchy for nongovernment entities.
List the individual financial statements normally included in a complete set and indicate which phrase of the opinion paragraph applies to each statement.
How does the auditor determine the date of the audit report?
What is meant by the phrase "dual dating of a report," and when would an auditor use this practice?
What reporting responsibility does an auditor have for prior-year financial statements presented with current-year audited statements if (1) he or she audited the prior year, (2) the prior year was unaudited, and (3) the prior year was audited by another auditor?
Distinguish between a reissued and an updated audit report.
What types of reports may a U.S. auditor issue on financial statements prepared in conformity with accounting principles generally accepted in another country that are for use only outside the United States?
What is the auditor's responsibility for information that is supplementary to the financial statements but required by the FASB or GASB? How does the auditor report on such information?
What is the auditor's responsibility for other information in the text portion of annual reports and other documents containing audited financial statements?
What actions should an auditor take if a material error is found in the financial statements after delivery of his or her audit report?
The standard audit report includes all of the following except a (an)a. Opinion paragraph.b. Scope paragraph.c. Explanatory paragraph.d. Opening paragraph.
The auditor's report may be addressed to any of the following except the client'sa. Stockholders.b. Board of directors.c. Chief executive officer.d. Partners.
In the opening paragraph of the standard audit report, auditors acknowledge their responsibility toa. Conduct their audit in accordance with generally accepted auditing standards.b. Evaluate the overall financial statement presentation.c. Express an opinion based on their audit.d. Plan and perform
The existence of audit risk is recognized by the statement in the auditor's standard report that thea. Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.b. Financial statements are presented fairly, in all material respects, in
Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?a. FASB Technical Bulletins.b. AICPA Accounting Interpretations.c. FASB Statements of Financial Accounting
The auditor's standard report should be titled, and the title should include the worda. Standard.c. Independent.b. Opinion.d. Audit.
The standard audit report explains that an audit includes all of the following excepta. Examining support for the amounts and disclosures in the financial statements.b. Evaluating internal control.c. Assessing the accounting principles used and significant estimates made by management.d. Evaluating
An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of fieldwork but before issuance of the auditor's report. The auditor's responsibility for events occurring subsequent to the completion of fieldwork wasa. Extended to subsequent events
An auditor has been asked to report on the balance sheet of Jane Company but not on the other basic financial statements. The auditor will have access to all information underlying the basic financial statements. Under these circumstances, the auditora. May accept the engagement but should disclaim
When unaudited financial statements of a nonpublic entity are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and I. The report on the unaudited financial statements should
Comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor's report was qualified, the successor shoulda. Indicate the substantive reasons for the qualification in the predecessor
Before reporting on the financial statements of a U.S. entity that have been prepared in conformity with another country's accounting principles, an auditor practicing in the U.S. shoulda. Understand the accounting principles generally accepted in the other country.b. Be certified by the
What is an auditor's responsibility for supplementary information that is outside the basic financial statements, but required by the FASBa. The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements.b. The auditor's only
Which of the following representations does an auditor make explicitly and which implicitly when issuing a standard report? Conformity with GAAP a. Explicitly Adequacy of disclosure Explicitly b. Implicitly Implicitly C. Implicitly Explicitly d. Explicitly Implicitly
Which paragraphs of an auditor's standard report on financial statements should refer to generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP) ? GAAS GAAP a. Opening Scope b. Scope Scope C. Scope Opinion d. Opening Opinion
When audited financial statements are presented in a client's document containing other information, the auditor shoulda. Perform inquiry and analytical procedures to ascertain whether the other information is reasonable.b. Add an explanatory paragraph to the auditor's report without changing the
Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?a. A technological development that could affect the entity's future ability to continue as a going
When a predecessor auditor reissues the report on the prior period's financial statements at the request of the former client, the predecessor auditor shoulda. Indicate the introductory paragraph of the reissued report that the financial statements of the subsequent period were audited by another
The auditor's standard report states that the financial statements are presented fairlya. With reasonable assurance.b. Without significant error.c. In all material respects.d. On a consistent basis.
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