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auditing international approach

Auditing An Assertions Approach 7th Edition G. William Glezen, Donald H. Taylor - Solutions

What is the difference between a flowchart and an internal control questionnaire?
Why would studying and evaluating each of the client's controls not necessarily be the most efficient way of determining the scope of related substantive tests?
What is an audit strategy?
Describe two alternative audit strategies.
Give three reasons for using the primarily substantive approach.
Describe the steps in Figure 9.6. FIGURE 9.6 Flowchart of the Primarily Substantive Approach Obtain an understanding of relevant internal control policies and procedures-document the understanding Assess control risk at the maximum level if the evidence calls for this assessment. Assess control
Describe the steps in Figure 9.7. FIGURE 9.7 Flowchart of the Lower Control Risk Approach Obtain an understanding of relevant internal control policies and procedures-document this understanding. Perform tests of controls necessary to support a lower planned level of control risk. Assess control
Give a four-part comparison of the two audit strategies.
In Figure 9.9, why are there fewer substantive tests for the existence assertion than for the valuation assertion? FIGURE 9.9 Illustration of Accounts Receivable Assertions Assertion: Valuation-Net Accounts Receivable is stated at the proper amount at the balance sheet date. Assertion:
Which of the following is not a characteristic of the primarily substantive approach?a. The auditor usually gathers all or most of the evidence with substantive tests.b. Usually little or no reliance is placed on controls.c. The assessment of control risk is usually at or near maximum level.d.
Which of the following is not a characteristic of the lower control risk approach?a. Control risk is usually assessed at maximum level.b. Substantive tests are usually restricted.c. The auditor usually plans to place considerable reliance on the controls.d. The auditor plans to perform extensive
Which of the following is not part of the control environment?a. Management philosophy and operating style.b. Organizational structure.c. Information and communication systems.d. Assignment of authority and responsibility.
If the auditor uses the primarily substantive approach instead of the lower control risk approacha. A higher level of understanding of internal control is required.b. The auditor plans to assess control risk at a lower level.c. The auditor plans heavier reliance on substantive tests.d. The auditor
The understanding of internal control that relates to a financial statement assertion should be used to do all of the following excepta. Determine inherent risk for that assertion.b. Identify types of potential misstatements for that assertion.c. Consider factors that affect the risk of material
To obtain an understanding of the relevant policies and procedures of internal control, the auditor performs all of the following excepta. Make inquiries.b. Inspect documents and records.c. Make observations.d. Design substantive tests.
After obtaining an understanding of an entity's internal control, an auditor may assess control risk at the maximum level for some assertions because the auditora. Believes the internal control policies and procedures are unlikely to be effective.b. Determines that the pertinent internal control
An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believesa. Sufficient evidential matter to support the assertions is likely to be available.b. Evaluating the effectiveness of policies and procedures is inefficient.c. More emphasis on
An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor'sa. Assessment of control risk.b. Identification of weaknesses in the system.c. Assessment of the control environment's effectiveness.d. Understanding of the system.
Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment whena. The audit committee is active in overseeing the entity's financial reporting policies.b. External policies
Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?a. Are assets that collateralize notes payable critically needed for the entity's continued existence?b. Are two or more authorized signatures required on checks that repay
Which of the following internal control procedures would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?a. Senior management verifies that securities in the bank safe deposit box are registered in the entity's name.b. The internal
Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control procedure that pro- vides fora. Segregation of duties of employees in the accounts payable department.b. Independent verification of invoices for disbursements recorded as
Sound internal control procedures dictate that immediately upon receiving checks from customers by mail, a responsible employee shoulda. Add the checks to the daily cash summary.b. Verify that each check is supported by a prenumbered sales invoice.c. Prepare a duplicate listing of checks
During the course of acquiring an understanding of the internal control of her client, Consent Company, Ms. Search was pleased to discover that the recordkeeping in general and the accountability for assets were good. Also, transactions were approved by the proper individuals, and there was an
For each of the following situations, indicate whether the auditor would use a primarily substantive approach or a lower control risk approach for most or all of the assertions. Give reasons for your answers. (Consider only the information given here.)1. The company is owned and managed by one
For each of the procedures listed below, do the following.a. Indicate what assertion(s) is being audited.b. Indicate whether the procedure is (1) acquiring an understanding of internal control (which might include some tests of controls) or (2) a substantive test.1. Ascertaining that the cash
Examine the flowchart for sales, shipping, billing, and collecting on page 271 and do the following:a. Write a narrative description of the system.b. From a review of the flowchart and of the narrative'written in (a), identify as many control activities as you can. Identify the financial statement
Examine the flowchart for purchases and do the following:a. Identify the sections of the flowchart and for each section write an accompanying narrative of the document flows.b. Supply answers and comments to the internal control questionnaire for purchases controls shown below.c. From a review of
Examine the flowchart for payroll shown and do the following:a. Identify the sections of the flowchart and for each section write an accompanying narrative of the document flows (use pages \(264-265\) as a guide).b. Supply answers and comments to the internal control questionnaire for payroll
In 19X4 XY Company purchased more than \(\$ 10\) million of office equipment under its "special" ordering system, with individual orders ranging from \(\$ 5,000\) to \(\$ 30,000\). "Special" orders entail low-volume items that have been included in an authorized user's budget. Department heads
Assume that an independent auditor is auditing the financial statements of a small not-for profit institution. He finds that the information system is handled by one individual who writes checks, records and deposits the cash receipts, and records and posts all transaction entries. The independent
Listed hereafter are eight responsibilities that might be performed by individuals in an accounting department. Assume that five people are employed for the purpose of handling these eight responsibilities.1. Responsible for the general ledger.2. Responsible for the accounts receivable subsidiary
In an effective internal control system, the following functions are separated: (1) authorizing a transaction, (2) recording a transaction, (3) maintaining custody of assets that result from a transaction, and (4) comparing assets with the related amounts recorded in the accounting records. In each
You have been engaged by the management of Alden, Inc. to review its internal control over the purchase, receipt, storage, and issue of raw materials. You have prepared the following comments to describe Aldens procedures.Raw materials, which consist mainly of high-cost electronic components, are
The flowchart depicts part of a client's revenue cycle. Some of the flowchart symbols are labeled to indicate control procedures and records. For each symbol numbered 61 through 73, select one response from the answer lists below. Each response in the lists may be selected once or not at all. SALES
Butler, CPA, has been engaged to audit the financial statements of Young Computer Outlets, Inc., a new client. Young is a privately-owned chain of retail stores that sells a variety of computer software and video products. Young uses an in-house payroll department at its corporate headquarters to
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc. (MMI) for the vear ended January 31, 19X5. Field has compiled a list of possible errors and fraud that mav result in the misstatement of MMI's financial statements, and a corresponding list of control activities that, if
An auditor's working papers include the narrative description below of the cash receipts and billing portions of internal control of Rural Building Supplies, Inc. Rural is a single-store retailer that sells a variety of tools, garden supplies, lumber, small appliances, and electrical fixtures to
Taylor, CPA, has been engaged to audit the financial statements of University Books, Inc. University Books maintains a large revolving cash fund exclusively for the purpose of buying used books from students for cash. The cash fund is active all year because the nearby university offers a large
Describe four reasons why auditing should be studied.
Give examples of two assertions or representations of an organization.
Explain the difference between accounting and auditing.
Explain the differences among the following.a. Financial statement auditing.b. Compliance auditing.c. Operational auditing.
Explain the differences among the following.a. External auditors.b. Internal auditors.c. Government auditors.
Describe four elements of the theoretical framework of auditing.
What are four conditions that create a demand for auditing?
Describe three reasons why independent auditors are the appropriate group to provide the potential investor with an unbiased opinion as to whether the financial statements are fairly presented.
Explain how stewardship or agency theory helps to explain the demand for audits.
Explain the motivational effect that an audit has on preparers of financial statements.
Describe three reasons why an audit is not a guaran- tee of the exactness or accuracy of the assertions or representations in financial statements.
What is meant by integrity?
Answer these questions about the history of auditing.a. Describe a method of auditing that seemed to be prevalent in ancient Egypt and Babylonia.b. Describe the audit of public accounts in ancient Greece.c. Describe the recordkeeping and auditing system used in English manors during the medieval
Which of the following types of audits is performed to determine whether an entity's financial statements are fairly stated in conformity with generally accepted accounting principles?a. Operational audit.b. Compliance audit.c. Financial statement audit.d. Performance audit.
Which of the following types of audit uses as its criteria laws and regulations?a. Operational audit.b. Compliance audit.c. Financial statement audit.d. Financial audit.
Which of the following types of auditing is per- formed most commonly by CPAs on a contractual basis?a. Internal auditing.b. Government auditing.c. Internal Revenue Service auditing.d. External auditing.
Which of the following statements does not prop- erly describe an element of the theoretical frame- work of auditing?a. The data to be audited can be verified.b. Short-term conflicts may exist between manag- ers who prepare data and auditors who examine the data.c. Auditors act on behalf of
Which of the following statements does not de- scribe a condition that creates a demand for auditing?a. Conflict between an information preparer and a user can result in biased information.b. Information can have substantial economic con- sequences for a decision maker.c. Expertise is often
Which of the following statements does not prop- erly describe a limitation of an audit?a. Many audit conclusions are made on the basis of examining a sample of evidence..b. Some evidence supporting dollar representa- tions in the financial statements must be ob- tained by oral or written
For each description, list the letter or letters whose term or terms define the description. Each term may be used once, more than once, or not at all. Description 1. This activity makes use of attesta- tion. Cet. 2. This activity makes use of internal auditors. e. 3. This condition creates a
Reread the broad definition of auditing in the chapter and discuss the meaning of each of the following key words and phrases as they relate to the definition.a. Systematic process.b. Objectively obtaining and evaluating evidence.c. Assertions about economic actions and events.d. Degree of
Reread the definition of operational auditing in the chapter. Select the key words and/or phrases that distinguish this definition from that of financial statement auditing. Discuss the meaning of each of these key words and/or phrases as they relate to the definition of operational auditing.
Odom Company is a medium-sized producer of fishing rods with approximately $5 million of annual sales. The company is wholly owned by Mike Odom, who serves as its president and is active in its daily operations. There is no long-term debt, and there are no current plans to incur any. Mr. Odom has
Ms. Wilson is president of Wilson Company, which operates hamburger restaurants in Houston, New Orleans, Memphis, and Dallas. She believes that her company may be large enough to need an operational audit of its activities. Profits have been good but not as good as expected. Certain accounting
Explain why each of the following audits would be classified as (1) financial statement, (2) operational, or (3) compliance.a. Audit of the contract costs of building jet fighter planes.b. Audit by internal auditors of the efficiency of purchasing operations.c. Audit by a CPA firm of whether a
Members of a single family own the majority of the capital stock of Custom Furniture Company, a small corporation not listed on any stock exchange. The balance of the capital stock is held by a few outside investors. Custom Furniture Company sells a limited variety of household furnishings such as
Describe the type of work performed and the general education requirements needed to enter each of the following career paths in accounting:a. Public accounting.b. Private accounting.c. Government accounting.d. Accounting education.
What are the three general requirements that must be followed to obtain a license to practice public ac counting?
Describe the differences among the following types of CPA firms.a. International CPA firms.b. National CPA firms.c. Regional CPA firms.d. Local CPA firms..
Describe the scope of service of each of the following services offered by CPA firms.a. Audit.b. Review.c. Tax services.d. Management consulting services.e. Accounting services.
Under what conditions is it acceptable for a CPA to perform management consulting services for an audit client?
Describe the five suggestions on how CPA firms can effectively implement a system of quality control.
Name the two sections of the Division of CPA Firms and describe the purpose of each section.
Give an explanation of each of the following parts of the independent auditor's report:
a. The heading.b. The addressee.c. The first sentence of the opening paragraph.d. The second and third sentences of the opening paragraph.e. The first sentence of the scope paragraph.f. The second sentence of the scope paragraph. g. The third sentence of the scope paragraph. h. The fourth sentence
Name the generally accepted auditing standards from which the following phrase or phrases are taken. (For example, the phrase "adequate technical training and proficiency" is taken from the first general standard.)a. "Due professional care is to be exercised."b. "Sufficient competent evidential
Describe the four types of audit opinions.
Describe three fundamental differences between at- testation standards and generally accepted auditing standards.
Answer the following questions about organizations that influence operations of CPA firms.a. What is the purpose of state boards of ac- counting?b. What are state societies of certified public accountants?c. What are the objectives of the American Institute of Certified Public Accountants?d. What
Answer the following questions.a. Why was the Commission on Auditors' Responsibilities appointed?b. Why was the Treadway Commission established?a. "Due professional care is to be exercised."b. "Sufficient competent evidential matter is to be obtained."c. "Informative disclosures in the financial
Which of the following is a correct statement?a. All states require only a CPA certificate to obtain a license to practice public accounting.b. All states require public accounting experience to obtain a license to practice public accounting. Most states require a CPA certificate to practice public
Which of the following is a correct statement?a. An audit provides limited assurance by at- testing to the fairness of the client's assertions.b. A review provides positive assurance by at- testing to the reliability of the client's assertions.c. Management consulting services provide at- testation
Which of the following is not a quality control standard?a. Independence in fact and appearance should be maintained at all organizational levels.b. Personnel should be hired who possess the appropriate characteristics to enable them to perform competently.c. CPA firms should not accept or continue
Which of the following sentences or phrases from the auditor's report is not correctly stated?a. We have audited the accompanying.b. We conducted our audit in accordance with generally accepted auditing standards. In our opinion, the financial statements referred to above present fairly the
The first general standard of generally accepted auditing standards states thata. An independence in mental attitude is to be maintained.b. Due professional care is to be exercised. The audit is to be performed by a person or persons having adequate technical training and proficiency as an
When the financial statements contain a material departure from generally accepted accounting principles, the auditor should issue eithera. An unqualified or qualified opinion.b. A qualified opinion or a disclaimer of opinion.c. A qualified opinion or an adverse opinion.d. An adverse opinion or a
Which of the following is not an attestation standard?a. The engagement shall be performed by a practitioner or practitioners having adequate. knowledge in the subject matter of the assertion.b. Sufficient evidence shall be obtained to pro- vide a reasonable basis for the conclusion that is
Which of the following is not an attestation standard?a. Sufficient evidence shall be obtained to pro- vide a reasonable basis for the conclusion that is expressed in the report.b. The report shall identify the assertion being reported on and state the character of the engagement.c. The work shall
Which of the following best describes what is meant by the term generally accepted auditing standards?a. Pronouncements issued by the Auditing Stan- dards Board.b. Rules acknowledged by the accounting profession because of their universal application.e. Procedures to be used to gather evidence to
Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards?a. The attestation standards provide a frame- work for the attest function beyond historical financial statements.b. The requirement that the practitioner be in- dependent
The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is toa. Enable the CPA firm to attest to the reliability of the client.b. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.c. Minimize the
Snow, CPA, was engaged by Master Co. to examine and report on management's written assertion about the effectiveness of Master's internal control over financial reporting. Snow's report should state thata. Because of inherent limitations of internal control, errors or fraud may occur and not be
For each description, list the letter or letters of the term or terms that define the description. Each term may be used once, more than once, or not at all. Description 1. Indicates that personnel should be hired who possess the charac- teristics to enable them to per- form competently. D 2.
You are a supervisor with a midsized regional CPA firm that has offices in several cities throughout the southwestern part of the United States. Your state has two-tier licensing requirements to practice public accounting; a person must have a CPA certificate and 40 hours of continuing professional
A business associate makes the following statements. 1. The auditing standards for your profession are too general and provide no real guidelines. It would be very difficult to tell whether or not an audit is substandard. 2. What is the "actual message" being conveyed in an unqualified opinion?
A graduating senior with a major in accounting is considering the following job offers.a. From a "Big Six" CPA firm.b. From a small local CPA firm.c. From a large corporation with training to become an internal auditor.d. From the Internal Revenue Service with training to become a revenue agent.
You have been asked by a client to provide professional assurance regarding the operation of a software package developed by your client. Explain how each of the attestation standards would be of assistance in this engagement.
After completing his auditing course with a grade of D-, a student was so excited about a career in auditing that he opened an office and began to solicit clients, even though he had not yet taken the CPA examination. His first client was a small hardware store owned by his father. D. Minus hired
Several years ago, Prescott Need opened a sporting goods store and invested heavily in a variety of inventory, including fishing rods, golf clubs, and a specialized brand of snow ski. He also secured a large loan from a local bank by using a personal relationship with one of the loan officers and
The atmosphere was tense as the Board of Directors met in July, 19X8. It was the second meeting since a member of Custom Furniture's original family of owners unexpectedly sold his stock to an outsider. For the first time in the company's history, a majority of stock was held by those outside the
Define the following terms:a. Ethics.b. Ethical commitment.c. Ethical awareness.d. Ethical competency.

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