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auditing international approach
Auditing An International Approach 7th edition Wally J. Smieliauskas, Kathryn Bewley - Solutions
Where has experience shown that most accounting errors requiring adjustment can be found?a. Systematic processing of large volumes of day-to-day ordinary transactions.b. Payroll fraudsters’ mistakes in using unissued social insurance numbers.c. Petty cash embezzlements.d. Non-routine,
Which of the following types of auditors have the highest expectations in their audit standards regarding the detection of fraud?a. External auditors of financial statements.b. Government auditors of financial statements, programs, activities, and functions.c. Internal auditors employed by
CASs do not require auditors of financial statements to do which of the following?a. Understand the nature of errors and fraud.b. Assess the risk of occurrence of errors and fraud.c. Design audits to provide reasonable assurance of detecting errors and fraud.d. Report all finding of errors and
Which of the following is characteristic of management fraud?a. Falsification of documents in order to steal money from an employer.b. Victimization of investors through the use of materially misleading financial statements.c. Illegal acts committed by management to evade laws and regulations.d.
When it comes to fraud, the auditor’s responsibility consists ofa. Detecting any type of fraud that occurred during the reporting period.b. Detecting fraud only if it is above the planning materiality level.c. Making inquiries with management about fraud and considering fraud risks.d. The auditor
Clive Papers Inc. (CPI), a printing company, implemented the following controls over its procurement and inventory process. Which of these controls represents a preventive control?a. The warehouse manager performs an inventory count at the end of each month to identify any damaged or stolen
Fabre Travels, a large travel agency, has put in place the following controls. Which of these controls represents a company-level control?a. Each travel agent must sign a letter at the beginning of each year acknowledging they read and understood the company’s code of conduct.b. Payroll of each
What do management’s internal control responsibilities include?a. Reducing the amount of testing done by the auditorsb. Allowing the auditors to assess control riskc. Preventing and detecting fraudd. Implementing policies and procedures such that auditors can assess control risk as being low
The primary purpose for obtaining an understanding of an auditee’s internal control structure is toa. Provide a basis for making constructive suggestions in a management letter.b. Determine the nature, timing, and extent of tests to be performed in the audit.c. Obtain sufficient appropriate
Company-level controls includea. Systems input, processing, and output controls.b. General controls, segregation controls, and application control procedures.c. Inherent, preventive, corrective, and detective controls.d. Control environment, management’s risk assessment processes, information
Auditors must obtain an understanding of internal control becausea. The financial statements determine the appropriate business processes and internal control framework.b. It is critical when assessing the possibility that management controls have not addressed the business risks that could lead
What are the two main types of control activities that are used in information systems?
What organizational features can act as general controls?
What communication responsibilities do auditors have regarding any suspicions or knowledge of fraud or illegal acts in an auditee?
What are illegal acts? When and why would an independent financial statement auditor be concerned about them?
Identify and explain the three factors that make it more likely that a fraud will occur.
What procedures do auditors use to assess fraud risk? What are an auditor’s responsibilities if a fraud is suspected?
Who has the primary responsibility for preventing and detecting fraud in a company?
Distinguish between fraud that involves theft of company assets and fraud that involves presenting misleading financial statements. Who is likely to be responsible for each type? Which is of greater concern to an auditor? Why?
What is the essential difference between and error and fraud?
Why do financial statement auditors have a responsibility to consider the risk of fraud?
What are management’s main purposes in implementing control activities?
Distinguish between the internal control elements that are company-level controls and those that are control activities. Which of these types is most directly relevant to a financial statement audit? Why?
Describe the five components of an internal control framework.
What is an internal control framework, and how is it used in a financial statement audit?
What is the purpose of management’s internal control structure? Why do auditors need to understand it?
When performing the audit risk assessment, it was determined that the audit risk for GXP’s current-year audit increased from moderate to high. As a result, the auditor shoulda. Proceed with the audit in a similar manner to the prior year as this is a recurring engagement and the auditor is
Evelyn is the controller of Mylan Connections (MC), a public relations firm with 50 account managers. Travel expenses for the consultants represent one of the largest expenses for MC. Evelyn does a thorough review of each expense report at the end of the month to ensure that all expenses are valid.
Oakland Hills (OH) is a ski resort, and the revenue they report each year is greatly affected by the temperature and snowfall in the winter months. The variation in revenues from year to year is difficult for management, as their bonus is based on increasing income year over year. This situation
The sole shareholder of Jade Company had a contractor pave the parking lot at the company building, and also pave the driveway of his home. Both paving jobs were billed to the company on a single invoice. The assertion affected by this activity isa. Accuracy.b. Valuation.c. Completeness.d.
If XYZ Co. records sales revenues in its current-year financial statements for shipments that were made the first day of its following fiscal year, the assertion affected isa. Valuation (the sales amounts are not correctly calculated).b. Completeness (the sales were not completed at year-end).c.
LMN Co. is holding consignment inventory for another company, which must be excluded from LMN’s financial statements to comply witha. The completeness assertion.b. The ownership/rights and obligations assertion.c. The existence/occurrence assertion.d. The valuation assertion.e. The recognition
BDD Co. has a large balance of accounts receivable from many different customers, some of which are more than 60 days overdue. BDD management asserts that it will collect all the accounts eventually by applying pressure on the slow payers. For this reason, BDD’s management claims that it would
In the audit risk model, detection risk (DR) refers toa. The risk the auditor is willing to accept of giving a clean audit opinion on financial statements that are materially misstated.b. The probability that a material misstatement occurred in an assertion of a class of transactions, account
In the audit risk model, control risk (CR) refers toa. The risk the auditor is willing to accept of giving a clean audit opinion on financial statements that are materially misstated.b. A misstatement that would probably affect users of the financial statements.c. The probability that
In the audit risk model, inherent risk (IR) refers toa. the probability that management’s internal controls do not catch a misstatement once it has occurred.b. The probability that a material misstatement occurred in an assertion of a class of transactions, account balance, or disclosure.c. The
In the audit risk model, audit risk (AR) refers toa. An uncorrected misstatement that would probably affect users of the financial statements.b. The probability that a material misstatement occurred in an assertion of a class of transactions, account balance, or disclosure.c. The probability that
In the audit risk model, audit risk (AR) refers toa. An uncorrected misstatement that would probably affect users of the financial statements.b. The probability that a material misstatement occurred in an assertion of a class of transactions, account balance, or disclosure.c. The probability that
Management assertions area. Stated in the footnotes to the financial statements.b. Implied or expressed representations about the financial statements.c. Explicitly expressed representations about the financial statements.d. Provided to the auditor in the assertions letter, but are not disclosed on
Management’s general purpose financial statementsa. Are the responsibility of the auditor.b. Include only non-routine transactions.c. Make assertions that are the focal point of audit procedures.d. Can rarely be reconciled to the auditee’s trial balance.
The revenue process of a company generally includes these accounts.a. Inventory, accounts payable, and general expensesb. Inventory, general expenses, and payrollc. Cash, accounts receivable, and salesd. Cash, notes payable, and capital stock
The cash account is included in more than one accounting process becausea. All the business processes involve either receiving or paying out cash at some point.b. Cash is the most difficult asset to control.c. Cash is the easiest asset to steal.d. Cash can be either an asset or a liability.
The auditors assessed a combined inherent risk and control risk at 0.67 and said they wanted to achieve a 0.15 risk of failing to detect misstatements in an account with a material balance. What audit risk are auditors planning to accept for this audit?a. 0.20b. 0.10c. 0.75d. 0.05
Auditors are responsible for the quality of the work related to management and control ofa. Inherent risk.b. Relative risk.c. Control risk.d. Detection risk.
If the XYZ company reports a $355,000 balance of accounts receivable, the existence assertion meansa. There are no accounts receivable by XYZ that have not been included in the balance.b. All the amounts making up the $355,000 balance will be collected in full, in cash.c. All the amounts included
Which of the following is not likely to be an important source of information the auditor can use to understand a client’s business?a. Geologist’s reports on mineral reservesb. Internal auditorsc. Retail sales statisticsd. Monday night football scores
The auditor assesses a business risk as high whena. it is unlikely and moderate.b. it is likely and significant.c. it is possible and insignificant.d. it is likely and insignificant.
Information technology changes can affect business risk whena. They result in a need to change business processes.b. They do not include e-commerce activities.c. Systems become less complex.d. Systems become less integrated
Business risk is related to business strategy because.a. Auditors assess business risk so they can provide their auditees with a business strategy.b. Business risks are events or actions that cause changes in technology.c. Managers frequently change their business risks in response to changes in
Miller & Bell (M&B) is a medium-size accounting firm that was recently approached by Mints, a candy company, to take on their yearend audit engagement. The Director of Marketing at Mints, Valerie, suggested M&B since she had heard good things about M&B and her cousin is a staff
When auditors determine financial statement materiality for a given audit engagement, they should primarily base their decisions ona. The materiality level used by the company’s management for internal audits.b. Users of the financial statements and their specific needs.c. The prior year’s
When taking an engagement, the auditor’s risk is best described as follows.a. The risk that negative consequences will arise for the auditor’s professional practice as a result of taking on a particular audit engagement.b. The risk that the auditor will uncover fraudulent activities during the
According to CAS 200, those charged with governancea. Have the main responsibility for the day-to-day accounting functions of the auditee.b. Must be a part of the most senior management of the auditee.c. Are responsible for the operations of the entity and thus are accountable to its
Materiality in the context of audit planning meansa. Amounts that should be disclosed if they are likely to influence the economic decisions of financial statement users.b. The largest amount of uncorrected dollar misstatement that could exist in published financial statements while still fairly
Analytical procedures can be used in which of the following ways?a. As a substitute for control testing to assess control effectiveness.b. As attention-directing methods at the end of an audit.c. As substantive audit procedures to obtain evidence when planning an audit.d. As a means of overall
Which of the following match-ups of types of analytical procedures and sources of information makes the most sense?TYPE OF ANALYTICAL PROCEDURE
ABC Company sells its products for a (gross) profit. If ABC increases its sales by 15 percent and increases its cost of goods sold by 7 percent, its costs of goods sold ratio will.a. Increase.b. Decrease.c. Remain unchanged.d. Not enough information is given to answer
When a company that has $5 million in current assets and $5 million in current liabilities pays $1 million of its accounts payable, its current ratio willa. Increase.b. Decrease.c. Remain unchanged.d. Not enough information is given to answer
When a company that has $3 million in current assets and $5 million in current liabilities pays $1 million of its accounts payable, its current ratio willa. Increase.b. Decrease.c. Remain unchanged.d. Not enough information is given to answer
When a company that has $5 million in current assets and $3 million in current liabilities pays $1 million of its accounts payable, its current ratio will.a. Increase.b. Decrease.c. Remain unchanged.d. Not enough information is given to answer
The overall audit strategy required by CAS 300a. Cannot be decided by the audit engagement partner to avoid independence threats.b. Identifies characteristics of the auditee entity and the engagement that define its scope.c. Requires the audit engagement partner to set the scope, timing, and
During the response to assessed risks step of the overall audit process, the auditora. Identifies the auditor’s own risks from accepting the engagement.b. Develops the audit plan and detailed audit programs.c. Reviews the overall evidence obtained from the audit.d. Performs substantive procedures.
What is the IAASB, and how do its standards affect auditing standards in Canada?
Are financial statement audits intended to detect fraud?
What is fraud?
What conditions create demand for financial reports, and who produces financial reports for external users?
Why would Aunt Zhang in the EcoPak Inc. case want audited financial statements even if she has to pay extra for them?
What does the concept “reasonable assurance” refer to? How does it relate to information risk reduction?
Using the example of a business with an owner, a hired manager, and an independent financial statement auditor, apply the three-party accountability structure: Which party would be the first, the second, and the third party in the model? For what is each party accountable?
Understanding the client’s business environment is important to the auditor becausea. It helps distinguish interim audit work from year-end audit work.b. Management’s draft financial statements contain assertions about the business environment.c. It helps the auditor to assess the risks that
During the risk assessment step of the overall audit process, the auditora. Identifies the auditor’s own risks from accepting the engagement.b. Accumulates the misstatements discovered during the audit.c. Forms a conclusion on fair presentation of the financial statements and issues the
GAAS require that auditors prepare and usea. A written engagement letter for all audits.b. A written engagement letter only for new, first-time audits.c. A written overall audit representation letter.d. A written audit representation letter only for new audits.
When a successor auditor initiates communications with a predecessor auditor, under the professional ethics codes the successor is requireda. To take responsibility for obtaining the auditee’s consent for the predecessor to give information about prior audits.b. To conduct interviews with the
Do auditing standards require auditors to use a specific quantitative criterion to determine materiality?
Why is the materiality decision one of the first decisions made in the audit?
What is the net cash flow for the current year for EcoPak Inc., shown in Exhibit 5–5?EcoPak Inc.: Preliminary Analytical Procedures Data PRIOR YEAR CURRENT YEAR CHANGE PERCENT COMMON-SIZE COMMON-SIZE CHANGE BALANCE ANALYSIS BALANCE ANALYSIS AMOUNT ANALYSIS Assets $ 600,000 $ 200,000 Cash 14.78%
What can the auditor learn from a horizontal analysis?
What methods can auditors use to apply comparison and ratio analysis to management’s financial statements?
What are management’s draft financial statements?
What is the purpose of performing analytical procedures at the beginning of the audit engagement?
What sources of information can an auditor use in deciding whether to accept an audit engagement? What risks must the auditor assess using this information before accepting the engagement?
Who are those charged with governance, and what are their responsibilities?
What other ongoing activities do auditors need to perform to complete an audit in accordance with GAAS as set out in the CASs?
Describe the three main steps in the financial statements audit process.
How is audit file documentation related to an auditor’s legal liability for negligence on an audit?
Why is all the key documentation supporting an audit team’s work retained in audit files?
What is included in an overall audit strategy in GAAS? What is the main purpose of this planning documentation?
How does the identification of key audit areas relate to the effectiveness and efficiency of an audit?
What does the term key audit areas mean in a financial statements audit?
What is a management risk assessment process? What role does it play in an auditor’s risk assessment?
How does an auditor identify things that could go wrong in a company that create risks of misstating its financial statements?
What are the implications if a company’s financial statements are materially misstated?
What does the term risk of material misstatement of the financial statements mean in auditing?
Why do auditors need an understanding of the business environment and operations of an auditee company? What are examples of a business’s environmental and operating risks?
What qualitative considerations are related to the concept of materiality in auditing? Why are qualitative factors more important than the quantitative materiality level decision?
What rules of thumb are used in practice for determining a reasonable quantitative materiality level in a financial statements audit?
How does the materiality level affect the effectiveness of an audit?
Explain how materiality is a user-based decision of the auditor.
Why is determining the materiality level one of the first and most important decisions an auditor must make?
What does the term materiality mean in auditing?
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