Questions and Answers of Auditing Risk Based Approach

The following questions concern internal controls in the acquisition and payment cycle. Choose the best response. a. An auditor traced a sample of purchase orders and the related receiving
The CPA examines all unrecorded invoices on hand as of February 28, 2020, the last day of the audit. Which of the following misstatements is most likely to be uncovered by this procedure?
List one possible control for each of the seven transaction-related audit objectives for acquisitions. For each control, list a test of control to test its effectiveness.
List one possible internal control for each of the seven transaction related audit objectives for cash disbursements. For each control, list a test of control to test its effectiveness.
This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found
In auditing the valuation of inventory, the auditor, Claudette Perrier, decided to use difference estimation. She decided to select an unrestricted random sample of 80 inventory items from a
The following questions relate to nonstatistical and monetary unit sampling. Choose the best response. a. A number of factors influence the sample size for a substantive test of details of an
An auditor is determining the appropriate sample size for testing inventory valuation using MUS. The population has 3,140 inventory items valued at $19,325,000. The tolerable misstatement is $575,000
Describe why the use of MUS sampling provides little, if any, evidence related to the completeness balance-related audit objective.
How does stratifying an account balance population for sampling differ from using data analytics to audit the entire balance?
This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found
You have been assigned to the first audit of the Chicago Company for the year ending March 31, 2019. Accounts receivable were confirmed on December 31, 2018, and at that date the receivables
The Salah Company sells electronics equipment and has grown rapidly in the last year by adding new customers. The audit partner has asked you to evaluate the allowance for doubtful accounts at
Chen, CPA, is auditing the financial statements of a manufacturing company with a significant amount of trade accounts receivable. Chen is satisfied that the accounts are correctly summarized and
Makoto Auto Parts sells new parts for foreign automobiles to auto dealers. Company policy requires that a prenumbered shipping document be issued for each sale. At the time of pickup or shipment, the
The following are the nine balance-related audit objectives, seven tests of details of balances for accounts receivable, and six tests of controls or substantive tests of transactions for the sales
With advances in technology, an increasing number of data analysis techniques are being used on audit engagements to increase both efficiency and effectiveness. In an article titled “Introduction
You are responsible for designing the audit of notes receivable for Hickory Appliance Retailers, which sells appliances and electronics to consumers for their homes or small businesses. Hickory
The following are common tests of details of balances or substantive analytical procedures for the audit of accounts receivable: 1. Select 20 customer accounts from the accounts receivable
The following questions concern auditor responsibilities related to the audit of accounts receivable. Choose the best response. a. The auditor sends out positive accounts receivable
The following questions deal with confirmation of accounts receivable. Choose the best response. a. The return of a positive confirmation of accounts receivable without an exception attests to
Explain how unacceptable results from tests of controls and substantive tests of transactions might impact the auditor’s planned reliance on tests of details of balances.
Describe how auditors might use data visualization techniques to perform analytical procedures on disaggregate data for sales or accounts receivable. Provide a specific example.
For the audit of Carbald Supply Company, Carole Wever, CPA, is conducting a test of sales for 9 months of the year ended December 31, 2019. Included among her audit procedures are the
The sampling data sheet below is missing selected information for six attributes involving tests of transactions for the sales and collection cycle. Required:a. Use Table 15-8 (p. 519) and Table
Auditing standards provide general guidance to auditors regarding audit sampling but do not require statistical versus nonstatistical sampling or specify which sampling method auditors should use.
The following items concern determining exception rates using random sampling from large populations using attributes sampling. Select the best response. a. The upper precision limit (CUER) in
List the major decisions that the auditor must make in using statistical attributes sampling. State the most important considerations involved in making each decision.
Define statistical attributes sampling. For which types of tests do auditors use attributes sampling?
Identify the factors an auditor uses to decide the appropriate ARO. Compare the sample size for an ARO of 10 percent with that of 5 percent, all other factors being equal.
Identify the factors an auditor uses to decide the appropriate TER. Compare the sample size for a TER of 7 percent with that of 4 percent, all other factors being equal.
Identify when an auditor would not use sampling to test the effectiveness of a control or perform a substantive tests of transactions. Explain circumstances when an auditor could test the entire
Explain the difference between an attribute and an exception condition. State the exception condition for the audit procedure: The sales invoice has been approved, indicating the performance of
Explain the difference between probabilistic and nonprobabilistic sample selection.
This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found
The PCAOB issues audit practice alerts to highlight new, emerging, or otherwise noteworthy circumstances. Revenue is the largest account in the financial statements for many companies, and many
The following is a list of possible errors or fraud (1 through 8) involving sales and controls (a. through k.) that may prevent or detect the errors or fraud: Possible Errors or Fraud 1.
The following questions deal with internal control and audit evidence in the sales and collection cycle. Choose the best response. a. Tracing shipping documents to sales invoices provides
The following questions deal with audit evidence for the sales and collection cycle. Choose the best response. a. To determine whether internal control relative to the revenue cycle of a
For each of the following types of misstatements (parts a. through c.), select the control that should have prevented the misstatement: a. Which of the following controls most likely will be
Diane Smith, CPA, performed tests of controls and substantive tests of transactions for sales for the month of March in an audit of the financial statements for the year ended December 31, 2019.
Accounting standards require that companies provide footnote disclosures that enable a reader to understand the nature, timing, amount, and uncertainty surrounding revenue and cash flows arising from
Describe the following documents and records and explain their use in the sales and collection cycle: a. Bill of lading, b. Credit memo, c. Remittance advice, d. Accounts
Both transaction-related and balance-related audit objectives include objectives related to presentation and disclosure. Visit the website of the United States Securities and Exchange Commission
Following are evidence decisions for the three audits described in Figure 13-4 on page 426: Audit A Ineffective client internal controls Audit B Very effective client internal controls Audit C
The following questions concern the overall audit strategy and audit program, including selection of the type of test to perform. Choose the best response. a. In the financial statement audit of
The following questions deal with tests of controls. Choose the best response. a. To support the auditor’s initial assessment of control risk below maximum, the auditor performs procedures to
How might the performance of test of controls provide evidence related to the presentation transaction-related audit objective?
List the nine balance-related audit objectives in the verification of the ending balance in inventory and provide one useful audit procedure for each of the objectives.
Explain the relationship between the methodology for designing tests of controls and substantive tests of transactions in Figure 13-5 (p. 429) and the methodology for designing tests of details of
Section 404(a) of the Sarbanes–Oxley Act requires management of a public company to issue a report on internal control over financial reporting (ICOFR) as of the end of the company’s fiscal year.
AU-C 265, “Communicating Internal Control Related Matters Identified in an Audit,” provides guidance to auditors on communicating deficiencies in internal control to management and those charged
Anthony Liu, CPA, prepared the flowchart on the next page that portrays the raw materials purchasing function of one of Anthony’s clients, Medium-Sized Manufacturing Company, from the preparation
Internal controls 1 through 5 were tested in prior audits. Evaluate each internal control independently and determine which controls must be tested in the current year’s audit of the December 31,
The following internal controls were identified by the auditor while gaining an understanding of internal control for the sales cycle. 1. Access to the customer master file is restricted to
Siva Kumar and Vera Collier are friends who are employed by different CPA firms. One day during lunch they are discussing the importance of internal control in determining the amount of audit
The following are general questions about assessing control risk, testing controls, and reporting on internal controls. Choose the best response. a. During the planning stage of an audit, the
The following questions concern auditing IT systems. Choose the best response. a. As general IT controls weaken, the auditor is most likely to (1) Reduce testing of automated application
The following questions deal with assessing control risk in a financial statement audit. Choose the best response. a. On the basis of audit evidence gathered and evaluated, an auditor decides to
Explain what is meant by auditing through the computer, and describe the challenges and benefits of this approach in an audit of a client that uses IT extensively to process accounting information.
The SEC issues Accounting and Auditing Enforcement Releases (AAERs) summarizing SEC actions concerning civil lawsuits brought by the SEC in federal court and related settlements from administrative
The following are general questions about internal control. Choose the best response. a. Which of the following situations is not an example of an inherent limitation of internal
Explain how the effectiveness of general controls impacts the effectiveness of automated application controls.
What is the primary focus of the monitoring component of internal control?
What is meant by the control environment? What is the relationship between the control environment and the other four components of internal control?
The following audit procedures are included in the audit program of Holland Equipment, Inc. 1. Use audit software to examine journal entries in the sales, cash receipts, purchases, cash
Public companies are required to file restated financial statements with the SEC when they discover after the audited financial statements have been issued that the financial statements are
The Art Appreciation Society operates a museum for the benefit and enjoyment of the community. When the museum is open to the public, two clerks who are positioned at the entrance collect a
The following questions concern auditor responsibilities related to the identification and assessment of fraud risk. Choose the best response. a. While performing a preliminary assessment for a
The following questions address fraud risks in specific audit areas and accounts. a. Which of the following internal controls will best detect the theft of valuable items from an inventory that
The following questions address fraud risk factors and the assessment of fraud risk. a. Which action regarding fraud is an activity related to performance of risk assessment procedures? (1)
Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2019. Henderson Energy is regulated by the state utility commission,
This problem is based on the JA Tires data that was first introduced in problem 6-35. If you have not already accessed the data, it can be downloaded from the textbook website. As part of risk
Mark Hopper is planning the audit of the investments account for audit client Garden Supply Co. (GSC). GSC invests excess cash at the end of the summer sales season through an investment manager who
Following are six situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit of inventory. Required:a. Explain what low, medium, and high
Listed below are various risks identified during audit planning that you have been asked to evaluate to assess whether they are significant risks. 1. Fernandez Wholesalers sells energy drinks to
This problem requires you to access PCAOB Auditing Standard AS 2110, Identifying and Assessing Risks of Material Misstatements (pcaobus.org). Use this standard to answer each of the questions below.
The following questions concern auditor responsibilities related to the assessment of risks of material misstatement. Choose the best response. a. Which of the following procedures would a CPA
Define what is meant by inherent risk. Identify four factors that are associated with higher inherent risk in audits.
This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found
Following are statements of earnings and financial position for Wexler Industries. Required:a. Use professional judgment in deciding on the preliminary judgment about materiality for earnings,
In the audit of the Worldwide Wholesale Company, you did extensive ratio and trend analysis as part of preliminary audit planning. Your analytical procedures identified the following: 1.
Your comparison of the gross margin percent for Jones Drugs for the years 2016 through 2019 indicates a significant decline. This is shown by the following information: A discussion with Tanvi
Your audit firm was recently engaged to conduct the financial statement audit for BBH Automotive, an original equipment manufacturer (OEM) in the automotive industry. As the senior manager on the
The following questions deal with client acceptance, audit planning, and materiality. Choose the best response. a. In which of the following circumstances would an auditor of an issuer be least
Assume a company with the following balance sheet accounts: You are concerned only about overstatements of owner’s equity. Set performance materiality for the three relevant accounts such that the
Assume that Xinran Wang, CPA, is using 5 percent of net income before taxes, current assets, or current liabilities as her major guideline for evaluating materiality. What qualitative factors should
Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a tool in conducting audits. For several engagements, he computed the industry ratios for his clients and compared them with
In recent years, globalization of business and factors such as technological disruption, tax reform, trade policies, and changing demographics in the workforce cause uncertainty and volatility in
Regulators are taking advantage of advances in technology to fulfill their oversight responsibilities. Visit the website of the Securities and Exchange Commission (SEC) (www.sec.gov) to locate the
As the in-charge senior auditor on the audit engagement for JA Tire Manufacturing for the year ended December 31, 2019, you are responsible for performing risk assessment procedures related to the
You are auditing payroll for the Morehead Technologies company for the year ended October 31, 2019. Included next are amounts from the client’s trial balance, along with comparative audited
This problem requires the use of ACL software, which can be accessed by following the instructions available on the textbook website. Information about downloading and using ACL and the commands used
The following are examples of documentation typically obtained by auditors: 1. Duplicate sales invoices 2. Receiving reports 3. Minutes of the board of directors 4. Signed W-4s 5.
The following questions concern audit evidence and audit documentation. Choose the best response. a. According to PCAOB audit standards, audit documentation must be retained for b. Which of
The following questions concern the use of analytical procedures during an audit. Select the best response. a. For all audits of financial statements made in accordance with auditing standards,
Distinguish among the following types of current-period supporting schedules and state the purpose of each: analysis, trial balance, and substantive analytical procedures.
Who owns the audit files? When can they be used by other people?
Explain why liquidity activity ratios are useful to auditors.
Describe how the use of audit data analytics might increase both the effectiveness and efficiency of the audit.

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