Questions and Answers of Principles Of Auditing And Other Assurance Services

An auditor who has been engaged to audit the financial statements of Ajax Inc. is ready to begin considering Ajax's internal controls.Required:1. What are the objectives of internal control?2. What
Apart from assessing control risk, an auditor's consideration of internal control lends insight into inherent limitations and significant deficiencies that ought to be communicated to management
The Committee of Sponsoring Organizations' COSO Report: Internal Control: Integrated Framework defines internal control as a process, effected by an entity's board of directors, management and other
The Auditor's Consideration of Internal Control Jim Harrison, CPA, is preparing a seminar on internal control for his entry-level professional staff. His predominant concern is to present the staff
An in-charge auditor is drafting interim tests of controls for the American Optical Company, a December 31 year end optics manufacturer located in Southbridge, Massachusetts.Tests will be performed
The town of Bullet Park operates a public parking lot near the railroad station for the benefit of town residents. The guard on duty issues annual prenumbered parking stickers to residents who submit
As part of your annual audit of Call Camper Company, you are responsible for preparing a report communicating internal control related matters noted in the engagement.Your working papers include a
Several days prior to completing field work at Ansonia Wire & Cable Co., the engagement partner. Colleen Kelly, discusses with Ansonia's CFO, Alan Rothstein, reportable conditions that her audit
During the course of a financial statement audit, an auditor may become aware of matters relating to the client's internal controls that may be of interest to the client's audit committee or to
Shannon Bracken, CPA, is considering internal control for the Rumford Company, a December 31 year end company. Rumford's purchasing, billing, receivables, payables, and job-order cost accounting
When a company converts from a manual to a computer accounting system, many records and documents become unnecessary and therefore are not prepared. With the audit trail eliminated or distorted, the
During your preliminary review of an entity's computer system, you note the following:a. Purchase orders initiated by line personnel within the manufacturing plant may be authorized and executed bv
When auditing a computer information system, the independent auditor should have a general familiarity with the effects of using a computer on the various characteristics of control and on the
Linder Company is completing the implementation of a new computerized inventory control and purchase order system. Linder's controller wants the controls that are incorporated into the software of
Of the four volumes in the COSO Report, one Committee of Sponsoring Organizations of the Treadway Commission (COSO). Internal Control: Integrated Framework. Evaluation Tools. New York: COSO, 1992.
The profession has argued for decades about the advisability of mandatory reporting on internal control by public companies and by governmental entities. In the 1970s and 1980s, the main players in
Threatened by a declining share of the long-distance phone service market, Noy Holland, Vice President, Consumer Service, KLR Communications, suggests at a sales retreat that KLR bank on the
What is meant by the term audit samplmgl
What is the purpose of attributes sampling in tests of controls?
What is nonsampling risk and how can it be controlled?
Identify the sampling risks inherent in sampling for attributes.
Compare and contrast nonstatistical and statistical audit sampling plans.
Why is it important that audit populations be defined properly?
How can an auditor achieve randomness when selecting a statistical sample?
What is the purpose of stratifying an audit population?
Identify the three parameters necessary to determine sample size in attribute estimation sampling plans.
Describe the alternative available to an auditor when an attributes sampling plan suggests that a control is not effective.
When is attribute estimation appropriate?
When is sequential sampling appropriate?
Under what conditions may discovery sampling be appropriate?
The practice of public accounting, and the preprofessional education for certified public accountants, have both been subject to considerable controversy and change recently.The controversy stems
Owing to serious criticisms of industrial era financial statements, the AICPA's Special Committee on Financial Repwrtiug (The Jenkins Committee) recommended sweeping changes to financial statements
Why is the market unlikely to permit the public accounting profession to develop measurement rules for assurance services when the same market granted the profession permission to develop measurement
Briefly trace the historical development of attestation standards and generally accepted auditing standards.
Why is independence important to the profession's acceptance as a major player in the assurance services market?
Distinguish between practitioner independence and profession independence.
What precautions can be expected of a prudent practitioner?
Identify and describe the quantitative criteria often used by practicing auditors when making materiality decisions.
What approaches are available for allocating a preliminary estimate of materiality to individual financial statement accounts?
Identify and describe the three component risks underlying audit risk for an individual financial statement account.
Assurance service engagements:a. Do not require independence.b. Require application of all attestation standards and GAAS.c. Are performed currently without professional standards.d. Do not require
A practitioner should comply with applicable attestation standards:a. On every attestation engagement, without exception.b. On every attestation engagement, except financial statement audits.c. On
Which of the following best describes the purpose of attestation standards and GAASla. Measures of quality for attestation and audit engagements.b. Methods to discharge professional responsibilities
What is the focus of the standards of field work for attestation and audit engagements?a. Guidelines for training, proficiency, and due care.b. Guidelines for the content of the practitioner's
Which of the following best describes due care?a. Tact in avoiding legal liability, b. Requisite skill and diligence.c. Reasonable infallibility.d. Freedom from undue influence.Choose the correct
The validity of evidence depends ultimately on the:a. Attestation standards and GAAS.b. Availability of subordinate evidence.c. Relevance of the evidence.d. Practitioner's professional
Practitioner independence:a. Minimizes risk.b. Helps achieve public confidence.c. Defends against liability.d. Achieves compliance with the standards of field work.Choose the correct answer.
Which of the following may be assessed nonquantitatively?Choose the correct answer. Inherent Control Detection Risk Risk Risk a. Yes. Yes No b. Yes No Yes C. No Yes Yes d. Yes Yes Yes
Materiality is:a. Addressed within a practitioner's attestation and audit reports.b. Expressed in terms of dollars.c. Measured using guidelines established by the AICPA.d. Not applicable to
Paul Dietz, CEO of the St. Joseph Medical Center, a two-hundred-bed hospital in northwest Indiana, has approached you, a partner in Dirksen & Co., a public accounting firm. The Medical Center's board
The AICPA's attestation standards and GAAS are classified as general standards, standards of field work, and standards of reporting, and are closely aligned with four concepts: independence, due
Interrupted by World War II, the Committee on Auditing Procedure, forebear to today's Auditing Standards Board, responded in the late 1940s to the SEC's 1941 call for auditing standards. The first
Generally accented auditing standards are an auditor's guidelines for selecting and designing detailed audit procedures, and an auditor typically applies selected procedures to determine whether an
Andrea Farell, a local CPA, has been approached by Whitely Corporation concerning audited financial statements for the year ended September 30, 1999. Whitely, a relatively new company, processes
The second general standard of GAAS states: In all matters relating to the assignment, an independence in mental attitude is to he maintained by the auditor or auditors. In addition to Rule 101 of
The public accounting firm, Rodgers and Burge, performed an audit of the Lexington Manufacturing Company's December 31, 1999 financial statements. The scope paragraph of the unqualified report reads
You are the managing partner of Berke & Co., CPAs. On February 2, 1999, you receive a letter from the president of Barbizon, Inc., requesting the following: "We have made arrangements with Farmers
You have been assigned by your firm to complete the audit of the financial statements of Carter Manufacturing Corporation. The senior accountant and an inexperienced assistant who began the
You are engaged in the audit of the financial statements of Rapid, Inc. and the Slow Corporation, a recently acquired subsidiary. In acquiring Slow Corporation during 1999, Rapid, Inc. exchanged a
Leer, CPA, has discussed various reporting considerations with two audit clients. The two clients asked how the following situations would affect the audit report.a. A client has a loan agreement
Smith, the owner of a small company, engaged Holmes, a CPA, to perform a financial statement audit. Smith told Holmes that an audit was to be completed in time to submit audited financial statements
Audit risk, the probability that an auditor may unknowingly fail to modify his or her opinion on materially misstated financial statements, occurs on all audit engagements, partly because auditors do
In planning a December 31, 1999 year end audit, you note that for the 1998 engagement your firm's assessment of audit risk was high, and the preliminary estimate of materiality, $1,200,000, was
The concept of materiality is important to the audit of financial statements and to an auditor's expression of an opinion on the statements.Required: Discuss the following:1. How is materiality (and
Richard Yates, CPA, is auditing the Levitan Corporation's financial statements for the year ended December 31, 1999. In prior years, Levitan's financial statements were audited by other auditors.
During the course of an audit engagement, an independent auditor gives serious consideration to the concept of materiahty, a concept that is inherent in the work of the independent auditor and is
Few organizations have had more impact on the profession's self-regulatory efforts than the Public Oversight Board (FOB). The FOB is a five-member autonomous monitoring mechanism that provides
Robert K. Elliott, KPMG Peat Marwick partner and chair of the AICPA's Special Committee on Assurance Services (the Elliott Committee), has been quite influential in awakening the profession to the
What does the language in Consumers Union Buying Guides and Consumer Reports have in contmon with reports issued by public accounting firms?
What message does an attestation report convey to readers?
On what should an auditor base his or her opinion about compliance with GAAP?
Under what conditions is a qualified audit opinion issued ordinarily?
Under what conditions is an adverse audit opinion issued ordinarily?
How does a standard audit report differ from a report which, owing to a scope limitation, disclaims an opinion?
Departures from GAAP may result in either a qualified or an adverse opinion, depending on materiality. How does an auditor judge materiality?
A report issued by a public accounting firm uses the language; In our opinion . the schedule presents . . . in all material respects . . . The firm's report is likely:a. A standard audit
Does an attester make the following representations explicitly or implicitly in an unqualified attestation report?Choose the correct answer. Assertion is Capable of Evaluation Against Assertions are
Does an auditor make the following representations explicitly or implicitly in an unqualified audit report?Choose the correct answer. a. Consistent Application of Accounting Principles Implicitly
Which of the following is likely a scope limitation?a. The auditor is reporting on the balance sheet only.b. A subsidiary's financial statements are audited by another auditor.c. Sufficient
A departure from GAAP is disclosed in a note to the financial statements. The auditor should:a. Issue an unqualified opinion, but emphasize the matter in an explanatory paragraph.b. Issue an
Management's financial statements disclose uncertainties about future events that are not susceptible to reasonable estimation. The auditor should issue:a. An unqualified opinion.b. A qualified
The opinion paragraph of a qualified opinion should include language such as:a. Except for.b. When read in conjunction with the notes.c. With the foregoing explanation.d. Subject to the explanation
An attestation or audit report should be dated as of:a. The date of the assertion or financial statements.b. The date the report is dehvered.c. The last date on which a subsequent event occurs.d. The
An explanatory paragraph reads as follows: The Company has adopted the first-in, first-out method of determining inventory costs, whereas it previously used the last-in, first-out method. Although
An audit report reads in part as follows: The financial statements do not include any adjustments that might result from the outcome of this uncertainty.The sentence likely appears in:a. An
On January 27, 2000, Sandeen & Walsh LLP issued the attestation report that appears below:Independent Accountant's Report As required by Article VL Section 7(a)(4) of the Supplemental Unemployment
The Economic Motive and Apparent Risk in an Attestation Engagement Following is an independent accountant's attestation report;Independent Accountant's Report Crownhill Super Computers, Inc.4500
Identifying Audit Opinions and Circumstances for Departure Following are excerpted sentences and phrases from audit reports issued by independent public accounting firms:a. (Scope Paragraph)Except as
Christine Burke has completed field work for the Willingham Corporation engagement, a December 31, 1999 year end audit, and is now deciding whether to modify her report.Below are two unrelated
Timothy Ross completed field work on September 23, 1999, and issued the following report to the directors of The Rancho Corporation:To the Directors of The Rancho Corporation:We have audited the
The following proposed audit report was drafted by a staff accountant at the completion of an engagement and submitted to the engagement partner for review. The partner reviewed the assistant's
The following audit report was drafted by a staff accountant and submitted to the engagement partner in the accounting firm of Better & Best, CPAs:To the Audit Committee of American Widgets, Inc.:We
On January 15, 2000, Marc David, CPA, was engaged to audit Kristin Manufacturing Company's December 31, 1999 financial statements. Kristin had taken a physical inventory on December 31, 1999; the
Sturdy Corporation owns and operates a large office building in a desirable section of New York City's financial district. For many years the management of Sturdy Corporation has: (a) written up
On March 17, 2000, Ross, Sandler & Co., CPAs completed an audit of The Fairfax Corporation's December 31, 1999 financial statements. The firm issued an unqualified opinion. Because of a scope
On March 15, 2000, you completed the audit of Excelsior Corporation's December 31, 1999 financial statements, the second year you've supervised the engagement. The following information came to your
In an article entitled, "American Gaming Says Its Chairman Resigns; Audit Raises Questions," The Wall Street Journal (April 14, 1996, p. A6) reported that the board chairman of a publicly traded
The annual reports for publicly traded companies typically include information that is not part of management's financial statements and, therefore, that is not captured in a financial statement
Lando Corporation controls two wholly owned domestic subsidiaries. Michaels, CPA, the principal auditor, has been engaged to audit the financial statements of Lando and one of the subsidiaries.
The Maumee Corporation's August 31, 1999 financial statements are presented below.Required: List deficiencies and omissions in the statements and discuss the prob- able effect of each deficiency or

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