Questions and Answers of Principles Of Auditing And Other Assurance Services

An auditor's audit working papers include the following narrative description of a segment of the Croyden, Inc., factory payroll system and the flowchart presented on the following two
During your audit of Fletcher Corporation's June 30, 1999, financial statements, you become aware of the following control procedures over Fletcher's personnel and payroll activities:1. All
The Linscott Supply Company employs about 50 production workers. Based on interviews, the factory supervisor hires or rejects job applicants. New hires prepare a W-4 form (Employee's Withholding
Early in your audit of the Kimberly Corporation, you note that the factory supervisor approves time cards for hours worked and for hourly rates and also distributes the payroll checks.Required:1.
When auditing within the expenditure/disbursement cycle, auditors often rely predominantly on interim tests of controls rather than year end substantive tests of details.In fact, in many cases, year
Following are selected questions from an internal control questionnaire relating to a company's personnel and payroll functions. A Yes response would indicate a potential strength of the system, and
An auditor is designing an audit program for a computerized payroll and is drafting procedures for payroll preparation, labor cost distribution, and paycheck distribution.Required: For each of the
Many organizations maintain separate bank accounts for payroll, thereby segregating all payroll disbursements from general disbursements, such as payments for purchases, inventory, plant assets, and
Nonunion production, clerical, and middle management employees of the Intersect Corporation participate in a postretirement benefit plan that encompasses health care, housing subsidies, and tuition
Owing in part to unprecedented controversy, the Financial Accounting Standards Board deliberated over ten years about the accounting for postretirement obligations other than pensions. The
Identify the major business function and activities common to the conversion cycle.
How does the conversion cycle of a manufacturing company differ from that of a retailer or wholesaler?
What is the major focus of tests of controls for perpetual records and for cost records?
How can management control against misplaced or misused inventory?
What procedure does an auditor use to determine whether recorded inventory exists?
For what reason does an auditor test a client's final priced inventory?
Identify and briefly describe the financial statement assertions that are relevant to physical inventory observations.
Under what conditions are interim, as opposed to year end, physical inventory counts appropriate?
Explain an auditor's role during a physical inventory observation.
Why should fixed assets be appraised periodically?
Identify some control procedures for fixed asset additions and disposals.
Why might an auditor elect to perform only limited or no tests of controls for fixed assets?
What is the focus of tests of controls for fixed asset records?
What is the focus of tests of controls for fixed asset additions and disposals?
How does an auditor test the valuation of fixed assets and depreciation?
Describe some substantive tests applicable to fixed asset additions and disposals.
Why would an auditor test cutoff for fixed asset transactions?
Given that write-downs decrease reported net income, why would management be motivated to write down impaired assets?
What incentives does an auditor have to assure that the timing and amount of discretionary write-downs for impaired assets is fairly presented in all material respects?
Which of the following control procedures is most likely to prevent or detect errors or frauds resulting from the production of unauthorized products or unauthorized quantities of authorized
Which of the following financial statement assertions are addressed by the physical observation of inventory counts?a. Existence and valuation.b. Rights and completeness.c. Presentation and
To determine whether merchandise is included in ending inventory, an auditor could test:a. Open purchase orders.b. Purchase cutoff.c. Commitments made by Purchasing.d. Invoices received on or around
From which of the following procedures would an auditor obtain evidence about the existence of inventory?a. Physical inventory observation.b. Written representations from management.c. Confirmation
What control objective is served by management implementing written procedures for all additions, disposals, and retirements?a. Procedures for operating, using, and physically moving plant assets
Which of the following financial statement assertions are addressed by testing the cutoff for plant asset additions?a. Existence and rights.b. Valuation or allocation.c. Completeness and valuation.d.
To control fixed asset additions, a company should establish control procedures that require:a. Capitalizing of the cost of fixed asset additions that exceeds a specified dollar amount.b. Restricting
Which of the following would not likely motivate management to time the write off of impaired assets in the current period?a. Current unaudited net income is abnormally high in relation to prior
Which of the following provides management with some latitude in measuring the amount recognized in discretionary write-downs of impaired assets, even with the advent of an authoritative
Assume you are considering internal control over a client's inventory and fixed asset records. System documentation was accomplished with a flowchart and questionnaire and, in conjunction with a
While auditing Trowbridge Corporation's June 30, 1999 financial statements, you become aware of the following controls or procedures over Trowbridge's inventory control and inventory accounting
Denise Ondeyko, CPA is drafting an audit program to test controls over the Purdue Corporation's cost records.Required:1. Explain the importance of determining the disposition of overapplied and
Following are selected questions from an internal control questionnaire relating to a company's inventory control, perpetual inventory, and cost records. A ]/es response would indicate a potential
Alicin Nagle, an in-charge auditor, is reviving the inventory controls for the city of Carlton's vehicle maintenance facility. Nagle has learned the following:a. Vehicle maintenance records indicate
Following are errors, frauds, or other circumstances that an auditor might encounter as a result of applying year end substantive tests of details to inventory as of December 31, 1999:a. Perpetual
During your audit of the financial statements of The Gary Manufacturing Company for the year ended December 31, 1999, you find that at January 1, 1999, the company had installed the following
Decker is auditing the financial statements of Allright Wholesale Sales, Inc., for the year ended December 31, 1999. Allright has been in business for many years, although the company has never been
In connection with his audit of the financial statements of Knutson Products Co., an assembler of home appliances, for the year ended May 31, 1999, Ray Mendez is reviewing with Knutson's controller
Late in December 1999, your public accounting firm accepted an audit engagement at Fine Jewelers, Inc., a corporation that maintains a diamond wholesale store in New York City and retail jewelry
Your audit client. Household Appliances, Inc., operates a retail store in the center of town. Lacking sufficient storage space. Household keeps undisplayed inventory in a public warehouse outside of
Ashton Tate, an in-charge auditor, has completed the year end physical inventory observation at a large wholesaler of automotive parts. Tate reviewed management's inventory-taking instructions
After observing a physical inventory, an auditor compared the physical inventory counts with the perpetual inventory records and noted apparent shortages that were materially larger than those found
LOC Container Corporation is preparing financial statements for the fiscal year ended April 30, 1999. Because all of LOC Container's shares are traded within state, the company does not file reports
Following is an inventory test count working paper that documents Donald Schwab's physical inventory observations in the Hillsdale Company's roofing materials warehouse on December 31, 1999, the date
You became aware of the following control procedures for Gatehouse & Company's fixed assets:1. All scrapped assets are agreed with published price lists before being offered for sale and are
Following are selected questions from an internal control questionnaire about a company's fixed asset records, additions, disposals, retirements, and depreciation functions. A yes response would
Following are errors, frauds, or other circumstances that an auditor might encounter as a result of applying year end substantive tests of details to fixed assets as of December 31, 1999:a. During
Rivers is the auditor for a manufacturing company with a balance sheet that includes the caption "Property, Plant, and Equipment." Management has asked Rivers if audit adjustments or
Terra Land Development Corporation is a closely held family business engaged in purchasing large tracts of land, subdividing the tracts, and installing paved streets and utilities. The corporation
You are auditing the financial statements of the Ute Corporation for the year ended December 31, 1999. The client has prepared the following schedules for the fixed assets and depreciation accounts.
You have been assigned to audit the fixed assets of the Johnson Corp., a manufacturer of janitorial supplies. The company maintains a detailed property ledger for all fixed assets. You prepare an
The Sonora Company mines precious metals at excavation sites throughout North and South America. Although sales of copper and gold have flattened during the year and gold sales are well below the
Below is a client prepared schedule that captures fixed assets and accumulated depreciation for the Rock View Corporation, and for which Molly Giles has completed audit work.Required:List the
Although once unusual, write-downs of impaired assets increased markedly in the first half of the 1980s. For example, D. Fried, M. Schiff, and A. C. Sondhi, in "Impairments and Writeoffs of
Identify the business functions associated with the financing cycle.
Describe some control procedures applicable to capital stock.
Why should unissued bonds be prenumbered consecutively?
Explain how an auditor tests the existence of investments recorded within a client's financial statements.
How does an auditor test the valuation of investment securities?
Why does an auditor typically examine market quotations for a client's investments?
What procedures can be used to determine whether all transactions that should be recorded are recorded?
Briefly describe the procedures an auditor might use to test long-term debt and interest expense at year end.
Why do auditors frequently rely predominantly or exclusively on substantive tests in auditing shareholders' equity and long-term debt?
How does an auditor verify recorded shareholders' equity balances?
Identify the specific types of transactions relating to shareholders' equity that are tested by an auditor at year end.
How and why does an auditor test earnings per share?
How should unrealized gains and losses on investments in equity securities be accounted for?
Briefly, why did the Financial Accounting Standards Board add the financial instruments project to its technical agenda?
Assuming that one of management's control objectives is to restrict access to securities, which of the following would not be appropriate to satisfy the objective?a. Establish physical barriers over
What control objective is served by management's establishing policies for selecting and approving investment transactions?a. Sources of capital funds should be authorized in accordance with
Which financial statement assertions are served by testing cutoff over investment transactions?a. Existence and completeness.b. Rights and valuation.c. Existence and rights.d. Presentation and
Which financial statement assertion is served by confirming bonds, notes, and interest payments directly with trustees?a. Completeness.b. Valuation.c. Rights.d. Presentation and disclosure.Choose the
Why is it less common for auditors to perform extensive tests of controls over investments, debt, and equity?a. It is customary to assess control risk at the maximum for these accounts.b. Physical
How can an auditor test the assertion of completeness for capital stock?a. Verify stockholders' equity balances.b. Test supporting documentation for stock issuances, stock dividends, and stock
Which of the following are debt investments an entity has both the positive intent and the ability to hold till maturity?a. Trading securities.b. Call options.c. Available-for-sale securities.d.
For which of the following portfolios are unrealized gains and losses not recognized?a. Trading securities.b. Call options.c. Available-for-sale securities.d. Held-to-maturity securities.Choose the
Which of the following would not likely motivate management to selectively sell available-for-sale securities?a. Market share declined 5 percent this year.b. A new product has not been
Which portfolio of debt and equity securities is always reported as a current asset in the balance sheet?a. Treasury shares.b. Held-to-maturity securities.c. Available-for-sale securities.d. Trading
In your audit of the Whitestable Company's December 31, 1999 financial statements, you become aware of the following controls or procedures over investments, debt, and equity:a. On June 15, 1999, the
Following are selected questions from an internal control questionnaire for a company's investment transactions. The questions relate to the custody, recording, and valuation of investments, and to
Following are errors, frauds, or other circumstances that an auditor might encounter as a result of applying audit tests to investments as of the balance sheet date:a. The client does not maintain
In an audit of the financial statements of Belasco Chemicals, Inc., Karen Mack is deciding whether to inspect marketable securities on the balance sheet date. May 31, 1999, or at some other date. The
As a result of highly profitable operations over a number of years. Eastern Manufacturing Corporation has accumulated a substantial investment portfolio. In auditing the financial statements for the
An audit client prepared. After completing the procedures listed at the bottom of the schedule, an audit assistant initialed, dated, and indexed the working paper.Required: List the deficiencies in
You have been engaged to audit the financial statements of the Elliott Company for the year ended December 31, 1999. You also audited the December 31, 1998 financial statements. Following is the
Harold Brodkey is engaged in the audit of the Longview Corporation's financial statements for the year ended December 31, 1999, and is about to begin auditing noncurrent investment securities.
Following are selected questions from an internal control questionnaire relating to a company's debt and equity transactions. A \/es response to any question indicates a potential strength of the
Following are errors, frauds, or other circumstances that an auditor might encounter as a result of applying audit tests to long-term debt as of the balance sheet date:a. Detailed long-term debt
Ronald Ondeyko, CPA, is considering the LaSalle Company's internal controls over investments, long-term debt, and capital stock. System documentation was accomplished with a questionnaire and a
The following covenants are extracted from the indenture of a bond issue. Although the bond due date is 2016, failure to comply with any covenant automatically advances the due date of the loan to
You were engaged to audit the financial statements of Ronlyn Corporation for the year ended June 30, 1999. On May 1, 1999, the corporation borrowed $500,000 from Second National Bank to finance plant

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