Questions and Answers of Principles of Auditing

All of the following phrases would be found in the standard unmodified audit report for a private company except:a. In our opinion, the financial statements referred to above are correct, in all
a. Analysis and evaluation: Does KCI have a justified change in accounting principle? If so, how should the change be presented in the financial statements?b. Conclusions: Assuming KCI has a
Answer the following question based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study
Mark Jackson is the partner on the audit team for a new client, Central Companies (CC). The client hired Mark’s firm in August 2022 in preparation for the December 31, 2022, audit. Mark’s firm is
Analysis and evaluation: Suppose management does not agree to make adjustments to correct the material misstatements and does not properly present the change in accounting principle in the financial
In a public company audit, the audit report is addressed to the:a. Audit committee.b. The CEO and CFO.c. The SEC.d. The board of directors and shareholders.
What is the significance of the date on the auditor’s report on the financial statements?
Your firm has been engaged to audit a private company that uses a tax basis of accounting to prepare the financial statements rather than using generally accepted accounting principles (GAAP). You
a. Information gathering and analysis: What factors should Leo & Lee consider when deciding whether to use the Brazilian accounting firm? (Refer back to the section “Using the Work of Another
If a client has a going concern issue that has been properly disclosed in the notes, the auditor should:a. Issue an unmodified report and add an emphasis-of-matter paragraph before the opinion
Marco Ramirez is the partner on the audit engagement of Sun Products, a private company based in New Mexico.Sun Products manufactures outdoor patio furniture and yard decorations. Sun Products
a. Information gathering: Prepare a list of questions that you will inquire of management at the afternoon meeting regarding this new development.b. Analysis and evaluation: Assuming this new
Explain the term “consistency” in the context of financial statements. Provide examples of situations that affect consistency of financial statements.
Waveland South, a private company, is a new audit client for 2022. Waveland’s financial statements for 2021 were audited by the previous auditor. An unmodified audit opinion with an
An emphasis-of-matter paragraph is used with an unmodified opinion when:a. A significant uncertainty exists that should be brought to the financial statements user’s attention.b. An extreme
Explain how the standard audit report on the financial statements would be modified if reference is made to a component auditor.
Billy’s Burger House, a private company, is a chain of fast-food restaurants that has experienced fast growth in the last decade. The restaurant chain has been successful because it focuses on the
When the audit opinion is based in part on the work of another auditor, all of the following changes are made to the standard unmodified audit report except:a. The auditor’s responsibility
Distinguish between a limitation of scope and a departure from the financial reporting framework. Provide an example of each.
Steven Edwards has had difficulties throughout the audit of Kingston Catering. The company is a long-standing client of the audit firm and there have been no problems in the past. However, four
Which of the following is an example of a modified opinion?a. A qualified opinion.b. A going concern emphasis-of-matter paragraph.c. A consistency emphasis-of-matter paragraph.d. A reference to the
Which would auditors consider to be more serious: a client-imposed scope limitation or a situation-imposed scope limitation? Provide an example of each to support your answer.
Mitch Jackson and Rosie Punter are part of the audit team for Hexagon Industries, a large manufacturing, private company client. The client’s year-end was December 31, 2022, the end of fieldwork
If the auditor encounters a material scope limitation and cannot obtain sufficient appropriate audit evidence regarding the fair presentation of the financial statements, what type of report would be
Distinguish between a subsequent event and a subsequently discovered fact. What is the auditor’s responsibility for each?
You are completing an internship with a Big Four accounting firm and have worked on one client, a public company, during the entire internship. In your college class, you learned that an audit firm
If an auditor becomes aware after the date of the auditor’s report but before the financial statements are issued, of a fact that may materially affect the financial statements, the first step
What factors should the auditor evaluate when deciding whether to dual date the audit report on the financial statements for a subsequently discovered fact?
Phillips & Craig LLP was hired by Richards Manufacturing, a public company, to perform an integrated audit of the December 31, 2022, financial statements and internal controls. Phillips &
Industrial Holdings Inc. (IH), a public company, has been a client of Walker LLP for several years. Walker has completed the integrated audit of IH for the year ended December 31, 2022. In February
The dual dating of an audit report means:a. The release date of the financial statements was after the completion of fieldwork.b. A subsequent event occurred.c. The auditors performed audit
List and briefly explain the components of the unqualified report on the effectiveness of ICFR.
You have learned that the auditor is responsible for expressing an opinion on the financial statements. The term “financial statements” includes the four financial statements and the notes
All of the following are components of the standard unqualified report on the effectiveness of ICFR except:a. A title that includes the term “independent.”b. A statement about the inherent
What factors do auditors consider when determining if an identified control deficiency is a significant deficiency or a material weakness?
You are a first-year staff at a regional accounting firm. The firm primarily services private company clients and performs more review engagements than audit engagements. Your first assignment is a
Explain how the standard unqualified report on the effectiveness of ICFR would be modified for an adverse opinion.
In an engagement to review financial statements of a private company, the auditor will do all of the following except:a. Confirm key account receivable balances.b. Inquire of management regarding
Discuss the items an auditor communicates at the end of the audit to those charged with governance.
Communication with those charged with governance must occur:a. After the audit report is issued.b. Before the audit report is issued.c. Before legal letters are sent to attorneys.d. After the
AU-C 260 stresses the importance of communication with “those charged with governance.” Who are “those charged with governance?” Discuss why it is important that the auditor communicate with
All of the following statements are included in a management representation letter except:a. There have been no violations of laws or regulations.b. No subsequent events have occurred that require
Why is the management representation letter obtained at the end of the audit? Discuss the impact on the audit if management refused to sign the management representation letter.
For a private company client that follows GAAP, auditors must consider the going concern assumption for a reasonable period of time, which is:a. One year from the date the financial statements are
As discussed in the “Management Representation Letter” section of this chapter, Section 302 of SOX requires the CEO and CFO of public companies to sign a certification statement when the
Evaluate why the accounting assumption of “going concern” is of interest to auditors. Are there specific audit procedures that must be performed related to the going concern assumption? Why or
Katrina Ellis is the engagement partner of the audit of Champion Securities, an investment company. Most of Champion’s assets and liabilities are financial and their valuation is critical to the
What are the audit file assembly deadlines and the audit file retention policies for public and private company audits? Provide an analysis of why you think the deadlines and policies are different
The audit firm must retain the audit file of a public company client for:a. 7 years.b. 6 years.c. 5 years.d. 4 years.
Columbia Metal Fabricators (CMF) makes steel components for the construction industry. It specializes in extreme precision manufacturing where tolerances are measured in distances of less than one
Explain the process of an engagement quality control review.
If auditors discover fraud during the audit, it should first be reported to:a. The SEC.b. The PCAOB.c. The employee who is committing the fraud.d. An appropriate level of management or those charged
Evaluation: You are drafting a document with items to discuss with BPH’s audit committee closer to the end of the audit. In addition to the kitchen fire incident, what else should you communicate
Mark Jackson is the partner on the audit team for a new client, Central Companies (CC). The client hired Mark’s firm in August 2022, in preparation for the December 31, 2022, audit. Mark’s firm
Discuss actions an auditor would take when misstatements identified during the audit are not corrected by the client.
All of the following are examples of qualitative characteristics of a misstatement except:a. Affects management’s compensation for the period.b. Exceeds the amount for performance materiality.c.
a. Analysis: Explain your responsibilities with respect to the kitchen fire.b. Evaluation: Recommend how this event should be handled in the financial statements.Goodfellow & Perkins gained a new
Provide an example of why an auditor would reevaluate control risk near the end of the audit. Provide a different example of why an auditor would reevaluate fraud risk near the end of the audit.
At the conclusion of the audit, the wrap-up process involves all of the following except:a. Review of proper and complete execution of planned audit procedures.b. Determination that all necessary
Information gathering: If Leo & Lee does not have an internal qualified individual to serve as engagement quality control reviewer, what options does the firm have? Research AS 1220 to provide a
On October 14, Montevista Inc. made deposits with an overseas supplier totaling $500,000 for the production of specialty items. On October 27, the supplier closed due to political unrest in the
Which of the following is a Type II subsequent event?a. Bankruptcy of a customer subsequent to year-end, which would be considered when evaluating the adequacy of the allowance for uncollectible
a. Analysis and evaluation: Evaluate the impacts the costing errors and inventory cutoff errors have on the audit and the assessments of control risk, fraud risk, and materiality. Does your
Martin Rorke is reviewing the results of the review of subsequent cash receipts. There are several receipts listed from customers that were considered doubtful at the end of the year (December 31).
Discuss the auditor’s responsibility for detecting subsequent events prior to the completion of fieldwork.
Evaluation and conclusions: Evaluate whether the recall qualifies as a subsequent event and its impact on the 2022 financial statements, if any.King Companies, Inc. (KCI) is a private company that
Brad Scarlett is reviewing the results of the subsequent events audit procedures. Brad is writing a report for the audit partner based on these results and will be attending a meeting tomorrow with
Differentiate between the two types of subsequent events. List some audit procedures that may identify subsequent events.
Answer the following question based on the information presented for Cloud 9 in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case study
Information gathering and analysis: Does KCI have a potential loss contingency? Discuss procedures the auditors should perform to gather evidence about this situation.King Companies, Inc. (KCI) is a
Conversations between the board of directors of Acme Inc. and the engagement partner of the audit, Angelo Del Santo, have revealed that Acme uses three law firms. Ball & Partners performs all
Describe the auditor’s process for preparing, sending, and receiving responses from legal letters, including at what point during the audit the letters are sent.
When a client does not maintain its own stock records, the auditor should obtain a written confirmation from the transfer agent and registrar concerning:a. Restrictions on the payment of dividends.b.
Andrews, CPA, has been engaged to audit the financial statements of Broadwall Corporation for the year ended December 31, 2022. During the year, Broadwall obtained a long-term loan from a local bank
An auditor’s program to examine long-term debt most likely would include steps that require:a. Correlating interest expense recorded for the period with outstanding debt.b. Comparing the carrying
The following transactions and events relate to financing transactions at Weber Inc.1. Declare cash dividend on common stock.2. Issue bonds.3. Pay bond interest.4. Purchase 500 shares of treasury
What considerations apply in determining the appropriate level of detection risk for stockholders’ equity?
If an auditor performs analytical procedures on rent expense and finds that rent expense has increased 50%, he or she is most likely to perform which of the following additional procedures?a. Test
Fabrication Holdings Inc. (FH) has been a client of KFP LLP for many years. You are an audit senior and have been assigned to the FH audit for the first time for the financial year-end June 30, 2022.
Explain how an auditor will usually test interest expense when auditing notes payable.
An auditor analyzes repairs and maintenance primarily to obtain evidence in support of the assertion that all:a. Non-capitalizable expenditures have been recorded.b. Expenditures for property and
The following is a copy of the auditor?s working paper for auditing additions and disposals relevant to the balance of property, plant, and equipment (PPE) for the client New Millennium
Explain the importance of obtaining confirmations regarding notes payable.
Explain why completeness is a more critical assertion for long-term debt than for cash, inventory, or PPE. What procedures are primarily designed to address the completeness assertion for long-term
From year one to year two, the ratio of sales to fixed assets declined significantly. This is a possible indication that:a. The client is over depreciating fixed assets.b. The client is capitalizing
Which of the following would represent the best evidence for testing the net realizable value of inventory?a. Investigate sales prices on the sale of inventory made after year-end.b. Vouch inventory
In the audit of inventory, selecting inventory items from a perpetual master file, going to the locations, and obtaining test counts is intended to produce evidence for which audit assertion?a.
Explain the difference between year-end counting of inventory and cycle counts. What conditions should exist at a client that conducts cycle counts and uses the perpetual inventory to value inventory
The primary objective of a CPA’s observation of a client’s physical inventory count is to:a. Discover whether a client has counted a particular inventory item or group of items.b. Obtain direct
a. Gather information: What is the economic substance of the patent acquired by Lewis Company? In your opinion, has Lewis Company accurately accounted for the investing side of the transaction?b.
How would an auditor test the existence of inventory on hand in a public warehouse?
For which of the following companies would the auditor have the least concern about the existence of inventory?a. A retail grocer.b. A computer manufacturer.c. An oil and gas field equipment
a. Analysis: Identify the relevant assertions for property, plant, and equipment, and indicate the principal substantive tests pertaining to each. b. Evaluate: Indicate whether each of the items
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is low, an auditor would probably:a. Insist that the client perform physical
Assume that a company has numerous hourly employees that it pays every Friday. Explain the transactions expected in this payroll process.
Which of the following industries would have the greatest concerns about purchases cutoff at month end, unrecorded liabilities, and accounting for advertising allowances provided by vendors?a.
a. Evaluate the implications of the evidence you noted above. 1. What are the implications of your direct findings for fair presentation in the financial statements? You may assume that it is your
The following is a copy of the auditor?s working paper for auditing additions and disposals relevant to the balance of property, plant, and equipment (PPE) for the client New Millennium
The following is a copy of the auditor?s working paper for auditing inventory balances for the client Zack?s Electrical Supply. It shows the details of the net realizable value (NRV)
Look up and watch a YouTube video on “proof of cash.”RequiredAnswer the following questions.1. Explain how a proof of cash differs from a bank reconciliation.2. If internal controls are weak and

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