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principles of auditing
Principles Of Auditing An Introduction To International Standards On Auditing 2nd Edition Rick Stephan Hayes, Roger Dassen, Arnold Schilder, Philip Wallage - Solutions
Risk Analysis. Four tasks are required to assess the risk of misstatement. They are:1 Identify risk by developing an understanding of the entity and its environment.2 Relate the risk to what could go wrong in management’s assertion.3 Determine whether risks could result in material misstatement
Materiality. Via the internet, get the latest balance sheet and income statement of Nokia, an international manufacturer of portable telephones headquartered in Finland. At the www.Nokia.com website click investors, click reports, click financial reports, finally click annual information or use the
When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that:(A) Internal control may be ineffective due to mistakes in judgment and personal carelessness.(B) Adequate safeguards over access to assets and records should permit an entity
During the consideration of internal control in a financial statement audit, an auditor is not obligated to:(A) Search for significant deficiencies in the operation of the internal control.(B) Understand the internal control and the information system.(C) Determine whether the control activities
Which of the following is not a component of an entity’s internal control?(A) Control risk.(B) Control activities.(C) Monitoring.(D) Control environment.
What impact does this weakness in the control environment have on Xerox, its auditors, its management, and its shareholders?
What audit procedures in this case should the auditor perform to reduce the risk of misstatement?
The overall attitude and awareness of an entity’s board of directors concerning the importance of internal control usually is reflected in its:(A) Computer-based controls.(B) System of segregation of duties.(C) Control environment.(D) Safeguards over access to assets.
The philosophy and operating style of management would most likely have a significant influence on an entity’s control environment when(A) The duties of all management are specifically designated.(B) The audit committee is active in overseeing the financial reporting process.(C) Management is
When Dunlop became CEO of Sunbeam in 1996, the share price shot up from $12.12 to$18.58 in a day. What aspect of Dunlop’s management style could have caused this?
If you were auditing Sunbeam in 1996, what financial statement accounts do you believe world be susceptible to misstatement?
Which of the following statements is correct concerning an auditor’s assessment of control risk?(A) Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity’s internal control.(B) Evidence about the operation of internal control in prior
Why did Citibank’s non-compliance with banking laws represent a weakness in internal control?
What controls were in place, but not operating?
Why were established control procedures not followed?
Proper segregation of functional responsibilities calls for separation of the functions of:(A) Authorization, execution, and payment.(B) Authorization, recording, and custody.(C) Custody, execution, and reporting.(D) Authorization, payment, and recording.
Which of the following procedures most likely would provide an auditor with evidence about whether an entity’s internal control activities are suitably designed to prevent or detect material misstatements?(A) Re-performing the activities for a sample of transactions.(B) Performing analytical
Control risk should be assessed in terms of:(A) Special controls.(B) Types of potential fraud.(C) Financial statement assertions.(D) Control environment factors.
An attitude that includes a questioning mind and a critical assessment of audit evidence is referred to as:(A) Due professional care.(B) Professional skepticism.(C) Reasonable assurance.(D) Supervision.
Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?(A) Internal control.(B) Corroborating evidence.(C) Quality control.(D) Materiality and relative risk.
Which of the following is a conceptual difference between the attestation standards and International Standards on Auditing?(A) The attestation standards provide a framework for the attest function beyond historical financial statements.(B) The requirement that the practitioner be independent in
Which of the following statements is correct concerning an auditor’s responsibilities regarding financial statements?(A) Making suggestions that are adopted about the form and content of an entity’s financial statements impairs an auditor’s independence.(B) An auditor may draft an entity’s
An auditor tests an entity’s control of obtaining credit approval before shipping goods to customers in support of management’s financial statement assertion of(A) Valuation or allocation.(B) Completeness.(C) Existence or occurrence.(D) Rights and obligations.
Which of the following is not a component of an entity’s internal control?(A) Control risk.(B) Control activities.(C) Monitoring.(D) Control environment.
What events and circumstances contributed to the growth and international scope of Deloitte’s operations?
What is the impact today of Ernst’s innovation of advertising professional services?
What do you think Young’s staff school taught to professional accountants in 1920?
What do you think Ernst & Young teach today in their staff school?
What types of problems could result from combining four firms from different nations with different cultures into a working environment?
Why did the Western hemisphere operations of Price and Coopers grow rapidly in the twentieth century?
What are the ISA standards that are used by an auditor to guide him through the first phase of an audit?
What are the three types of auditors? Briefly define them.
International Auditing Standards. The London, Tokyo and New York Stock Exchanges, among others, require an annual audit of the financial statements of companies whose securities are listed on it. What are the possible reasons for this?
Describe the Public Interest Oversight Board. Discuss what you think their impact will be on worldwide auditing
Based on ISA 200 what are the general principles governing an audit of financial statements. Discuss ethics, professional skepticism, audit scope, business risk and audit risk.
Independent External Auditor. Give reasons why the following organizations should have annual audits by an independent external auditor:(a) The US Federal Reserve Board(b) A retail company traded on the London Stock Exchange(c) Walt Disney Company(d) Amnesty International(e) A small grocery store
Management Assertions and Audit Objectives. The following are management assertions(1 through 9) and audit objectives applied to the audit of accounts payable ((a) through(h)).Management Assertion:1 Existence 2 Rights and obligations 3 Occurrence 4 Completeness 5 Valuation and allocation 6 Accuracy
Audit Objectives and Financial Statement Accounts. Look at the financial statements of a major public company. Pick three accounts and discuss the financial statement assertions that might be associated with those accounts. For example, the financial statement assertions that might be associated
International Standards on Auditing (ISA). Download the latest version of Handbook Of International Auditing, Assurance, And Ethics Pronouncements from the IFAC website www.IFAC.org. Pick one ISA and discuss how that standard would influence the work of an auditor.
Qualifications of Auditors. From the library get a copy of the EC Eighth Company Law Directive which is about the qualifications and work of auditors.Required:Based on the Eighth Directive, answer the following questions.A. How many years of work experience must an auditor have before he can
Due Professional Care. Discuss lawsuits resulting from negligence of “Due professional Care.”Required:A. Consult the library, a database like Lexis-Nexis or the internet for lawsuits resulting from negligence of “Due Professional Care.” Discuss at least two.B. Describe briefly the courts
Why can we expect that a fraud that works now may not work in the future?
Why can a company not continue to grow indefinitely at 15 percent per year?
Why can a management who make up fictitious sales not profit in the long run?
Why does every form of earnings manipulation have its cost?
Based on this one sentence, how would you justify the existence of ethics?
A group that was established in 2002 by the US Congress to oversee and investigate the audits and auditors of public companies and sanction both firms and individuals for violations of laws, regulations, and rules is:(A) The Public Interest Oversight Board.(B) The Review Board.(C) The Public
The nature and extent of a CPA firm’s quality control policies and procedures depend on: size The audit firm's The nature of the audit firm's practice Cost-benefit considerations (A) Yes Yes Yes (B) Yes Yes No (C) Yes No No (D) No Yes Yes
Should the whole audit firm be charged with an offense by a few of its auditors?
In what ways can auditor workpapers (correspondence, plans and audit notes) be beneficial to an investigation of company fraudulent practices?
What security procedures should WorldCom have had taken overall in order to prevent these illegal acts from happening?
What steps should innocent middle management have taken in order to stop or prevent top executives who performed the illegal acts?
Should they have reported to officials at the first sign of improper accounting? Or should they have just quit the company immediately.
An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. If the entity’s financial statements adequately disclose its financial difficulties, the auditor’s report is required to include an explanatory
Was Andersen fulfilling its responsibility to consider fraud and risk?
Whose responsibility is it to determine the materiality of fraud on the financial statements:Enron management or Andersen?
Which of the following statements best describes an auditor’s responsibility to detect errors and fraud?(A) An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.(B) An auditor is responsible to detect
Name the three public oversight boards discussed in the chapter. Discuss their similarities and dissimilarities.
What is the theoretical basis for the assumption that Big Four firms provide higher technical audit quality than non-Big Four firms?
Agency Theory. Identify principals and agents in the cases mentioned below. Describe the contributions and “prices” associated with these relationships, identify potential risks for the principal and give suggestions for limiting these risks.A. The Pasadena Bank lends money to the Alhambra
Audit Regulation. Comment on the following statements:A. In most countries audits are legally required for every type of company.B. The PCAOB sanctions firms but not individuals for violations of laws, regulations, and rules.C. The PCAOB inspects all US audit firms.D. The FRC has broad oversight
Audit Quality and Audit Fee Determination. Company Hochbau, a construction company, has decided to change auditors, as a result of continuous communication problems with the existing auditors. As the chief financial officer, you have made a schedule for the audit tender.Required:Give a brief
Auditor’s Opinion on the Occurrence of Fraud. Sundback, CGR, is the auditor for Upseerin Manufacturing, a privately owned company in Espoo, Finland, which has a June 30 fiscal year. Upseerin arranged for a substantial bank loan which was dependent upon the bank receiving, by September 30, audited
Opinion on the Occurrence of Illegal Acts. Ostling, Auktoriserad Revisor, accepted an engagement to audit the financial statements of Sandnes Company of Göteborg, Sweden.Ostling’s discussions with Sandnes’s new management and the predecessor auditor indicated the possibility that Sandnes’s
Compare the Combined Code and the Sarbanes-Oxley Act on what each says about the following:A. Corporate governance B. Audit firms C. Internal controls.
The auditor with final responsibility for an engagement and one of the assistants has a difference of opinion about the client’s application of an accounting method. If the assistant believes it is necessary to be disassociated with the matter’s resolution, the audit firm’s procedures should
Does an auditor violate the confidentially of their client by revealing the client’s financial condition to another client?
Why would an auditor report sufficient cash reserves in their audit report and then tell another client that the audited company had a shortfall cash position?
What impact does employment of former independent auditors by an audit client have on that auditor’s independence during the audit?
Were Atchison’s actions ethical?
Which of the following statements is correct about independence?(A) Independence is potentially affected by self-interest, self-review, advocacy, familiarity and intimidation threats.(B) Independence is not an element that is considered in the audit process.(C) Independence is immaterial to the
An auditor strives to achieve independence in appearance to(A) Appear to an independent third party not to have compromised their integrity.(B) Become independent in fact.(C) Comply with the international auditing standards of fieldwork.(D) Evaluation of all matters of continuing accounting
Why would selling and servicing the product of an audit client for significant revenue be considered a threat to independence?
What safeguards could E&Y have put in place to compensate for this threat?
Would the relationship between E&Y and PeopleSoft be viewed differently if it happened after the Sarbanes-Oxley Act was passed?
Before accepting an audit engagement a proposed (successor) auditor should make specific inquiries of the existing (predecessor) auditor regarding the existing auditor’s:(A) Opinion of any subsequent events occurring since the existing auditor’s audit report was issued.(B) Understanding as to
Was Betty Vinson justified in her actions because there were at the request of her superiors?Why?
If you were in Ms. Vinson’s situation, what would you have done?
What are ethics?
What are the Fundamental Principles an accountant must observe to achieve the objectives of the accounting profession according the to IFAC ethics guidelines? Briefly discuss them.
Define the five types of threats listed in the Code of Ethics for Professional Accountants.Give one example and one safeguard for each type of threat.
Give an example of a professional accountant in public practice engaging in activities incompatible with practice.
What steps must an exiting auditor take if he is going to audit a company now audited by another firm?
What should employed accountants do if they feel they are being asked to so something that is contradictory to accounting standards?
Can IFAC discipline an accountant for violation of the Code of Ethics? What common sanctions does IFAC suggest?
Ethics Guidelines. Why is there a need for an ethics guideline for professional accountants?Explain. In what ways should the ethics code for accountants be different from that of other groups such as physicians or attorneys?
Violations of Code of Ethics. For each of the following situations involving relations between auditors and the companies they audit indicate whether it violates IFAC’s Code of Ethics for Professional Accountants and the rationale for the applicable guideline.A. Yaping Lei, CPA, discloses
Professional Accountants in Public Practice. Galati and Brambila formed a corporation called Financial Fitness Systems, each woman taking 50 percent of the authorized common stock. Galati is a Dottore Commercialista (CONSOB), a public accountant, and Brambila is an insurance underwriter. The
Ethical Issues. The following situation involves Kevin Smith, staff accountant with the local CPA firm of Hobb, Mary, and Khang (HM&K). The bookkeeper of Mirage Manufacturing Company resigned three months ago and has not yet been replaced. As a result, Mirage’s transactions have not been recorded
Which of the following is a conceptual difference between the International Standards for Assurance Engagements (ISAE) and International Auditing Standards (ISA)?(A) ISAEs provide a framework for the attest function beyond historical financial statements.(B) The requirement that the practitioner be
What criteria would the pristine audits have to meet to be considered an audit engagement?
What criteria would the pristine audits have to meet to be considered “audit-related”?
Can the pristine audits be considered an assurance service? How does the pristine audit meet the five criteria required to qualify an engagement as an assurance service?
Financial statements of a non-public entity that have been reviewed by an accountant should be accompanied by a report stating that a review:(A) Provides only limited assurance that the financial statements are fairly presented.(B) Includes examining, on a test basis, information that is the
An auditor’s report on financial statements prepared on the cash receipts and disbursements basis of accounting should include all of the following except:(A) A reference to the note to the financial statements that describes the cash receipts and disbursements basis of accounting.(B) A statement
An auditor may express an opinion on an entity’s accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole provided the:(A) Report on the accounts receivable discloses the reason for the disclaimer of opinion on the financial
A certified accountant’s report on agreed-upon procedures related to management’s assertion about an entity’s compliance with specified requirements should contain:(A) A statement of limitations on the use of the report.(B) An opinion about whether management’s assertion is fairly
Financial statements of a non-public entity compiled without audit or review by an accountant, which are expected to be used by a third party, should be accompanied by a report stating that:(A) The scope of the accountant’s procedures has not been restricted in testing the financial information
What are audit related services? List the major categories (except for consulting) of auditor’s services.
Define subject matter. Give some examples of common subject matter in assurance and related service engagements.
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