Questions and Answers of Principles of Auditing

Assume an auditor is testing an IT application control over the accuracy of purchases. The auditor is most likely to submit test data for a:a. Voucher with different quantities than on the receiving
The following questions are included in the internal control questionnaire on control procedures for payroll transactions in the Pena Company:1. Are pay rates, payroll deductions, and terminations
The key documents involved in recording a purchase adjustment involve:a. A purchase return authorization, a shipping report, and a debit memo.b. A vendor’s invoice, a receiving report, and a credit
As part of the audit of Beach Land Construction, you are assigned to review and test the payroll transactions. Beach Land Construction is a privately owned company, which has about 30 full-time
Explain how examining subsequent payments paid after the balance sheet date (or a cutoff date) is a useful test of the completeness of purchases and payables.
An evaluated receipt system is:a. A highly automated business process between suppliers and purchasers to exchange data electronically to execute a purchase transaction.b. A highly automated business
Butler, CPA, has been engaged to audit the financial statements of Young Computer Outlets, Inc., a new client. Young is a privately owned chain of retail stores that sells a variety of software and
Explain the flow of transactions for purchase returns.
Which of the following controls would most likely prevent a vendor’s invoice from being paid twice?a. An independent bank reconciliation is prepared.b. The software application compares information
In 2003, the Securities and Exchange Commission released an Accounting and Auditing Enforcement Release (AAER) describing charges and discipline against TruServ Corporation and the company’s chief
Assume that your client is a major grocery chain that uses evaluated receipt settlement (ERS) for 75% of its purchases. Explain the flow of transactions from the purchasing of products (e.g., various
Which of the following IT application control procedures would be most effective in assuring that recorded purchases are accurately recorded for transactions that actually occurred?a. The software
Explain a typical control preventing, or detecting and correcting, payments to a fictitious vendor.
Describe the IT application control procedure that provides assurance that all the merchandise for which the client was billed was received. Assume the software application prepares an exception
Taylor, CPA, is engaged in the audit of Rex Wholesaling for the year ended December 31, 2022. Taylor performed a proper study of the internal control structure relating to the purchasing, receiving,
You were in the final stages of your audit of the financial statements of Ozine Corporation for the year ended December 31, 2022, when you were consulted by the corporation’s president, who
Explain a typical control preventing, or detecting and correcting, duplicate payment of a vendor’s invoice in a purchasing system.
Assume that your client is a private company that manufacturers wedding rings. The company’s raw materials are gold, silver, platinum, and gem stones. Explain the expected flow of transactions, the
The auditor is studying a ratio of accounts payable turnover in days. Which of the following indicates a potential risk of unrecorded liabilities?a. Accounts payable turnover in days increased from
Analysis and evaluation: Identify the control deficiencies in the payroll process for The Vane Corporation. Recommend the changes necessary to improve the control structure. Arrange your answer in
Management has requested a review of internal control over cash disbursements for parts and supplies purchased at manufacturing plants. Cash disbursements are centrally processed at corporate
If the auditor is concerned about the risk of fraud in the purchasing process, which of the following best describes the auditor’s potential fraud risk assessments?a. Fraudulent financial
The following information was taken from the accounting records for Aurora Manufacturing, Inc.: Required a. Calculate the following information and ratios for years 2, 3, 4, and 5: 1. Purchases. 2.
What are the greatest inherent risks in the purchasing process? Explain the assertions that are at risk and the underlying drivers causing an increase in inherent risk.
Explain how the risk of material misstatement in the purchasing process is different for a hotel than it is for a manufacturer of gas and oil field equipment.
a. Analysis and evaluation: What concerns, if any, are raised by the evidence noted above? Assuming that the problems found in the sample are representative of problems in the population, determine
Your client is a local independent grocer with five stores which competes with a number of large grocery chains. It purchases goods from several large grocery supply chains as well as from various
Explain the transactions in the purchasing process.
Answer the following questions based on the information for Cloud 9 presented in the appendix to this text and the current and earlier chapters. You should also consider your answers to the case
a. Analysis and evaluation: Evaluate the effectiveness of the CIRI?s control environment. You may evaluate each individual component of the control environment but then develop an overall conclusion
The purchasing process normally includes all of the following transactions:a. Purchases, inventory transactions, and cash receipts.b. Purchases on account, purchase returns, and cash receipts.c.
The following data was taken from the production and accounting records for Casuccio Manufacturing, Inc. Required a. Calculate the following ratios for 2023, 2022, and 2021: 1. Sales to total
Assume that you are preparing to confirm accounts receivable at December 31, 2022, which is one month prior to the fiscal year-end of January 31, 2023. The book value of gross accounts receivable
Jennifer Jones has been assigned to audit inventory for Consumer Home Electronics Warehouse. Consumer Home Electronics Warehouse is a retailer of a variety of home electronics and appliances (ranging
Explain the differences between an audit of internal controls as required by PCAOB AS 2201 and the testing of internal controls for the purposes of expressing an opinion on the financial statements
Explain the role of professional judgment in selecting and evaluating a sample.
Your client is a regional motel chain. It owns 27 properties in your region and manages another 40 properties for absentee owners. All the motels are located on interstate highways and achieve at
Identify a risk of fraudulent financial reporting in the revenue process. Describe a sound internal control that would detect and correct the misstatement on a timely basis.
A small manufacturing company makes only credit sales. If cash receipts from sales are misappropriated, which of the following acts would most likely conceal this fraud?a. Understating the accounts
The auditor decides which controls to test by considering:a. the points at which fraud or error can occur.b. the nature of controls implemented by management.c. the significance of each control in
Identify the eight steps performed in assessing control risk and place them in the proper order.
As an audit manager at Gung & Ho, CPAs, you have been scheduled to serve as the discussion leader for an in-office training session on consideration of the internal control structure in a
Effective internal controls at the transaction level are designed to prevent or detect and correct material misstatements that could occur within the flow of transactions. In the case study
When obtaining an understanding of internal controls, the auditor identifies important programmed application controls over the occurrence of sales. However, the auditor also has serious concerns
A software application will not allow a sale to be processed if a customer is over its credit limit. This is an example of a(n):a. Detective control.b. Preventive control.c. IT general control.d.
Explain why reconciliations, such as bank reconciliations, are classified as detective controls.
The software application compares all sales invoices with underlying shipping information on the bills of lading and packing slips with sales invoices. If differences are revealed, a report is
Which of the following represents an example of an IT application control?a. The assistant controller performs a monthly bank reconciliation and follow-up of unexpected outstanding items.b. The
Dakota Drapers supplies custom-fitted curtains and blinds to retail customers. It has recently expanded to offer a wide variety of home decorating products through its six stores across the state.
An auditor is going to test the client’s controls over bank reconciliations. The auditor will perform which of the following audit procedures for this test of controls?a. Software-based audit
The first-year auditor on the engagement has suggested that since no exceptions were detected in previous years, no work on internal controls is required because last year’s evidence will be
The lead auditor was reviewing the results of testing controls in the payroll expense area for a public company. The documentation for the testing showed that there was one instance of a part-time
Benchmarking is a process that involves:a. Comparing the effectiveness of one control with another control.b. An audit strategy that allows an auditor to rely on IT application controls if manual
If an auditor decides to assess control risk as low based on IT application control procedures, which of the following would not be part of the auditor’s strategy for testing controls?a. Testing
Identify the factors that influence sample size in a test of controls. Provide an example related to each factor in terms of how it would potentially increase the level of control testing.
If an auditor performs tests of controls and determines that the control is not effective, what should the auditor’s next step in testing controls be?a. Document the results of tests of controls
Explain the relationship between the results of tests of controls and substantive testing.
a. Information gathering: Prepare a list of questions that the auditors would ask MSI managers regarding how the impairment loss was determined.b. Analysis and evaluation: Comment on the level of
Which assertion is typically related to income statement accounts rather than balance sheet accounts or presentation and disclosure?a. Completeness.b. Accuracy.c. Rights and obligations.d. Cutoff.
Differentiate risk response at the financial statement level with risk response at the assertion level.
James and Katie will be auditing the revenue account for their retail client, Go Big Tires. They disagree about how to test the occurrence assertion for the revenue account. James thinks they should
a. Information gathering: Describe how you would gather information about the incidence of upcoding that occurred at the hospital.b. Analysis: Identify two key account balances likely to be affected
Which of the following would be the most likely reason to include more unpredictability in the selection and performance of audit procedures?a. Client has a strong internal control environment.b.
The nature of an audit procedure refers to:a. When the procedure is performed.b. The assessed level of detection risk.c. The sample size required to perform the procedure.d. Its purpose and its type.
Using the inventory trial balance as an example, explain the initial procedures that will be performed.
All of the following are initial procedures performed on an account balance except:a. Agreeing the opening balance to the audited ending balance from the prior year’s working papers.b. Footing a
Iman has the task of reviewing the evidence from substantive analytical procedures conducted by the audit associates on the audit of Smalley Services Inc. The audit associates have reported the
Which of the following situations increases the reliability of data being used for substantive analytical procedures?a. The source of the data is the client’s internal budget reports.b. During the
Develop an example of the type of substantive test an auditor might use to investigate notable items when ADA is performed as a risk assessment procedure.
When analyzing the results of substantive procedures, auditors should beware of:a. Professional skepticism.b. Audit engagement deadlines.c. Confirmation bias.d. Weak internal controls.
Does using audit data analytics remove the need to test the client’s internal controls?
Crescent City Fun Park (Crescent City), an amusement park with thrilling rides and a water park, sells tickets onsite and has a website that allows customers to purchase tickets in advance and bypass
Which of the following situations would most likely preclude an auditor from performing substantive procedures during an interim period?a. Internal controls are weak and the risk of material
What is confirmation bias? How can auditors minimize it?
Crescent City Fun Park (Crescent City), an amusement park with thrilling rides and a water park, sells tickets onsite and has a website that allows customers to purchase tickets in advance and bypass
Which of the following would not be a reason to increase the extent of a substantive test?a. The risk of material misstatement is high.b. Qualitative factors suggest there may be errors in the
When is it appropriate to use roll-forward procedures?
The following items are documented in the working papers:1. A sales transaction is included in the year ended December 2022, but evidence from the cutoff procedure suggests the sale should be dated
Which of the following characteristics of an accounting estimate would lead to lower estimation uncertainty?a. Estimate is related to routine transactions.b. Estimate is derived from a model
Using the inventory trial balance as an example, explain different techniques for selecting a sample of items for testing. What are the advantages and disadvantages of each technique?
The PCAOB staff prepares documents called Staff Inspection Briefs. The purpose of the briefs is to help auditors, audit committees, investors, and preparers to understand the PCAOB inspection process
Which of the following can be used as both a risk assessment procedure and a substantive procedure for the audit of accounting estimates?a. Gain an understanding of what is required by the applicable
Using the allowance for doubtful accounts as an example, briefly explain the risk assessment procedures that would be performed on the accounting estimate.
The auditor’s best estimate of the misstatement in a population based on the misstatement found in a sample drawn from the population is called a:a. Factual misstatement.b. Judgmental
Provide an example of (1) A factual misstatement (2) A judgmental misstatement that could affect the balance of property, plant, and equipment.
Which of the following factors would most likely cause an auditor to use audit sampling versus audit data analytics?a. Evidence to support the audit test is not available in electronic form.b. The
Assume that you are auditing inventory for a computer manufacturer with strong internal controls. Identify one assertion where the auditor is likely to use audit sampling. Explain your reasoning.
You are auditing Northeastern Food Wholesalers (NFW). NFW purchases a full line of various grocery products and sells them to independent grocery stores in six Northeastern states. NFW has one
Determine the objectives of the test. You are auditing both quantities and pricing of the final inventory accumulation. a. Explain the assertions that you are testing. b. Explain the evidence that
Audit sampling is defined as a situation where:a. The auditor tests a subset of the population to draw a conclusion about a subset of the population.b. The auditor screens 100% of the population to
Using your example of audit sampling in the answer to R10.1, what items make up the population? What items are subject to being sampled? When the sample is complete, is the auditor drawing a
One of the generally accepted auditing standards states that sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmation to afford a
a. Evaluate results judgmentally: Determine the estimated audited value of the population using nonstatistical ratio analysis. b. Document conclusion: What audit conclusion can you draw based on the
Fred Hutchinson is auditing revenue for Urban Homes, a home builder in California. Urban Homes usually has between 450 and 600 home construction projects going at any point in time, for between 300
Analysis: Discuss the appropriate method of sampling PPE for the planned tests of depreciation. Define the population. What assertions are most at risk?Fabrication Holdings, Inc. (FHI) has been a
Explain the difference between the two types of sampling risk for substantive tests: the risk of incorrect acceptance and the risk of incorrect rejection. What are the errors’ different
Evaluation and conclusion: What conclusion would you draw about valuation and allocation of PPE from the above information? Justify your conclusion.Fabrication Holdings, Inc. (FHI) has been a client
The critical difference between statistical and nonstatistical sampling is:a. The required use of judgment in nonstatistical sampling.b. The elimination of nonsampling risk with statistical
Jennifer Jones has been assigned to audit inventory for Consumer Home Electronics Warehouse. Consumer Home Electronics Warehouse is a retailer of a variety of home electronics and appliances (ranging
a. Analysis: Determine an appropriate risk of incorrect acceptance for each population. b. Determine sample size: Calculate sample size in each of the plans. Show computations. Data relative to

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