Questions and Answers of Principles of Auditing

Identify four risks associated with IT systems in accounting. For each of the four risks, identify whether they are mitigated by IT general controls or IT application controls. Identify a specific
An auditor normally obtains an understanding of transaction-level controls by:a. Conducting an interview with senior management.b. Performing a system walk through.c. Reading the prior year’s
Omega Airways is a public company and a new client of your audit firm. Its accounting policy for revenue is to credit unearned revenue when cash is received, and subsequently transfer to revenue in
Explain eight steps that an auditor follows when understanding internal controls at the transaction level and developing an audit strategy.
In a good system of segregation of duties, which of the following duties should be segregated?a. Authorization of transactions, physical access to assets, and recording transactions.b. Authorization
Sinha Airways owns many of its aircraft. The useful lives and residual values may be influenced by external changes to economic conditions, demand, and new technology. Analytical procedures show that
Which of the following represent a common categorization of control activities?a. Authorization controls, control over human error, information processing controls, physical controls, and segregation
Several categories of control activities are identified in the chapter using the following framework:A. AuthorizationB. Performance reviewsC. Information-processing controlsC1. IT general controlsC2.
The internal control component that addresses how an organization holds an individual accountable for his or her internal control responsibilities in pursuit of objectives is related to:a. The
For a retail entity, give some examples of risks that should be considered in the risk assessment process. Which of these risks would be relevant to a retailer’s financial reporting? Explain.
Peterson, CPA, is auditing the financial statements of a publicly held manufacturing company, Amalgamated Products, Inc. In complying with the PCAOB standards, Peterson seeks to obtain an
Explain why an auditor would be interested in the functioning of the human resources department within an organization.
The control environment:a. Sets the tone of an entity with respect to internal control and influences the control consciousness of its people.b. Is focused on how the entity addresses information
The objectives of internal control include:a. Operations objectives, internal control objectives, and financial reporting objectives.b. Operations objectives, control environment objectives, and
What are the three internal control objectives? Illustrate each with an example.
It is important for an auditor to understand a public company’s system of internal control in order to:a. Audit internal control over financial reporting.b. Make a preliminary assessment of control
Sharon Gallagher and Josh Thomas have assessed the internal controls at Cloud 9 as being effective at an entity level. This means that, at a high level, the company demonstrates an environment where
Parsons & Co, LLC, an audit firm, has audited Cascade Motors, a manufacturer of auto parts, for the last two years. Dereck Miller, a first-year auditor, has noted that the IT auditor has
Internal control is defined as:a. The entity’s system to prevent, or detect and correct, misstatements in the financial statements.b. A process, effected by an entity’s board of directors,
A detailed listing of the specific audit procedures to be used to gather evidence for an account is called the:a. Permanent file.b. Audit strategy.c. Audit program.d. Accounting records.
Bright Spark Fashion has retail outlets in six large regional cities in the eastern United States. The shops are run by local managers, but purchasing decisions for all stores are handled by Ray
An auditor is performing a cluster analysis and sorts a client’s customers into groups based on the aging of accounts receivable. The auditor is most likely auditing which of the following
Explain how visualizations can be used as part of ADA and why they are important.
The audit firm you work for is auditing the 2022 financial statements for a national clothing retailer. As part of the audit, ADA is being used to assess risk associated with accrued wages.
An auditor is using regression analysis to investigate battery expense for a computer manufacturer that purchases batteries. Which of the following would be a good choice of independent variable for
Describe two risks associated with using visualizations as part of ADA.
Timothy Steele, a recent college graduate and new audit staff member, is having lunch with Michael Watts, an audit senior. Both are working on the audit engagement of a retailer that has operations
When performing ADA as a substantive test, the auditor:a. Uses ADA to match electronic information that otherwise would have been audited manually.b. Uses ADA to identify high-risk transactions and
Identify two analytical techniques that could be used as part of risk assessment ADA and how they could be useful.
Assume that you are auditing a real estate company that owns and rents several apartment buildings. In total, the company owns 22 buildings and has over 1,000 apartments that it rents out on annual
An auditor is using ADA as a substantive test to validate accounts receivable because consumers are poor at responding to confirmations. In this case, the auditor validates the receivable by:a.
Explain why strong IT general controls and strong IT application controls are important when an auditor plans to use ADA as a substantive test of details.
Read the following article, available online: G. Baader and H. Krcmer, “Reducing False Positives in Fraud Detection: Combining the Red Flag Approach with Process Mining,” International Journal of
What should an auditor do if the conclusion from performing ADA as a substantive test does not agree with a previous conclusion regarding internal controls?
Explain how applying ADA as a substantive test differs from ADA as a risk assessment procedure.
A team from More & Less CPAs are auditing SportsLovers, a U.S. sporting goods manufacturer and distributor. The audit team recently had a meeting to discuss how to perform the current ADA, which
In April 2011, the SEC charged Satyam Computer Services Ltd., an India based-company, with fraudulently overstating the company’s revenue, income, and cash balances by more than $1 billion over
Jennifer Jones is reading documents prepared by the members of the team working on the audit of receivables for a private company audit client. Jennifer is the senior manager assisting the engagement
List some key elements that would be included in any working paper document.
Before the external auditors decide to use the work performed by the internal auditors, the external auditors must first assess:a. The size of the internal audit function relative to the client.b.
Provide examples of situations in which an auditor would use the work of a component auditor.
Describe the general composition of an external audit team. Discuss whether a client’s internal auditors can be part of the external audit team.
Which audit procedure is being used when an auditor checks the calculations in a client-prepared spreadsheet?a. Analytical procedure.b. Recalculation.c. Reperformance.d. Scanning.
An audit associate is preparing an audit program for the audit of a client’s allowance for doubtful accounts. To gather evidence in support of the valuation assertion, the associate included the
When an auditor inspects loan documentation and traces the details to recording in the client’s records, the auditor is gathering evidence to support the:a. Completeness assertion.b. Existence
An audit associate is preparing an audit program for the audit of a client’s inventory purchases transactions. To gather evidence in support of the cutoff assertion, the associate included the
Differentiate between recalculation and reperformance, and provide an example of each.
When an auditor inspects a tangible asset to support a balance in the client’s records, the auditor is gathering evidence to support the:a. Completeness assertion.b. Existence assertion.c.
An audit associate is preparing an audit program for the audit of a client’s revenue transactions. To gather evidence in support of the occurrence assertion, the associate included the following
List and describe the procedures for gathering audit evidence. At which stage(s) of the audit is each procedure appropriate?
James Thomas is responsible for preparing bank reconciliation statements at Ajax Inc. Ajax has many bank accounts, including separate accounts for each major branch, accounts for payments of salaries
Differentiate between the “occurrence” and “existence” assertions. How do both differ from “completeness”?
Which is generally the most reliable form of evidence?a. Internally generated evidence from the client’s IT system.b. Internally generated evidence based on discussions with upper management.c.
Analysis: Select three asset accounts that you consider significant accounts for BPH and explain why they are significant. For each significant account that you identify, determine the two most
Explain how inspecting a client’s tangible assets provides evidence about the completeness and existence assertions.
The quantity of evidence that an auditor will gather:a. Varies with the assessed risk of material misstatement.b. Is the same for most audits because it has to be appropriate.c. Depends on the size
Analysis and evaluation: Using AS 2605 as a guide, discuss how Leo & Lee would evaluate the internal audit function of MSI. Based on the information, make a decision regarding the use of MSI’s
Propel Equipment rents heavy equipment, such as cranes, bulldozers, and dump trucks, to industrial contractors. One of Propel’s larger expenses is repairs and maintenance on the rental equipment.
Discuss why an auditor must consider the reliability of audit evidence.
Analysis: Describe how you would apply the mandatory requirements of AU-C 230 when documenting your understanding related to the potential bad debt.King Companies, Inc. (KCI) is a private company
Davis Do-It-Center (Davis) is a local hardware store with five locations in southern Georgia. The company has been operating for over 70 years. In the last 15 years, the two owners, who are brothers,
The assertion related to recording transactions in the correct accounting period is:a. Accuracy.b. Completeness.c. Cutoff.d. Occurrence.
The inventory of a large grocery store client is material, and it is the largest current asset on the balance sheet. The cost of inventory items ranges from very small amounts (like individual candy
Are financial statements considered statements of fact? Discuss in the context of management assertions.
The three categories of management assertions are:a. Journal entries, ledgers, and trial balances.b. Journal entries, account balances, and financial statements.c. Transactions, ledgers, and account
Client closing procedures:a. Are routine transactions that do not impact audit risk.b. Are the responsibility of those charged with governance who must ensure that transactions are recorded in the
Shane Woodrow is getting to know his new client Clarrie Potters, a large discount electrical retailer. Shane discovers that toward the end of last year, Clarrie Potters installed a new IT system for
Risks of material misstatement that are associated with a client’s IT system include all of the following except:a. Failure to accrue for a contingent liability.b. A terminated employee who is
Genesis Physical Therapy has been providing outpatient physical therapy services for 30 years. The owners, Jesse and Janice, have been slow to implement updated technology for the accounting system
Do only publicly traded companies have good corporate governance? Explain.
An audit committee of a publicly traded company should be composed of:a. Executive and non-executive members of the board of directors.b. The CFO and two other board members who are also
Ajax Inc. is a public company and a new client of Hawthorne Partners, a medium-sized audit firm. Jeffrey Rush is the engagement partner on the audit and has asked the members of the audit team to
Why is it important to maintain professional skepticism when gaining an understanding of related party transactions?
Which of the following statements is false regarding related parties?a. Management should have controls in place for identifying related parties.b. Related party transactions do not have to be
During the risk assessment phase for a new client, you have been assigned the task of identifying related parties. You need to refresh your memory regarding why identifying related parties is
What is a time-series analysis? How could it be useful to an auditor?
Common uses of analytical procedures include all of the following except:a. Risk identification during the risk assessment stage.b. Testing account balances derived from estimates during the risk
Li Chen has calculated profitability ratios using data extracted from his client?s pre-audit trial balance. He also has the values for the same ratios for the preceding two years (using audited
Companies use profitability measures to assess performance and to:a. Assess their ability to compete.b. Maintain consistency in operations each month.c. Measure their ability to pay short term debts
The audit team is preparing to audit a new client in the fashion industry. The client imports garments from manufacturers in several Asian countries and retails them in a chain of shops located
When gaining an understanding of the client at the industry level, the auditor will:a. Consider the level of demand for the goods provided by companies in the industry.b. Determine if the client has
Analysis: Using BPH?s financial data, perform analytical procedures to gain an understanding of BPH. Conduct a trend analysis, common-size analysis, and ratio analysis. Based on your analysis,
As part of your intern training at a large public accounting firm, you have been asked to conduct research about audit procedures related to client noncompliance with laws and regulations. You will
a. Gather information: As MSI is looking for someone to fill the vacant board position, what requirements must be followed? What characteristics or qualities would be ideal for the board member to
Ivy Brown is preparing a report for the engagement partner of an existing client, Scooter Inc., an importer of scooters and other low-powered motorcycles. Ivy has been investigating certain aspects
Gather information: You have access to the following information for KCI:1. Prior period financial statements.2. Budgets for the current year.3. Industry comparisons.Plan, in detail, the types of
Explain the importance of the risk assessment phase of a financial statement audit.
Part I:The common stock of Wilson, Inc. is owned by 10,000 stockholders who live in several states. Wilson’s financial statements as of December 31, 2021, were audited by Doe & Co., CPAs, who
The following situations involve Herb Standard, staff accountant with the regional accounting firm of Cash & Green:1. The bookkeeper of Ethical Manufacturing Company resigned two months ago and
Under the AICPA ethics rules on independence, which of the following individuals would not be a covered member?a. A consulting manager in another office who provides 100 hours of non-audit services
Is it appropriate for an audit firm to ask questions of an employee about his or her investments or the investments of his or her spouse? Why or why not?
Tyler Corp. is insolvent. It has defaulted on the payment of its debts and does not have assets sufficient to satisfy its unsecured creditors. Slade, a supplier of raw materials, is Tyler’s largest
Which of the following best describes the independence requirements for a close relative of a covered member?a. A close relative cannot have an immaterial, direct investment in an audit client.b. A
What independence problems are created when an audit manager is approached by a private company audit client, which he or she audits, to become the company’s CFO? Are there appropriate safeguards
Astor Inc. purchased the assets of Bell Corp. A condition of the purchase agreement required Bell to retain a CPA to audit Bell’s financial statements. The purpose of the audit was to determine
The essence of the due care standard is that the auditor should not be guilty of:a. Bias.b. Errors in judgment.c. Fraud.d. Negligence.
List three situations in which the SEC and PCAOB independence rules are stricter than the AICPA rules. Give an example of each.
Without the consent of the client, a CPA should not disclose confidential client information contained in working papers to a:a. Voluntary quality control review board.b. CPA firm that is a likely
The AICPA rule on general standards identifies four aspects of professional behavior. Identify each of the four aspects and develop an example illustrating the violation of each aspect.
Henry Owens, CPA works in a local accounting firm. He is the tax manager on a major client in the office. The firm prepares compiled financial statements for the client on a quarterly basis. The

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