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business
auditing assurance services

Questions and Answers of Auditing Assurance Services

Compare and contrast the different levels of assurance provided by assurers who conduct reviews, compilation engagements, and agreed-upon procedures engagements. As part of your answer, describe why
Assertions are amenable to attestation when the measures used to make them are objective and the data to support the assertion are available. In that light, consider the following assertions:a. Nine
Why do you believe that the SEC requires that quarterly financial statements be issued and subject to a review? Describe the procedures that an auditor performs when conducting a review of interim
In reviewing the interim financial statements of Lady Day Enterprises, a publicly traded electronic components wholesaler, your audit firm (which also conducts the annual audit) performs the
Given that a compilation does not involve providing any assurance and the auditor does not need to be independent to conduct the engagement, why do you believe that auditing standards (for example,
Your audit firm has been called in to examine the financial forecasts of Martin Corp., a multinational commercial building contractor. Toward that end, your firm conducted the following procedures:-
Assume that a hotel audit client owned by a consortium of investors is not satisfied with the hotel management company that performs most of its operations. The hotel hires a public accounting firm
As part of your audit engagement of Walter's Bank N.A., you have been asked to provide a letter assuring the Office of the Comptroller of the Currency (OCC) that the bank has maintained adequate
Describe why you believe that many auditors are reluctant to issue reports on prospective information and financial forecasts. How do the restrictions associated with these reports help address these
Flappers, a restaurant located in Birmingville, has hired their auditors, Bud's Accounting Firm, to attest to the following assertion: "Our chicken wings are world famous!" Bud's Accounting Firm
What are some risks and barriers associated with providing independent assurance for corporate sustainability reports? What are the possible ramifications of not providing assurance for these
Barbara and Bill Hoehn have engaged A. Local Accounting Firm to conduct an audit of the cash accounts of their diamond mining business. The mines are not publicly owned, so a full-fledged audit is
Compare and contrast an attestation engagement and an audit of financial statements. Provide examples of attestation engagements that are not audits of financial statements and describe how they are
The Buddy Guy Co., a moving and storage firm with operations throughout the Midwest, has contracted with the Memphis Slim Accounting and Consulting Group to evaluate the adequacy of the controls
Public accounting firms are sometimes called on to perform operational audits, where the operational effectiveness and efficiency of some process of an organization is studied. Consider the following
Assume the same facts as in the preceding problem except that your junior staff auditors performed a review, instead of a compilation. The rough draft of the engagement report looks like this:Discuss
The chapter describes five principles that are evaluated during a WebTrust \({ }^{5 M}\) engagement:- Availability- Security- Processing Integrity- Privacy- Confidentiality Suppose that you are
The risk model from the chapter can be restated as follows:\[ \mathrm{DR}=\frac{\mathrm{AR}}{(\mathrm{IR} \times \mathrm{CR})} \]where \(\quad \mathrm{DR}=\) detection risk\(\mathrm{IR}=\) inherent
In 1999, the U.S. Securities and Exchange Commission issued SAB 99-3, which essentially established that no level of materiality is acceptable for intentional misstatements involving any registered
Explain the benefit of setting tolerable misstatement for individual accounts. Argue for or against using the same level of tolerable misstatement for each account.
Misstatements that are not corrected in a given year because they are not deemed material likely will affect the financial statements in the following year. This impact might be in the form of a
Consider each of the qualitative considerations in setting materiality listed below. For each, describe why it could lead to users being more impacted by smaller levels of misstatements (i.e., why it
Three of the most important decisions that auditors make concern the nature, timing, and extent of evidence. Describe each of these decisions, carefully describing how each decision impacts the other
Describe how residual business process risks impact management assertions about transactions and accounts. As part of your answer, consider the risk that management fails to properly store and label
Consider the factors described in Figure 10-6 that affect the risk of assertions being materially misstated. For each of the following factors from that table, describe how the high-risk condition
Consider the alternative audit planning strategies depicted in Figures 10-12 and 10-13 and answer each of the following questions.a. Why would a strategy of performing moderate substantive tests of
Describe how an auditor is able to achieve a given level of audit risk through different combinations of tests of controls and substantive tests. Consider the soccer/football analogy provided in
Risk of material misstatement can be decomposed into two highly interrelated risks. Discuss these risks and indicate how they are related.
What factors should the auditor consider in setting the level of audit risk? How do these factors affect the level of audit risk?
What is materiality? Why is it an important concept for auditors to consider in the conduct of their audits?
How do auditors establish a materiality level? What factors affect the level of materiality set by the auditor?
What characteristics can be considered by the auditor to assess the appropriateness of audit evidence? Define these characteristics and illustrate each with an example.
What is an audit program? How does the auditor compose the audit program?
Using the audit risk model, compute the detection risk for the following values of audit risk, inherent risk, and control risk. Then answer the questions below.a. Which of the "points" yields the
Assume that a client has materiality of \(\$ 10\) million for financial statements that has accounts receivable (net) of \(\$ 20\) million and inventory of \(\$ 80\) million.a. What amount of
Armour Inc. has been in the defense contracting business for about 22 years. From its small factory in Wales, it manufactures boots, belts, ammo holders, and assorted accessories for foot soldiers in
In practice, the auditor frequently sets tolerable error on individual accounts so that the sum of those errors is greater than the level of materiality for the engagement. For example, the audit
For each of the following independent scenarios, state whether detection risk is higher or lower. If detection risk is higher, select the reason for the increase from the following four: inadequate
For each of the following situations, discuss the competence of the evidence gathered to support the assertion being audited. Where possible, suggest a more competent procedure. Why might your
Consider the following three independent scenarios:a. Chieftain's, Inc.: A chain of finer men's clothing shops with locations in malls throughout the country.b. Sunnystuff Inc.: A bottler of
McGuffin Corp. is a manufacturer of aircraft parts for government-owned and commercial planes. The company's government contracts are usually performed on a "cost-plus" basis whereas its private
In planning the audit of Tralfaz Co., a manufacturer of animal feeds and fertilizers, a staff member prepares the following audit program for the substantive test of the accounts receivable
Assume that materiality was set for Barclay's Bank at 5 percent of net income. Research Barclay's Bank and describe qualitative reasons for why an auditor of Barclay's might assess materiality lower
Explain how creating a process map and internal threat analysis helps in determining the extent to which substantive testing is to be performed on the accounts associated with the marketing, sales,
One of the most common forms of fraudulent financial reporting is recording sales that never occurred. Examine the examples of financial reporting controls for sales-related transactions in Figure
Reconciliation is an important control for helping to test the management assertions of completeness, occurrence, and accuracy of cash receipts transactions. Describe how a reconciliation helps test
Examine the inherent risk, impact of controls, and residual risk plots in Figure 11-6 for the sales and customer service process. Based on this plot, what conclusions should an auditor reach for each
Figure 11-7 contains a listing of tests of operating effectiveness for internal controls related to the sales and customer service process. For each type of control activity (performance reviews and
Among the tools the auditor may employ to determine the reasonableness of the sales amount for a company during a given accounting period is regression analysis, whereby the company's sales are
Discuss the utility of using confirmations to test the valuation of accounts receivable. Assuming that the auditor has decided to employ confirmations, discuss the possible ways the auditor may use
Many organizations are moving to automated processes for performing the sales and customer service process, using such processes as electronic data interchange, in which order placing, product
Evidence gathering procedures for the cash account have been de-emphasized by many auditors in recent years. As described in Appendix 11A, there is a large volume of transactions that flow through
Audit documentation, described in detail in Appendix 11B, has received attention during the past several years, with standards being issued emphasizing its importance by international standards
What process objectives and activities typically are associated with the sales and customer service process? Why is understanding them important for the auditor?
What key accounts and transactions are affected by the sales and customer service process? Discuss and illustrate with examples.
As part of his or her internal threat analysis of the sales and customer services process, the auditor will pay special attention to internal control over financial reporting. In the context of the
For each of the following process activities for sales and customer service, discuss management assertions related to transactions or accounts that are impacted by the specific activity:a. Marketing
For each of the following internal controls in the sales order processing function, state the management assertion related to sales and receipts transactions that the control helps meet. Then list a
Examine the following questions from an internal control questionnaire for the sales process of a large home improvement retailer that extends credit to small contractors. Assume that the answer to
The following are routine procedures for the audit of revenue processes. For each procedure, state whether it is a test of controls or a substantive test of transactions, state which management
High-tech manufacturers are notorious for practicing "channel stuffing," whereby they ship to their distributors a great deal of merchandise shortly before the end of the accounting period, knowing
Your assignment as an auditor is to reconcile the general disburseinent account at the Green Dolphin Bank for Monk, Miles, and Trane Co. as of 12-31-06. Your analysis of its cash activity for the
In preparation for your audit of the accounts receivable of Stern Co., you compose a confirmation letter to send to several of their largest customers. Your effort looks like the following:Discuss
In your audit of the allowance for uncollectible accounts for Patrick Co., a wholesaler of hospital supplies, you prepare the following aging schedule:a. What type of audit evidence is this
Discuss the deficiencies in the following audit program for the tests of controls over the sales order process of Skylark, a cable TV home shopping channel. Working Paper Step Reference 1 2 3 5 6 9.
Distinguish between internal controls and internal controls over financial reporting, Under what circumstances does this distinction matter for auditors?
Distinguish between each of the following types of controls and given an example of each that makes the difference clear.a. Management controlsb. Business process controlsc. Monitoring controlsd.
Distinguish between the following management assertions about transactions and give an example of each that makes the difference clear.a. Classification vs. Accuracyb. Occurrence vs. Completenessc.
For each of the four components of a financial reporting process, provide an example for how a control weakness within that component could result in materially misstated financial statements.a.
For each of the four components of a financial reporting process, discuss how information technology can be used to reduce the likelihood or impact of a material misstatement. Also, describe how
Compare and contrast the merits and drawbacks associated with the requirement for U.S. registered companies and auditors to perform assessments of the effectiveness of internal control over financial
Define a walkthrough. As part of the definition, describe how the procedure is used to develop an understanding of internal control over financial reporting. Also, describe the conditions, if any,
Why is the assessment of control risk a critical part of any financial statement audit? What is the impact on an auditor's financial statement audit strategy if control risk is set at a high level
Compare and contrast a material weakness discovered during an assessment of internal control over financial reporting for a U.S. registered public company and a reportable condition identified during
What are compensating controls? When would an auditor need to identify compensating controls, and how can the auditor determine whether they serve their intended purpose? For example, what would be
The chapter emphasizes accounting informations systems in ensuring internal control over financial reporting. What is the role of financial reporting personnel in internal control over financial
What is a control deficiency in an integrated audit (i.e., an audit that includes opinions related to ICOFR)? What are the three categories of control deficiencies? How does the presence of these
Suppose that as an audit staff associate of an accounting firm, you are asked to perform a complete walkthough of two financial reporting processes at a retailer that specializes in selling athletic
In its first Assessment of Internal Control over Financial Reporting (for the fiscal year ended December 31, 2004), General Electric identified a material weakness in internal control and concluded
As an audit manager, you have been given charge of assessing risk management for two business processes of The Solas Co., a privately owned wholesaler of textbooks (hence not subject to PCAOB AS
For each of the following, state the financial reporting process control activity that is being followed and which management assertion for associated transactions is strengthened if a company
In preparing to conduct the audit of the O'Farrell Corp, a manufacturer of fine Irish apparel, you have prepared the following narrative description of the process internal controls over financial
You are analyzing the control plans of a new client, McGriff Co., a publicly traded U.S. airline specializing in long-distance cargo shipping. Its receivables processing business subprocess is your
USBB, an Australian property and casualty insurer, actively seeks to maintain a paperless office. Toward that end, it has invested in optical character recognition scanning technology so that
Consider the following control weaknesses revealed by your tests of controls on a publicly held U.S. mail-order computer peripheral retailing company.a. Clerks do not compare daily sales orders to
Consider the following situations for each of the privately owned organizations independently. For each situation, identify the risk exposures and any possible controls.a. In your observation of the
Consider the following independent assessments of the level of control risk for a class of transactions the following publicly traded U.S. companies.a. The control plans for the accounts payable
Explain the following internal control procedures classified under "Independent Verifications." Give an example where a newspaper subscription processing department might use each of them.a. Key
Why do you believe that auditors traditionally have been required to perform preliminary analytical procedures? What role does these procedures help achieve in the risk assessment process?
Inquiry has long been considered one of the most controversial forms of audit evidence. Describe the strengths for the audit if an auditor effectively utilizes inquiry as a key source of audit
Three considerations provided in the chapter when conducting inquiries include- Being clear to the interviewer and the interviewee as to what is to be discussed- Staying on topic unless follow-up is
The chapter discusses the need to compare and contrast answers to inquires made across different aspects of the audit (e.g., this discussion can occur during engagement brainstorming sessions). For
Consider each of the basic judgmental methods for obtaining analytical evidence:- Comparative financial statement analysis- Common-size financial statement analysis- Ratio analysis Describe
Describe the strengths and weaknesses associated with using nonfinancial performance measures. How can auditors ensure that they are properly utilizing nonfinancial performance measures as analytical
Use the systematic process for conducting analytical procedures provided in Figure \(9-8\) to design an approach for developing an expectation for the commissions expense account for an electronics
Developing expectations independent of the client is critical for effective use of analyti\(\mathrm{cal}\) evidence. Figure 9-9 presents a process for evaluating analytical evidence. Examine the
Regression can help the auditor develop fairly precise expectations for financial reporting. However, auditors should use regression carefully. For example, consider the following scenario:The
When using regression, interpreting the output is very important for carefully using the results as analytical evidence. Discuss each of the following regression terms and describe how they can be
What aspects should be taken into account when planning client inquiries? How can evidence collected by means of inquiry be supplemented with other types of evidence? Give examples.
One of the techniques that auditors can use when obtaining analytical evidence is ratio analysis across a number of categories. Describe these categories and provide examples of ratios in each

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