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auditing international approach
Questions and Answers of
Auditing International Approach
Of the following, which is the most efficient audit procedure for verification of interest expense on bonds payable?a. Tracing interest declarations to an independent record book.b. Re computing
An auditor's program to examine long-term debt most likely would include steps that requirea. Comparing the carrying amount of the debt to its year-end market value.b. Correlating interest expense
During its fiscal year, a company issued a substantial amount of first-mortgage bonds at a discount. When performing audit work in connection with the bond issue, the independent auditor shoulda.
To ascertain the number of authorized shares of stock of a corporate client, the auditor relies primarily on thea. Corporate minutes.b. Bylaws.c. Transfer agent.d. Articles of incorporation.
When a company has treasury stock certificates on hand, a year-end count of the certificates by the auditor isa. Not required when the treasury stock is confirmed by the corporate secretary.b. Always
Which of the following is the most important consideration of an auditor when examining the stockholders' equity section of a client's balance sheet?a. Changes in the capital stock account are
Items(a) through(f) represent audit objectives for the investments and property and equipment accounts. To the right of each set of audit objectives is a listing of possible audit procedures for that
When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerninga. The number of shares issued and
A staff assistant who was performing work in the property section of the Theta Industries audit prepared the vouching schedule for property additions shown below. Review this schedule and make notes
In connection with a recurring audit of the financial statements of Louis Manufacturing Company for the year ended December 31, 19X9, you have been assigned the audit of the manufacturing equipment,
In connection with the annual audit of Johnson Corporation, a manufacturer of janitorial supplies, you have been assigned to audit property and equipment. Johnson Corporation maintains a detailed
One procedure for determining the existence of property and equipment is physical observation, although other methods may be as effective in some cases. Discuss means of gathering evidence as to the
During your audit of property and equipment, you review the following construction work order listing:List the items you would select for additional audit followup and give your reasons for listing
You have been engaged to audit the financial statements of the Elliott Company for the year ended December 31, 19X9. You performed a similar audit as of December 31, 19X8.Following is the trial
Larkin, CPA, has been engaged to audit the financial statements of Vernon Distributors, Inc., a continuing audit client, for the year ended September 30, 19X1. After obtaining an understanding of
Taylor, CPA, is auditing the financial statements of Palmer Company, a continuing audit client. Taylor is about to perform substantive audit procedures on Palmer's goodwill (excess of cost over the
Johnson, CPA, has been engaged to audit the financial statements of Broadwall Corporation for the year ended December 31, 19X1. During the year, Broadwall obtained a long-term loan from a local bank
During the audit of notes payable of Mohamed Tractor Company, a CPA was reviewing the terms of a related loan agreement. She noted that the note matured within 12 months of the audit date but the
Discuss the audit procedures that a CPA might use in gathering evidence of the following transactions and balances.a. The refinancing (cancellation of old note and issuance of a new note) of a note
Companies that have stock option plans include a footnote in their financial statements that describes the plan and states the number of options for shares authorized, granted, exercised, and
Kalinki Supply Company is a small, privately held corporation that manufactures and sells Christmas tree ornaments. The stock book is maintained by the corporate secretary. Treasury stock is kept in
Jones, CPA, the continuing auditor of Sussex, Inc., is beginning the audit of the common stock and treasury stock accounts. Jones has decided to design substantive tests with control risk assessed at
The following misstatements could occur in the property and equipment, investments, goodwill, long-term debt, and equity accounts. Describe an audit procedure that provides reasonable assurance of
Explain the importance to investors and others of the statement of income.
State the objectives of the audit of revenue and expense.
On what procedures does the auditor place heavy reliance in the audit of revenue and expense?
What are the purposes of the review of operations?
Name four ratio tests that may be applied in the audit of revenue and expense.
Describe an overall test of revenue for reasonableness.
Give two reasons for analyzing an expense account.
List four expense accounts that would usually be analyzed and indicate the reasons.
Why is an auditor concerned with a client's revenue recognition policies?
What are some inquiries an auditor can make when examining revenue and expense to add value to the audit?
List seven examples of matters of interest to an auditor that may be found in a review of minutes of meetings of stockholders and board of directors.
Why should the auditor be concerned with commitments and contingencies, since no amounts are shown for them in the financial statements?
State the objectives of the audit of commitments and contingencies.
What analytical procedures may be applied to commitments and contingencies?
List four audit procedures that are specifically designed to detect contingencies.
What are some inquiries an auditor can make when examining contingencies to add value to the audit?
What are the two types of subsequent events that may require adjustment to, or disclosure in, the financial statements? Give an example of each.
List the four general groups of audit procedures applied to subsequent events.
State the objectives of the audit of subsequent events.
Name eight documents or records that would be examined in the review of subsequent events. For what period would the review be conducted?
List eleven matters that would be discussed with management in connection with the audit of subsequent events.
What are the purposes of management representations?
List and explain nine types of representations that may be obtained from management.
Which client personnel normally sign the representation letter to the auditor?
What information is a company's legal counsel requested to confirm to the auditor?
An auditor compares \(19 \times 5\) revenues and expenses with those of the prior year and investigates all changes exceeding 10 percent. By this procedure, the auditor would be most likely to learn
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest
Which of the following ratios would be most useful in the audit of revenue and expense?a. Current ratio.b. Ratio of selling expense to sales.c. Ratio of net income to sales.d. Debt-to-equity ratio.
Auditors sometimes use comparisons of ratios as audit evidence. For example, an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?a.
As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditor
Legal expense is understated because legal fees related to an unexpected lawsuit brought by a minoritv stockholder have not been billed br the law firm or accrued bv the client. Which of the
An auditor would most likely identify a contingent liability by obtaining a(an)a. Related party transaction confirmation.b. Accounts payable confirmation.c. Confirmation of open letters of credit
In the audit of contingent liabilities, which of the following procedures would be least effective?a. Standard bank confirmation.b. Analytical procedures.c. Inquiry of management.d. Confirmation with
An auditor is concerned with completing various phases of the audit after the balance sheet date. This "subsequent period" extends to the date of thea. Auditor's report.b. Final review of the audit
Which of the following events occurring during the subsequent period is most likely to result in adjustment to the financial statements?a. A worker is injured in a plant accident.b. A large customer
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?a. Determine that changes in employee pay rates after year end were properly
After an audit report containing an unqualified opinion on a nonpublic client's financial statements was issued, the client decided to sell the shares of a subsidiary that accounts for 30 percent of
A purpose of a management representation letter is to reducea. Audit risk to an aggregate level of misstatement that could be considered material.b. An auditor's responsibility to detect material
Which of the following statements ordinarily is included among the written client representations obtained by the auditor?a. Compensating balances and other arrangements involving restrictions on
To which of the following matters would materiality limits not apply in obtaining written management representations?a. The availability of minutes of stockholders' and directors' meetings.b. Losses
The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor witha. The probable outcome of asserted claims and pending or threatened
Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?a. Obtain assurance from management that it has disclosed
Match the assertion that relates to each substantive test. Each assertion may be used once, more than once, or not at all. Substantive test 1. Compare sales for the period with prior-year audited
The primary source of information to be reported about litigation, claims, and assessments is thea. Client's lawyer.b. Court records.c. Client's management.d. Independent auditor.
During your audit of Fraudulent Fabrics, you note that the company's gross profit ratio increased to 25 percent this year from 20 percent last year. List the possible causes of this increase and the
In your audit of June Company, you are investigating an increase in sales during the current year and have made inquiry of the sales manager, who tells you the increase is due to a sales price
As auditor of Royal Radio Broadcasting Company, you have learned from past audit experience, familiarity with broadcasting industry practice, and a review of Royal's contracts and agreements the
When examining documentation supporting costs and expenses, an auditor must consider its availability and its reliability. Discuss the reliability and adequacy of documentation you would expect for
Young, CPA, is considering the procedures to be applied concerning a client's loss contingencies relating to litigation, claims, and assessments.Required:What substantive audit procedures should
Commitments and contingencies can take many forms, including the following.a. Guarantee of the debt of an affiliated company.b. Contract with a builder to construct a plant.c. Maintenance of an
In general, a lease will be considered a capital lease if it meets any one of the following criteria.a. The lease transfers ownership of the property to the lessee by the end of the lease term.b. The
Green, CPA, is auditing the financial statements of Taylor Corporation for the year ended December 31, 19X9. Green plans to complete the fieldwork and sign the auditor's report about May 10, 19X0.
During the audit of the financial statements of Amis Manufacturing, Inc., the company's president, R. Alderman, and Luddy, the auditor, reviewed matters that were supposed to be included in a written
The fieldwork for the December 31, 19X8 audit of Bypass Manufacturing Company was completed on February 20, 19X9, and the audit report was delivered to the client on March 1, 19X9. The following
In connection with her audit of Flowmeter, Inc., for the year ended December 31, 19X8, Hirsch, CPA, is aware that certain events and transactions that took place after December 31, 19X8, but before
Barge Construction Company constructs large oil barges, each requiring from six to nine months to build. The company follows the percentage-of-completion method of recording construction revenue for
Caldwell and Douglas, CPA, are completing the audit of Carmel Corporation for the year ended December 31, 19X4. While performing a review of subsequent events, they note the following situations.1.
During his review of subsequent events in connection with the audit of Jordan Match Company, Ron Gray, CPA, was informed by the corporate secretary that, although there had been two meetings of the
During an audit of Miller Carpet Company, Kelley, CPA, learned that the company had been charged with discriminatory hiring policies and that lawsuits totaling \(\$ 10\) million had been brought
Windek, CPA, is nearing the completion of an audit of the financial statements of Jubilee, Inc. Windek is currently concerned with ascertaining the occurrence of subsequent events that may require
Cole \& Cole, CPAs, are auditing the financial statements of Consolidated Industries Co. for the year ended December 31, 19X2. On April 2, 19X3, an inquiry letter to J.J.Young, Consolidated's
The following misstatements could affect revenue and expense, commitments and contingencies, and subsequent events. Devise one audit procedure that will provide reasonable assurance of detecting each
Lambert Skull recently graduated from an accounting program at a local university and accepted a position on the audit staff of Look and Look, CPAs. He was assigned to the audit of Grand Toys, a
List the important concepts of the four standards of reporting.
State what each paragraph in the standard audit report is called and the information each conveys.
To whom should the audit report normally be addressed?
Because much of an auditor's work involves an audit of various client financial records, why does the auditor's report state that he or she has audited the financial statements rather than the
How does the auditor explain in the audit report his or her responsibility for the detection of errors and fraud?
What is the significance of the phrase "in our opinion" in the audit report?
Define the word "fairly" as used within the context of the auditor's report.
Can financial statements not be fair and yet be in conformity with generally accepted accounting principles? Explain.
List the conditions specified in SAS No. 69 for financial statements to "present fairly."
What are the rule-making bodies whose pronouncements have been designated as generally accepted accounting principles by the AICPA?
Describe the GAAP hierarchy for nongovernment entities.
List the individual financial statements normally included in a complete set and indicate which phrase of the opinion paragraph applies to each statement.
How does the auditor determine the date of the audit report?
What is meant by the phrase "dual dating of a report," and when would an auditor use this practice?
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