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principles of auditing
Questions and Answers of
Principles of Auditing
Family Finance Company opened four personal loan offices in neighboring cities on January 2, 19X2. Small cash loans are made to borrowers, who repay the principal with interest in monthly
Jones, CPA, who has been engaged to audit the financial statements of Ajax Inc., is about to commence obtaining an understanding of the internal control structure and is aware of the inherent
The Yazoo Company, a client of your firm, has come to you with the following problem: It has three clerical employees who must perform these functions: 1 Maintain general ledger 2 Maintain accounts
Eagle Rock Corporation fabricates products, using very expensive components purchased from suppliers. Therefore, the company attempts to tightly control raw materials inventories through the use of
Willow Paper Company engaged you to review its internal control structure. Willow does not prelist cash receipts before they are recorded, and it has other deficiencies in processing collections of
The internal control structure includes the plan of organization and all of the coordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and reliability
Bob Hines is employed by Marshall & Co., CPAs, and has been put in charge of the audit of a new client, the Family Clothing Store Ltd. The Family Clothing Store Ltd., is owned by three men, Messrs.
An important part of the audit of a company is the consideration of the company's internal control structure, in which the auditor identifies risks of potential misstatements that could affect the
Why are auditors targeted in lawsuits out of proportion to their degree of wrongdoing?
Explain what is meant by "coerced out-of-court settlements."
Why should the litigation crisis facing auditors be of concern to other businesspeople, professionals, senators, or others?
Identify several proposed legal reforms and state how they would contribute to resolving the litigation crisis.
Distinguish between foreseen and foreseeable parties. Give examples of each.
a. What are the accountant's primary defenses in tort actions?b. Define contributory negligence.c. When does contributory negligence ordinarily represent a valid defense?
State the issues and the court's conclusions in the BarChris case.
a. Indicate the jury's findings in the Fund of Funds case.b. State the accounting issue and the jury's findings in the Continental Vending case.
a. Contrast the original intent of the Racketeer Influenced and Corrupt Organization Act (RICO) with the courts interpretations of its provisions.b. What advantages does a plaintiff have in a RICO
Contrast the positions of the AICPA, the SEC, and the courts on the relative importance of professional standards in legal cases.
Perfect Products Co. applied for a substantial bank loan from Capitol City Bank. In connection with its application. Perfect engaged William & Co., CPAs, to audit its financial statements. William
Mason & Dilworth, CPAs, were the accountants for Monrad Corporation, a closely held corporation. Mason & Dilworth had been previously engaged by Monrad to perform certain compilation and tax return
a. What is the overall objective of a financial statement audit?b. How does the auditor customarily meet this overall objective?
State the five categories of management's financial statement assertions and briefly explain each.
What is the difference in the nature of a misstatement resulting from a misrepresentation of the existence or occurrence assertion versus a misrepresentation of the completeness assertion?
a. What two aspects of reporting a financial statement component at an appropriate amount are encompassed in the valuation or allocation assertion?b. Identify four aspects of proper measurement that
a. To what should specific audit objectives relate?b. What constitutes a useful starting point for deriving such objectives?c. Identify three factors the auditor should consider in tailoring specific
Identify the two categories of evidential matter recognized in SASs.
Indicate the factors that affect the sufficiency and competency of eviden¬tial matter.
An auditor is expected to have a conclusive basis for expressing an opinion on financial statements. Do you agree or disagree? Explain.
List the types of corroborating information that may be obtained in an audit and indicate the categories of management assertions to which each type relates.
Indicate the effects of circulation on the reliability of documentary evidence.
a. Identify the types of audit procedures that may be used to obtain and evaluate evidence.b. State two factors that should be considered in selecting the procedures to be used to obtain evidence
What are the principal differences between tracing and vouching?
Identify three classifications of audit procedures and describe the purpose of each.
a. Identify three types of substantive tests and indicate how they relate to one another.b. What is a dual-purpose test?
When does the evaluation of evidence obtained from audit procedures occur and what effects can it have on the auditor's report?
Identify four major types of working papers.
Describe five essential techniques of good working paper preparation.
Identify two categories of working paper files and differentiate the contents of each.
a. Who owns and maintains custody of the working papers?b. Is it ever appropriate for the auditor to disclose the contents of working papers to anyone other than the client?
a. Indicate which categories of the generally accepted auditing standards apply to each phase of the audit.b. Identify other environmental factors that have an impact on the phases of an audit.
a. State the steps involved in accepting an audit engagement.b. Contrast the manner in which the auditor can evaluate the integrity of management between a new and a recurring audit engagement.
Before accepting an audit engagement, the auditor should identify special circumstances and unusual risks.a. Why is it important to identify the intended users of financial statements?b. Why should a
a. Why is it essential for auditors to determine whether they have the competence to complete an engagement before accepting it?b. What is involved in making this determination?
a. What is the composition of a typical audit team?b. Is it ever appropriate to accept an engagement in which the members of the proposed audit team do not possess all the expertise needed to
a. State four examples of situations in which an auditor might wantto use the services of a specialist outside the auditor's firm.b. What should an auditor do before relying on the work of a
a. Why is it important for an auditor to evaluate independence in deciding whether to accept a new client?b. What should an auditor do if he or she concludes that independence requirements cannot be
a. State two critical factors in determining the ability to use due care in completing an audit.b. Why is it advisable to accept a new audit engagement early in the client's fiscal year?
a. Distinguish the time frames in which interim and year-end work are typically performed.b. Why do auditors prefer to perform part of the field work at an interim date?
a. What are the purposes of an engagement letter?b. Who prepares the engagement letter, to whom is it sent, and what is its disposition?
a. State the first standard of field work.b. Identify the components of audit planning.
a. What information about a client is essential in audit planning?b. What procedures may be used by the auditor to acquire the information?
a. What specific information should an auditor seek to obtain from taking a tour of the client's operations?b. What is the purpose of having the auditor communicate with the audit committee in the
a. Why is it important for the auditor to identify related parties in the planning phase of the audit?b. Give three examples of transactions involving related parties.c. What specific auditing
In addition to currently effective SFASs and SASs, what other types of pronouncements should be considered for their potential impact on an audit engagement?
a. State three uses of analytical procedures in an audit engagement.b. Which uses are required on all audits?
a. How can analytical procedures assist the auditor in audit planning?b. List the steps involved in the effective use of analytical procedures in the planning phase.
a. Describe the types of calculations and comparisons commonly used in analytical procedures.b. What premise underlies the use of analytical procedures in auditing?c. Identify five sources of
Kent, CPA, is engaged in the audit of Davidson Corp.'s financial statements for the year ended December 31,19X9. Kent is about to commence auditing Davidson's employee pension expense, but Kent's
Dodd, CPA, audited Adams Company's financial statements for the year ended December 31,19X8. On November 1,19X9, Adams notified Dodd that it was changing auditors and that Dodd's services were being
Over the past two decades, increasing recognition has been given to the importance of analytical procedures in performing financial statement audits. Their use has been required since SAS 56 became
Pro-Tex Company is a wholesale distributor of professional equipment and supplies. The company's sales have averaged about \($900,000\) annually for the three-year period 19X3-19X5. The firm's total
Choose an industry of interest to you. Assume that you have just received your first audit assignment as a staff assistant on an audit engagement for a client in this industry. Eager to show your
State the two levels at which preliminary judgments of materiality should be made in the planning phase and state the reason for each.
a. In audit planning, the auditor should recognize that there may be more than one level of materiality relating to the financial statements. Explain,b. What decision rule should be used when
a. What official quantitative guidelines exist for financial statement materiality?b. State five quantitative guidelines commonly used in practice.
a. Flow do qualitative considerations relate to making materiality judgments?b. A misstatement that is quantitatively immaterial may be qualitatively material. Explain.
a. Define materiality at the account-balance level.b. What is another name for materiality at this level?c. Distinguish between the terms material account balance and materiality.
a. Identify two factors the auditor should consider in allocating financial statement materiality to accounts.b. If the amount of error found in an account is less than its materiality allocation,
a. Define inherent risk.b. When might an auditor choose to forego assessing inherent risk for an assertion?
a. Define control risk.b. Can control risk be zero? Explain.c. What must the auditor do to support a lower assessed level of control risk?
a. Define detection risk.b. What influences the actual level of detection risk for an assertion?
What is the relationship among the audit risk components?
a. What is the audit risk model and when is it used?b. What is a risk components matrix and when is it used?
Generally, the auditor specifies an overall audit risk level for the financial statements as a whole and then uses that same level for each assertion.However, the levels of inherent, control, and
a. What is a preliminary audit strategy?b. Name two alternative audit strategies.
a. Identify four components of audit strategies.b. Contrast the four components of audit strategies under the primarily substantive approach versus the lower assessed level of control risk approach.
A major part of audit planning is selecting an appropriate audit strategy for obtaining sufficient competent evidence for each significant financial statement assertion. These strategies are based on
Each year, the AICPA issues a general audit risk alert document and a number of industry audit risk alerts. If you can obtain access to a current copy of either the general alert or one of the
Explain the common attributes of activities defined as auditing.
Distinguish among the three principal types of audits and describe the nature of the auditor's report for each.
Distinguish among the three principal types of auditors and indicate the types of audits each may perform.
a. What is the origin of what we would recognize as a company audit?b. Whatled to the migration of the company audit to the U.S., when did the migration occur, and what was the focus of these early
Identify three important milestones in the rise of the U.S. public accounting profession.
a. Describe three important changes in audit practice that evolved by the 1940s.b. Which of those changes has the profession come under pressure to reverse in recent years?
What besides auditing contributed to the growth of the public accounting profession in the U.S.?
Explain the nature of attest services and identify several types performed by CPA firms.
Explain the nature of nonattest services and identify several types performed by CPA firms.
Identify three sets of professional standards that pertain at least in part to attest services and three sets that pertain in part to nonattest services.
Name three types of attestation reports and the type(s) of attest services to which each pertains.
Identify four private sector organize ions associated with the public accounting profession and briefly desciibe their principal activities.
Name four divisions of the AICPA that have a direct impact on auditing.
a. In what forms may a CPA firm be organized?b. In what four groups are CPA firms often classified?
Identify six public sector organizations associated with the public accounting profession and briefly describe one or two principal activities of each.
What is the purpose of the profession's multilevel regulatory framework?
Describe the four components of the multilevel regulatory framework.
State the nine elements of a system of quality control for a CPA firm.
What are the roles of the Quality Control Inquiry Committee and the Public Oversight Board?
Cowan, an engineer, is the president of Arco Engineering.At a meeting of the board of directors, Cowan was asked to explain why audits of the company are made by (1) internal auditors, (2)
After performing an audit, the auditor determines that 1. The financial statements of a corporation are presented fairly.2. A company's receiving department is inefficient.3. A company's tax return
The public accounting profession has achieved remarkable growth and stature in the United States since the beginning of this century, to the point that by the 1960s, some claimed the U.S. was the
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