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business
auditing

Questions and Answers of Auditing

A key litmus test in many overtime lawsuits filed against accounting firms is whether employees below the position of senior have the ability and authority to exercise "independent discretion and
KPMG Azsa ultimately agreed to accept Olympus's accounting decisions for the Gyrus acquisition after being given an "experts" report that supported those decisions. In the United States, what
What responsibility do auditors have in the U.S. to determine whether or not "related parties" exist for a given audit client? What types of audit procedures should be applied to related party
Michael Woodford pointed out correctly that he had to sign the "letter of representations" provided to Olympus's independent auditors. What is the nature and purpose of a letter of representations?
In the United States, which audit firm has the responsibility for initiating predecessor-successor auditor communications? Briefly summarize the information a successor auditor should obtain from a
What main characteristics of the organization and conduct of public accounting firms permit them to fulfill their social function competently and independently?
What roles are played by the professional accounting bodies for their members?
Distinguish between Australian auditing standards and Australian accounting standards, and give two examples of each.
'An audit conducted in accordance with auditing standards provides reasonable assurance as to whether the financial report taken as a whole is free from material misstatement.' What is meant by
Australian auditing standards have been criticised from different sources for failing to provide useful guidelines for conducting an audit. The critics believe the standards should be more specific
The following is an example of a public accounting firm's quality control procedure requirement: 'Any person being considered for employment by the firm must have completed a basic auditing course
Describe the role of the Corporations Act 2001 and discuss its relationship with and influence on the practice of auditing.
Fred Owens is the loan officer of the Commonwealth Bank in Newcastle. The bank has a loan of $260 000 outstanding to Regional Delivery Service Pty Ltd, a company specialising in delivering products
Ray, the owner of a small company, asked Harris, a public accountant, to conduct an audit of the company's records. Ray told Harris that an audit was to be completed in time to submit audited
Describe the nature of the evidence the tax auditor will use in the audit of Jones Co. Ltd's tax return.
What have been the most significant regulatory developments in Australia affecting auditor liability since 2001?
What are the main contemporary issues for auditors in Australia in relation to their liability to third parties?
A common type of legal action against auditors is for failure to detect a defalcation. Describe the auditor's responsibility for such discovery.
In what ways can an auditor positively respond to and reduce liability in auditing?
Vera Crosden & Beryl Sykes, a medium-sized accounting firm, was engaged to audit Posh Supply Company Ltd. Several staff were involved in the audit, all of whom had attended the firm's in-house
The public accounting firm of Bigge & Brown was expanding very rapidly. Consequently, it hired several junior accountants, including a man named Lee. The partners of the firm eventually became
Watt & Hu, a firm of public accountants, audited the accounts of Simpson Skins Ltd, a company that manufactures and distributes potato products to cafes and fast-food outlets. On completion of
Don Spark recently joined the public accounting firm of Watts & Ampage. He quickly established a reputation for thoroughness and a steadfast dedication to following prescribed auditing procedures
In confirming accounts receivable on 30 June 20X8, the auditor found 15 discrepancies between the customer's records and the recorded amounts in the subsidiary ledger. A copy of all confirmations
West & East, CPAs, were the auditors of Southern Development Ltd, a real estate company that owned several shopping centres. It was Southern's practice to let each shopping centre manager
National Fertiliser Distributors Ltd is a broad-based chemical warehousing and wholesaling company. It is reported to be carrying a very high level of inventory in its audited balance sheet at the
Nu-Wave Expansion Ltd is a Melbourne-based company contemplating the acquisition of all the shares in Kute Technics Pty Ltd, a small proprietary company registered in Perth, having learned of the
What actions can ASIC take against an auditor?
How does liability capping apply to auditors, and why do you think it is desirable or undesirable?
What is 'proportionate liability', and why was it introduced by legislation?
What is 'vicarious liability', and how does it affect auditors?
Name three groups for whose work an audit partner may be held liable.
Explain the role of auditing in corporate governance.
What is the accounting profession's position regarding the provision of management advisory services to a client?
It is often stated that an auditor cannot be truly independent when payment of fees is dependent on the client's management. Explain two approaches that could reduce this appearance of impaired
After accepting an engagement, the partners in an audit firm discover that the client's industry is more technical than they had realised and that their firm is not competent in certain areas of the
What is meant by 'inconsistent occupations' (as used in ethical rules)? Is there any difference between the ethical rules and the Corporations Act in this regard?
How can audit committees help to preserve auditor independence?
Why is audit quality an important issue in corporate governance?
Each of the following situations involves a possible violation of the relevant ethical rules or legal obligations. For each one, state any applicable ethical rules and Corporations Act provisions and
Each of the following situations involves possible violations of relevant ethical rules or independence requirements. For each one, state whether or not it is a violation. In those cases in which it
The ASX expects member firms to have audit committees and requires them for Top 500 companies.a. Describe an audit committee.b. What are the typical functions performed by an audit committee?c.
Jasmine Wang encounters the following situations in doing the audit of a large car dealership. Wang isn't a partner.1. The sales manager tells her there is a sale (at a substantial discount) on new
The following situations may violate the Code of Ethics for Professional Accountants. Assume, in each case, that the public accountant is a partner.1. Able, CA, owns a substantial limited unit trust
In 20X0 Arnold Diaz is a bright, upcoming audit manager in the Adelaide office of a national accounting firm. He is an excellent technician and a real 'people person'. Arnold is also able to bring
What is the audit expectations gap and how can it be reduced?
Explain the concept of audit competence. What is its relevance to audit quality?
Describe an ethical dilemma. How can individuals resolve ethical dilemmas?
Explain the need for a code of professional ethics for professionals. How should the accountants' code of ethics be similar to and different from that of other professional groups, such as legal
Distinguish between independence in fact and independence in appearance. State three activities that may not affect independence in fact but are likely to affect independence in appearance.
The following two reports are taken from the same page of a published annual report.DIRECTORS' DECLARATIONThe Directors declare that:(a) In the Directors' opinion, there are reasonable grounds to
The following are the classes of transactions and the titles of the journals used for Phillips Equipment Rental Co. Ltd.Classes of transactions Titles of journalsPurchases
The following general ledger accounts are included in the trial balance for a client, Jones Wholesale Stationery Pty Ltd.REQUIREDa. Identify the accounts in the trial balance that are likely to be
Explain why the statement 'Analytical procedures are essential in every part of an audit, but these tests are rarely sufficient by themselves for any audit area' is correct or incorrect.
Audit procedures differ from, but are related to, types of evidence. The following questions relate to types of evidence and audit procedures.a. What is an audit procedure?b. Why should audit
Your comparison of the gross margin percentage for Jones Drugs Ltd for the years 20X1 to 20X4 indicates a significant decline. This is shown by the following information:A discussion with Marilyn
As part of the analytical procedures of Mahogany Products Ltd, you perform calculations of the following ratios:REQUIREDFor each of the preceding ratios:a. State whether there is a need to
Below are the auditor's calculations of several key ratios for Cragston Star Products Ltd. The primary purpose of this information is to assess the risk of financial failure, but any other relevant
Solomon Pty Ltd is a highly successful, closely held Brisbane company that manufactures and assembles motor vehicle speciality parts that are sold in auto parts stores. Sales and profits have
Summarise the benefits derived by the auditor from adequate planning.
Judy Bailey is an experienced senior auditor in charge of several important audits for a mediumsized firm. Her philosophy of conducting audits is to ignore all permanent working papers and those from
Your firm has performed the audit of Rogers Limited for several years and you have been assigned audit responsibility for the current audit. How will your review of the company's constitution for
For the audit of Radline Manufacturing Ltd, the audit partner asks you to read carefully the new mortgage loan contract with the Rural Bank and abstract all pertinent information. List the
Define the term 'current audit file', and list several types of information typically included.
A public accountant sells his auditing practice to another accounting firm and includes all working papers as a part of the purchase price. Under what circumstances is this a violation of APES 110
The minutes of the board of directors of Martin Catalogue Company Ltd for the year ended 31 December 20X3 are provided to you. (The company has a 31 December year-end.)MEETING OF 15 FEBRUARY 20X3Ruth
Following are the auditor's calculations of several key ratios for Cragston Star products. The primary purpose of this information is to understand the client's business and assess the risk of
Examine the working paper for Vandervoort Company Ltd, shown in Figure 6.10.a. List the deficiencies in the working paper.b. For each deficiency, state how the audit schedule could be improved.c.
Chapter 6 introduced the eight parts of the planning phase of an audit. Which part is the evaluation of materiality and risk?
Brenton Jones is an audit senior with a major accounting firm. He has been assigned the audit of inventories for two different audit engagements as follows:• Big Deal Trailers Pty Ltd. This company
Briefly discuss the importance of considering the possibility of fraud in the audit planning process.
You are evaluating audit results for current assets in the audit of Piper Plumbing Ltd. You set the preliminary judgment about materiality for current assets at $12 500 for overstatements and at $20
The following are an income statements and balance sheets for General Foods Ltd.REQUIREDa. Use professional judgment in deciding on the preliminary judgment about materiality for profit, current
In the audit of Bright Chemicals Ltd, a large public company, you have been assigned responsibility for obtaining background information for the audit. Your firm is auditing the client for the first
Assume that Elizabeth Madden, public accountant, is using 5% of operating profit before tax, current assets or current liabilities as her main guidelines for evaluating materiality. What qualitative
Chapter 6 introduced the eight parts of the planning phase of audits. Which part is understanding internal control and assessing control risk? What parts precede and follow that understanding and
Explain what is meant by 'reportable conditions' as they relate to internal control. What should the auditor do with reportable conditions?
Examine the control risk matrix in Figure 8.6. Explain the purpose of the matrix. Also explain the meaning and effect of an assessment of control risk of low compared with one of medium.
Recently, while eating lunch with your family at a local cafeteria, you observe a practice that is somewhat unusual. As you reach the end of the cafeteria line, an employee asks how many people are
Tom Pherson and Michelle Collier are friends employed by different public accounting firms. One day during lunch they are discussing the importance of internal control in determining the amount of
Often, management is more concerned about internal controls that promote operational efficiency than about those that result in reliable financial data. How can the independent auditor persuade
Following is the description of sales and cash receipts for Lady's Fashion Fair, a retail store dealing in expensive women's clothing. Sales are for cash or credit, using the store's own billing
Identify ways in which IT may increase the risk of misstatements in financial statements.
Each year near 30 June, when the managing director of Bargon Construction Ltd takes a three-week holiday to the Barrier Reef, she signs several cheques to pay major bills during the period she is
Kent, a public accountant, is the engagement partner on the financial report audit of Super Computer Services Co. Ltd (SCS) for the year ended 30 April 20X0. On 6 May 20X0 Smith, the senior auditor
Identify three audit-related tasks that may be performed with the use of a microcomputer.
Explain why it is unacceptable for an auditor to assume that an independent computer service centre is providing reliable accounting information to a client. What can the auditor do to test the
ACE Distribution Pty Ltd is an Australian company engaged in the distribution of glassware products to the Australian market. The company normally carries some 500 different products, acquired both
You are conducting an audit of sales for James Smith Pty Ltd, a retail chain store with a computerized sales system in which computerised cash registers are integrated directly with accounts
In the audit of Greenline Manufacturing Company Ltd for the year ended 30 June 20X1, Ann Bartlett, public accountant, concluded that the lack of an audit trail for the property, plant and equipment
A public accountant's client, Anderson Industries Pty Ltd, is a medium-sized manufacturer of products for the leisure-time activities market (camping equipment, scuba gear, archery equipment and so
Following are 10 key internal controls in the payroll cycle for Gilman Stores Ltd: 1. To input hours worked, payroll accounting personnel input the employee's identification number. The system
The following are audit procedures from different transaction cycles: 1. Use audit software to foot (add) and cross-add the cash payments journal and trace the totals to the general ledger. 2. Select
For each of the following controls, identify whether the control leaves a paper audit trail. Also identify a test of control audit procedure the auditor can use to test the effectiveness of the
The following are three situations in which the auditor is required to develop an audit strategy.1. The client has inventory at approximately 50 locations in four States. The inventory is difficult
John Williams was assigned to an audit engagement, where there had not been an audit carried out by any public accounting firm in the preceding year. In conducting the audit, he did no testing of the
The following are parts of a typical audit for a company with a financial year-end of 30 June.1. Confirm accounts payable.2. Perform tests of controls and substantive tests of transactions for
Graeme Brown, chartered accountant, has been the partner in charge of the audit of Merkle Manufacturing Ltd, a client listed on the Australian Stock Exchange, for 13 years. Merkle has had excellent
McCartney Plastics has been an audit client of Belcor, Rich, Smith & Barnes (BRS&B), chartered accountants, for several years. McCartney Plastics was started by Evan McCartney, who owns 51%
Diane Smith, CA, performed tests of controls and substantive tests of transactions for sales for the month of September in an audit of financial statements for the year ended 30 June 20X1. Based on

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