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business
auditing

Questions and Answers of Auditing

Discuss the following situations in a group and report to the class:a. What rules would you expect the codes of other professions to have in common with the AICPA? Explain.b. Examine the SEC's basic
Public accounting firms have taken many positive steps to ensure the independence of their firms in conducting audits.Requireda. Identify five ways in which a public accounting firm can take positive
Independence is often hailed as the "cornerstone of auditing" and recognized as the most important characteristic of an auditor.Requireda. What is meant by independence as it is applied to the CPA?b.
The following are a number of scenarios that might constitute a violation of the Code of Professional Conduct.RequiredFor each of the following situations, identify whether it involves a violation of
Rule 301 on confidentiality recognizes a fundamental public trust between the client and the auditor and reflects the manner in which all professionals conduct themselves. However, in certain
Robert, CPA, has a large one-office firm in a growing city, but his practice is shrinking.6 Several other firms recently opened offices in the city, and Robert lost several key clients to his new
As the auditor for XYZ Company, you discover that a material sale ($500,000 sale, cost of goods of $300,000) was made to a customer this year. Due to poor internal accounting controls, the sale was
Your audit client, Germane Industries, has developed a new financial instrument, the major purpose of which is to boost earnings and to keep a significant amount of debt off the balance sheet. Its
In a 1988 article, Arthur Wyatt, a former member of the FASB, stated:"Practicing professionals should place the public interest above the interests of clients, particularly when participating in a
In The Fund of Funds, Ltd. v.Arthur Andersen & Co., Arthur Andersen auditors completed the audit of Fund of Funds with no problems encountered and issued an unqualified opinion. Shortly thereafter,
You have been engaged to examine the balance sheet of Hi-Sail Company, which provides services to financial institutions. Its revenue source comes from fees for performing these services. Its
Define the following terms:• Enterprise risk• Engagement risk• Financial reporting risk• Audit risk
What is enterprise risk management (ERM) and why is it important that an organization implements an effective ERM? Who has the primary responsibility for the effective implementation of an ERM?
Explain how enterprise risk affects engagement risk and how both enterprise risk and engagement risk affect financial reporting risk.
Explain why the internal environment is so important and why many corporate losses are tied to a poor risk management environment.
How are risks and controls related? Why is it important to assess risks prior to evaluating the quality of an organization's controls?
What kinds of risks does a company encounter if it decides to develop a new product?
What are the major procedures an auditor will utilize to identify the risks associated with an existing or a potential new client?
Why is the quality of corporate governance a significant determinant of the auditor's risk assessment of an entity?
How would an auditor go about assessing management integrity? Why management integrity is considered the most important factor affecting the client acceptance or continuation decision?
What are the primary factors an auditor will want to investigate before accepting a new audit client?
What is a "high risk" audit client? What are the characteristics of clients that are considered high risk?
Why do related party transactions represent special risks to the auditor and the conduct of an audit?
What sources of information should an auditor look at in determining whether to accept a new client? Why is it important that the auditor systematically make the accept decision?
What information should the auditor seek from the predecessor auditor?
What is an engagement letter? What is the purpose of the engagement letter?
How will an auditor find out if there has been a dispute between the client and the preceding auditor regarding accounting principles?
What is audit risk? Does the auditor determine audit risk or does the auditor assess it? What factors most influence audit risk?
Explain how the concepts of audit risk and materiality are related. Must an auditor make a decision on materiality in order to implement the audit risk model?
Some audit firms develop very specific guidelines, either through quantitative guidelines or in tables, relating planning materiality to the size of sales or assets for a client. Other audit firms
Explain how an accounting estimate would not be materially misstated for two consecutive years, but because of the "swing" in the accounting estimate, net income could be misstated by a material
The SEC is very concerned that auditors recognize the qualitative aspect of materiality judgments. Explain what the "qualitative" aspect of materiality means.
A recent graduate of an accounting program went to work for a large international accounting firm and noted that the firm sets audit risk at 5% for all major engagements. What does a literal
What is inherent risk? How can the auditor measure it? What are the implications for the audit risk model if the auditor assesses inherent risk at less than 100%?
What are the major limitations of the audit risk model? How should those limitations affect the auditor's implementation of the audit risk model?
What are the major lessons learned in the analysis of the audits of Lincoln Savings & Loan? Where would the auditor obtain information regarding the real estate market in the Phoenix area or in the
Janice Johnson is an experienced auditor in charge of several clients. Her approach to an audit is to plan the audit without referring to previous year's documentation to ensure that a fresh approach
Explain the linkage of a risk-based approach to particular account balances. Use either inventory or accounts receivable to explain the linkage.
Why is it important for the auditor to use risk analysis to develop expectations about client performance?
What background information might be useful to the auditor in planning the audit to assist in determining whether the client has potential inventory obsolescence or receivables problems? Identify the
On accepting a new manufacturing client, the auditor usually arranges to take a tour of the manufacturing plant. Assuming that the client has one major manufacturing plant, identify the information
Explain how ratio analysis and industry comparisons can be useful to the auditor in identifying potential risk on an audit engagement. How can such analysis also help the auditor plan the audit?
What ratios would best indicate problems with potential inventory obsolescence or collectibility of receivables? How are those ratios calculated?
Explain why a thorough understanding of the business, its risks, and the competitive environment is essential to an auditor in making judgments about the quality of accounting choices used by the
How does risk analysis affect the nature of procedures performed on specific account balances? Use as an example the following accounts for illustration:• Allowance for loan losses• Inventory•
Multiple Choice Question1. Management integrity affects all of the following risks except:a. Enterprise riskb. Financial reporting riskc. Engagement riskd. All of the above2. An external auditor is
Multiple Choice Question1. Which of the following models expresses the general relationship of risks associated with the auditor€™s evaluation of control risk (CR), inherent risk (IR), and
The auditor can control some types of risks, but must assess other types of risks. A number of different types of risk were introduced in this chapter.Requireda. Define each of the following risk
The concepts of risk and control are integrally related.Requireda. Explain how risk and control are related. Is one concept broader than the other? Explain.b. What risks does a company have in
Consider the payment of individuals working in a factory and who are paid by the hour. According to union contract, they have extensive benefits.RequiredWhat are the risks that affect the processing
Two auditors were having the following discussion:Auditor 1: Risk analysis is good. But, when all is said and done, it does not add much to the audit. You still need to directly test the account
The auditor needs to assess management integrity as a potential indicator of risk. Although the assessment of management integrity takes place on every audit engagement, it is difficult to do and is
In early summer, an auditor is advised of a new assignment as the senior auditor for Lancer Company, a major client for the past five years. She is given the engagement letter for the audit covering
Bob Jones, a relatively new partner for Kinde & McNally, CPAs, has recently received a request to provide a bid to perform audit and other services for Wolf River Outfitting, a large regional
A staff auditor was listening to a conversation between two senior auditors regarding the audit risk model. The following are some statements made in that conversation regarding the audit risk
The audit report provides reasonable assurance that the financial statements are free from material misstatements. The auditor is put in a difficult situation because materiality is defined from a
Assume that the auditor has set $100,000 as materiality for misstatements affecting income and $125,000 for asset or liability misstatements that do not affect income. The auditor tests some accounts
James Johnson has just completed a detailed analysis of a potential new audit client, Rural Railroad and Pipeline, Inc. (RRP). James reports that the name is deceiving. The company is no longer in
The auditor needs to understand the business in order to assess the risk of potential account misstatements. In preparing for a new audit, the auditor arranges to take a tour of the manufacturing
Analytical review can be an extremely powerful tool in identifying potential problem areas in an audit. Analytical review can consist of trend and ratio analysis and can be performed by comparisons
The following table contains calculations of several key ratios for Indianola Pharmaceutical Company, a maker of proprietary and prescription drugs. The company is publicly held and is considered a
The auditor for ABC Wholesaling Company has just begun to perform analytical procedures as part of planning the audit for the coming year.ABC Wholesaling is in a competitive industry, selling
What is "audit evidence"? Describe the basic sources of audit evidence.
What are the three basic decisions auditors must make concerning audit evidence during the planning process?
Explain the importance of audit assertions for financial statement audits. Define each of the following types of assertions:• Existence• Occurrence• Completeness• Cutoff• Accuracy• Rights
The valuation assertion is often difficult to audit. Identify all the components of the valuation assertion for short-term investments in marketable securities.
The third standard of fieldwork requires the auditor to gather sufficient appropriate evidence to afford a reasonable basis for an opinion regarding the financial statements. What are the basic
Are the concepts of reliability of evidence and audit risk interrelated, or are they two separate concepts? For example, could the auditor accept less reliable audit evidence for an engagement in
Explain how the following transaction assertions are related to the account balance assertions: Transaction Assertions Account Balance Assertionsa. Cutoff .............. Existence and
Discuss the relative reliability and usefulness of internal and external documentation. Give two examples of each.
What is directional testing? How can the concept of directional testing assist the auditor in attaining audit efficiency?
Explain how testing an asset account for overstatement provides evidence on potential overstatements of revenue and understatement of expenses. Illustrate using accounts receivable and inventory as
Which assertions are best tested by observation? What are the relative strengths and weaknesses of observation as an audit procedure?
Are inquiries of management considered reliable evidence? Under what conditions and for what assertions would inquiry of management be considered reliable evidence?
Is paper-based evidence more reliable than the same evidence generated through EDI and stored on a computer system? Explain. Under what conditions is electronically stored evidence as reliable as
What is the difference between reprocessing a transaction and vouching a transaction? What underlying assertion does each test address?
Assuming that the client has external documentation on hand, such as correspondence with its lawyers or payments from its customers, why is sending confirmations to those same parties considered
Confirmations at times may be unreliable even if they involve external documentation. What assumptions should the auditor address concerning confirmations before concluding that utilizing
Why is it generally more efficient to test ending account balances rather than testing transactions throughout the year? Explain why the efficiency might change in a computerized environment with
What are the purposes of an audit program?
What are the important considerations (judgments) that determine what is included in an audit program?
What is audit documentation? What key components should each audit document contain?
Is a memo that explains the rationale for an auditor's conclusion about the correctness of an account balance considered an audit document?
Many organizations are consciously eliminating paper documents by integrating their computer system with those of their suppliers and customers. Paper documents, such as purchase orders, are being
What is meant by the phrase," Audit documentation ought to stand on its own"? What is the importance of this concept?
Assume an auditor wishes to estimate an account balance by reference to outside data or other information generated from outside the accounting system. Under what conditions would such a procedure
What is a concurring partner review, and what is its purpose?
Multiple Choice Question1. The auditor wishes to gather evidence to test the assertion that the client's capitalization of leased equipment assets is properly valued.Which of the following sources of
Accounts Payable is generally one of the larger, and most volatile, liability accounts to audit. However, the auditor can use the assertion approach developed in this chapter to develop an overall
Several of the financial statement assertions are interrelated.Requireda. For each of the following, indicate what transaction assertion is violated and describe the affect on related account balance
You are planning the audit of the Pagemate Company's inventory. Pagemate manufactures a variety of office equipment.Required Describe how each of the following procedures could be used in the audit
The following are examples of documents typically obtained by auditors.RequiredFor each example:a. Classify the document as internal or external evidence.b. Classify the document as to its relative
In this chapter, several different kinds of audit evidence were identified. The following questions concern the reliability of audit evidence.Requireda. Explain why confirmations are normally
One way that the auditor might achieve audit efficiency is to recognize the interrelationship between accounts. In many situations, evidence gathered in auditing a balance sheet account (asset,
With the double-entry accounting system, testing one account balance produces audit evidence concerning another account balance or class of transactions. For example, testing for overstatement of
Nine major types of audit procedures are identified as part of the audit evidence-gathering process. These procedures are as follows:Observation Physical examination of documents Inquiry of company
One major task for an auditor is to evaluate the reliability of testimonial evidence, which may come in the form of oral representations from management or in written form from parties outside the
The following situations present the auditor with alternative sources of evidence regarding a particular assertion.Requireda. For each of the following situations, identify the assertion the auditor
You have been assigned to audit the notes receivable of a medium-size audit client, Eagle River Distributing. The notes receivable account is new this year and per discussion with the controller, it
The audit documentation represents the auditor's accumulation of evidence and conclusions reached on an audit engagement. Prior year audit documentation can provide insight into an audit engagement

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