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business
auditing

Questions and Answers of Auditing

You are the internal auditor for a company that started over 40 years ago as a local retailer of major home appliances. The company has now grown to include 55 retail stores in 12 metropolitan areas.
UTStarcom is a global leader in the manufacture, integration, and support of networking and telecommunications systems. The company sells broadband wireless products and a line of handset equipment
What is supply-chain management? What key issues are usually included in agreements between suppliers and their customers to bring efficiencies to the process and ensure control?
What significant controls will a company such as General Motors implement in a partnering arrangement with a major supplier to ensure that all goods received are (a) properly accounted for, (b) of
What are the important attributes of good supply-chain management and how do those attributess affect the audit of accounts payable and inventory?
How might a company understate expenses?
How can cross-sectional analysis help the auditor identify potential inventory misstatements for a multi-location retail client?
Identify the major phases of the acquisition cycle and the control objectives that should be addressed in the design of controls for each phase.
Identify the different ways in which the requisition process might be implemented. For each method, indicate how the requisition is authorized and the evidence the auditor would gather to determine
Why should the function of requisitioning the purchase of goods be segregated from the function of issuing purchase orders?
How does an automated receiving function differ from a traditional manual receiving function? How do the controls differ in the automated function? What controls does the auditor normally find most
Assume that renumbered receiving documents are not used in an organization that has attempted to automate much of the purchase and receiving function. What control objective is addressed by having
Many organizations use the computer to generate purchase orders. Who is responsible for a purchase when the computer generates the purchase order? How does the responsible individual ensure that
Explain how an automated matching process works regarding the payment of accounts payable. What controls need to be implemented in the automated matching process to ensure that only authorized
A client with just-in-time inventory does not formally receive goods, but unloads supplies from the railroad car directly into the production line. The client has a long-term contract with the
What important controls would an auditor expect to find in an accounts payable environment when payments are automatically scheduled and checks or electronic transfers of cash are generated by the
Why does much of the audit work in the acquisition cycle focus on tests of transactions rather than year-end tests of account balances?
What objectives are addressed by accounts payable confirmations? What form is used for accounts payable confirmations? Explain why accounts payable confirmations are often not used on an audit.
What assumptions must hold true if the auditor chooses to test the completeness of accounts payable by examining subsequent disbursements and reviewing open accounts payable? What options exist to
What information should an auditor gather in reviewing long-term purchase contracts or long-term supply contracts? How might the information affect the audit?
The auditor often examines some expense accounts, such as legal expenses, in detail even if the account balance is not material. Explain why.
Why does the auditor examine travel and entertainment expenses? What would poor controls regarding executive reimbursements say about the "tone at the top" for purposes of evaluating and reporting on
How might the auditor effectively use analytical procedures in the audit of various expense accounts, such as miscellaneous expenses? Give an example of how analytical procedures might be used in the
An auditor has been assigned to audit the accounts payable of a high-risk audit client. Control risk is assessed as high, management integrity is marginal, and the company is near violation of
What factors contribute to the complexity of inventory audits?
Explain why self-checking digits are an important control procedure found in computerized inventory systems. What potential errors are prevented by the use of self-checking digits?
Why is it important that the standard cost system be audited? How would the auditor test the standard cost system to determine that payroll expenses are appropriately charged to products?
Why is it important that a quality control function be used for receiving important inventory items? What is the financial statement risk if a manufacturing client does not use such a function?
During observation of the client's year-end inventory, the auditor notes that shipping document 8702 was the last shipment for the year, and that receiving report 10,163 was the last receiving slip
The Northwood’s Manufacturing Company has automated its production facilities dramatically during the last five years, to the extent that the number of direct-labor hours has remained steady while
During the observation of a client's physical inventory count, the auditor noted that the client had changed the numbering system used to identify inventory products. In your observations, you
The auditor has always received good cooperation from a particular client and has been willing to share information about the audit with the controller on a timely basis. The controller has requested
Assume that customers are allowed to return merchandise that is defective or that they simply did not like. What is the proper accounting for the returns? What control procedures should be
The auditor is always concerned that slow-moving or potentially obsolete inventory is included in inventory, and that the goods should be reduced to a lower market value. Identify five procedures the
During the audit of inventory, you note that the client had generated substantial cost and material variances. The client explains that many of the variances were due to irregular production
Explain the procedures the auditor would use to verify the cost of inventory, assuming the client uses the following valuation approaches:a. FIFO valuation on a periodic inventory basisb. LIFO based
Explain how ACL could be used to help identify potentially obsolete inventory.
Explain the purpose of the test counts and other inventory observations that the auditor notes while a physical inventory is being taken. Explain how each written observation is used in completing
What financial statement disclosures are required for inventory? How does the auditor determine the adequacy of the client's financial statement disclosures?
Identify two audit approaches that might be used to gain assurance about the correctness of perpetual inventory records.
Multiple Choice Questions1. Auditors use analytical procedures to help identify potential misstatements in inventory. Which of the following would not be useful for this purpose?a. Calculating
One of your audit clients manufactures fishing boats and sells them all over the country. Boats are sold to dealers who finance their purchases on a floor-plan basis with their banks. The
Hodag Company has automated its receiving function as follows:1. A receiving supervisor accesses an open purchase order file, listed by vendor, to determine whether a shipment should be accepted.If
Assume the internal auditor has assessed that the potential is high that some purchase agents are involved in a kickback scheme with vendors who have received preferential treatment. The purchasing
Each year Susan Riley, president of Bargon Construction, Inc., takes a three-week vacation to Hawaii and signs several checks to pay major bills during the period she is absent. Riley’s vacation
The organization structure of a manufacturing firm includes the following departments: purchasing, receiving, inspecting, warehousing, and controllership. An internal auditor is assigned to audit the
Paul Mincin, CPA, is the auditor of Raleigh Corporation. Mincin is considering the audit work to be performed in the accounts payable area for the current-year engagement. The prior year
The following audit procedures are found in audit programs addressing the acquisition and payment cycle.RequiredFor each audit procedure described:a. Identify the objective of the procedure or the
Because of the small size of the company and the limited number of accounting personnel, Dry Goods Wholesale Company initially records all acquisitions of goods and services at the time cash
You have been assigned to audit the factory supplies expense account for a medium-sized manufacturing firm. Here is the relevant data for the past three years:Requireda. Briefly explain how
Kane, CPA, is auditing Star Wholesaling Company’s financial statements and is about to perform substantive audit procedures on Star’s trade accounts payable balances. After obtaining an
The following are some tests of transaction procedures frequently performed in the acquisition and payment cycle. Each is to be done on a sample basis.Requireda. State whether each procedure is
You have been assigned the task to audit legal expenses for the recent year. The client prepares a schedule of all recorded legal expenses and presents the schedule to you for your audit work. You
The following errors or omissions are included in the accounting records of Westgate Manufacturing Company.Requireda. For each error, identify the transaction assertion that was not met.b. For each
You are planning the audit of a company that manufactures outdoor equipment in Chicago and has distribution centers in Chicago, Boston, Tampa, Houston, Denver, and San Francisco. The client has
Ace Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse; instead, it uses statistical sampling to test the accuracy of the
The auditor is required by existing auditing standards to observe the client’s physical inventory. That requirement could be met by observing the client’s annual physical count of inventory, and,
You have been assigned to the audit of Technotrics, a company specializing in the wholesale of a wide variety of electronic products. Its major product lines are stereo and similar electronic
The auditor has gathered shipping cutoff information for Johnny M. Golf Company in conjunction with its December 31 year end. The auditor has observed the client’s year-end physical inventory and
Inhale Retail Company keeps its inventory on a perpetual FIFO basis for internal reporting, but adjusts the year-end FIFO balance to a LIFO basis using a dollar value LIFO index. The auditor is
Badger Meter of Milwaukee, Wisconsin, designs and manufactures water meters, gasoline meters, and other metering systems to measure and report the flow of liquid through various lines. The company
RequiredFor each of the following tests of internal controls over acquisition and inventory, indicate the effect of the deficiency on the planning of direct tests of the related account balances.1.
How much evidence is needed to be persuasive? Each of the following scenarios describes the auditor's findings of internal control.RequiredFor each situation, indicate whether additional evidence in
You are auditing inventory of HUSKY Corp. as of December 31, 2007.The inventory general ledger balance is $8,124,998.66. HUSKY manufactures lawn and garden tractors, snowmobiles, and supplies.
The SEC alleged that many deficiencies occurred during the audit of CMH, as discussed in the Auditing in Practice feature in this chapter. Among the complaints were the following:1. The audit firm
Assume that you are conducting the audit of College Ware, a manufacturer and distributor of printed, embroidered, and embossed specialty clothing and gift items marketed to college students with
Why is it important to coordinate the testing of cash and other liquid asset accounts?
Explain the purpose and risks associated with each of the following types of bank accounts:a. General cash accountb. Imprest payroll account
Evaluate the following statement made by a third-year auditor:"In comparison with other accounts, such as accounts receivable or property, plant, and equipment, it is my assessment that cash and
Why is there a greater emphasis on the possibility of fraud in cash accounts than for other asset accounts of the same size? Identify three types of frauds that would directly affect the Cash
What factors should be considered when planning the audit of cash and marketable securities?
Describe how a lockbox arrangement with a bank works. What is its advantage to an organization? What risks are associated with it? What controls should an entity develop to mitigate each of the risks
What is a compensating balance? How does the auditor become aware of the existence of compensating balances?
How should duties be segregated in an automated cash receipts processing system? Explain the rationale for the segregation of duties that you recommend.
What are monitoring activities? Identify the major monitoring activities the auditor would expect to find in the cash management system. For each monitoring activity identified, indicate how the
What are the major authorization principles the auditor should investigate regarding both cash management and investments in marketable securities?
Explain how turnaround documents can improve the controls over the cash receipts process. Does the existence of a turnaround document negate the need to assign a unique identification number to each
What is the impact on the audit if the client does not perform independent periodic reconciliations of its cash accounts? What audit procedures would be dictated by the lack of the client's
Explain the purpose of the following audit procedures:a. Sending a bank confirmation to all the banks with which the client does businessb. Obtaining a bank cutoff statementc. Preparing a bank
What information does an auditor search for in reviewing loan agreements with the client's bank?
How might management utilize the internal audit function to gain assurance about the effectiveness of its controls over cash and cash management?
Define and illustrate kiting. What procedures should the client institute to prevent it? What audit procedures should the auditor utilize to detect kiting?
Under what circumstances might it be acceptable to use an audit procedure other than physically examining marketable securities to verify their existence?
How does the auditor determine whether marketable securities are properly classified as short-term securities or long-term investments? What are the accounting implications of the classification as
What role should the board of directors have regarding an organization's investment in marketable securities? What documentation would the auditor expect to find regarding the board's oversight role?
What role does collateral play in valuing marketable securities? Would an audit of marketable securities ever require an audit of the underlying collateral? Explain.
How would the absence of each of the following factors affect the auditor's assessment of the control environment? Assume that the company's investment in marketable securities is material to the
In what ways do the new types of financial instruments differ from traditional financial instruments? What additional risks are associated with such securities?
What controls should an organization implement if it wishes to become an investor in more complex financial instruments? Explain the purpose of each control.
Multiple Choice Questions1. XYZ Company concealed a cash shortage by transporting funds from one location to another and by converting negotiable instruments to cash. Which of the following audit
Multiple Choice QuestionsThe auditor would send a bank confirmation to all banks with which the client had business during the year, becausea. The confirmation seeks information on indebtedness that
Electronic funds transfer has been identified as a major method of transferring cash for most organizations.Required complete one of the following:a. Describe how electronic commerce and electronic
One of the major controls over cash and cash transfers is to ensure that only authorized personnel are handling cash, making cash transfers, or investing excess cash.Requireda. For each of the
In conversation with another auditor, Fran-an auditor who has been associated primarily with audits of large clients-offers her opinion that "substantive testing of cash accounts is obsolete. The
The following items were discovered during the audit of the Cash account. For each item identified:a. Indicate the audit procedure that most likely would have led to the discovery of the error.b.
Pembroke Company had poor internal control over its cash transactions. The following are facts about its cash position at November 30:• The cash books showed a balance of $18,901.62, which included
Toyco, a retail toy chain, honors two bank credit cards and makes daily deposits of credit card sales in two credit card bank accounts (Bank A and Bank B). Each day Toyco batches its credit card
Generally accepted auditing standards require that auditors send confirmations to all banks with which the client has done business during the year. The AICPA has developed a standard bank
Assume a major client is involved in transactions with customers such that almost all of the cash receipts are transferred to the client's bank electronically. The bank separates the remittance
The following client-prepared bank reconciliation is being examined by Kautz CPA, during an examination of the financial statements of Concrete Products, Inc.RequiredIdentify one or more audit

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