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business
auditing

Questions and Answers of Auditing

The following represents a critical review of the documentation of a new auditor for the cash and marketable securities audit areas. Several deficiencies are noted; they resulted in significant
Eagle River Plastics Company has a major branch located in Phoenix. The branch deposits cash receipts daily, and periodically transfers the receipts to the company's home office in Eagle River. The
The following are weaknesses in internal controls over cash:a. Authorized check signers are not updated on a timely basis when job assignments are changed or people leave the firm.b. The person who
The client prepared the following worksheet listing all activities in the marketable securities account for the year under audit. For purposes of this question, you may assume that there are no
The existence of an internal audit department is recognized as a strong element of a company's control environment. Internal auditors can perform financial audits (similar to that of the external
Financial institutions usually require collateral as part of a lending agreement. For example, loans to build shopping centers usually require the property to be put up as collateral in case the
Rhinelander Co. is a regional retailer with 45 stores located in the Southeast. The company accepts major credit cards and its own credit card in addition to cash. Approximately 25% of the company's
Justin Company, a medium-size manufacturing client located in the Southwest, produces supplies for the automobile industry. The company is publicly traded on the American Stock Exchange. Joann Sielig
As an example of difficulties that auditors experience in collecting confirmations of cash balances, consider the Parma at fraud. In that case, the company overstated cash by about $5 billion, which
Explain how management could manage earnings through manipulation of fixed-asset accounts.
Identify the major elements of internal controls over fixed assets. For specific control procedures identified, indicate their importance to the audit.
How would an integrated audit of fixed assets differ from a traditional balance sheet audit of the fixed assets?
Identify the analytical procedures that may be most effective in performing an audit of depreciation expense. Indicate also how the procedures may provide information on the accuracy of asset
Explain how the auditor could use generalized audit software in auditing a client's property account.
What audit procedures might an auditor use to identify fully depreciated equipment? How might the auditor determine that such equipment is properly valued?
Why does an auditor ask the client to prepare a schedule of repair and maintenance expenditures that exceeds some predetermined limit? Why might a company want to expense an item rather than
During the audit of a new client, you uncover an accounting policy stating that all purchases of equipment or other items under $1,000 will be expensed, regardless of their nature. When you ask the
A client has a policy manual that categorizes equipment by type and assigns a depreciation life based on the categorization of the equipment. All equipment in a category is depreciated using the same
What responsibility does the auditor have to determine the estimated life of a new asset that has been acquired by the company? How might an auditor go about determining whether the estimate of
What is meant by asset impairment? What are the major audits issues related to asset impairment that must be addressed on an audit?
What is a recoverability test as used in the context of testing for asset impairment?
What evidence might an auditor gather to determine the proper valuation of an impaired asset?
Assume that a company obtains an appraisal for equipment that may be impaired. Does the auditor need to test the appraisal? What work should the auditor perform to determine that the appraisal should
What major audit problems are associated with the audit of natural resources? To what extent do auditors utilize specialists in the audit of a natural resources company? Explain, using a specific
Explain why a company might choose to lease assets rather than purchase the asset.
Some managers believe there are positive financial reporting benefits to leasing assets for a period of time that is less than their economic life. What are those benefits? How might the leasing
What criteria should the auditor examine to help determine whether leases should be capitalized?
Does the auditor have to determine the economic life of a leased asset? Explain.
Describe the basic approach to auditing leases.
Multiple Choice Questions1. Which of the following is not a risk related to fixed-asset accounts?a. Failing to record asset disposals.b. Capitalizing repairs and maintenance expense.c. Treating
RequiredThe following questions might be addressed in an evaluation of internal controls for fixed assets. For each question:a. Indicate the purpose of the control.b. Indicate the impact on the audit
This is the first-year audit of a company that wants to register with the SEC in the near future. The company has been very successful and uses a fixed-assets database to manage its fixed assets. The
The audit senior has asked you to perform analytical procedures to estimate the reasonableness of recorded depreciation expense of the delivery vehicles of a client. Changes in the account occurred
The following conclusions were taken from a staff auditor's summary worksheet for fixed assets and the worksheet for prepaid insurance.Requireda. For each conclusion or situation listed, identify the
WorldCom engaged in a fraud that involved fixed assets. Assume we know the following about the fixed-asset account called telecommunications equipment:Beginning Balance ........... $3.8
WorldCom is one of the largest bankruptcies in U.S. economic history. Much of the fraud was carried out by capitalizing operating expenses such as payment to other companies for line rental, as fixed
You are performing the year-end audit of Halvorson Fine Foods, Inc. for December 31, 2007.The client has prepared the following schedule for the fixed assets and related allowance for depreciation
Red Lake Mining Co. engages in the search and mining of gold in North America, principally Canada. During the year, it discovered a substantial new source of gold, which it estimates holds 15.5
While performing analytical procedures on Merrill Traders, Inc., the auditor discovered a substantial increase in lease expense and a corresponding decrease in both the fixed-asset accounts and
The Rousch Racing Company is in the business of building NASCAR race cars. They also have an engineering department that builds components for other racing teams, as well as for specialty cars built
Tiger, Inc. signed a lease for equipment on July 1, 2007.The lease is for 10 years (the useful life of the asset).The first of 10 equal annual payments of $500,000 was made on July 1, 2007.The
A corporation operates a highly automated flexible manufacturing facility. The capital-intensive nature of the corporation's operations makes internal control over the acquisition and use of fixed
Your firm has been the auditor of Cowan Industries for a number of years. The company manufactures a wide range of lawn care products and typically sells to major retailers. In recent years, the
Why do audits of acquisitions and mergers contain high amounts of inherent risk? Have most mergers and acquisitions been successful?
How does a company measure the cost of an acquisition of a company? What factors often complicate the determination of actual cost? Explain how each factor complicates the calculation of cost and the
How is the amount of goodwill determined at the time of acquisition?
An audit client has acquired another company and accounted for the acquisition as a purchase. An independent real estate appraiser has been hired to value the assets of the acquired company. What are
Does the auditor need to engage another independent specialist to test the work of the specialist hired by the company to determine the value of the tangible and intangible assets other than
How does an auditor test for the impairment of goodwill? What are the significant judgment issues that must be addressed?
What factors might signal the likelihood that goodwill may be impaired? Explain and indicate how the auditor would be aware of each of these factors.
How does an auditor determine the fair value of goodwill if:• The reporting entity is the total company and the company is publicly traded.• The reporting entity is the total company and the
Assuming the company's stock price goes down in a bear market that occurs at the end of the year. However, the stock price more than doubles in the next year. The company recognized goodwill
What is a related entity? What is the proper accounting for transactions with related entities?
The FASB has used the term "variable-interest" entities to describe a company's relationship with other entities. Ownership may vary from none, to less than 50%, to a 50-50 joint venture, to majority
What is a special purpose entity (SPE)? Explain how Enron used SPEs to commit financial reporting fraud.
What are the broad approaches used to identify and audit related entity transactions? What are the audit risks associated with related entity transactions?
Companies may have significant relationships with other entities that do not involve ownership interests, but may involve control issues. What is the nature of these relationships? What disclosures
What is the required disclosure if management uses company resources for personal purposes, e.g., entertainment, birthday parties, decorating apartments, etc.?
What are the significant estimates that must be made with the following liability accounts?• Restructuring reserves• Warranty reserves• Pension obligations• Other post-retirement liabilities
Explain how outside specialists are used in auditing pension obligations.
Explain how General Motors believed it had a better control over its warranty risks by assuming the warranty liability for supplier's parts, e.g., tires, than Ford Motor Company did by having their
What information should the auditor note when reading a bond indenture? How is the information used in the audit?
Assume that common stock of a publicly held company is issued to acquire the operating assets of company (but not the other company) .What information should be used to determine the value of the
A company declared a 5% stock dividend. Identify the evidence the auditor would examine to determine if the stock dividend was accounted for properly.
Explain how a bond amortization spreadsheet might be used to audit interest expense over the life of a bond.
Multiple Choice Question1. The audit client has acquired another company by purchase. Which of the following would be the best audit procedure to test the appropriateness of the allocation of cost
Research has shown that mergers and acquisitions during the past two decades have met with mixed success- with a majority appropriately labeled as ineffective.Requireda. What processes should an
Romenesko Conglomerate Co. recently acquired Teasedale Cosmetic Company through a tender offer for all the common stock of Teasedale Cosmetic.Teasedale stock had been trading on the market at $25 per
In 2006, Nelson Communications purchased a controlling interest in Telnetco that resulted in goodwill in the 2006 consolidated financial statements of $4,500,000.There are no other intangible
Merrill Publishing Company has operated primarily as a printer for catalogs, SEC filings, and phone books.During the past few years, it has:• Expanded into a new product line in magazine publishing
Many acquisitions require a restructuring of operations to integrate the acquired entity into the acquiring company's business structure.Requireda. What actions does a company typically take in
Maxair Corporation has a reputation of acquiring a number of companies. They managed earnings by estimating high reserves for merger-related activity such as terminating employees and closing plants.
It is common for an entity to have transactions with related entities-some of which are fully owned, some of which share common ownership, but are not otherwise related, and others where ownership is
Eisenhower Construction, a privately held company, used to own all of its construction equipment used for highway work (bulldozers, cranes, graders, cement trucks). The company recently sold all of
The relationship between successful organizations is changing. In some cases, competitors even combine efforts to jointly develop new products. In other situations, companies license their products
You have been assigned to the audit of Oshkosh Truck Corporation. The company is the leading manufacturer of fire trucks and heavy duty army trucks. All of the basic components are warranted for
The text talks about Delphi Company reducing its other post-retirement benefits by approximately $500 million because of a change in the law. The federal government will not reimburse companies for
The auditor should review the bond indenture at the time a bond is issued and any time subsequent changes are made to it.Requireda. Briefly identify the information the auditor would expect to obtain
The following covenants are extracted from a bond indenture. The indenture provides that failure to comply with its terms in any respect automatically advances the due date of the loan to the date of
A CPA firm is engaged in the examination of the financial statements of Zeitlow Corporation for the year ended December 31, 2007. Zeitlow Corporation’s financial statements and records have never
The long-term debt documentation (indexed K-1) on pages 000 was prepared by client personnel and audited by AA, an audit assistant, during the calendar year 2007 audit of American Widgets, Inc., a
You are part of an audit team working on the audit for one of the largest clients in the office. This public client is growing and in the past year has increased its use of leases for equipment. In
What is the purpose of performing analytical procedures on revenue and expenses at the end of the audit?
What are the purposes of the concurring partner review?
What is the primary source of information about litigation, claims, and assessments? What is the primary source of corroborative evidence?
Why might lawyers be hesitant to disclose information to auditors?
Who sends the letter of audit inquiry to the lawyers? To whom should the lawyer send the response to that letter?
How is a disclosure checklist helpful? What precautions should the auditor take when using such a checklist?
What is a management representation letter? Who prepares it? Who should sign it? When should it be dated? How does if differ from the CEO and CFO certification of financial statements?
How does a summary of possible adjustments help the auditor determine whether the financial statements are fairly presented? What information might it contain? How might an analysis of the summary
Are auditors required to evaluate the likelihood of each audit client being a going concern as a part of each audit? What types of conditions and factors should auditors look for to help make this
An Altman Z-score indicates the possibility that a client will go bankrupt. What effect will this have on the audit report? Explain.
Why should the auditor take special care concerning accounting estimates?
What items should the auditor discuss with the audit committee near or at the end of the audit? Why is this important?
What types of subsequent events should the auditor identify as part of a normal audit? Give an example of each type of subsequent event. How should each type be handled in the financial statements?
With one exception, auditors do not have a responsibility to continue their review of subsequent events beyond the audit report date. What is that exception?
What audit procedures should be performed to search for subsequent events?
What is meant by "dual dating"? Explain how dual dating limits the auditor's responsibility for subsequent events.
Explain the auditor's responsibilities when it is discovered that facts existed at the date of the audit report but were not known to the auditor.
During an internal peer review, it was discovered that the auditors failed to perform a significant audit procedure on an audit completed five months earlier. What steps should the auditors take?

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