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business
auditing

Questions and Answers of Auditing

What is value-added auditing?
What is the internal auditor’s role regarding risk analysis and control?
What is the difference between independence and objectivity? Which of the two is most important on an audit engagement? Explain.
How can the internal audit department contribute to the effective operations of an audit committee? Why is it important for an internal audit function to fulfill this role as opposed to the external
Why is it important to have an internal audit charter? What should be included in the charter?
Does the auditor primarily serve senior management or the audit committee? If there are conflicts in serving these two different masters, how are they to be resolved?
What are the major differences between internal and external auditing? Why is the scope of activities much different for internal auditing than for the external audit?
Can a public accounting firm perform internal audit activities? Can it perform these activities for an audit client? Explain.
Can internal auditors and external auditors both perform consulting activities? Explain and describe the limitations of the external auditor in performing consulting activities?
Is there a difference in the nature of the audit work performed if an internal auditor from within the organization does it or if an external audit firm performs it? Explain.
What competitive advantages might a large public accounting firm have in outsourcing or co-sourcing internal audit services?
What are the competitive advantages of using an existing internal audit department over outsourcing the function to a large public accounting firm?
What is an operational audit?
What are the ten steps of an operational audit program? Identify each step and what the auditor accomplishes in each step. Explain why all operational audit programs follow this approach even for
Why is it important that the auditor establish objective criteria to determine the efficiency and effectiveness of performance before beginning the audit?
How does an operational audit program differ from a financial audit program?
What should be communicated in an operational audit report?
Define the following types of internal audits:• Risk analysis.• Information reliability.• Effectiveness of controls.• Operational effectiveness and efficiency.• Conformance with regulatory
What is a compliance audit and how does it differ from an operational audit?
What are the major determinants in designing a compliance audit program?
How does compliance auditing add value to an organization?
What role(s) does the internal audit department play in assisting management and the audit committee to prepare for Sarbanes- Oxley reporting?
What is control self-assessment (CSA)? Is CSA a normal audit function? How does the auditor facilitate CSA and how does it add value to an organization?
What is the nature of the attribute and performance standards that are part of the International Standards for the Professional Practice of Internal Auditing? Do the standards apply to both assurance
What responsibility does an internal auditor have to evaluate residual risks associated with an organizational activity? What should the internal auditor do if the auditor decides that the remaining
What is the internal auditor’s responsibility for reporting a corporate wrongdoing? For example, what should an internal auditor do if they find management has inappropriately recognized revenue by
What are the major principles contained in the IIA’s Code of Ethics?
MULTIPLE CHOICE QUESTIONS1. Which of the following statements regarding assurance services is true with respect to internal auditors?I. Assurance services by internal auditors can be provided only to
Internal auditing is defined as an objective assurance and consulting activity.Requireda. What is an assurance service? How does an assurance service differ from an attestation service?b. Under what
Internal auditing is defined as contributing to the effectiveness of an organization’s governance processes.Requireda. Explain how an internal audit might contribute to the effectiveness of
Internal auditing is an independent objective assurance and consulting activity.Requireda. Differentiate between independence and objectivity.b. Can the internal auditor attain the same level of
Internal auditors are meeting regularly with audit committees.Requireda. What is an audit charter? Why is it important that an audit charter be approved by the Board of Directors?b. Select a
Internal auditing and external auditing share many commonalities. However, they also differ in a number of key aspects.Requireda. What are the major commonalities between the internal audit and the
You have been assigned to do an operational audit of the purchasing department to determine whether it is effective, efficient, and economical. The department has been audited before.Requireda.
An internal auditor of Murry Manufacturing Company has just been assigned to perform an operational audit of the company’s inventory warehousing procedures. The company manufactures seven lines of
During a discussion with the audit committee, the chair of the audit committee raised questions about the company’s waste disposal processes. After the discussion, the area was identified as one of
Management needs assurance that the organization is in compliance with various policies and controls. Assume you are the auditor of a major movie studio. The movie studio has contracts with many
The new definition of internal auditing emphasizes that its objective is to add value to the organization.Requireda. An internal audit function has a value-added mission. Does that mission require
The internal audit department has been assigned to perform an operational audit of the treasury function. More specifically, the audit committee wants the auditor to focus on the following major
Assume the following additional information about the use of financial derivatives for the operational audit described in Problem 19-51:1. Company policy limits financial derivatives strictly to
The following comments are to be presented in a report on the operational audit of the customer service department of a business equipment retailer.Requireda. Identify each comment as an audit
Internal auditing is a growing profession. Some of the recent growth can be attributed to the requirements of the Sarbanes-Oxley Act of 2002.Requireda. What are the relative roles of the internal
Certified Internal Auditors (CIA) are often faced with situations that may involve ethical considerations.RequiredConsider the following cases. For each of the cases, identify the relevant principle
You are planning an operational audit of inventory control for a company that manufactures electronic equipment such as stereos and televisions.RequiredDevelop an audit program that identifies the
What is some capacity measures for each of the following: University, Hospital, Computer repair shop, Farm.
Find the 90% confidence interval for estimating μd based on these paired data and assuming normality. (Give your answers correct to one decimal place.)before 50 64 57 52 59 65After 46 42 54 39 55
The corrosive effects of various soils on coated and uncoated steel pipe was tested by using a dependent sampling plan. The data collected are summarized below, where d is the amount of corrosion on
The following data were collected on scores (out of a possible 100) for a pretest in quantitative methods. Using Excels statistical functions complete the following questions.ArrivalsData Set 1
Charlie Company is expected to grow at an annual rate of 6% indefinitely. The return on similar stocks is currently 11%. Charlie's board of directors declared a dividend of $1.85 yesterday. What
GoPack Corporation completed work on three jobs in the most recent period. Only these three jobs were worked on for the period. Information for the three jobs is as follows:Cost of direct materials
Collier Bicycles has been manufacturing its own wheels for its bikes. The company is currently operating at 100% capacity, and variable manufacturing overhead is charged to production at the rate of
a. Prepare the year-end entries for any amounts that should be recorded as a result of each of the above contingencies. (If no entry is required for a event, select "No journal entry required" in the
1. One night, Bob was leaving his health club, but his car wouldn’t start. Bob asked Ted, an acquaintance at the health club for a ride home. Even though it was 50 miles out of his way, Ted agreed
Explain how the move towards greater use of fair value accounting might increase information risk.
Busch Corporation has an existing loan in the amount of $6 million with an annual interest rate of 6.0%. The company provides an internal company-prepared financial statement to the bank under the
Distinguish between auditing standards and generally accepted accounting principles, and give two examples of each.
The responsibilities principle requires that auditors be responsible for having appropriate competence and capabilities to perform the audit. What are the various ways in which auditors can fulfill
Auditing standards have been criticized by different sources for failing to provide useful guidelines for conducting an audit. The critics believe the standards should be more specific to enable
Sarah O’Hann enjoyed taking her first auditing course as part of her undergraduate accounting program. While at home during her semester break, she and her father discussed the class and it was
You have been asked to make a presentation in your Inter- national Business class about how globalization is impacting the auditing profession. In preparation, you met with your auditing professor
Explain why auditors’ reports are important to users of financial statements and why it is desirable to have standard working.
List the eight parts of a standard unqualified audit report for a non-public entity and explain the meaning of each part. How do the parts compare with those found in a qualified report?
What four circumstances are required for a standard unqualified report to be issued?
Compare the wording in the standard unqualified report for a non-public entity under AICPA auditing standards in Figure (a) with the wording for a public company audit under PCAOB auditing standards
Describe what is meant by reports involving the use of other auditors. What are the three options available to the primary auditor responsible for the opinion, and when should each be used?
Various types of €œaccounting changes€ can affect audit reporting. AICPA auditing standards indicate that an emphasis-of-matter explanatory paragraph should be included when
What are the six core ethical values described by the Josephson Institute? What are some other sources of ethical values? Discuss.
Identify two examples of acts or behavior by CPAs that would be considered discreditable to the profession under Rule 501.
The following relate to auditors’ independence:a. Why is independence so essential for auditors?b. Compare the importance of independence of CPAs with that of other professionals, such as
The following questions relate to the AICPA Code of Professional Conduct:a. What are the four parts of the AICPA Code of Professional Conduct? What parts are enforceable?b. Explain the principles
In 2008, Arnold Diaz was a bright, upcoming audit manager in the South Florida office of a national public accounting firm. He was an excellent technician and a good “people person.” Arnold also
Ann Donnelly is a senior audit manager in an East Coast office of a public accounting firm. Her prospects for promotion to partner are excellent if she continues to perform at the same high-quality
The following are five independent situations.1. The audit firm, Weaver and Jones, LLP, received a subpoena for its documentation related to the audit of Westbrook Corporation's financial statements.
Explain the auditor’s responsibility to consider compliance with laws and regulations. How does this responsibility differ for laws and regulations that have a direct effect on the financial
What is the auditor’s responsibility when noncompliance with laws or regulations is identified or suspected?
The following information was obtained from several accounting and auditing enforcement releases issued by the Securities and Exchange Commission (SEC) after its investigation of fraudulent financial
Analytical procedures consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. They range from simple comparisons to the
You have performed preliminary analytical procedures on one of your audit engagements and observed the following independent situations:1. The allowance for obsolete inventory increased from the
Your audit firm has recently been engaged as the new auditor for Pinnacle Manufacturing effective for the audit of the financial statements for the year ended December 31, 2013. Pinnacle is a
What is meant by using benchmarks for setting a preliminary judgment about materiality? How will those benchmarks differ for the audit of a manufacturing company and a government unit such as a
Distinguish between the terms performance materiality and preliminary judgment about materiality. How are they related to each other?
Provide two examples of when an auditor might set a lower level of performance materiality for a particular class of transactions, account balance, or disclosure.
Assume materiality for the financial statements as a whole is $100,000 and performance materiality for accounts receivable is set at $40,000. If the auditor finds one receivable that is overstated
Explain why inherent risk is set for audit objects for segments (classes of transaction, balances, and presentation and disclosure) rather than for the overall audit. What is the effect on the amount
Explain why there is an inverse relationship between planned detection risk and the amount of evidence an auditor collects for a specific audit objective.
Explain how audit risk and materiality are related and why they need to be considered together in planning an audit.
Ling, an audit manager, is planning the audit of Modern Technologies, Inc., (MT, Inc.) a manufacturer of electronic components. This is the first year that Ling€™s audit firm has performed
Below and on page 278 are statements of earnings and financial position for Wexler Industries. a. Use professional judgment in deciding on the preliminary judgment about materiality for earnings,
Mark Hopper is planning the audit of the investments account for audit client Garden Supply Co. (GSC). GSC invests excess cash at the end of the summer sales season through an investment manager who
Explain what is meant by independent checks on performance and give five specific examples. Discuss.
The following are internal controls that the auditor has identified for various cycles.1. Sales invoices are matched with shipping documents and customer orders before recording in the sales
Internal controls 1 through 5 were tested in prior audits. Evaluate each internal control independently and determine which controls must be tested in the current year’s audit of the December 31,
The two components of professional skepticism are a questioning mind and a critical assessment of the audit evidence. How do these components help an auditor distinguish an unintentional misstatement
The chapter vignette on page 350 highlights the fraud at Koss Corporation where the principal accounting officer, Sujata (“Sue”) Sachdeva, embezzled approximately $31 million over 5 years to fund
Companies and auditors now operate in a global environment and need to be aware of potential risks that stem from subsidiaries, business partners, and network firms located outside the U.S. In the
Most grocery stores use bar code scanning technologies that interface with cash registers used to process customer purchases. Cashiers use the scanners to read bar code labels attached to each
A growing number of organizations are using cloud computing as a viable alternative for their IT resource needs. Cloud computing allows organizations to increase their ability to meet computing
Explain the relationship between the methodology for designing tests of controls and substantive tests of transactions in Figure (a) and the method ology for designing tests of details of balances in
The following are audit procedures from different transaction cycles:1. Examine sales invoices for evidence of internal verification of prices, quantities, and extensions.2. Select items from the
Angela Walsh is a new staff auditor. On her first three engagements, she was assigned to perform tests of controls for acquisitions and payments and test of details of balances for accounts payable.

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