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business
auditing

Questions and Answers of Auditing

How does the materiality of a departure from GAAP affect the auditor’s choice of financial statement audit reports?
In 2011, your firm issued an unmodified report on Tosi Corporation, a private company. During 2013, Tosi entered its first lease transaction, which you have determined is material but not pervasive
What are the auditor’s responsibilities for other information included in an entity’s annual report?
If the auditor determines that other information contained with the audited financial statements is incorrect and the client refuses to correct the other information, what actions can the auditor
List three examples of special reports.
List four bases for special purpose financial statements. Why is it important that the audit report clearly identify the basis of accounting used in the preparation of the financial statements?
Multiple Choice1. In which of the following situations would an auditor ordinarily issue an unqualified/ unmodified financial statement audit opinion with no explanatory ( or emphasis- of- matter/
For each of the following independent situations, indicate the type of financial statement audit report that you would issue and briefly explain your reasoning. Assume that all companies mentioned
For each of the following independent situations, indicate the reason for and the type of financial statement audit report that you would issue. Assume that all companies mentioned are private
The CPA firm of May & Marty has audited the consolidated financial statements of BGFI Corporation, a private company. May & Marty examined the parent company and all subsidiaries except for BGI-
Devon, Inc., a private company, engaged Rao to examine its financial statements for the year ended December 31, 2013. The financial statements of Devon, Inc., for the year ended December 31, 2012,
On March 12, 2014, Kristen & Valentine, CPAs, completed the audit of the financial statements of Modern Museum, Inc., for the year ended December 31, 2013. Modern is a privately held company.
For the year ended December 31, 2012, Friday & Co., CPAs (“Friday”), audited the financial statements of Kim Company and expressed an unqualified opinion on the balance sheet only. Friday did
The following auditor’s report was drafted by a staff accountant of Nathan and Matthew, CPAs, at the completion of the audit of the comparative financial statements of Monterey Partnership for the
You are auditing the financial statements for your new client, Paper Pack-aging Corporation, a manufacturer of paper containers, for the year ended March 31, 2014. Paper Packaging€™s
Briefly describe the three theories of ethical behavior that can be used to analyze ethical issues in accounting.
Why are companies like Kmart able to continue in business after experiencing federal indictments, convictions of top executives, and bankruptcy, while accounting firms, like the once highly
What entities are involved in establishing standards and rules for the professional conduct of public accountants? Who establishes such standards for auditors of public versus private companies?
What are the two major sections of the Code of Professional Conduct? What additional guidance is provided for applying the Rules of Conduct? LO
Describe the six Principles of Professional Conduct.
What are the five major sections of the Rules of Conduct?
What types of personal loans from a financial institution are allowed by the Rules of Conduct? What is meant by normal lending procedures, terms, and requirements within this context?
Summarize the major differences between the AICPA’s Code of Professional Conduct independence rules and the SEC’s independence rules for auditors of public companies. Briefly describe why the
Generally, a CPA is not allowed to disclose confidential entity information without the consent of the entity. Identify four circumstances in which confidential entity information can be disclosed
Give three examples of acts that are considered discreditable under the Rules of Conduct.
A CPA is allowed to advertise as long as the advertising is not false, misleading, or deceptive. Provide three examples of advertising that might be considered false, misleading, or deceptive. Why
What is the purpose of a CPA firm’s establishing a system of quality control? List the six elements of quality control and provide one example of a policy or procedure that can be used to fulfill
How are the roles of the PCAOB inspection program and the AICPA peer review program similar, and how are they different?
Multiple Choice1. Which of the following statements best explains why public accounting, as a profession, promulgates ethical standards and establishes means for ensuring their observance? a.
Dean Wareham, an audit manager, is preparing a proposal for a publicly held company in the manufacturing industry. The potential client is growing rapidly and introducing many new products yet still
Each of the following situations involves a possible violation of the AICPA’s Code of Professional Conduct, Rule 101. Indicate whether each situation violates the Code. If it violates the Code,
The questions that follow are based on Rule 101 of the AICPA Code of Professional Conduct as it relates to independence and family relationships. Check yes if the situation violates the rule, no if
Each of the following situations involves a possible violation by a member in industry of the AICPA’s Code of Professional Conduct. For each situation, indicate whether it violates the Code. If it
Perez, CPA, has been asked by a nonpublic company audit entity to perform a nonrecurring engagement involving implementing an IT information and control system. The entity requests that, in setting
Refer back to the hypothetical Sun City Savings and Loan case presented in this chapter, and consider each of the following independent situations: a. Suppose that Pina, Johnson & Associates also
Schoeck, CPA, is considering leaving a position at a major public accounting firm to join the staff of a local financial institution that does write- up work, tax preparation and planning, and
For each of the following scenarios, indicate whether or not independence related SEC rules are being violated, assuming that the audit entity is a public company. Briefly explain why or why not. a.
Your supervisor tells you that for the next month you will be working on an audit entity with a controller who loves to talk. She explains that the entity will want you to spend an hour or so talking
While completing a test of controls, you appropriately cleared two minor exceptions by examining related documents. The entity will need to do some serious digging to find the documents to resolve a
Visit the AICPA’s website (www.aicpa.org), under Research Standards. On the left side of the page click “Code of Professional Conduct.” Find Section 100 of the Code of Professional Conduct.
Briefly describe the four stages of the auditor dispute process.
What is meant by proportionate liability? Contrast this legal doctrine with the doctrine of joint and several liability.
For what types of actions are auditors liable to a client under common law? Why would the client prefer to sue the auditor for a tort action rather than for a breach of contract?
Distinguish among the four standards that have evolved for defining auditors’ liability for ordinary negligence to third parties under common law. Why is this area of auditors’ liability so
Distinguish between the Securities Act of 1933 and the Securities Exchange Act of 1934. Why is it easier for a plaintiff to sue an auditor under the Securities Act of 1933?
What elements must a plaintiff prove in order to win action under Rule 10b- 5 of the Securities Exchange Act of 1934?
What was the significance of the out-come of the Ernst & Ernst v. Hochfelder case for auditors’ liability?
What were the most significant components of the Private Securities Litigation Reform Act of 1995 and the Securities Litigation Uniform Standards Act of 1998? Did the ruling in Tellabs v. Makor make
In what ways does the Sarbanes- Oxley Act change criminal liability for auditors of public companies?
What types of sanctions can the SEC and the PCAOB impose on auditors?
How does the Dodd- Frank Act affect the auditing profession?
What types of activities should the auditor be alert to that may violate the Foreign Corrupt Practices Act?
What actions can result in an auditor being held criminally liable under statutes and regulations?
Multiple choice1. Cable Corporation orally engaged Drake & Company, CPAs, to audit its financial statements. Though the financial statements Drake audited included a materially overstated accounts
Becker, Inc., purchased the assets of Bell Corporation. A condition of the purchase agreement was that Bell retain a CPA to audit its financial statements. The purpose of the audit was to determine
Astor Electronics, Inc., markets a wide variety of computer- related products throughout the United States. Astor’s officers decided to raise $ 1 million by selling shares of Astor’s common stock
Butler Manufacturing Corporation planned to raise capital for a plant expansion by borrowing from banks and making several stock offerings. Butler engaged Meng, CPA, to audit its financial
Sleek Corporation is a public corporation whose stock is traded on a national securities exchange. Sleek hired Garson Associates, CPAs, to audit Sleek’s financial statements. Sleek needed the
Conan Doyle & Associates (CD& A), CPAs, served as the auditors for Lestrad Corporation and Watson Corporation, publicly held companies traded on NASDAQ. Watson recently acquired Lestrad Corporation
Critics of the Sarbanes-Oxley Act do not believe the Act will be effective at deterring accounting frauds because it primarily relies on specifying new crimes and higher penalties (i. e., increasing
Define assurance services. Discuss why the definition focuses on decision making and information.
Define an attest engagement. List the two conditions that are necessary, according to the third general standard for attestation engagements, in order to perform an attest engagement.
What types of engagements can be provided under the attestation standards? Give two examples of attestation engagements.
How can the practitioner satisfy the requirement that specified users take responsibility for the adequacy of procedures performed on an agreed- upon procedures engagement?
What kind of entity might request an attestation report on internal control, and why?
What are the two types of prospective financial statements? How do they differ from each other?
The accounting profession is concerned about whether companies are in compliance with various federal and state environmental laws and regulations and whether they have reported environmental
The IIA maintains its own website containing useful information about the Institute and the internal auditing profession in general. Visit the IIA’s home page (www.theiia. org). Required: a. Under
The AICPA has developed an assurance service related to electronic commerce called WebTrust. Visit the WebTrust home page (www.webtrust. org) and examine the WebTrust seal.Required:a. Under the
EarthWear has a number of competitors that sell goods over the Internet. Visit the home page for any two of EarthWear’s competitors. For example, visit the home page for Timberland (www.
Using an Internet search engine, find the web page on PrimePlus services created by the AICPA. On the website, find the PrimePlus / ElderCare glossary.Required:Describe the “funeral rule” defined
Identify two substantive analytical procedures that can be used to audit prepaid insurance.
Confirmation is a useful audit procedure for verifying information related to prepaid insurance. What type of information would be requested from an entity’s insurance broker in such a confirmation?
List four categories of intangible assets and four types of property, plant, and equipment transactions.
Describe two or more factors that the auditor should consider in assessing the inherent risk for (a) Intangible assets and (b) The property management process.
What is a typical control over authorization of capital asset transactions?
What is one of the key segregation of duties for the property management process? What errors or fraud can occur if such segregation is not present?
Identify three substantive analytical procedures that can be used to audit property, plant, and equipment.
What procedures would an auditor use to verify the completeness, rights and obligations, and valuation assertions for property, plant, and equipment?
1. When auditing prepaid insurance, an auditor discovers that the original insurance policy on a key piece of manufacturing equipment is not avail-able for inspection. The policy’s absence most
Natherson, CPA, is engaged to audit the financial statements of Lewis Lumber for the year ended December 31. Natherson obtained and documented an understanding of internal control relating to the
Taylor, CPA, has been engaged to audit the financial statements of Palmer Company, a continuing audit client. Taylor is about to perform substantive audit procedures on Palmer’s goodwill (excess
Nakamura, CPA, has accepted an engagement to audit the financial statements of Grant Manufacturing Company, a new client. Grant has an adequate control environment and a reasonable segregation of
Gonzales, CPA, is the auditor for a manufacturing company with a balance sheet that includes the entry â€œProperty, plant, and equipment.â€ Gonzales has been asked by the companyâ€™s
To support financial statement assertions, an auditor develops specific sub-stantive procedures to satisfy or address each assertion. Required: Items (a) through (c) represent assertions for the
Pierce, an independent auditor, was engaged to examine the financial statements of Wong Construction, Inc., for the year ended December 31. Wong’s financial statements reflect a substantial
On January 15, 2013, Leno, Inc., which has a March 31 year- end, entered into a transaction to sell the land and building that contained its manufacturing operations for a total selling price of $
Visit the website of another catalog retailer similar to EarthWear Clothiers, and determine what useful lives and depreciation methods are used for property, plant, and equipment. Compare those
Visit the SEC’s website ( www. sec.gov), and identify a company that has been recently cited for problems related to property, plant, and equipment or lease accounting ( e. g., in years past, many
Why does the auditor generally follow a substantive strategy when auditing long-term debt and capital accounts? Under what conditions might the auditor follow a reliance strategy?
What are the most important assertions for long- term debt? What documents would normally contain the authorization to issue long-term debt?
What types of services can be performed under Statements on Standards for Accounting and Review Services?
What type of knowledge must an accountant possess about the entity in order to perform a compilation engagement? A review engagement?
Define corporate governance. Why do you think an effective internal audit function is referred to as one of the cornerstones of corporate governance?
Explain how internal auditors play a role in helping management comply with the requirements of the Sarbanes- Oxley Act of 2002.
The Elliott Committee developed six assurance services with significant market potential for CPA firms. What are these six services?
What are the risks of electronic commerce? What are the Trust Services Principles?
What is the main difference between WebTrust and SysTrust Services?
Why is PrimePlus potentially a major service for CPA firms? What types of PrimePlus services can a practitioner offer?
Multiple Choice1. An assurance report on information can provide assurance about the information’s a. Reliability. b. Relevance. c. Timeliness. d. All of the above. 2. Which of the following

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