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business
auditing

Questions and Answers of Auditing

For which documents relating to the accounts payable operation would you recommend the use of serial numbers as an internal control activity?
As part of the investigation of accounts payable, auditors sometimes vouch entries in selected creditors’ accounts back through the journals to original documents, such as purchase orders,
Whitehall Company records its liabilities in an accounts payable subsidiary ledger. The auditors have decided to select some of the accounts for confirmation by direct communication with vendors.
Identify three audit procedures (other than “Search for unrecorded accounts payable”) that are concerned directly or indirectly with disclosing unrecorded accounts payable.
What do you consider to be the most important single procedure in the auditors’ search for unrecorded accounts payable? Explain.
What is the purpose of the auditors’ review of cash payments subsequent to the balance sheet date?
Most auditors are interested in performing as many phases of an audit as possible in advance of the balance sheet date. The verification of accounts payable, however, generally is regarded as
What differences should auditors expect to find in supporting evidence for accrued liabilities as contrasted with accounts payable?
In applying audit procedures and evaluating the results of those procedures, auditors may encounter specific information that may raise a question concerning the existence of noncompliance with laws
A summary of the controls for the acquisition cycle of Keystone Computers & Networks, Inc., appears on pages 594€“595.a. For the following three controls over the acquisition cycle,
As indicated on the control risk assessment working paper on page 594, the auditors identified two weaknesses in internal control over the acquisition cycle of KCN. Describe the implications of each
The auditors’ working paper that relates control strengths and weaknesses to the assertions about purchases and accounts payable is presented on page 594. This working paper also presents the
Long-term creditors often insist upon placing certain restrictions upon the borrowing company for the term of the loan. Give three examples of such restrictions, and indicate how each restriction
Palmer Company has issued a number of notes payable during the year, and several of these notes are outstanding at the balance sheet date. What sources of information should the auditors use in
In addition to verifying the recorded liabilities of a company, the auditors should also give consideration to the possibility that other unrecorded liabilities exist. What specific steps may be
“Auditors are not qualified to pass on the legality of a bond issue; this is a question for the company’s attorneys. It is therefore unnecessary for the auditors to inspect the bond indenture.”
Mansfield Corporation has outstanding an issue of 30-year bonds payable. There is no sinking fund for these bonds. Under what circumstances, if any, should this bond issue be classified as a current
Describe the significant features of a stock certificate book, its purpose, and the manner in which it is used.
You have been retained to perform an audit of Valley Products, a small corporation which has not been audited during the previous 10 years of its existence. How will your work on the Capital Stock
Corporations sometimes issue their own capital stock in exchange for services and various assets other than cash. As an auditor, what evidence would you look for to determine the propriety of the
In your second annual audit of a corporate client, you find a new account in the general ledger called Treasury Stock, which has a balance of $306,000. Describe the procedures you would follow to
In auditing the financial statements of Foster Company, you observe a debit entry for $200,000 labeled as Dividends in the Retained Earnings account. Explain in detail how you would verify this
Name three situations that might place a restriction on retained earnings, limiting or preventing dividend payments. Explain how the auditors might become aware of each such restricting factor.
What errors are commonly encountered by the auditors in their examination of the capital and drawing accounts of a sole proprietor?
The only long-term liability of Range Corporation is a note payable for $1 million secured by a mortgage on the company’s plant and equipment. You have audited the company annually for the three
During your annual audit of Walker Distributing Co., your assistant, Jane Williams, reports to you that, although a number of entries were made during the year in the general ledger account Notes
You are engaged in the audit of the financial statements of Armada Corporation for the year ended August 31, 20X0. The balance sheet, reflecting all your audit adjustments accepted by the client to
You are retained by Columbia Corporation to audit its financial statements for the fiscal year ended June 30. Your consideration of internal control indicates a fairly satisfactory condition,
Valley Corporation established a stock option plan for its officers and key employees this year. Because the options granted have a higher option price than the stock’s current market price, the
Multiple Choice QuestionsSelect the best answer choice for each of the following, and justify your selection in a brief statement.a. Which of the following is least likely to be an audit objective
Your client, Summerford, Inc., has a debt agreement with Valley City Bank that includes a number of restrictions and covenants. Violation of any restriction or covenant results in the entire amount
Robert Hopkins was the senior office employee at the Griffin Equipment Company. He enjoyed the complete confidence of the owner, William Barton, who devoted most of his attention to sales,
You have received confirmations from the transfer agent and the registrar of Lowe Company as to the number of authorized and outstanding shares as of December 31, 20X1, Lowe’s year-end.a. Which
You are engaged in the audit of Phoenix Corp., a new client, at the close of its first fiscal year, April 30, 20X1. The accounts had been closed before the time you began your year-end fieldwork.You
What does the trust indenture used by a corporation in creating long-term bonded indebtedness have to do with the payment of dividends on common stock?
Most corporations with bonds payable outstanding utilize the services of a trustee. What relation, if any, does this practice have to the maintenance of adequate internal control?
Two assistant auditors were assigned by the auditor-in-charge to the verification of long-term liabilities. Sometime later, they reported to the auditor-in-charge that they had determined that all
Compare the auditors’ examination of owners’ equity with their work on assets and current liabilities. Among other factors to be considered are the relative amounts of time involved and the
In the audit of a small corporation not using the services of an independent stock registrar and stock transfer agent, what use is made of the stock certificate book by the auditors?
Your new client, Black Angus Valley Ranch, is a small corporation with fewer than 100 stockholders. It does not utilize the services of an independent stock registrar or transfer agent. For your
Comment on the desirability of audit work on the owners’ equity accounts before the balance sheet date.
Match the following definitions (or partial definitions) to the appropriate term. Each term may be used once or not at all.Definition (or Partial Definition)a. An institution charged with
Identify three revenue accounts that are verified during the audit of balance sheet accounts; also, identify the related balance sheet accounts.
How are analytical procedures used in the verification of revenue?
Identify three items often misclassified as miscellaneous revenue.
Identify three expense accounts that are verified during the audit of balance sheet accounts; also, identify the related balance sheet accounts.
When you are first retained to audit the financial statements of Wabash Company, you inquire whether a budget is used to control costs and expenses. The controller, James Lowe, replies that he
Describe how the auditors use analytical procedures in the examination of selling, general, and administrative expenses.
Should the auditors make a complete review of all correspondence in the client’s files?Explain.
List the audit procedures that should be completed near the date of the audit report.
What are loss contingencies? How are such items presented in the financial statements? Explain.
What is the usual procedure followed by the CPA in obtaining evidence regarding pending and threatened litigation against the client?
Explain how a loss contingency exists with respect to an unasserted claim. Should unasserted claims be disclosed in the financial statements?
Describe the manner in which the auditors evaluate their audit findings.
When the auditors have audited the financial statements, what is their responsibility with respect to other information (not including required supplemental information) included in an annual report
In your audit of the financial statements of Wolfe Company for the year ended April 30, you find that a material account receivable is due from a company in reorganization under Chapter 11 of the
During an audit engagement, Robert Wong, CPA, has satisfactorily completed an examination of accounts payable and other liabilities and now plans to determine whether there are any loss
You are the audit manager in the audit of the financial statements of Midwest Grain Storage, Inc., a new client. The company’s records show that, as of the balance sheet date, approximately 15
Warren Cook, CPA, is auditing the State University Bookstore and has obtained the following summary of revenues and cost of sales from the client€™s computer.a. Calculate the gross margin
The auditor’s opinion on the fairness of financial statements may be affected by subsequent events.a. Define what is commonly referred to in auditing as a subsequent event, and describe the two
Linda Reeves, CPA, receives a telephone call from her client, Lane Company. The company’s controller states that the board of directors of Lane has entered into two contractual arrangements with
Justin Kealey, CPA, is auditing Tustin Companies, Inc. Kealey has accumulated known and likely misstatements for the current year to evaluate whether there is a sufficiently low risk of material
On July 27, 20X0, Arthur Ward, CPA, issued an unqualified audit report on the financial statements of Dexter Company for the year ended June 30, 20X0. Two weeks later, Dexter Company mailed annual
Linda Tanner, CPA, is auditing the Carson Company. For the current year, Carson is presenting December 31, 20X5, financial statements with comparative financial statements for the year ended
Multiple Choice QuestionsSelect the best answer for each of the following and give reasons for your choice:a. Which of the following is least likely to be considered a substantive procedure relating
In connection with your audit of the financial statements of Hollis Mfg. Corporation for the year ended December 31, 20X3, your review of subsequent events disclosed the following items:a. January
In connection with her audit of the financial statements of Flowmeter, Inc., for the year ended December 31, 20X3, Joan Hirsch, CPA, is aware that certain events and transactions that have taken
Rita King, your staff assistant on the April 30, 20X2, audit of Maxwell Company, was transferred to another assignment before she could prepare a proposed adjusting journal entry for Maxwell’s
Your client is a company that owns a shopping center with 30 store tenants. All leases with the store tenants provide for a fixed rent plus a percentage of sales, net of sales taxes, in excess of a
The following are typical questions that might appear on an internal control questionnaire for payroll activities:1. Is there adequate separation of duties between employees who maintain human
In connection with an audit of the financial statements of Olympia Company, the auditors are reviewing procedures for accumulating direct labor-hours. They learn that all production is by job order
Rowe Manufacturing Company has about 50 production employees and uses the following payroll procedures.The factory supervisor interviews applicants and on the basis of the interview either hires or
Robertson Company had accounts receivable of $200,000 at December 31, 20X0, and had provided an allowance for uncollectible accounts of $6,000. After performing all normal auditing procedures
The audit staff of Adams, Barnes & Co. (ABC), CPAs, reported the following audit findings in their 20X5 audit of Keystone Computers & Networks (KCN), Inc.:1. Unrecorded liabilities in the amount of
Marshall and Wyatt, CPAs, has been the independent auditor of Interstate Land Development Corporation for several years. During these years, Interstate prepared and filed its own annual income tax
What auditing procedure can you suggest for determining the reasonableness of selling, general, and administrative expenses?
What safeguards should be employed when the inaccessibility of banking facilities makes it desirable to pay employees in cash?
You are asked by a client to outline the procedures you would recommend for handling of unclaimed wages. What procedures do you recommend?
What specific procedures are suggested by the phrase “test of controls over payroll transactions”?
What is the purpose of analytical procedures performed as a part of the overall review?
If the federal income tax returns for prior years have not as yet been reviewed by federal tax authorities, would you consider it necessary for the client to disclose this situation in a note to the
What is the meaning of the term commitment? Give examples. Do commitments appear in financial statements? Explain.
What are general risk contingencies? Do such items require disclosure in the financial statements?
Describe a disclosure checklist. What is its purpose?
The following situations represent excerpts from the responses to audit inquiries of external legal counsel of XYZ Co. during the annual audit of year 1 (€œlegal response€). For
Match the following terms to the appropriate definition (or partial definition). Each definition is used once.Terma. Commitmentb. Contingent liabilityc. General risk contingencyd. Iron curtain
Explain three situations in which the wording of a report with an unmodified opinion might depart from the auditors’ standard report.
What factors determine whether a misstatement is considered pervasive?
Why are adverse opinions rare?
Comment on whether you agree with the following: A basis for modified opinion paragraph is the same as a basis for qualified opinion paragraph.
Assume that CPAs are attesting to comparative financial statements. Can the CPAs change their report on the prior year’s statements?
Describe the reports containing audited financial statements that are customarily filed by a company subject to the reporting requirements of the SEC.
An accountant of an audit client made the following statement: It is important to read the notes to financial statements, even though they are presented in technical language and are
Rowe & Myers audits the financial statements of Dunbar Electronics. During the audit, Ross & Myers engaged Jones & Abbot, a Canadian public accounting firm, as a component auditor to audit
Lando Corporation is a domestic company with two wholly owned domestic subsidiaries. Michaels, CPA, has been engaged to audit the financial statements of the parent company and one of the
While performing your audit of Williams Paper Company, you discover evidence that indicates that Williams may not have the ability to continue as a going concern.a. Discuss types of information that
Multiple Choice Questionsa. A material departure from generally accepted accounting principles will result in auditor consideration of:(1) Whether to issue an adverse opinion rather than a disclaimer
For each of the following brief scenarios, assume that you are reporting on a client’s financial statements. Reply as to the type(s) of opinion possible for the scenario. In addition:• Unless
Use the following to provide the type of audit report the auditors generally should issue in the situations presented below:1. Unmodified—standard.2. Unmodified—with an emphasis-of-matter
Auditors report on the consistency of application of accounting principles. Assume that the following list describes changes that have a material effect on a client’s financial statements for the

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