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business
auditing

Questions and Answers of Auditing

Oak Industries, a manufacturer of radio and cable TV equipment and an operator of subscription TV systems, had a multitude of problems. Subscription services in a market area, for which $ 12 million
Horizontal analysis refers to changes of financial statement numbers and ratios across two or more years. Vertical analysis refers to financial statement amounts expressed each year as proportions of
As part of your regular year- end audit of a public client, you must estimate the probability of success of its proposed new product line. The client has experienced financial difficulty during the
Kelly Griffin, an audit manager, had begun preliminary analytical procedures of selected statistics related to the Majestic Hotel. Her objective was to obtain an understanding of the hotel's business
Dunder Mifflin Inc. wanted to expand its manufacturing and sales facilities. The company applied for a loan from First Bank, presenting the prior- year audited financial statements and the forecast
Audit Risk Model. Audit risks for particular accounts and disclosures can be conceptualized in the model: Audit risk (AR) 5 Inherent risk (IR) 3 Control risk (CR) 3 Detection risk (DR). Use this
Suppose management estimated the market valuation of some obsolete inventory at $ 99,000; this inventory was recorded at $ 120,000, which resulted in recognizing a loss of $ 21,000. The auditors
Risk Assessment. This question consists of a number of items pertaining to an auditor’s risk analysis for a company. Your task is to tell how each item affects overall audit risk— that is, the
Management fraud (fraudulent financial reporting) is not the expected norm, but it happens from time to time. In the United States, several cases have been widely publicized. They happen when motives
The following situations represent errors and frauds that could occur in financial statements. Required: State how the ratio in question would compare (higher, equal, or lower) to what the ratio
The enterprise risk management (ERM) framework was developed by COSO to provide managers a formalized methodology to evaluate risk in their businesses. Required: Explain how management would use the
Audit Strategy Memorandum. The auditor should establish an overall audit strategy that sets the scope, timing, and direction of the audit and guides the development of the audit plan. In establishing
Give an example of an error or fraud that would misstate financial statements to affect the accounts as follows, taking each case independently.a. Overstate one asset; understate another asset.b.
Audit standards distinguish auditors’ responsibility for planning procedures for detecting noncompliance with laws and regulations having a direct effect on financial statements versus planning
What is business risk?
How can the ERM framework help managers address business risk?
What are the three goals of an internal control system according to the COSO Report? Which of the three is most important to auditors?
What types of control breakdowns can cause a failure to achieve the goals?
What is the concept of reasonable assurance? Who is responsible for assessing reasonable assurance?
What are management’s and auditors’ respective responsibilities regarding internal control?
Define control risk and explain the role of control risk assessment in audit planning.
How does control risk affect the nature, timing, and extent of further audit procedures?
What are the five components of management’s internal control?
What is the control environment ?
What is an audit committee? What are its duties?
What kinds of functional responsibilities should be performed by different departments or persons in a control system with good separation of duties?
What is an audit trail? Of what use is it in the audit process?
Give some examples of everyday work an entity’s management can use to enact the monitoring component of internal control. When are such activities control activities and when are they monitoring
What is a “top- down” approach to evaluation of internal controls?
Must the overall understanding of internal control always be followed by assessment and testing phases? Explain.
Where can an auditor find a client’s documentation of the accounting system?
What are the advantages and disadvantages of documenting internal control by using (1) an internal control questionnaire, (2) a narrative memorandum, and (3) a flowchart?
What is the difference between document examination and reperformance when conducting tests of controls?
What is management’s responsibility for reporting on internal control over financial reporting?
What steps do audit teams follow in examining internal control over financial reporting?
What are (a) An internal control deficiency, (b) A significant deficiency, and (c) A material weakness?
What options are available to the auditor for presenting reports on the entity’s financial statements and internal control over financial reporting?
Describe the major components of the auditors’ standard, unqualified report on internal control over financial reporting.
What are some major reasons for departing from the standard, unqualified report on internal control over financial reporting?
What type of opinion(s) would the audit team issue on the effectiveness of internal control over financial reporting if a material weakness in internal control exists? How would the standard report
The most important fundamental component of an entity’s internal control is a. Effectiveness and efficiency of operations. b. People who operate the control system. c. Reliability of financial
The primary purpose for obtaining an understanding of a nonpublic audit client’s internal control is to a. Provide a basis for making constructive suggestions in a management letter. b. Determine
Effectiveness of audit procedures would be reduced by a. Selecting larger sample sizes for audit. b. Performing audit procedures at the fiscal year- end date as opposed to the interim period. c.
According to the PCAOB, during the audit of internal controls for an issuer, the ultimate objective of testing the design effectiveness of internal controls is to a. Determine whether the company’s
To test the operating effectiveness of a control, an audit team might use a combination of each of the following tests except for: a. Inquiry of client personnel. b. Observation of company
Which of the following is a preventive control? a. Reconciliation of a bank account. b. Recalculation of a sample of payroll entries by internal auditors. c. Separation of duties between the payroll
In most audits of large entities, control risk assessment contributes to audit efficiency, which means that a. The cost of substantive procedures will exceed the cost of control evaluation work. b.
Which of the following is a device designed to help the audit team obtain evidence about the accounting and control activities of an audit client? a. A narrative memorandum describing the control
Tests of controls in a GAAS audit are required for a. Obtaining evidence about the financial statement assertions. b. Accomplishing control over the occurrence of recorded transactions. c. Applying
A transaction- level internal control activity is best described as a. An action taken by auditors to obtain evidence. b. An action taken by client personnel for the purpose of preventing, detecting,
When planning the audit of internal controls for an issuer, the audit team should a. Identify significant accounts, locations, and assertions. b. Conduct a walkthrough of the internal control
A material weakness is a situation in which a. It is probable that an immaterial financial statement misstatement would not be detected on a timely basis. b. There is a remote likelihood that a
When completing the audit of internal controls for an issuer, the severity of an internal control deficiency depends on: a. Whether there is a reasonable possibility that the company’s controls
Which of the following does not accurately summarize auditors€™ requirements regarding internalcontrol?
When completing the audit of internal controls for a public company, the PCAOB requires auditors to audit internal controls over a. Operations. b. Compliance with regulations. c. Financial reporting.
When completing the audit of internal controls for a public company, AS 5 requires auditors to report onManagement’s Report An Audit of Internal Controlon Internal Controla. No Nob. Yes
When completing the audit of internal controls for a public company, AS 5 requires auditors to test a. Operating effectiveness only. b. Design effectiveness only. c. Both operating and design
Which of the following would probably not be considered an indication of a material weakness? a. Evidence of a material misstatement. b. Ineffective oversight by the audit committee. c. Immaterial
Which report would not be appropriate for a public accounting firm to provide on financial reporting controls? a. Unqualified— no material weaknesses found. b. Disclaimer of opinion— unable to
The purpose of separating the duties of hiring personnel and distributing payroll checks is to separate the a. Authorization of transactions from the custody of related assets. b. Operational
Which of the following statements is not true with respect to the auditors’ report on internal control over financial reporting? a. The report will be dated as of the date of the financial
If the auditors encounter a significant scope limitation in evaluating a public company’s internal control over financial reporting, which of the following types of opinions on the effectiveness of
Which of the following information would be included in the introductory paragraph of the auditors’ report on internal control over financial reporting if the report is presented separately from
If the auditor plans to assess control risk at less than the maximum and rely on controls, and the nature, timing, and extent of further audit procedures are based on that lower assessment, the
When testing a control activity’s operating effectiveness, procedures the auditor performs to test operating effectiveness would likely include a. Inquiry of appropriate personnel. b. Reading over
Matters that could affect the necessary extent of testing for a control activity as it related to the degree of auditor reliance on a control activity would not include the following: a. The
The auditor should assess control risk for each relevant assertion by evaluating the evidence obtained from all sources, includinga. The auditor’s testing of controls for the audit of internal
Once the auditor detects a control deficiency, which of the following steps must he or she take first? a. Perform tests of other controls related to the same assertion as the control deemed
Auditors are required to obtain a sufficient under-standing of each component of a client’s internal control. This understanding is used to assess control risk and plan the audit of the client’s
Your small business client, Phillip’s Computer Repair Shop, is experiencing financial difficulties and has to lay off one of its four employees in the accounting area. Phillip has asked you to
Indicate whether each of the following audit procedures is a test of controls, a substantive test, or dual- purpose test. Next, indicate the financial statement assertion most closely related to each
Your long- time client, Central Office Supply, has been rapidly expanding, and the board of directors is considering taking the company public. CEO Terry Puckett has heard that costs of operating a
Internal Control Questionnaire Items: Assertions, Tests of Controls, and Possible Errors or Frauds. Following is a selection of items from the payroll processing internal control questionnaire in
The 12 partners of a regional public accounting firm met in special session to discuss audit engagement efficiency. Jones spoke up, saying, “We all certainly appreciate the firm wide policies set
Simon Blfpstk Construction Company has two divisions. The president (Chris Simon) manages the roofing division. Simon delegated authority and responsibility for management of the modular
Refer to the internal control questionnaire on a payroll system. a. Assume that the answer to each question is no. Prepare a table matching the questions to errors or frauds that could occur because
For each of the following situations, describe how the auditors’ report on internal control over financial reporting would be modified from the standard, unqualified report. Do not write the actual
Assume that the local newspaper just ran the following headline and article: Audit Results: Airport executives from Kentucky racked up $ 500K in lavish expenses, concert tickets, and even
Reports on Internal Control over Financial Reporting (Identify Report Deficiencies). Sorrell, CPA, is auditing the financial statements of Van Dyke as of December 31, 2014. Sorrell’s substantive
Mini- Case: Control Environment. Refer to the mini- case “Unhealthy Accounting at HealthSouth” shown on page C14 and respond to Questions 3 and 4.3. How can auditors determine a company’s true
Effect of Internal Control Evaluation on Auditors’ Fees. Refer to the mini- case “ How Much Are Auditors Paid?” shown on page C23 and respond to Questions 5 and 6.5. For General Electric and
What are the primary reasons for conducting an evaluation of an audit client’s internal control?
What is the purpose of risk assessment for an entity
What is the difference between preventive controls and detective controls? Give an example of each.
What are tests of control activities?
What purposes are served by a dual- purpose test?
What type of opinion would be issued by the audit team as the result of a scope limitation on the examination of internal control over financial reporting?
What reports (other than auditors’ report) on internal control do audit teams give to an entity’s management, board of directors, or audit committee?
What are the defining characteristics of employee fraud? Embezzlement?
What does a fraud perpetrator look like? How does one act?
What are some pressures that can cause honest people to contemplate fraud? List some egocentric and ideological pressures as well as economic ones.
What conditions provide opportunities for employee fraud?
Give some examples of rationalizations that people have used to excuse fraud. Can you imagine using them?
Is capability required to commit a fraud? Is capability part of opportunity, or should it be considered a separate element of fraud?
Is there anything odd about these two situations?(a) A check to Larson Electric Supply was endorsed with “Larson Electric” above the signature of “Eloise Garfunkle.”(b) Numerous checks were
What is the basic sequence of activities in the cash collection process?
Why should a list of cash remittances be made and sent to the accounting department? Wouldn’t it be easier to send the cash and checks to the accountants so they can enter the credits to
What is lapping? What procedures can auditors employ to detect lapping?
What feature of the acquisition and expenditure control would be expected to prevent an employee from embezzling cash by creating fictitious vouchers?
How can you tell whether the amount on a check was altered after it was paid by a bank?

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