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business
auditing

Questions and Answers of Auditing

What sources are used by the auditor to gather information to assess fraud risks?
What should the audit team consider in its planning discussion about fraud risks?
Auditors are required to make inquiries of individuals in the company when gathering information to assess fraud risk. Identify those with whom the auditor must make inquiries.
Describe the purpose of corporate codes of conduct and identify three examples of items addressed in a typical code of conduct.
Discuss the importance of the control environment, or "setting the tone at the top," in establishing a culture of honesty and integrity in a company.
Distinguish management's responsibility from the audit committee's responsibility for designing and implementing antifraud programs and controls within a company.
What are the three categories of auditor responses to fraud risks?
What three auditor actions are required to address the potential for management override of controls?
Describe the three main techniques used to manipulate revenue.
You go through the drive-through window of a fast food restaurant and notice a sign that reads "your meal is free if we fail to give you a receipt." Why would the restaurant post this sign?
Name the three categories of inquiry and describe the purpose of each when used by an auditor to obtain additional information about a suspected fraud.
Identify three verbal and three nonverbal cues that may be observed when making inquiries of an individual who is being deceitful.
You have identified a suspected fraud involving the company's controller. What must you do in response to this discovery? How might this discovery affect your report on internal control when auditing
Multiple Choice QuestionsThe following questions address fraud risk factors and the assessment of fraud risk.a. Because of the risk of material misstatements due to fraud (fraud risk), an audit of
Multiple Choice QuestionsThe following questions concern the auditor's responses to the possibility of fraud.a. When fraud risk factors are identified during an audit the auditor's documentation
Multiple Choice QuestionsThe following questions address fraud risks in specific audit areas and accounts.a. Cash receipts from sales on account have been misappropriated. Which of the following acts
During audit planning, an auditor obtained the following information:1. Management has a strong interest in employing inappropriate means to minimize reported earnings for tax-motivated reasons.2.
Assessing the risk of fraud in a financial statement audit is a difficult audit judgment. Auditing standards require the auditor to perform several audit procedures to accumulate information to
The Art Appreciation Society operates a museum for the benefit and enjoyment of the community. When the museum is open to the public two clerks who are positioned at the entrance collect a $5.00
The following misstatements are included in the accounting records of the Joyce Manufacturing Company:1. A shipment to a customer was not billed because of the loss of the bill of lading.2. A sales
Appliances Repair and Service Company bills all customers rather than collecting in cash when services are provided. All mail is opened by Tom Gyders, treasurer. Gyders, a CPA, is the most qualified
The Kowal Manufacturing Company employs about 50 production workers and has the following payroll procedures. The factory foreman interviews applicants and on the basis of the interview either hires
Each year near the balance sheet date, when the president of Bargon Construction, Inc. takes a 3-week vacation to Hawaii, she signs several checks to pay major bills during the period she is absent.
The following are activities that occurred at Franklin Manufacturing, a nonpublic company.1. Franklin's accountant did not record checks written in the last few days of the year until the next
The following are various potential frauds in the sales and collection cycle:1. The company engaged in channel stuffing by shipping goods to customers that had not been ordered.2. The allowance for
The following audit procedures are included in the audit program because of heightened risks of material misstatements due to fraud.1. Use audit software to search cash disbursement master files for
Kent, CPA, is the engagement partner on the financial statement audit of Super Computer Services Co. (SCS) for the year ended April 30, 2011.On May 6, 2011, Smith, the senior auditor assigned to the
In Parts I (pp. 245-247) and II (pp. 287-288) of this case you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing. In Part III
This problem requires the use of ACL software, which is included in the CD attached to the text. Information about installing and using ACL and solving this problem can be found in Appendix, pages
SAS No. 99 requires auditors to conduct a brainstorming session to discuss the potential for fraud and how the auditor might respond to the risk of fraud. However, the standard provides limited
Explain how client internal controls can be improved through the proper installation of IT.
Identify risks for accounting systems that rely heavily on IT functions.
Define what is meant by an audit trail and explain how it can be affected by the client's integration of IT.
Distinguish between random error resulting from manual processing and systematic error resulting from IT processing and give an example of each category of error.
Identify the traditionally segregated duties in noncomplex IT systems and explain how increases in the complexity of the IT function affect that separation.
Distinguish between general controls and application controls and give two examples of each.
Identify the typical duties within an IT function and describe how those duties should be segregated among IT personnel.
Explain how the effectiveness of general controls affects the auditor's tests of automated application controls, including the auditor's ability to rely on tests done in prior audits.
Explain the relationship between application controls and transaction-related audit objectives.
Explain what is meant by auditing around the computer and describe what must be present for this approach to be effective when auditing clients who use IT to process accounting information.
Explain what is meant by the test data approach. What are the major difficulties with using this approach? Define parallel simulation with audit software and provide an example of how it can be used
Describe risks that are associated with purchasing software to be installed on desktop computer hard drives. What precautions can clients take to reduce those risks?
Compare the risks associated with network systems to those associated with centralized IT functions.
How does the use of a database management system affect risks?
An audit client is in the process of creating an online Web-based sales ordering system for customers to purchase products using personal credit cards for payment.Identify three risks related to an
Your client has outsourced the majority of the accounting information system to a third-party data center. What impact would that have on your audit of the financial statements?
Multiple Choice QuestionsThe following questions concern the characteristics of IT systems. Choose the best response.a. Effective management of information technologies in an organization embraces
Multiple Choice QuestionsThe following questions concern auditing complex IT systems. Choose the best response.a. Which of the following client IT systems generally can be audited without examining
The following are misstatements that can occur in the sales and collection cycle:1. A customer number on a sales invoice was transposed and, as a result, charged to the wrong customer. By the time
You are doing the audit of Phelps College, a private school with approximately 2,500 students. With your firm's consultation, they have instituted an IT system that separates the responsibilities of
The Meyers Pharmaceutical Company has the following system for billing and recording accounts receivable:1. An incoming customer's purchase order is received in the order department by a clerk who
During your audit of Wilcoxon Sports, Inc., a retail chain of stores, you learn that a programmer made an unauthorized change to the sales application program even though no work on that application
You are conducting an audit of sales for the James Department Store, a retail chain store with a computer-based sales system in which computer-based cash registers are integrated directly with
A CPA’s client, Boos & Baumkirchner, Inc., is a medium-size manufacturer of products for the leisure-time activities market (camping equipment, scuba gear, bows and arrows, and so forth). During
One of the firm's audit partners, Alice Goodwin, just had lunch with a good friend, Sara Hitchcock, who is president of Granger Container Corporation. Granger Container Corp. is a fast-growing
Following are 10 key internal controls in the payroll cycle for Gilman Stores, Inc.Key Controls1. To input hours worked, payroll accounting personnel input the employee's Social Security number. The
Your new audit client, Hardwood Lumber Company, has a computerized accounting system for all financial statement cycles. During planning, you visited with the information systems vice president and
Parts for Wheels, Inc. has historically sold auto parts directly to consumers through its retail stores. Due to competitive pressure, Parts for Wheels installed an Internet-based sales system that
Based on a cost-benefit analysis, management at First Community Bank decided to contract with Technology Solutions, a local data center operator, to host all of the bank's financial reporting
The information systems (IS) department at Jacobsons Inc. consists of eight employees, including the IS Manager, Melinda Cullen. Melinda is responsible for the day-to-day oversight of the IS function
This problem requires the use of ACL software, which is included in the CD attached to the text. Information about installing and using ACL and solving this problem can be found in Appendix, pages
The proliferation of information technology (IT) has made governance of IT an important issue for businesses of all sizes and types, as well as their auditors. The IT Governance Institute has
What are the five types of tests auditors use to determine whether financial statements are fairly stated? Identify which tests are performed to reduce control risk and which tests are performed to
What is the purpose of risk assessment procedures and how do they differ from the four other types of audit tests?
What is the purpose of tests of controls? Identify specific accounts on the financial statements that are affected by performing tests of controls for the acquisition and payment cycle.
Distinguish between a test of control and a substantive test of transactions. Give two examples of each.
State a test of control audit procedure to test the effectiveness of the following control: Approved wage rates are used in calculating employees' earnings.State a substantive test of transactions
A considerable portion of the tests of controls and substantive tests of transactions are performed simultaneously as a matter of audit convenience. But the substantive tests of transactions
Evaluate the following statement: "Tests of sales and cash receipts transactions are such an essential part of every audit that I like to perform them as near the end of the audit as possible. By
Explain how the calculation and comparison to previous years of the gross margin percentage and the ratio of accounts receivable to sales are related to the confirmation of accounts receivable and
Distinguish between substantive tests of transactions and tests of details of balances. Give one example of each for the acquisition and payment cycle.
The auditor of Ferguson's Inc. identified two internal controls in the sales and collection cycle for testing. In the first control, the computer verifies that a planned sale on account will not
Assume that the client's internal controls over the recording and classifying of fixed asset additions are considered deficient because the individual responsible for recording new acquisitions has
For each of the eight types of evidence discussed in Chapter 7, identify whether it is applicable for risk assessment procedures, tests of controls, substantive tests of transactions, analytical
Rank the following types of tests from most costly to least costly: analytical procedures, tests of details of balances, risk assessment procedures, tests of controls and substantive tests of
In Figure, explain the difference among C3, C2, and C1. Explain the circumstances under which it will be a good decision to obtain audit assurance from substantive tests at point C1. Do the same for
State the four-step approach to designing tests of controls and substantive tests of transactions.
Why is it desirable to design tests of details of balances before performing tests of controls and substantive tests of transactions? State the assumptions that the auditor must make in doing so.
Explain the relationship of tolerable misstatement, inherent risk, and control risk to planned tests of details of balances.
List the eight balance-related audit objectives in the verification of the ending balance in inventory and provide one useful audit procedure for each of the objectives.
Why do auditors often consider it desirable to perform audit tests throughout the year rather than wait until year-end? List several examples of evidence that can be accumulated before year-end
Multiple Choice QuestionsThe following questions concern types of audit tests.Choose the best response.a. The auditor looks for an indication on duplicate sales invoices to see whether the accuracy
Multiple Choice QuestionsThe following questions deal with tests of controls. Choose the best response.a. Which of the following statements about tests of controls is most accurate?(1) Auditing
The following are 11 audit procedures taken from an audit program:1. Foot the accounts payable trial balance and compare the total with the general ledger.2. Confirm accounts payable balances
The following are audit procedures from different transaction cycles:1. Examine duplicate copy of shipping documents for evidence that quantities were verified before shipment.2. Select a sample of
The following are audit procedures from different transaction cycles:1. Use audit software to foot and cross-foot the cash disbursements journal and trace the balance to the general ledger.2. Select
The following are independent internal controls commonly found in the acquisition and payment cycle. Each control is to be considered independently.1. At the end of each month, an accounting clerk
The following internal controls for the acquisition and payment cycle were selected from a standard internal control questionnaire.1. Checks are mailed by the owner or manager or a person under her
Beds and Spreads, Inc. specializes in bed and bath furnishings. Its inventory system is linked through the Internet to key suppliers. The auditor identified the following internal controls in the
Following are evidence decisions for the three audits described in Figure.Audit Assurance from Substantive Tests and Tests of Controls atDifferent Levels of Internal Control EffectivenessAudit A
Following are several decisions that the auditor must make in an audit of a nonpublic company. Letters indicate alternative conclusions that could be made.Requireda. Identify the sequence in which
The following are three situations, all involving nonpublic companies, in which the auditor is required to develop an audit strategy:1. The client has inventory at approximately 50 locations in a
Kim Bryan, a new staff auditor, is confused by the inconsistency of the three audit partners she has been assigned to on her first three audit engagements. On the first engagement, she spent a
The following are parts of a typical audit for a company with a fiscal year-end of July 31.1. Confirm accounts payable.2. Do tests of controls and substantive tests of transactions for the
Gale Brewer, CPA, has been the partner in charge of the audit of Merkle Manufacturing Company, a nonpublic company, for 13 years. Merkle has had excellent growth and profits in the past decade,
In evaluating the audit approach for McClain for the current year's audit, Sessions believed that a substantive approach was really only appropriate for the audits of small nonpublic companies. In
The engagement partner agreed with Sessions’s recommended approach. In planning the audit evidence for detailed inventory tests, the audit risk model was applied with the following results:TDR =
Although the planning went well, the actual testing yielded some surprises. When conducting tests of controls over acquisitions and additions to the perpetual inventory, the staff person performing
Auditors develop overall audit plans to ensure that they obtain sufficient appropriate audit evidence. The timing and extent of audit procedures auditors use is a matter of professional judgment,
Describe the nature of the following documents and records and explain their use in the sales and collection cycle: bill of lading, sales invoice, credit memo, remittance advice, monthly statement to

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