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business
auditing

Questions and Answers of Auditing

Risk Capital Limited, a Delaware corporation, was considering the purchase of a substantial investment in Florida Sunshine Corporation, a closely held corporation. Initial discussions with the
Smith, CPA, is the auditor for Juniper Manufacturing Corporation, a nonpublic entity that has a June 30 fiscal year. Juniper arranged for a substantial bank loan, which depended on the bank receiving
Flacco, CPA, conducted the audit of Raven Company and issued an unmodified opinion that concluded that the financial statements presented its financial condition, results of operations, and cash
Madeoff is a small, nonpublic retailer seeking capital for expansion. To obtain necessary capital, Madeoff engaged Allen, CPAs to audit is annual financial statements. In discussing the engagement,
Mason & Dilworth (M& D), CPAs, were auditors for Hotshot Company, a closely held corporation owned by 30 residents of the area. Hotshot had previously engaged M& D to perform some compilation and tax
Orange is a public entity whose shares are traded on a national exchange. A Public Company Accounting Oversight Board inspection revealed a deficiency in audits conducted by Orange’s auditor,
Jones, CPA, audits a number of public-companies. During the past year, some deficiencies with respect to audits conducted for two of Jones’s clients in the software industry (SoftWare and
In the United States, it has become common to seek recovery of financial losses from other parties, often even if that other party is not at fault. Frequently, this occurs by means of a class action
Butler Manufacturing Corporation raised capital for a plant expansion by borrowing from a bank and making a stock offering. Butler engaged Weaver, CPA, to audit its December 2014 financial
One of your firm’s clients, Fancy Fashions Inc., is a highly successful, rapidly expanding entity. It is owned predominantly by the Munster family and key corporate officials. Although additional
Liability Exposure. Chriswell Corporation decided to raise additional long- term capital by issuing $ 20 million of 12 percent subordinated debentures to the public. May, Clark & Company, CPAs, the
Rule 10(b) - 5 Liability under the Securities Exchange Act of 1934. Gordon & Groton (G& G), CPAs, were auditors of Bank & Company, a brokerage firm and member of a national stock exchange. G& G
Anderson, Olds, and Watershed (AOW) have been the independent auditors for Accord Corporation since 1990. Accord is a public entity obligated to file periodic reports under the Securities Exchange
Adam, an Illinois resident, was interested in purchasing stock in Joshua Foods Inc. Joshua Foods has corporate head-quarters in Fond du Lac, Wisconsin, and is incorporated in Delaware. Adam e-mailed
Mini- Case: Ethics. Refer to the mini- case “Andersen: An Obstruction of Justice?” on page C1 and respond to questions 1, 2, 3, 4, 5, and 7.On page C11. Look up the term corrupt in the
Describe the due diligence and causation defenses available to auditors under the Securities Act.
What liability exposure for auditors is found in the Securities Act in (a) section 17 and ( b) section
What are the criminal penalties associated with violations of the Securities Exchange Act?
What is the difference between joint and several liability and proportionate liability?
What new requirement was enacted in the Securities Litigation Uniform Standards Act that affected class action lawsuits?
What auditing services do internal auditors provide?
What auditing services do governmental auditors provide?
What difficulties do auditors find when conducting a performance audit?
How can governmental and internal auditors try to achieve objectivity when developing conclusions about economy, efficiency, or program results?
What scope of practice do GAGAS suggest or require?
What audit fieldwork requirements do GAGAS and the Single Audit Act of 1984 impose that AICPA generally accepted auditing standards do not?
What are the major differences between independent auditors’ reports on financial statements and internal and governmental reports on efficiency, economy, and program results audits?
Compare and contrast the type of work performed by external auditors (auditing financial statements to render an opinion) and fraud examiners.
Internal auditors have one of the highest incidents of fraud detection (higher then external auditors). Why might this be true? To what extent would you think internal auditors include fraud
Why might fraud examiners’ attitudes about control systems and materiality differ from that of other auditors?
Why do fraud examiners handle information in a different manner than auditors? Why is this important?
Which of the following would be considered in determining whether an internal audit department is independent? a. The organizational level of the chief audit officer and the objectivity of the audit
Which of the following would be considered the most significant problem for internal audit if the chief audit executive reports to the controller? a. The controller would amend the audit schedule so
Which of the following is not an internal audit objective designed to add value to a purchas-ing department? a. A review of the bidding process indicates that a vendor company may be operating under
In an internal auditor’s report, audit findings would include all of the following except a. The effect of audit finding on the auditee or the company. b. The cause of the audit finding. c. The
Governmental auditors’ independence and objectivity are enhanced when they report the results of an audit assignment directly to a. Managers of the government agency under audit and in which the
In all audits of governmental units performed according to GAGAS, the most important work is a. Compliance auditing. b. Obtaining a sufficient understanding of internal control. c. Documentation of
Which of the following is considered different and more limited in objectives than the others? a. Operational auditing. b. Performance auditing. c. Management auditing. d. Financial statement
A typical objective of an operational audit is for the auditor to a. Determine whether the financial statements fairly present the company’s operations. b. Evaluate the feasibility of attaining
A governmental auditor assigned to audit the financial statements of the state highway department would not be considered independent if the auditor a. Also held a position as a project manager in
Governmental auditing can extend beyond audits of financial statements to include audits of an agency’s efficient and economical use of resources and a. Constitutionality of laws and regulations
Which of the following best describes how the detailed audit plan of a financial statement auditor compares with the audit client’s comprehensive internal audit plan? a. The comprehensive internal
Which of the following is usually not part of an internal audit department’s audit charter? a. A commitment from management to ensure the independence of the internal audit department. b. A
Which of the following would you not expect to see in an auditor’s report(s) on the financial statements of an independent government agency? a. A statement that the audit was conducted in
The federal Single Audit Act of 1984 requires auditors to determine and report several things about state and local governments that receive federal funds. Which of the following is not normally
The Government Accountability Office (GAO) describes expanded- scope governmental auditing to include all of the following except a. Financial statement audits. b. Attestation engagements. c.
In government and internal performance auditing, which of the following is the least important consideration when performing the fieldwork? a. Determining the applicable generally accepted government
Which of the following is the least important consideration for a governmental auditor who needs to be objective when auditing and reporting on an agency’s achievement of program goals? a. Measure
Compliance auditing performed under the Single Audit Act of 1984 in accordance with GAGAS is necessary for an auditor’s a. Report on the auditee’s internal control, including reportable
Which two of the following characterize the work of fraud examiners? a. Analysis of control weaknesses for determination of acceptable fraud risk. b. Analysis of control strengths as a basis for
When auditing with “fraud awareness,” auditors should especially notice and review employee activities under which of these conditions? a. The company always estimates the inventory but never
The best way to enact a broad fraud prevention program is to a. Install airtight control systems of checks and supervision. b. Name an ethics officer who is responsible for receiving and acting upon
A reason to believe that a fraud has occurred is called a. Deliberation. b. Forensics. c. Predication. d. Restitution
In a fraud examination, original documents must be protected from damage and tampering to a. Establish motive. b. Develop documentation for employee dismissal. c. Protect the chain of custody. d.
An environmental audit might include all of following except a. Determining that proper tracking of waste material is being maintained by the organization. b. Reviewing the liability account
Audits may be characterized as (a) Financial statement audits, (b) Compliance audits, (c) Economy and efficiency audits, and (d) Program audits. The work can be done by independent (external)
You are the director of internal auditing of a large municipal hospital. You receive monthly financial reports prepared by the accounting department, and your review of them has shown that total
The study and evaluation of management risk control in a governmental or internal audit is not easy. First, auditors must determine the risks and the controls subject to audit. Then they must find a
External auditors usually calculate inventory turnover (cost of goods sold for the year divided by average inventory) and use the ratio as a broad indication of inventory age, obsolescence, or
Internal auditors perform risk- based audits that go beyond the risks of the financial statements. Assume you are on the internal audit staff of McDonald’s.Required:a. Identify the risks in the
A public accounting firm has been engaged to audit a local food distribution program funded by the U. S. Department of Agriculture. The engagement is to encompass both financial and performance
The following lettered items are some “suspicions,” and you have been requested to select some effective procedures designed to con-firm or repudiate the suspicions.a. The custodian of the petty
A fraud examiner was called into a business because of a suspicion of fraud. An assistant manager in a bookstore is taking books off the shelf, bringing them to the return book area, completing a
The following problem is based on an actual program and situation.The Office of Economic Opportunity (OEO) designed special programs to have a major impact on unemployment, dependency, and community
Danny Deck, the director of internal auditing for Rice Department Stores, was working in his office one Thursday when Chris McMurray, president of the company, burst in to tell Deck about a problem.
The GAO reporting standards for performance audits state that each report should include “recommendations for action to correct the problem areas and to improve operations.” For example, an audit
The U. S. Postal Service (USPS) advertises prompt delivery schedules for express mail (overnight delivery) and priority mail (two- to– three- day delivery). The USPS knows various risks that may
Embezzlers often try to cover up by removing canceled checks they made payable to themselves or endorsed on the back with their own names. Missing canceled checks are a signal (red flag). However,
Many companies outsource their internal audit function to CPA firms. Required: a. What benefits might be gained from having a CPA firm provide its internal audit services? b. What benefits might be
Wen-Li is an internal auditor for Main Electrical Supply in Springfield, Illinois. During her audit, she came across the invoice shown in Exhibit D. 60.1.The invoice is in almost pristine condition
a quality audit, defining the measurement criteria is often difficult and time consuming. You have been a student at a college or university for several years and should have a basic understanding of
Go to the website of the town where you reside and find the Comprehensive Annual Financial Report (CAFR). Find and print the auditor’s report. Warning: Be careful! CAFRs can be more than 100 pages,
How can internal auditors achieve practical independence?
Why do GAGAS require a review for compliance with laws and regulations in conjunction with financial audits?
Why do you think GAGAS reporting standards permit performance audit reports to include the views of responsible officials concerning the auditors’ findings, conclusions, and recommendations?
Why is prosecution of fraud perpetrators generally a good idea?
How is sampling risk controlled?
What are the seven major steps involved with sampling?
Briefly identify and explain the four methods used to select sample items.
What methods of sample selection are appropriate to use with a statistical sampling plan? Why?
Define the terms precision ( allowance for sampling risk), reliability ( confidence), and precision interval.
Describe the basic procedure used to evaluate sample results.
What are the two sampling risks associated with attributes sampling? What types of losses are associated with each of these risks?
What are the two sampling risks associated with variables sampling? What types of losses are associated with these risks?
What factors affect the sample size used in an attributes sampling application? How do these factors affect sample size?
What factors affect the sample size used in a variables sampling application? How do these factors affect sample size?
In an audit sampling application, an auditor a. Performs procedures on all items in a balance and makes a conclusion about the entire balance. b. Performs procedures on less than 100 percent of the
Auditors consider statistical sampling to be characterized by the following: a. Representative sample selection and nonmathematical evaluation of the results. b. Carefully biased sample selection and
In which of the following scenarios would the use of sampling be most appropriate? a. The population consists of a relatively small number of items. b. The need for precise information about the
The risk that the decision made based on the sample will differ from the decision made based on the entire population is referred to as a. Audit risk. b. Examination risk. c. Sampling risk. d.
Which of the following is not a method that auditors use to control their exposure to sampling risk during the examination? a. Determining an appropriate sample size. b. Performing the appropriate
Which of the following is an advantage of non-statistical sampling? a. It measures the audit team’s exposure to sampling risk. b. It is required by generally accepted auditing standards. c. It
Selecting a sample using a series of random numbers to identify sample items is referred to as a. Block selection. b. Haphazard selection. c. Systematic random selection. d. Unrestricted random
If systematic selection is used with a starting point of 10, a population size of 100, and a necessary sample size of 20, the first three items selected for examination would be a. 10, 110, 210. b.
A limitation of systematic random selection is that this method a. Has a relatively low likelihood of yielding a representative sample. b. Results in a larger sample size than other selection
Which of the following is appropriately used for statistical sampling applications?
Which of the following pairs of selection methods could appropriately be used in statistical sampling applications? a. Unrestricted random selection, block selection. b. Block selection, haphazard
The distance from the sample estimate that has a certain likelihood (equal to reliability) of including the true population value is known as the a. Confidence. b. Mean. c. Precision. d. Precision
The likelihood that an identified precision interval contains the true (but unknown) population value is the a. Confidence. b. Mean. c. Precision. d. Sampling risk
Which of the following statements is not true if the precision interval for a sampling risk of 10 percent ranges from 60 to 70? a. A 10 percent probability exists that the true population value is

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