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business
auditing

Questions and Answers of Auditing

What are some examples of assurance services rendered on representations other than traditional financial statements?
What three elements of planning and supervision are considered essential in audit practice?
What is a practice inspection, and what roles does it play in the quality control self-regulation of the profession?
Compare the quality inspection reports of the CPAB and PCAOB. Do the PA firms in the United States and Canada have similar quality control problems?
You are meeting with executives of Cooper Cosmetics Corporation to arrange your firm’s engagement to audit the corporation’s financial statements for the year ending December 31. One executive
You have accepted the engagement of auditing the financial statements of the C. Reis Company, a small manufacturing firm that has been your auditee for several years. Because you were busy writing
Your public accounting practice is located in a town of 15,000 people. Your work, conducted by you and two assistants, consists of compiling clients’ monthly statements and preparing income tax
PA Musgrave and his associates audited the financial statements of North Company, a computer equipment retailer. Musgrave conducted the audit in accordance with the general and field work standards
The Lovett Corporation uses an IBM mainframe computer system with peripheral optical reader and high-speed laser printer equipment. Transaction information is initially recorded on paper documents
The standard unmodified report contains several important sentences and phrases. Give an explanation of why each of the following phrases is used instead of the alternative language indicated.1.
The Canadian Public Accountability Board (CPAB) and the Public Company Accounting Oversight Board (PCAOB) in the United States will provide oversight for public accountants who audit public
Consider the following two situations:1. The auditor discovers during the audit that the auditee company has entered a complex legal contract that involves transferring assets to another company if
A radio advertisement for a new software management product included the following statement: “According to ITR, Knovel’s new software product will pay back in three months.” ITR is an
The third reporting standard of GAAS states that the auditor’s opinion on the financial statements should indicate whether they present fairly the financial position, results of operations, and
Bunting Technology Corporation is a large public company that manufactures the IXQ, a telecommunications component that speeds up Internet transmission over fiber-optic cable. Subsequent to its
Auditors are required to have professional skepticism, but an auditor must also rely on management representations in order to complete the audit. Discuss the inherent conflicts in these two
During 2002 and 2003, United Nations weapon inspectors entered Iraq to search for “weapons of mass destruction.” These include chemical, biological, and nuclear weapons. It has been reported that
Access the CPAB website at www.cpab-ccrc.ca and find the most common weaknesses in Canadian audit practice as identified in their reports.
Some have proposed the idea of an “audit expectation gap” which is the difference between what the auditor accomplishes using GAAS and what third-party users expect from audited financial
Is there more of an expectations gap in private sector auditing or public sector auditing? Discuss. Explain any difference in terms of the independence characteristic. In particular, are public
Why would auditors act as though there is always a potential conflict of interest between the auditor and the management of the enterprise under audit?
Can the auditor detect deception without being skeptical? Explain.
When might the rule “Let conscience be your guide” not be a sufficient basis for your personal ethical decisions? For your professional ethical decisions?
Assume that you accept the following ethical rule: “Failure to tell the whole truth is wrong.” In the illustrations about (a) Your position as a bank director and (b) Your knowledge of the
Why are simplified monastic theories of ethics not sufficient for professional decision making?
What are some causes of auditors becoming defendants in lawsuits?
How do utilitarian ethics differ from duty-based ethics?
What are the three specific aspects of independence that an auditor should carefully guard in the course of a financial statement audit?
What proportion of lawsuits against accountants relate to tax practice?
Knowledge of the rules of conduct and related interpretations on independence, integrity, and objectivity will help you respond to the following cases.Required:For each case, state whether or not the
Knowledge of the rules of conduct, interpretations thereof, and related rulings on independence, integrity, and objectivity will help you respond to the following cases.Required: For each case, state
For each of the following completely independent situations, describe the rules of professional conduct that are relevant. Have they been violated? Support your conclusion.Situation ARandi Woode, PA,
In mid-May, Aileen Macdonald, PA, received a phone call from one of her largest clients, a manufacturer. The client wanted to know more details about the impact that the GST would have on his 20X4
Smith, PA, is the auditor for Juniper Manufacturing Corporation, a privately owned company that has a June 30 fiscal year.Juniper arranged for a substantial bank loan, which was dependent on the
A bank that lent considerable funds to a “high-flying” and, until its recent bankruptcy, highly successful real estate development company has hired your firm to investigate the company’s
Is there any moral difference between a disapproved action in which you are caught and the same action that never becomes known to anyone else? Do many persons in business and professional society
You are treasurer of a church. A member approaches you with the following proposition: “I will donate shares to the church on December 31, if, on January 1, you will sell them back to me. All you
Accounting firms are often asked to present “proposals” to companies’ boards of directors. These proposals are comprehensive booklets, accompanied by oral presentations, telling about the
A time budget is always prepared for audit engagements. Numbers of hours are estimated for various segments of the work—for example, internal control evaluation, cash, inventory, report review, and
All accountants’ performance evaluations are based in part on their ability to do audit work efficiently and within the time budget planned for the engagement. New staff accountants, in particular,
Knowledge of the rules of conduct and interpretations thereof will help you respond to this case problem. Gilbert and Bradley formed a corporation called Financial Services Inc. Each took 50% of the
The Unexpected Failure of Lehman Brothers. The failure of Lehman Brothers bank on September 15, 2008, created the largest bankruptcy in U.S. history and the global financial crisis that followed.
Why should Pas issue a report whenever they are associated with financial statements?
What is the difference between assurance and accounting credibility?
What are the major reasons for departures from the unmodified audit opinion?
If an auditor is not independent with respect to an auditee company, what should he or she do?
Explain the effect of materiality or pervasive materiality on an auditor report when the client uses an accounting method that departs from GAAP.
What is the most important distinction between an auditor’s opinion on financial statements and other PA communications?
What is negative assurance? When is negative assurance permitted?
Think about the standard unmodified introductory and scope paragraphs. What do they identify as the objects of the audit? What is meant by this sentence, “We conducted our audit in accordance with
With reference to evidence, what extent of evidence is required as a basis for the unmodified opinion? For an adverse opinion? For an opinion qualified for GAAP departure?
What are the differences between a report qualified for a scope limitation and a standard unmodified report?
What are the differences between a report in which the opinion is disclaimed because of scope limitation and a standard unmodified report?
For each of the situations described below, state whether the PA is or is not associated with the financial statements. What is the consequence of being associated with financial
The concept of materiality is important to PAs in audits of financial statements and expressions of opinion on these statements.Required:How will materiality influence an auditor’s reporting
Crow Corporation, a public company, has set up a number of limited partnerships to pursue some risky development projects. The limited partnerships borrow money from various financial institutions to
Ellen Eagle is a banker in a small town. Her customers, Dave and Dot Dauber, are the owners of a franchised candy store in town. They have an opportunity to buy a second franchised store in a nearby
Officers of the Kingston Company do not want to disclose information about the product liability lawsuit filed by a customer asking $500,000 in damages. They believe the suit is frivolous and without
The following audit report was drafted by an assistant at the completion of the audit of Cramdon Inc., on March 1, 20X5. The partner in charge of the engagement has decided the opinion on the 20X4
One of your neighbors, Hans House, is a minority shareholder of Grackle Corporation, a private company. Grackle is also the company that employs Hans. Recently Hans and the other Grackle Corporation
Explain the difference between “negative assurance” and an “adverse opinion.”
Give three examples of fact situations in which the General Standards of GAAS are not met. For each example, explain the impact of the violation on the scope of the audit and the audit report.
Give one example of a fact situation in which each of the three Examination Standards of GAAS are not met. For each example explain the impact of the violation on the scope of the audit and the audit
The unmodified audit opinion states that the financial statements “. . . present fairly. . . in accordance with Canadian generally accepted accounting principles.”Required:a.
a. What alternative procedures can an auditor perform to determine whether the inventory balance is not materially misstated when he or she is appointed in the middle of the year and did not observe
a. What alternative procedures can an auditor perform to determine whether the accounts receivable balance is not materially misstated when client management will not permit audit confirmations to
Describe the pre-2011 requirements of Canadian GAAS for reporting for contingencies and uncertainties. Identify the pros and cons of the current approach, contrasting these with the pros and cons of
Current Canadian GAAS through 2010 did not permit the auditor to refer to a going-concern uncertainty in the audit report when the uncertainty was properly disclosed in the financial statement
For the purpose of assessing the going-concern assumption, it is presumed that the auditor will consider whether the company will continue in existence for a “reasonable time” that does not
PA is the auditor of Jayhawk Inc. Jayhawk’s revenues and profitability have decreased in each of the past three years and, as of this year end, 20X3, its retained earnings will fall into a deficit
Before 2011, CICA Handbook, paragraph 5510.53, provided guidance for audit reporting when there is a going-concern problem. Required: a. Critique the audit reporting required by paragraph 5510.53
CICA Handbook section 7600 sets out procedures relating to requests for advice from a PA from parties other than the PA’s audit clients.Required:a. What are the purposes of section 7600?b. Describe
Kite Corporation’s auditor, PA1, formed the opinion that Kite should accrue for estimated future costs to clean up an environmental problem on one of Kite’s properties in its 20X3 financial
Lark Limited reports a material balance of deferred development costs in its current financial statements. The cost relates to the development of a mobile robot that can be used to monitor
Explain auditor responsibilities regarding going-concern disclosures under GAAS. Contrast these with GAAP requirements and discuss ways of reconciling the two.
Investigate the history and current status of the CICA Exposure Draft on the going-concern assumption that was originally issued in 1996. Use the CICA website, CA Magazine, and other professional
Find Nortel’s 2004 annual report on its website or SEC filings, and review the audit reports for 2001–2004. In light of Nortel’s history, do you think these reports are appropriate? Discuss.
What other ongoing activities do auditors need to perform to complete an audit in accordance with generally accepted auditing standards as set out in the GAS?
What sources of information can an auditor use in deciding whether to accept a new audit engagement?
High Roller Inc. needs an audit and has asked two different audit firms to bid on the engagement. Both auditors assess the engagement risk to be high. Auditor A declines the engagement, but Auditor B
What is the purpose of a time budget, and what information does it contain?
Why does the auditor need a good understanding of the auditee’s business and environment?
How do changes in the economic environment affect a business’s risks?
How do changes in the industry environment affect a business’s risks?
What specific risks exist in high-tech companies? In the forestry industry?
What is the role of the auditor’s understanding of the business and its risks in performing analytical procedures?
What are five types of general analytical procedures?
What official documents and authorizations should an auditor read when performing preliminary analytical procedures?
What important information can be found in directors’ minutes about officers’ compensation, business operations, corporate finance, accounting policies, and control?
What is the role of business risk analysis in the audit planning process?
What can the auditor learn from a vertical analysis?
What are some of the ratios that can be used in preliminary analytical procedures? Discuss.
What is the operating cash flow for the current year for Anycompany shown in Exhibit?
How is the materiality level applied in auditing an accounting estimate?
What do you think is the best objective evidence of the reasonableness of an accounting estimate? Use the allowance for doubtful accounts receivable as an example.
How does overall materiality for the financial statements as a whole differ from overall performance materiality in the auditing standards?
What issues arise if an auditor realizes part way through the audit that a smaller materiality level is appropriate?
Why are qualitative criteria important in the auditor’s materiality decision?
How do fraud considerations relate to the auditor’s materiality decision?
Briefly explain the five principal assertions that can be made about assets and liabilities, and auditors’ objectives related to each.

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