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business
auditing

Questions and Answers of Auditing

Why should auditors think about a compliance assertion that is not listed in the auditing standards about assertions?
How are assertions used in audit planning?
What audit planning activities are documented in the overall audit strategy?
What types of company’s need audited financial statements? What types of companies often do not need to be audited?
What is an “audit client”? How does it differ from an “auditee”?
Why does the successor auditor need to obtain the auditee’s consent in order for the predecessor auditor to provide the successor with information about the auditee?
What benefits are obtained by having an engagement letter?
What is interim audit work? Year-end audit work?
What steps can auditors use to apply comparison and ratio analysis to management’s financial statements?
How can computing the accounts receivable turnover ratio indicate potential misstatement in the accounts receivable balance?
How can computing the number of days of sales in inventory indicate potential misstatement in the inventory balance?
Is anything questionable about the relationship between retained earnings and income for the Anycompany data shown in Exhibit?
Why don’t preliminary analytical procedures provide direct evidence about financial statement misstatements? What then is their purpose in an audit?
What is material information in accounting and auditing?
What limitations of accounting affect auditors?
What are the advantages of using the same overall materiality level for planning the audit instead of assigning a part of the overall materiality to each account balance?
How do financial statement assertions relate to audit procedures?
Why is it particularly challenging to obtain audit evidence about the completeness assertion?
How does the overall audit strategy relate to the audit plan and detailed programs?
The following situations represent errors and irregularities that can occur in financial statements.Required:Your requirement is to state how the ratio in question would compare (greater, equal, or
In the table below, the left column names several €œclasses of transactions.€ The right column names several general ledger accounts.Required:Identify the general ledger accounts
Suppose management estimated the lower-of-cost- and net realizable value of some obsolete inventory at $99,000, and wrote it down from $120,000, recognizing a loss of $21,000. The auditors obtained
a. Which accounts may be most susceptible to overstatement? To understatement?b. Why do you think a company might permit asset accounts to be understated?c. Why do you think a company might permit
Walter Wolf was pleased. He had been with the firm of Riding, Hood & Co. less than a year-and-a-half since graduation from university and had received excellent performance reviews on every
The assertions listed in CAS 315 are each cross-referenced to the five principal assertions.Required:Why are these different terms used to describe assertions in different audit guidance materials?
If expertise in a field other than accounting or auditing is necessary to obtain sufficient appropriate audit evidence, an auditor may need to use the work of an auditor’s expert. The need for
As an exercise in using the CAS, see if you can link up the related CAS requirements and application and other explanatory material to the steps Jack has taken in the Analysis section of the
Your firm has been contacted by the president of Lyrac Inc. about becoming the company’s auditor. Lyrac was audited last year by PA Diggs and, while generally pleased with the services provided by
Sunrise Solar Inc. (SSI) is a medium-sized company that is developing solar energy systems for private residences and small businesses. It is privately owned, with the majority of the shares held by
The president of Allpurpose Loan Company had a genuine dislike for external auditors. Almost any conflict generated a towering rage. Consequently, the company changed auditors often.Wells &
The auditors were planning the work on the financial statements of the Mary Short Cosmetics Company. The unaudited financial statements showed $515,000 net income after providing an allowance of 35%
Your firm has been engaged to do the current year’s audit of Dawood Ltd., a medium sized business involved in manufacturing television screens and monitors. Dawood is privately owned and its two
Your firm has done the audit of Rhea Fashions Inc. for many years. You are in charge of the fieldwork for the current year’s audit. Rhea is a manufacturer of high-fashion clothing. Its shares are
Three former university classmates are meeting for dinner to celebrate completing their first year as junior auditors at three different public accounting firms. After reminiscing about the time they
The auditors of Letron Inc. have set an overall materiality level of $900,000 and a performance materiality level of $800,000 for the current year audit, 20X2. They used the same materiality levels
You are performing the audit of the Pirouette Systems Inc. (PSI) financial statements for its year ended November 30, 20X0. PSI is a private company that sells and installs computer networks for
Using the SEDAR database, find the most recent annual reports for two Canadian retailers (e.g., Loblaw, Rona, Danier Leather).Required:a. Based on the information provided in the companies’ audited
You are a PA in an accounting firm that has 10 offices in three provinces. Mr. Shine has approached you with a request for an audit. He is president of Hitech Software and Games Inc., a five-year-old
What are the four risks included in the audit risk model? How are they related?
What factors influence the auditor’s decision on an acceptable audit risk level?
Given an example of one account with high inherent risk and one with low inherent risk?
What is the purpose of a control framework?
Identify two control frameworks that can help in the auditor’s preliminary control risk assessment.
How do bad economic times increase the risks that auditors should be alert to in auditees’ financial statements?
What is the difference between “audit risk in an overall sense” and “audit risk applied to individual account balances”?
How does the auditor’s decision on materiality relate to audit risk?
How can the risk model be expanded to incorporate limitations to the audit that arise from accounting and other business risks?
Explain the business risk–based approach to the audit. What is its purpose?
How does understanding the business’s strategy help the auditor to assess business risk?
How do business processes relate to strategy and business risk?
Give an example of one business risk that affects the airline industry and one that affects a manufacturing business.
How do organizational differences relate to strategies and business processes?
What are the implications of a business using e-commerce on its business analysis?
What are some examples of external and internal business performance measures? How can these performance measures motivate management to misstate the financial statements?
What are the auditor’s communication responsibilities when he or she suspects or finds evidence of fraud? How do his or her responsibilities differ if the fraud involves low-level employees or
What are the activities in a financial performance analysis? When would the auditor design and carry out additional substantive audit procedures as a result of performance analysis?
Why does the auditor examine the relationship between financial and nonfinancial performance measures?
What are four of the major accounting processes? What accounts can be identified with each? Why can an accounting process be described as a cycle?
Why is the cash account involved in more than one accounting process?
How can business risks be managed?
What are some examples of management controls? What are the purposes of management controls?
Why does the auditor consider management’s controls of business processes?
How does business analysis relate to the auditor’s goal of assessing the risk that the financial statements might be materially misstated?
What are the five basic components of internal control?
What are the basic functions and components of an information system? How do information system functions relate to financial statement assertions?
How does the information system facilitate communication within an organization? Why is this communication important?
What are some of the important characteristics of “tone at the top” and control environment?
What is the auditor’s main purpose in understanding the auditee’s internal control system?
What are monitoring controls?
Distinguish among the control environment, general controls, and application controls.
What kinds of knowledge does the auditor gather to understand internal control and assess the risk of material misstatement?
Compare and contrast company-level controls to internal controls relevant to the audit?
What aspects of the accounting system are relevant to financial reporting objectives?
What misstatement risks might not be eliminated by automated control procedures? How does this possibility affect the audit?
Why do auditors seek information about the use of nonstandard journal entries?
In the hockey game analogy used to explain the audit risk factors, whom do the hockey team’s fans represent?
What is the relationship between business risk and audit risk?
How do risks of IT and e-commerce affect the risks of financial statement misstatements?
What is earnings quality, and what are some indicators of high-quality earnings?
What are the three components of business performance analysis? Why does the auditor conduct business performance analysis?
What are the activities of nonfinancial performance analysis?
Why do auditors tend to find it easier to look at accounting processes rather than individual trial balance accounts?
Are environmental controls preventive or detective/corrective? Explain.
What is the purpose of application controls? How does it differ from the purpose of general controls?
Super Natural Foods Limited manufactures, distributes, and sells all-natural grocery products.Required:Describe three business risks for this company and explain why they are important considerations
You are the auditor of Royal Health Limited (Royal). Royal is a public company that grows medicinal plants and sells them across North America, Europe, and the Far East. Its largest expense is
Required:Explain what an accounting process/cycle is and how it relates to business processes and to the entity’s financial statements. Why is the approach of identifying accounting
Required:What business processes would be related to each of the four accounting processes in the following businesses?a. a bicycle manufacturing businessb. an architectural firmc. a retail grocery
Required:In assessing the risk of material misstatement in the financial statements as a whole, why should auditors pay particular attention to external and internal performance measures that are
Audit risks for particular accounts and disclosures can be conceptualized in this model: Audit risk (AR) 5 Inherent risk (IR) 3 Internal control risk (CR) 3 Detection risk (DR).Required:Use this
Darter Ltd. is a medium-sized business involved in manufacturing and assembling consumer electronic products, such as DVD players, radios, and satellite receivers. It is privately owned. Its minority
Assume you have recently been assigned to the audit team working on the financial statement audit of Town Groceries Limited (TGL). As a member of the team you are now in the process of gaining an
The following newspaper article discusses strategic issues related to two large Canadian retailers: HBC and Winners.COST-CONSCIOUS STRATEGY SCORES WINNER FOR HBCHudson’s Bay Co. (HBC), in the midst
You have joined a public accounting firm as a junior auditor and have been assigned to the audit team for one of your firm’s largest audit engagements, Cold Beverages Corp. (CB), a large public
The 12 partners of a regional PA firm met in special session to discuss audit engagement efficiency. Jones spoke up, saying:“We all certainly appreciate the firm-wide policies set up by Martin and
Jabiru Inc.’s senior management recently obtained a new decision-support database system that allows the managers to generate standard reports and also customize enquiries that use data from all
You have been assigned to the audit of the financial statements of Office Moving and Storage Limited (OMS) for its year ending December 31, 20X2. The company started 10 years ago and is in the
What are the defining characteristics of white-collar crime, employee fraud, embezzlement, defalcation, management fraud, errors, and illegal acts?
What are the CAS requirements regarding: (a) Fraud risk assessment (b) Procedural audit work, (c) Professional skepticism, and (d) Reporting?
What are some of the pressures that can cause honest people to contemplate theft? List some egocentric and ideological pressures, as well as economic ones.

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