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business
auditing

Questions and Answers of Auditing

You have been assigned to the confirmation of aged accounts receivable for the Blank Paper Company audit. You have tested the aged trial balance and selected the accounts for confirming. Before the
You have been assigned to the first audit of the Chicago Company for the year ending March 31, 2011. Accounts receivable were confirmed on December 31, 2010, and at that date the receivables
The following are various changes in audit circumstances.Audit Circumstance1. Analytical procedures indicated a significant slowing in accounts receivable turnover.2. The client entered into sales
In the confirmation of accounts receivable for the Reliable Service Company, 85 positive and no negative confirmations were mailed to customers. This represents 35% of the dollar balance of the
You are auditing the sales and collection cycle for the Smalltown Regional Hospital, a small not-for-profit hospital. The hospital has a reputation for excellent medical services and deficient record
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
In recent years, several high-profile incidents of improper revenue recognition attracted the attention of the business media. The SEC has also expressed concerns about the number of instances of
What major difference between (a) Tests of controls and substantive tests of transactions(b) Tests of details of balances makes attributes sampling inappropriate for tests of details of balances?
Define stratified sampling and explain its importance in auditing. How can an auditor obtain a stratified sample of 30 items from each of three strata in the confirmation of accounts receivable?
Distinguish between the point estimate of the total misstatements and the true value of the misstatements in the population. How can each be determined?
Evaluate the following statement made by an auditor: "On every aspect of the audit where it is possible, I calculate the point estimate of the misstatements and evaluate whether the amount is
Define monetary unit sampling and explain its importance in auditing. How does it combine the features of attributes and variables sampling?
Define what is meant by sampling risk. Does sampling risk apply to nonstatistical sampling, MUS, attributes sampling, and variables sampling? Explain.
What are the major differences in the 14 steps used in nonstatistical sampling for tests of details of balances versus for tests of controls and substantive tests of transactions?
The 2,620 inventory items described in Question are listed on 44 inventory pages with 60 lines per page. There is a total for each page. The client's data are not in machine-readable form. Describe
Explain how the auditor determines tolerable misstatement for MUS.
Explain what is meant by acceptable risk of incorrect acceptance. What are the major audit factors affecting ARIA?
Evaluate the following statement made by an auditor: "I took a random sample and derived a 90 percent confidence interval of $800,000 to $900,000. That means that the true population value will be
What is the relationship between ARIA and ARACR?
What is meant by the "percent of misstatement assumption" for MUS in those population items that are misstated? Why is it common to use a 100% misstatement assumption when it is almost certain to be
An auditor is determining the appropriate sample size for testing inventory valuation using MUS. The population has 2,620 inventory items valued at $12,625,000. The tolerable misstatement for both
Assume that a sample of 100 units was obtained in sampling the inventory in Question. Assume further that the following three misstatements were found:Calculate adjusted misstatement bounds for the
Why is it difficult to determine the appropriate sample size for MUS? How should the auditor determine the proper sample size?
What is meant by a decision rule using difference estimation? State the decision rule.
What alternative courses of action are appropriate when a population is rejected using nonstatistical sampling for tests of details of balances? When should each option be followed?
Define what is meant by the population standard deviation and explain its importance in variables sampling. What is the relationship between the population standard deviation and the required sample
In using difference estimation, an auditor took a random sample of 100 inventory items from a large population to test for proper pricing. Several of the inventory items were misstated, but the
Distinguish among difference estimation, ratio estimation, mean-per-unit estimation, and stratified mean-per-unit estimation. Give one example in which each can be used. When is MUS preferable to any
An essential step in difference estimation is the comparison of each computed confidence limit with tolerable misstatement. Why is this step so important, and what should the auditor do if one of the
Explain why difference estimation is commonly used by auditors.
Give an example of the use of attributes sampling, MUS, and variables sampling in the form of an audit conclusion.
Multiple Choice QuestionsThe following questions relate to determining sample size in tests of details of balances. For each one, select the best response.a. Mr. Murray decides to use stratified
Multiple Choice QuestionsThe following apply to evaluating results of audit sampling for tests of details of balances. For each one, select the best response.a. While performing a substantive test of
Multiple Choice QuestionsThe following relate to the use of statistical sampling for tests of details of balances. For each one, select the best response.a. When the auditor uses monetary unit
You are planning to use nonstatistical sampling to evaluate the results of accounts receivable confirmation for the Meridian Company. You have already performed tests of controls for sales, sales
You are evaluating the results of a nonstatistical sample of 85 accounts receivable confirmations for the Bohrer Company. Information on the sample and population are included below. An
The accounts receivable population for Jake's Bookbinding Company follows. This table is the same as Table 17-1 on page 560, except that cumulative amounts are included to assist you in completing
In the audit of Price Seed Company for the year ended September 30, the auditor set a tolerable misstatement of $50,000 at an ARIA of 10%. A PPS sample of 100 was selected from an accounts receivable
You intend to use MUS as a part of the audit of several accounts for Roynpower Manufacturing Company. You have done the audit for the past several years, and there has rarely been an adjusting entry
An audit partner is developing an office training program to familiarize her professional staff with audit sampling decision models applicable to the audit of dollar-value balances. She wishes to
In auditing the valuation of inventory, the auditor, Claire Butler, decided to use difference estimation. She decided to select an unrestricted random sample of 80 inventory items from a population
Marjorie Jorgenson, CPA, is verifying the accuracy of outstanding accounts payable for Marygold Hardware, a large, single-location retail hardware store.There are 650 vendors listed on the
You are doing the audit of Peckinpah Tire and Parts, a wholesale auto parts company. You have decided to use monetary unit sampling (MUS) for the audit of accounts receivable and inventory. The
You have just completed the accounts receivable confirmation process in the audit of Danforth Paper Company, a paper supplier to retail shops and commercial users. Following are the data related to
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
Monetary unit sampling (MUS) is the most commonly used statistical method of sampling for tests of details because of its simplicity and its ability to provide statistical results in dollars. Read an
List five asset accounts, three liability accounts, and five expense accounts included in the acquisition and payment cycle for a typical manufacturing company.
List one possible internal control for each of the six transaction related audit objectives for cash disbursements. For each control, list a test of control to test its effectiveness.
List one possible control for each of the six transaction-related audit objectives for acquisitions. For each control, list a test of control to test its effectiveness.
Evaluate the following statement by an auditor concerning tests of acquisitions and cash disbursements: “In selecting the acquisitions and cash disbursements sample for testing, the best approach
What is the importance of cash discounts to the client and how can the auditor verify whether they are being taken in accordance with company policy?
What are the similarities and differences in the objectives of the following two procedures? (1) Select a random sample of receiving reports and trace them to related vendors’ invoices and
If an audit client does not have prenumbered checks, what type of misstatement has a greater chance of occurring? Under the circumstances, what audit procedure can the auditor use to compensate for
What is meant by a voucher? Explain how its use can improve an organization’s internal controls.
Explain why most auditors consider the receipt of goods and services the most important point in the acquisition and payment cycle.
Explain the relationship between tests of the acquisition and payment cycle and tests of inventory. Give specific examples of how these two types of tests affect each other.
Explain the relationship between tests of the acquisition and payment cycle and tests of accounts payable. Give specific examples of how these two types of tests affect each other
The CPA examines all unrecorded invoices on hand as of February 28, 2012, the last day of the audit. Which of the following misstatements is most likely to be uncovered by this procedure? Explain.a.
Explain why it is common for auditors to send confirmation requests to vendors with “zero balances” on the client’s accounts payable listing but uncommon to follow the same approach in
Distinguish between a vendor’s invoice and a vendor’s statement. Which document should ideally be used as evidence in auditing acquisition transactions and which for verifying accounts payable
It is less common to confirm accounts payable at an interim date than accounts receivable. Explain why.
In testing the cutoff of accounts payable at the balance sheet date, explain why it is important that auditors coordinate their tests with the physical observation of inventory. What can the
Distinguish between FOB destination and FOB origin. What procedures should the auditor follow concerning acquisitions of inventory on an FOB origin basis near year-end?
Multiple Choice QuestionsThe following questions concern internal controls in the acquisition and payment cycle. Choose the best response.a. A client erroneously recorded a large purchase twice.
Multiple Choice QuestionsThe following questions concern accumulating evidence in the acquisition and payment cycle. Choose the best response.a. In auditing accounts payable, an auditor’s
Multiple Choice QuestionsThe following questions concern the audit of accounts payable.a. For effective internal control, the accounts payable department generally should(1) Stamp, perforate, or
Questions 1 through 8 are typically found in questionnaires used by auditors to obtain an understanding of internal control in the acquisition and payment cycle. In using the questionnaire for a
Following are some of the tests of controls and substantive tests of transactions procedures commonly performed in the acquisition and payment cycle. Each is to be done on a sample basis.1. Trace
Donnen Designs, Inc. is a small manufacturer of women’s casual-wear jewelry, including bracelets, necklaces, earrings, and other moderately priced accessory items. Most of their products are made
The following misstatements are included in the accounting records of Westgate Manufacturing Company.1. The accounts payable clerk prepares a monthly check to Story Supply Company for the amount of
The following auditing procedures were performed in the audit of accounts payable:1. Obtain a list of accounts payable. Re-add and compare with the general ledger.2. Trace from the general ledger
In testing cash disbursements for the Jay Klein Company, you obtained an understanding of internal control. The controls are reasonably good, and no unusual audit problems arose in previous years.
The Broughton Cap Company requires that prenumbered receiving reports be completed when purchased inventory items arrive in the receiving department. At the time of receipt, the receiving clerk
You were in the final stages of your audit of the financial statements of Ozine Corporation for the year ended December 31, 2011, when you were consulted by the corporation’s president, who
Even though Bergeron Wholesale Company is privately held, management has decided that it is worthwhile to have effective internal controls to the extent it is practical in a small company, as a way
As part of the June 30, 2011, audit of accounts payable of Milner Products Company, the auditor sent 22 confirmations of accounts payable to vendors in the form of requests for statements. Four of
The physical inventory for Ajak Manufacturing was taken on December 30, 2011, rather than December 31, because the client had to operate the plant for a special order the last day of the year. At the
The following tests of controls and substantive tests of transactions audit procedures for acquisitions and cash disbursements are to be used in the audit of Ward Publishing Company. You concluded
Assume a sample size of 50 for all procedures, regardless of your answers in Part I. For other procedures, assume that an adequate sample size for the circumstance was selected.The only exceptions in
The embezzlement of funds from organizations is often orchestrated through fictitious accounts payable and related cash disbursement transactions. The AuditNet online resource center for auditors
Explain the relationship between substantive tests of transactions for the acquisition and payment cycle and tests of details of balances for the verification of property, plant, and equipment. Which
Explain why the emphasis in auditing property, plant, and equipment is on the current period acquisitions and disposals rather than on the balances in the account carried forward from the preceding
What is the relationship between the audit of property, plant, and equipment accounts and the audit of repair and maintenance accounts? Explain how the auditor organizes the audit to take this
List and briefly state the purpose of all audit procedures that might reasonably be applied by an auditor to determine that all property, plant, and equipment retirements have been recorded in the
In auditing depreciation expense, what major considerations should the auditor keep in mind? Explain how each can be verified.
Explain the relationship between substantive tests of transactions for the acquisition and payment cycle and tests of details of balances for the verification of prepaid insurance.
Explain why the audit of prepaid insurance should ordinarily take a relatively small amount of audit time if the client’s assessed control risk for acquisitions is low.
Distinguish between the evaluation of the adequacy of insurance coverage and the verification of prepaid insurance. Explain which is more important in a typical audit.
What are the major differences between the audit of prepaid expenses and other asset accounts such as accounts receivable or property, plant, and equipment?
Explain the relationship between accrued rent and substantive tests of transactions for the acquisition and payment cycle. Which aspects of accrued rent are not verified as part of the substantive
In verifying accounts payable, it is common to restrict the audit sample to a small portion of the population items, whereas in auditing accrued property taxes, it is common to verify all
Which documents will be used to verify accrued property taxes and the related expense accounts?
List three expense accounts that are tested as part of the acquisition and payment cycle or the payroll and personnel cycle. List three expense accounts that are not directly verified as part of the
What is meant by the analysis of expense accounts? Explain how expense account analysis relates to the tests of controls and substantive tests of transactions that the auditor has already completed
How will the approach for verifying repair expense differ from that used to audit depreciation expense? Why will the approach be different?
List the factors that should affect the auditor’s decision whether to analyze an account balance. Considering these factors, list four expense accounts that are commonly analyzed in audits.
Multiple Choice QuestionsThe following questions concern internal controls in the acquisition and payment cycle. Choose the best response.a. Which of the following controls will most likely justify a
Multiple Choice QuestionsThe following questions concern analytical procedures in the acquisition and payment cycle. Choose the best response.a. Which of the following comparisons will be most useful
Multiple Choice QuestionsThe following questions concern the audit of asset accounts in the acquisition and payment cycle. Choose the best response.a. In testing for unrecorded disposals of
Multiple Choice QuestionsThe following questions concern the audit of liabilities or income and expense accounts. Choose the best response.a. The auditor may note that annual depreciation expense is

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