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business
auditing

Questions and Answers of Auditing

Several of the Waste Management accounting personnel were formerly employed by the company's auditor, Arthur Andersen. What are the risks associated with allowing former auditors to work for a client
Discuss possible reasons why the Andersen partners allegedly allowed Waste Management executives to avoid recording the identified accounting errors. How could accounting firms ensure that auditors
What is meant by the term professional judgment?
What kind of professional judgments do the auditors of Waste Management have to make in regards to the examination of the accounting for property, plant, and equipment?
Financial information was provided for Xerox for the period 1997 through 2000. Go to the SEC website (www.sec.gov) and obtain financial information for Hewlett Packard Company for the same reporting
KPMG has publicly stated that the main accounting issues raised in the Xerox case do not involve fraud, as suggested by the SEC; rather they involve differences in judgment.(a) What is meant by the
Some will argue that KPMG inappropriately subordinated its judgments to Xerox preferences. How could accounting firms ensure that auditors do not subordinate their judgments to client preferences on
The SEC outlines in Accounting and Auditing Enforcement Release No. 2234 KPMG's alleged acts and omissions (section C. 3.). Obtain and read a copy of the enforcement release (try
Professional standards outline the auditor's consideration of material misstatements due to errors and fraud.(a) What responsibility does an auditor have to detect material misstatements due to
Three conditions are often present when fraud exists. First, management or employees have an incentive or are under pressure, which provides them a reason to commit the fraud act. Second,
Several questionable accounting manipulations were identified by the SEC. (a) For each accounting manipulation identified, indicate the financial statement accounts affected. (b) For each accounting
In its complaint, the SEC indicated that Xerox inappropriately used accounting reserves to inflate earnings. ... What responsibility do auditors have regarding accounting reserves established by
On April 19, 2005, KPMG agreed to pay $22 million to the SEC to settle its lawsuit with the SEC in connection with the alleged fraud. Go to the SEC's web site to read about the settlement of this
The SEC outlines in Accounting and Auditing Enforcement Release No. 2234 its assessment of the Xerox fraud. Obtain and read a copy of the enforcement release (try
The SEC outlines in Accounting and Auditing Enforcement Release No. 2234 five "undertakings" for KPMG to alter or amend its audit practices. Obtain a copy of the enforcement release (try
Some of the members of Phar-Mor's financial management team were former auditors for Coopers & Lybrand. (a) Why would a company want to hire a member of its external audit team? (b) If the client has
(a) What factors in the auditor-client relationship can put the client in a more powerful position than the auditor?(b) What measures has and/or can the profession take to reduce the potential
(a) Assuming you were an equity investor, would you pursue legal action against the auditor? Assuming the answer is yes, under what law(s) would you bring suit and what would be the basis of your
Coopers & Lybrand was sued under both federal statutory and state common law. The judge ruled that under Pennsylvania law the plaintiffs were not primary beneficiaries. Pennsylvania follows the legal
Coopers was also sued under the Securities Exchange Act of 1934. The burden of proof is not the same under the Securities Acts of 1933 and 1934. Identify the important differences and discuss the
(a) The auditors considered Phar-Mor to be an inherently "high risk" client. List several factors at Phar-Mor that would have contributed to a high inherent risk assessment. (b) Should auditors have
The popular press has indicated that inventory fraud is one of the biggest reasons for the proliferation of accounting scandals.(a) Name two other high profile cases where a company has committed
Research the difference between American Depositary Shares and American Depositary Receipts. Then, visit the SEC's website (www.sec.gov) to locate the final SEC rule Release No. 33-8879 issued on
What can professionals do to overcome the confirmation tendency?
Research auditing standards and other guidance on effective internal control to answer the following questions: (a) What are IT general controls and what type(s) of IT general controls were
Research PCAOB auditing standards (which can be found on the PCAOB's website - www.pcaobus.org) related to the use of confirmations and document the specific requirements related to maintaining
The Satyam auditors attempted to confirm both cash and accounts receivable balances with external parties. Which of the audit assertions for cash and accounts receivable would confirmations be most
Research the PCAOB's website - www.pcaob.org to learn about the PCAOB's inspection process. How often are firms inspected by the PCAOB and to what extent are the inspection findings available to the
Research PCAOB auditing standards (which can be found on the PCAOB's website - www.pcaobus.org) related to the use of audit documentation and identify specific requirements related to deadlines for
Research the AICPA's Code of Professional Conduct (which is available on the AICPA's website - www.aicpa.org) to research what it means to be in a "network" of firms. How might the actions of one of
Locate the PCAOB's Settled Disciplinary Order against the auditors of the Satyam financial statements, which can be found on the PCAOB's website under the link for "Enforcement" (see PCAOB Release
One of the judgment shortcuts that can lead to bias in professional judgments is the "confirmation tendency." Briefly describe what is meant by confirmation tendency and where was that evident in the
What are your two biggest concerns relating to possible fraud for the café part of the business? For each concern, generate two or three controls that could effectively reduce risk related to your
What are your two biggest concerns relating to possible fraud for the motel part of the business? For each concern, generate two or three controls that could effectively reduce risk related to your
Describe the potential impact of your proposed controls on the morale of the couple in charge of the day-to-day operations. How might Francisco deal with these concerns?
Briefly describe the impact each proposed control would have on the efficiency of running the business. Are the controls you generated both effective and efficient?
The proposed new IT-based sales accounting system will cloud-based and St. James will access the underling software via online access. Visit the website of the Committee of Sponsoring Organizations
The Committee of Sponsoring Organizations of the Treadway Commission (widely known as COSO) revised its Internal Control - Integrated Framework to update its guidance to reflect a number of
Review auditing standards or COSO's Internal Control - Integrated Framework to answer the following questions: (a) What are "technology general controls"? (b) How do "technology general controls"
According to AS5: (a) What should the auditor consider when determining whether an account should be considered significant? (b) What qualitative factors might cause an account that is otherwise
Referring to Delmoss Watergrant's policy for identifying significant accounts as well as Sarbox Scooter's consolidated balance sheet and income statement, answer the following questions:(a)
Auditing standards require the identification and testing of entity-level controls. What are examples of entity-level controls? What are the auditor's responsibilities with respect to evaluating and
What are the definitions of a control deficiency, significant deficiency, and material weakness as contained in AS5? Which, if any, of these deficiency categories must the external auditor include in
Referring to Delmoss Watergrant's policy for evaluating control deficiencies, determine if the following three deficiencies represent a control deficiency, significant deficiency, or a material
How might the overconfidence tendency affect management's assessment of the likelihood and magnitude of potential misstatement from an observed control deficiency? If the auditor believes that
The term "tone at the top" is typically associated with a firm's control environment. How would you characterize Société Générale's tone at the top and what effect do you
Using auditing standards or your textbook, define the following control-related terms: (a) Control environment (b) Segregation of duties (c) Restricted access (d) • Preventative controls •
In an independent audit of the financial statements of a large bank, why do auditors typically follow a controls reliance strategy (i.e., obtaining some audit assurance via controls testing)? In the
Fraud research indicates three conditions must exist before a fraud occurs: Pressure/Incentive, Rationalization, and Opportunity. (a) What do you think were Jérôme Kerviel's incentives and
What are the advantages and disadvantages of promoting personnel across functional areas within a company (e.g., from risk and controls to operations)?
The loss from Kerviel's rogue trading resulted in a loss many times greater than audit materiality. The external auditor did not discover the misstatement. Was this an audit failure? Conduct internet
Identify the most significant new business risks facing Harley-Davidson as a result of integrating eBusiness into its supply-chain management system and by allowing suppliers to have access to the
For each risk you identified in question number one above, identify a control Harley-Davidson might have implemented to mitigate that risk.
Given the technology linkages between business partners in eBusiness systems, how might an eBusiness system like Harley-Davidson's increase business risks for its business partners?
Research the different types of Service Organization Control (SOC) Reports that CPAs can provide to clients from the information on the following web page:
According to the AICPA Web site indicated in question number four, what professional standards must a CPA follow when providing services that result in the issuance of a SOC 1 report or a SOC 2
What Trust Services Principles are examined in a SOC 2 engagement? Describe the role of the criteria when evaluating these principles in a SOC 2 engagement.
Assume Harley-Davidson asks your CPA firm about the SOC 2 service that your firm can provide. Write a brief memo to Gerry Berryman, Vice president of Materials Management, detailing the potential
To become more familiar with these assurance services opportunities, visit the AICPA's website (www.aicpa.org) and enter "trust services principles" in the search box to locate information about the
The use of IT offers tremendous advantages. At the time of implementation, what benefits did the use of Spot Cards offer to the following groups: • Jaguar stadium snack and souvenir vendors? •
While the Spot Card offered several benefits, the use of the related information technology to process snack and souvenir transactions did create new risks. Identify risks for the following
What processes or controls might the stadium and First Union have implemented to help reduce these risks?
What kind of information could the CPA examine and evaluate in order to assure stadium vendors that they can reasonably rely on the Spot Card system to conduct business?
Most likely the bank marketed similar smartcard services to other businesses unrelated to Ever Bank Field and the Jacksonville Jaguars. As a result, the bank's host computer functioned much like a
Conduct Internet research to learn more about the Trust Services Principles and Criteria for the "Online Privacy Principle," and the AICPA and CICA's Generally Accepted Privacy Principles to answer
Review Exhibits 1 and 2; audit memos G-3 and G-4; and audit schedules G-5, G-6 and G-7. Based on your review, answer each of the following questions: (a) Why are different materiality bases
Based on your review of the Exhibits (1 and 2), audit memos (G 3 and G 4), complete audit schedules G 5, G 6, and G 7.
Perform analytical procedures to help you identify relatively risky areas that indicate the need for further attention during the audit, if any.
Focus specifically on each of the following balance-related management assertions for the inventory account: existence, completeness, valuation, and rights and obligations. Link any risks you
Why might an auditor be likely to adopt a client's judgment frame in performing analytical procedures, and how might that frame affect her or his evaluation of the findings from the procedures that
As part of the year-end audit and using the analytical-procedure approach similar to last year's audit (average loan volume multiplied by weighted-average interest rate), determine if Northwest
Given the additional information provided in Part B (i.e., quarterly information by loan type), please determine if Northwest Bank's interest income from loans reported at December 31, 2014 appears
Based on the results of the analytical procedure performed in Part B, how likely do you think it is that 2014 interest income is materially misstated?
Please indicate on the scale below your assessment of the strength (quality and sufficiency) of evidence provided by the interest income analytical procedure:
Now reevaluate the first analytical procedure you performed (i.e., based only on average aggregate loan and interest averages). Using hindsight, please indicate on the scale below your assessment of
Most auditors and students who complete Part A and Part B have a lower assessment in Part B question 4 than they do for Part A question 3. (a) Considering common judgment tendencies and traps, what
Research auditing professional standards and list the requirements related to developing an expectation and conducting analytical procedures when those procedures are intended to provide substantive
Using the information provided, please develop a precise expectation (i.e., using the detailed or disaggregated data provided) for ticket revenues for the 2014 fiscal year.
(a) What are the advantages of using analytical procedures as substantive tests? (b) If the engagement team decides to use analytical procedures for the Bees' audit, how will the audit plan differ
(a) How close does the Bees' reported ticket revenue for 2014 have to be to your expectation for you to consider reported ticket revenue reasonable or fairly stated?(b) If reported ticket revenues
Why is the audit of cash an important part of the audit?
Bill performed tests of controls for all transaction cycles with good results. Why is it important to also perform substantive audit procedures for the ending cash balance even when tests of controls
According to AICPA auditing standards, what are the necessary ingredients for audit evidence to be considered "appropriate"?
For each procedure listed in the audit program (schedule C 2), indicate the primary assertion(s) targeted by the procedure.
For each error, concern, or adjustment you listed on the Audit Summary (schedule C 3), briefly describe at least one additional test you could perform to gain evidence as to whether or not the cash
The AICPA and the American Banker's Association developed a standardized bank confirmation form-see working paper C 6. What is the purpose for confirming information in item number two on the bank
What audit procedures might you perform if you were to decide that the risk of fraud involving the cash account was relatively high for this client?
Do an online search for "electronic bank confirmations." Summarize in one page or less what you learn about recent developments in the use of web-based bank confirmations. Include a brief discussion
Describe the sales transaction audit trail from the point of sale to the general ledger posting to the consolidated sales accounts at the corporate office. Be sure to emphasize which aspects of the
What control deficiencies can you identify in the existing sales system?
Describe the difference between a preventative control and a detective control and give an example of each that are present in the sales system at Henrico.
Develop a proposed strategy for auditing the occurrence assertion for sales transactions. Describe whether there is a sufficient paper-based audit trail to audit that assertion without relying on IT
What evidence source would you use to select a sample of sales transactions to test the occurrence of sales transactions at one store? Why would you use this source? What evidence would you examine
Develop a proposed strategy for auditing the accuracy assertion for sales transactions. Describe whether there is a sufficient paper-based audit trail to audit that assertion without relying on IT
Describe whether you can use the same sample of transactions selected to test the occurrence assertion to also test the accuracy assertion.
How would you select a sample to test the completeness assertion for sales? Would the sample used to test the occurrence assertion be effective for testing the completeness assertion?
How do risks related to manual controls differ from risks related to automated controls? Give an example of each from the sales system at Henrico.
What portion, if any, of the accounting system will likely require the assistance of an IT systems auditor, who evaluates evidence existing only in electronic form?
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) recently completed a joint project to develop a common revenue standard for U.S. GAAP and IFRS
One of the environmental factors affecting judgment is the "rush to solve" judgment trap. Briefly describe the trap and how it applies to the situation affecting the recording of the sales

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