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business
auditing

Questions and Answers of Auditing

The third step in performing analytical procedures involves developing expectations of recorded amounts or ratios, and evaluating whether the expectations are precise enough to accomplish the
What is a false confirmation? Why are false confirmations so problematic for auditors in terms of evidence reliability expectations?
As part of the audit of KC Enterprises, the auditor assessed control risk for the existence and valuation assertions related to accounts receivable at the maximum level. Katie, the staff person
A Focus on Fraud feature presented in the chapter discussed the SEC's complaint against Benjamin Silva III, Tvia's vice president of worldwide sales. The complaint alleges a number of actions taken
Refer to the Standards Appendix at the end of this text. Identify the relevant auditing standards (PCAOB, AICPA, and IAASB) relating to external confirmations. Locate the standards on each
Refer to the Standards Appendix at the end of this text. Identify the relevant auditing standards (PCAOB, AICPA, and IAASB) concerning using analytical procedures as a substantive test. Locate the
This case will enable you to practice conducting planning and substantive analytical procedures for accounts in the revenue cycle. When analyzing the financial data, you may assume that the 2015
Refer to the Focus on Fraud feature "Common Fraud Schemes Relating to Cash" and describe at least three such schemes. Be prepared to discuss fraud schemes that you have learned about in your local
Assume that you are testing the client's bank reconciliation at year-end. Following is a list of items on the reconciliation. For each item (listed as (a) through (e)), identify one or more
The following are deficiencies in internal controls over cash. For each deficiency indicate what substantive audit procedure(s) should be performed to determine whether any material misstatements
Read about the massive fraud committed by Russell Wasendorf Sr. at PFG that is described in Problem 10-70. Use appropriate resources to document the latest developments in the case against Wasendorf.
Refer to the Focus on Fraud feature "The Parmalat Fraud and Its Many Victims." Use appropriate resources to answer the following questions. a. Which two audit firms did Parmalat sue after the
Refer to the Standards Appendix at the end of this book. Determine the relevant International Standard on Auditing (ISA) for external confirmations, then locate the actual standard on the IAASB's web
Refer to the Focus on Fraud feature "Fraud in the Acquisition and Payment Cycle at WorldCom and Phar-Mor." Compare and contrast the nature of these two frauds, motivations underlying the frauds, and
The Focus on Fraud feature "Examples of Fraud in Inventory" provides examples of how clients may fraudulently manipulate inventory amounts. List at least five such examples explain why even a
Identify two substantive audit procedures that an auditor might use to gain assurance about the correctness of perpetual inventory records.
The Focus on Fraud feature "Fraud in the Acquisition and Payment Cycle at WorldCom and Phar-Mor" introduced you to the basic facts underlying the WorldCom fraud. Use appropriate sources to answer the
Refer to the Focus on Fraud feature "Examples of Fraud in Inventory." The AICPA's Practice Alert described in the feature provides examples of many types of inventory frauds that have occurred.
This case will enable you to practice conducting planning and substantive analytical procedures for accounts in the acquisition and payment cycle. When analyzing the financial data, you may assume
Refer to the Focus on Fraud feature "Improper Capitalization of Operating Expenses: The Case of Safety-Kleen Corporation." In addition to the information provided in the feature, consider the
Assume you are working on the audit of a client that is a U.S. nonpublic company (non-issuer) and focusing on long-lived assets. The senior on the audit team has noted that this audit area has a
Assume that you are a staff auditor working on long-term debt accounts of a client that is a company where you are performing an audit in accordance with auditing standards issued by the
This case will enable you to practice conducting planning and substantive analytical procedures for accounts in the acquisition and payment cycle. When analyzing the financial data, you may assume
Refer to the Standards Appendix at the end of this book. Identify the relevant auditing standards (PCAOB, AICPA, and IAASB) relating to communicating with audit committees. Locate the standards on
Quality control is pervasive throughout the audit and in completing the audit. No specific LO exists for this problem, but it applies to each activity in an underlying sense. Refer to the Standards
What is the effect on the auditor's report of a lawyer's refusal to furnish the information requested in the letter of audit inquiry?
When assessing disclosures, about what matters regarding disclosures should the auditor have reasonable assurance?
Refer to the Focus on Fraud feature "Triton Energy and Noncompliance with Laws and Regulations." How did Triton Energy violate the provisions of the Foreign Corrupt Practices Act? What are the
This is the third-year audit of Green Lawns. The company has carved out a new market niche on the Internet for the delivery of lawn and garden supplies, including links with local companies that
What is the auditor's responsibility if, after the report release date, the auditor discovers that an important audit procedure was not performed?
PCAOB inspection reports that have been released to the public contain a variety of examples of audit engagements in which auditors have had difficulty dealing with potential adjustments to client
On February 28, 2016, Stu & Dent, LLP completed the audit of Shylo Ranch, Inc. (a public company) for the year ended December 31, 2015. A recent fire destroyed the accounting records concerning the
In what situations would an auditor issue an adverse opinion?
How does an organization measure the cost of an acquisition of another organization? What factors often complicate the determination of actual cost? Explain how each factor complicates the
Assume that in 2015, Nelson Communications purchased a controlling interest in Telnet co that resulted in goodwill in the 2015 consolidated financial statements of $4,500,000. There are no other
Assume that you are on the audit of a nonpublic client. The client has significant investments in derivative securities and you recognize that these securities are be measured at fair value. Review
What guidance would the auditor rely on for examples of appropriate reports when reporting on an audit of a single financial statement or of a specific element, account, or item of a financial
What guidance would the auditor rely upon when reporting on compliance with aspects of contractual agreements or regulatory requirements in connection with audited financial statements? What level of
Review the Emerging Issues feature "Creation of the Sustainability Accountings Standards Board," access the web site of the SASB, and answer the following questions. a. What is the mission of
What fundamental principles dictate when a company should recognize or record revenue in its accounting records? Revenue recognition issues can be particularly complex for companies that sell
The SEC charged KPMG with "repeated audit failures" in this case. Identify general conditions, specific circumstances, and other factors that are common causes of, or, at a minimum, commonly
The SEC criticized KPMG for relying on "quantitative" measures in arriving at materiality judgments while ignoring important "qualitative" issues relevant to those judgments. Under what circumstances
Do you agree with Henry Yuen's assertion that a businessperson who is complying with all applicable laws and regulations is, by definition, behaving "ethically"? Defend your answer.In June 2004, the
Identify and briefly describe any mistakes or errors in judgment that Coopers & Lybrand may have made in its effort to confirm the Wow Wee receivable at the end of fiscal 1995. In your opinion,
Should the Coopers & Lybrand auditors have confirmed the receivable from West Coast Liquidators at the end of fiscal 1995? Why or why not? Should the auditors have included one or more sales to
What alternative audit procedures can be applied to a large receivable of an audit client when a confirmation of that receivable cannot be obtained, for whatever reason? Compare and contrast the
The SEC charged certain executives of Happiness Express with "insider trading." Do auditors have a responsibility to consider or investigate the possibility that client executives have engaged in
Prepare common-sized financial statements for Regina for the period 1986 to 1988. Also, compute key liquidity, solvency, activity, and profitability ratios for the years 1987 and 1988. Given these
Identify audit procedures that might have resulted in Peat Marwick discovering (a) The $5 million of bogus sales recorded by Regina executives during fiscal 1988 and (b) The intentional
Identify and discuss the principal audit objectives associated with the performance of year‑end sales cutoff tests. Which of the fraudulent errors in Regina's accounting records would such tests
Were the Peat Marwick auditors justified in relying on Golden's assertion that the ship‑in‑place sales transaction they discovered was an isolated item? If not, what additional audit procedures
As noted in this case, one Peat Marwick partner stated that his firm preferred to trust the people it was auditing. Should auditors trust their clients? If so, under what circumstances and to what
Identify the ethical issues that Dutch faced. How should he have addressed or dealt with those issues?The following morning, Dutch was awakened by a phone call. The caller was T.J. Gillette, the
Do you believe that Clayton Morris dealt appropriately with Dutch during their telephone conversation? Defend your answer.The following morning, Dutch was awakened by a phone call. The caller was
A major focus of the lawsuit that Chevron Chemical filed against Touche Ross was the auditing profession's rules regarding the "subsequent discovery of facts existing at the date of the auditor's
Given your previous answer, do you believe that Touche Ross complied with the applicable professional standards after learning of the error in AFS's 1985 financial statements? Explain.AFS filed for
Do you agree with the assertion of AFS's legal counsel that Touche Ross would have violated the profession's client confidentiality rule by withdrawing its 1985 audit opinion and notifying all
Research online and hardcopy databases to identify important recent developments within the Indian accounting profession. Summarize these developments in a bullet format.The highly publicized release
In the United States, the accounting profession is regulated at the state level, while in India the accounting profession is regulated by a federal agency. Identify and briefly discuss the
In India, independent auditors are considered to be "watchdogs," not "bloodhounds." How, if at all, does that concept of the auditor's role differ from the prevailing concept of the independent
Do you believe it was appropriate for the major international accounting firms to establish networks of "surrogate" firms in India for the purpose of gaining wider access to the professional services
State boards of accountancy in the United States have allowed accounting firms and individual CPAs to advertise for approximately three decades. Identify the pros and cons of allowing professionals
In a bullet format, identify the parties impacted by regulatory policies designed to protect domestic professionals from foreign competitors. Briefly explain how each of these parties is affected by
What are the principal issues that organizations such as the ICAI and NASBA should consider in deciding whether or not to establish reciprocity agreements with other countries?The highly publicized
When CPAs outsource professional services to accountants in other countries, do they have an ethical responsibility to disclose this fact to their clients? Does your answer change depending on the
Identify key factors or circumstances that complicate an independent audit of a multinational company.Claudio Pessina refused to destroy his computer as his superior had ordered. Prosecutors would
What audit procedures would likely have been the most effective for detecting Parmalat's fraudulent double-billing scheme? Defend your choices.Claudio Pessina refused to destroy his computer as his
Identify the fraud risk factors that were present during the Parmalat audits. Rank orders these risk factors from the most important to the least important. Be prepared to defend your rank
According to generally accepted auditing standards (GAAS), how should the responsibility for performing "shared audits" be allocated to the accounting firms involved in such engagements?Claudio
Do you believe that the individual national practice units of international accounting firms' global networks should face joint and several liability? Defend your answer.Claudio Pessina refused to
Cultural norms and nuances affect the operations of large companies worldwide. Identify examples of distinctive cultural norms and nuances specific to three countries. Explain how these cultural
Both Deloitte and Grant Thornton were named as defendants in a class-action lawsuit filed by Parmalat's bondholders. Deloitte agreed to pay $149 million to settle the lawsuit, while Grant Thornton
Research online news services to identify recent developments impacting the accounting and auditing profession in Japan. Briefly summarize these developments in a bullet format.To prevent Kanebo,
As noted in this case, Japanese companies typically rely more heavily on debt capital than U.S. companies. Explain how this fact may cause the independent audit functions in the two countries to
The much higher barriers to enter the public accounting profession in Japan (as compared with other major industrialized countries) has resulted in a relatively small number of CPAs in that nation.
In both Japan and the United States, a small number of accounting firms audit the great majority of large public companies. Identify the advantages and disadvantages of this "market structure" for
In both Japan and the United States, external auditors have frequently been accused of failing to maintain a proper degree of independence from their clients. What measures have and should be taken
Research online and hardcopy databases to identify important recent developments within the South African accounting profession. Summarize these developments in a bullet format.Within the first five
Over the history of the global accounting profession, political forces have often played a major role in the development of individual nations' independent audit function. Explain how political
Identify the advantages and disadvantages of having a professional credential or designation for independent auditors in addition to a professional credential for accountants.Within the first five
In your opinion, should the United States adopt a rule similar to South Africa's "reportable irregularities" rule? Defend your answer. How do you believe such a requirement would affect the
Identify strategies that the South African accounting profession could use to encourage young black men and women in that country to choose accounting as a career. In your opinion, what party or
How, if at all, do financial reporting objectives differ between a free market economy and a "socialistic market economy"? Explain. Are there specific accounting concepts or principles that are more
Consider two organizations that require annual independent audits. Organization A is a Chinese SOE with a minority ownership interest of 20 percent, while Organization B is a U.S. company of similar
What recommendations would you make to Big Four firms to help them (1) avoid confrontations with governmental officials in an authoritarian society and (2) deal effectively with such confrontations
List the challenges that a major accounting firm faces when it establishes its first practice office in a foreign country. Identify the key factors that accounting firms should consider when deciding
Suppose that a U.S. based accounting firm has a major audit client in a foreign country that routinely engages in business practices that are considered legal in that country but that would qualify
What responsibilities, if any, do you believe PwC had to Gazprom's minority investors?Despite earlier reports that Gazprom would likely retain a new audit firm, in May 2002 the company issued a press
In your opinion, should PwC have agreed to perform the "special audit" of the Itera transactions? Defend your answer. In your answer, identify the specific ethical issues or challenges that the
In the United States, what responsibility do auditors have to determine whether or not "related parties" exist for a given audit client? Explain.Despite earlier reports that Gazprom would likely
Explain how the British "true and fair" audit approach or strategy differs from the audit philosophy applied in the United States. In your opinion, which of the two audit approaches is better or, at
Research relevant databases to identify important recent developments within France's accounting profession, including the nation's independent audit function. Summarize these developments in a
Societe Generale maintained that because Jerome Kerviel's "unauthorized activities" were initiated in 2007, the 6.4 billion euro loss that he incurred in January 2008 should be recorded in 2007. Do
Societe Generale was criticized for invoking the "true and fair override" in IFRS. Is there a comparable clause or rule in GAAP? If so, identify two scenarios under which a departure from GAAP would
Compare the general format and content of the audit report shown in Exhibit 4 with the standard audit report issued under U.S. GAAS. What are the key differences between those two audit reports?
This case lists Societe Generale's three principal internal control objectives. Compare and contrast those objectives with the primary internal control objectives discussed in GAAS.The Special
Identify countries in addition to France where joint audits are performed. What economic, political, geographic or other characteristics are common to these countries?The Special Committee appointed
Identify audit risk factors common to a bank client. Classify these risk factors into the following categories: inherent, control, and detection. Briefly explain your classification of each risk
What characteristics make an accounting association an accounting network?
Which rules of the AICPA Code of Professional Conduct recognize the PCAOB as a body authorized to issue technical standards?

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