Questions and Answers of Auditing Risk Based Approach

The following questions concern the use of analytical procedures during an audit. Select the best response. a. For all audits of financial statements made in accordance with auditing standards,
Distinguish among the following types of current-period supporting schedules and state the purpose of each: analysis, trial balance, and substantive analytical procedures.
Who owns the audit files? When can they be used by other people?
Explain why liquidity activity ratios are useful to auditors.
Describe how the use of audit data analytics might increase both the effectiveness and efficiency of the audit.
Why is it important that an auditor develop an expectation of the account balance when performing substantive analytical procedures about the reasonableness of an account balance? What are the audit
As part of the engagement team for the audit of JA Tire Manufacturing for the year ended December 31, 2019, you are responsible for auditing the sales and collection cycle. Visit the textbook website
The following questions concern auditor responsibilities in an audit of financial statements. Choose the best response. a. The auditor’s responsibility regarding material misstatements caused
The following questions deal with management assertions. Choose the best response. a. An auditor reviews aged accounts receivable to assess likelihood of collection to support management’s
The following questions concern the reasons auditors do audits. Choose the best response. a. The major reason an independent auditor gathers audit evidence is to (1) Form an opinion on the
Identify the management assertion and general balance-related audit objective for the specific balance-related audit objective: Read the fixed asset footnote disclosure to determine that the types of
Identify the two broad categories of management assertions.
What are the six elements of professional skepticism? Describe two of those six elements.
Describe management’s responsibility for the financial statements. Do you believe the CEO and CFO of a public company perceive an even greater responsibility as a result of the Sarbanes–Oxley Act
Part 1. Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934. The act requires such a brokerage firm to file audited financial statements with the SEC
The SEC Enforcement Division investigates possible violations of securities laws; recommends SEC action when appropriate, either in a federal court or before an administrative law judge; and
Gordon & Groton, CPAs, were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange. Gordon & Groton audited and reported on the financial statements of
Taylor Bean & Whitaker Mortgage Corp. (Taylor Bean) was a Florida mortgage lender. Once one of the nation’s largest privately held mortgage companies, the company collapsed in 2009 after a
In order to expand its operations, Gibson Corp. raised $5 million in a public offering of common stock, and also negotiated a $2 million loan from Citizens National Bank. In connection with this
The following questions concern CPA firms’ liability under common law or statutory law. Choose the best response. a. Which of the following elements is required to be proven by the plaintiff
The following questions concern CPA firms’ liability under common law. Choose the best response. a. In a common law action against an accountant, lack of privity is a viable defense if the
Distinguish between audit risk and audit failure. Why is there at least some level of audit risk on every audit engagement?
The following questions concern auditor professional responsibilities. Choose the best response. a. The concept of materiality would be least important to an auditor when considering
The following questions concern auditor independence. Choose the best response. a. What is the meaning of the rule that requires the auditor be independent? (1) The auditor must adopt a
What is the purpose of the AICPA Code of Professional Conduct restriction on commissions?
Describe some of the reasons why there have been calls for mandatory rotation of audit firms. How could an investor of a public company determine how long an audit firm has served as that company’s
PCAOB Rule 3211, Auditor Reporting of Certain Audit Participants, requires that an audit firm file a form, referred to as Form AP, for each initial issuance of an audit report. On Form AP, the audit
A careful reading of an unmodified opinion audit report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided: a.
The following questions concern audit reports other than unmodified opinion audit reports with standard wording. Choose the best response. a. As compared to an unmodified opinion, an opinion
The following questions concern unmodified opinion audit reports. Choose the best response. a. Which of the following is not a required element of a standard unmodified opinion audit report
When an auditor discovers more than one condition that requires departure from or modification of the standard unmodified opinion audit report, what should the auditor’s report include?
Distinguish between an unmodified opinion audit report that contains an emphasis-of-matter explanatory paragraph and a qualified report.
What is the rationale for the PCAOB’s requirement to include a discussion of critical audit matters in the audit report? Provide two examples of areas that might be considered critical audit
Describe the information included in the opinion and basis for opinion sections in a separate audit report on the effectiveness of internal control over financial reporting. What is the nature of the
What four circumstances are required for a standard unmodified opinion audit report to be issued?
On February 17, 2019, a CPA completed all the evidence gathering procedures on the audit of the financial statements for the Buckheizer Technology Corporation for the year ended December 31, 2019.
Review the information in Table 2-1 on page 25 and discuss the following: a. For the largest 10 firms listed in the table, how many firms generate the largest percentage of their revenue from
The following questions require you to access AICPA standards (www.aicpa.org), PCAOB auditing standards (pcaobus.org), and IAASB auditing standards (www.iaasb.org). a. Your audit supervisor
For each engagement described below, indicate whether the engagement is likely to be conducted under international auditing standards, AICPA auditing standards, or PCAOB auditing standards. a.
Sarah O’Hann enjoyed taking her first auditing course as part of her undergraduate accounting program. While at home during her semester break, she and her father discussed the class, and it was
The following questions address CPA firms and entities that regulate them. Choose the best response. a. An auditor of an entity subject to the rules of the SEC must conduct the financial
The following questions deal with auditing standards. Choose the best response. a. Which of the following best describes what is meant by U.S. auditing standards? (1) Acts to be performed
Auditing standards have been criticized by different sources for failing to provide useful guidelines for conducting an audit. The critics believe the standards should be more specific to enable
Individuals are licensed as CPAs by individual states. Information on the requirements for each state can be found through links to websites of each state board of accountancy that are provided on
There are many types of information that require assurance. Individually or in groups, identify the following types of assurance services. Required:a. Identify three or more assurance services
Dave Czarnecki is the managing partner of Czarnecki and Hogan, a medium-sized local CPA firm located outside of Chicago. Over lunch, he is surprised when his friend Juarez Foley asks him,
Monterrey Corporation has an existing loan in the amount of $7 million with an annual interest rate of 6.5%. The company provides an internal company-prepared financial statement to the bank under
The following questions deal with assurance services and types of audits. Choose the best response. a. Which of the following is considered an assurance engagement? (1) Bookkeeping (2)
What is the role of the Public Company Accounting Oversight Board (PCAOB)? How does the PCAOB provide oversight of audit firms?
Why might an organization seek the assurance of a CPA about information presented in the organization’s corporate sustainability report?
Economic conditions and financial markets have been significantly affected by the global financial crisis that swept around the world in 2008. Love and Lawson identified a series of specific issues
Concerns have been raised over how quickly the Alberta oil sands are being developed. Amid the international concern of global warming, the oil sands have emerged as Canada’s fastest growing source
Public company financial statements The financial statements for public companies are available through SEDAR (www.sedar.com). This is the official site that provides access to information filed by
Executive remuneration Listed companies are required to make certain disclosures in their annual reports about the compensation paid to their top executives. One reason for this is to help interested
The Focus on Fraud feature “Weak Internal Controls, Unethical Decisions, and a Fictitious Vendor at Baird Products” introduced you to an example of a purchasing manager who used a fictitious
As of mid-2017, the FASB was conducting early stage research about developing an accounting standard for digital currency. With the use of digital currency increasing, proponents argue that
AS 2110 provides the following guidance regarding the auditor’s need to obtain an understanding of the company's selection and application of accounting principle:As part of obtaining an
Locate and read the article listed below.Choi, J. H., S. Choi, C. E. Hogan, and J. Lee. (2013). The effect of human resource investment in internal control on the disclosure of internal control
Locate and read the article listed below.Gramling, A. A., E. F. O’Donnell, and S. D. Vandervelde. (2013). An experimental examination of factors that influence auditor assessments of a deficiency
Locate and read the article listed below.Pickerd, J. S., Summers, S. L., & Wood, D. A. (2015). An examination of how entry-level staff auditors respond to tone at the top vis-à-vis tone at the
Access information about the Auditing Standards Board on the AICPA website at www.aicpa.org.a. Identify the members of the Board and describe their backgrounds. What are their professional
Fabrication Holdings Ltd. (FH) has been a client of KFP Partners for many years. You are an audit senior and have been assigned to the FH audit for the first time for the financial year end, December
Fabrication Holdings Ltd. (FH) has been a client of KFP Partners for many years. You are an audit senior and have been assigned to the FH audit for the first time for the financial year end, December
It is August 2016 and the first audit for Springsteen Ltd. with your audit firm (refer to question 12.9) for the 2015–16 year is almost complete. Prior to reaching your final conclusions, you are
Springsteen Ltd. is a new audit client for the 2016 financial year. Springsteen’s financial report for the 2015 year, the last with the previous auditor, was prepared on the assumption of a going
Hatami and Partners completed the field work for the December 31, 2016, audit of Harbinger Corporation on March 1, 2017. The financial statements and auditor’s report were issued and mailed to
Martin Rorke is reviewing the results of the review of subsequent cash receipts. There are several receipts listed from customers that were considered doubtful at the end of the year (June 30).
Phil Nanere is the partner in charge of the audit for a new client, Western Wonderland (WW). The client engaged Phil’s audit firm in November 2015, in preparation for the 2016 audit. From January
Why do audit reports contain paragraphs outlining (a) management’s responsibility for the financial statements and (b) the auditor’s responsibility for the financial statements? What is
List and describe the engagement wrap-up process. Why is it important?
Communication with those charged with governance: (a) Means that the auditor should write to the board of directors about any matters of governance interest arising from the audit of the
Emphasis of matter is used without an accompanying qualification of the audit report when: (a) Significant uncertainty exists that should be brought to the reader’s attention. (b) An
Management’s responsibility for the financial statements includes: (a) Selecting internal controls tests. (b) Selecting samples for audit testing. (c) Selecting and applying
The following is an example of an event that provides evidence with respect to conditions that developed subsequent to year end: (a) Bankruptcy of a customer subsequent to year end, which would
If an auditor becomes aware after the date of the auditor’s report but before the financial statements are issued of a fact that may materially affect the financial statements, the auditor
The following is a valid type of subsequent event: (a) An event that provides additional evidence with respect to conditions that existed at year end. (b) An event that occurred after the
Subsequent events are: (a) Events subsequent to the start of the financial year. (b) Events subsequent to the appointment of the auditor. (c) Events subsequent to the end of the
The going concern assumption means: (a) The entity is facing difficulties continuing as a going concern. (b) The entity is viewed as continuing in business for the foreseeable future with
If an auditor finds any misstatements or deviations in planned procedures: (a) The auditor should consider the reason for the misstatement or deviation. (b) The auditor should not revise
At the conclusion of the audit, the wrap-up process involves: (a) Review of proper and complete execution of planned audit procedures. (b) The determination that all necessary matters have
Subsequent payments testing is: (a) Vouching for a sample of payments made after year end to supporting invoices to ensure that amounts related to invoices dated prior to year end have been
Auditing payables usually focuses most heavily on: (a) Completeness, and valuation and allocation. (b) Existence. (c) Rights and obligations. (d) Existence, and rights and
Additions and disposals of PPE: (a) Are usually minor amounts so are not audited. (b) Are usually tested for cut-off. (c) Can be easily audited through analytical procedures so no
Physical inspection of PPE: (a) Is a useful technique to gather evidence about the completeness of PPE on the balance sheet. (b) Is always done for every asset every year because PPE is a
Auditing cash receipts: (a) Can provide evidence about the balance of accounts receivable. (b) Could reveal unusual delays in posting credits to debtors’ accounts. (c) Can reveal
An accounts receivable positive confirmation: (a) Provides evidence about the classification assertion. (b) Provides evidence about the existence of the accounts receivable. (c)
An auditor compares remittance advices or lists of cash receipts with entries in the cash receipts journal and entries in the cash receipts journal with the remittance advices or lists of cash
Valuation and allocation is a significant assertion for cash: (a) Always. (b) Never. (c) When the client has cash balances that are held in a foreign currency. (d) None of the
A major assertion for the cash account is: (a) Existence. (b) Completeness. (c) Classification. (d) All of the above.
The timing of substantive procedures is influenced by: (a) Work done to obtain an understanding of internal audit activities. (b) A review of processes to generate estimates of
Beautiful Shoes Inc. is a high-end ladies shoe store. It has recently expanded its operations and signed a long-term lease in a popular shopping centre. The owner, Beverly Hung, is concerned because
You, a recently designated CPA, have agreed to serve on a committee that is organizing a sports adventure race as a fundraiser for Far West Camp, a camp for teenagers from all economic backgrounds.
Securimax Ltd. has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high-tech armour-plated personnel carriers. Securimax
Securimax Ltd. has been an audit client of KFP Partners for the past 15 years. Securimax is based in Waterloo, Ontario, where it manufactures high-tech armour-plated personnel carriers. Securimax
André is seeking your advice on the selection of substantive procedures for the audit of his client, Rock Ltd. Rock is a specialist outdoor clothing and equipment retailer and has experienced
The following is a copy of the auditor’s working paper relating to the search for accounts payable cut-off testing for the client New Millennium Ecoproducts. Required (a) Why does an
The following is a copy of the auditor’s working paper relating to the search for unrecorded liabilities for the client New Millennium Ecoproducts. Required (a) Why does an auditor search
The following is a copy of the auditor’s working paper relating to the cut-off procedures for inventory sales for the client New Millennium Ecoproducts. Required (a) Why is an auditor
The following is a copy of the auditor’s working paper relating to the roll forward procedures for accounts receivable for the client New Millennium Ecoproducts. Required (a) When are
The following is a copy of the auditor’s working paper relating to the testing of depreciation expense for the client New Millennium Ecoproducts. Required (a) The opening book value

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