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principles of auditing
Questions and Answers of
Principles of Auditing
For each one of the following statements indicate whether the statement is true or false.a. When the auditor's approach to substantiating an account balance is to apply an audit procedure to less
The following questions relate to the selection of audit samples. Select the best response.a. Which of the following statistical selection techniques is least desirable for use by an auditor?1.
The following questions relate to use of audit sampling for tests of transaction classes. Select the best response.a. Given random selection, the same sample size, and the same tolerable rate for the
The Dorans Dairy's principal activity is buying milk from dairy farmers, processing the milk, and delivering the milk to retail customers. You are engaged in auditing the retail accounts receivable
The following is a list of audit procedures that might be applied to sales transactions. Identify those procedures that would be applied using audit samplinga. Scan the accounting records to identify
The following is a list of audit procedures that might be applied to property and equipment. Identify those procedures that might be applied using audit sampling.a. Inquire about procedures followed
An auditor has analyzed additions to property and equipment for the year as follows:The auditor plans to substantiate all the additions above $10,000 and rely on analytical procedures for the
An auditor is selecting shipping documents as part of testing sales transactions. There were 3,000 shipping documents issued during the period being tested and the auditor has judgmentally decided to
The sample size for a test of a transaction class should be based on the auditor's consideration of 1. Tolerable rate 2. Risk of assessing control risk too low 3. Expected rate Required: For
The questions below relate to estimating the sample size necessary for tests of transaction classes given the specified decisions for the considerations that affect sample size.Required:a. For each
For the sample sizes calculated in Problem 7-11 above, assume that application of the planned audit test to the items selected produced the following results:Required:a. What is the maximum deviation
Shoe & Shoe, a CPA firm, wants to adopt a sampling plan for tests of transaction classes based on the Poisson distribution, with the following specifications:A risk of assessing control risk too low
Martin, a CPA, has selected a sample of 50 cash disbursement transactions and has found the following sample results: Two vouchers are not initialed to indicate that the supporting documents were
Dennis, a CPA, has selected a sample of 50 sales transactions. The sample size was based on the CPA's judgment rather than statistically estimated but selected using a random number table. However,
The sample size for a direct test of a balance should be based on the auditor's consideration of 1. Tolerable error 2. Risk of incorrect acceptance 3. Population characteristicsRequired: For each of
PIC Inc. has prepared a trial balance of general ledger accounts from which the following information is extracted:For convenience assume that all known error will be corrected and expected error
In planning an audit sample, one of the important considerations is the relationship between the sample and the objective of the test. How do these considerations differ for tests of transaction
You are planning an audit sample for confirmation of accounts receivable. The aged trial balance of receivables after removal of individually significant items has a remaining population of
You are examining additions to property and equipment for the year using the PPS statistical method. The remaining population recorded amount is \($1,000,000,\) and you believe a tolerable error of
In examining additions to property and equipment for the year using the PPS statistical method you estimated a sample size of 40 additions. The remaining population recorded amount was $1,000,000,
a. Who administers the Foreign Corrupt Practices Act of 1977 and to whom does it pertain?b. What provisions of the Act relate to internal control and how?
a. What recommendations regarding internal control were made by the National Commission on Fraudulent Financial Reporting?b. What is COSO, what were the two principal purposes of its efforts
a. State the COSO definition of internal control.b. Identify four fundamental concepts reflected in the definition.c. Which entity objectives and related internal controls are of primary relevance in
Identify several parties that have roles and responsibilities related to an entity's internal control structure and briefly describe their roles and responsibilities.
a. Name the five components of an internal control structure.b. In a financial statement audit, the auditor focuses on each component's relationship to entity objectives and related controls that are
a. List the factors that comprise the control environment.b. State four things the CEO and other members of top management should do to emphasize the importance of integrity and ethical values among
How is management s risk assessment for financial reporting purposes similar to and different from the auditor's risk assessment?
a. In addition to its being a part of the information and communication component, how would you describe the accounting system?b. What are the attributes of an effective accounting system?c. Relate
a. What is the objective of segregation of duties? Explain.b. Identify four types of situations in which appropriate segregation of duties may be important.
Differentiate between (a) independent checks, (b) performance reviews, and (c) monitoring.
a. Identify two matters that should be covered in obtaining an understanding of the internal control structure,b. How should knowledge of the ICS components be used by the auditor?
a. What effect does the auditor's choice of a preliminary audit strategy for a portion of the audit have on the level of understanding needed for related internal control structure policies and
a. What should the auditor understand based on obtaining sufficient knowledge of the factors comprising the control environment component of the ICS?b. What aspects of the information system relevant
a. What procedures can be used in obtaining an understanding of the ICS?b. What is a transaction walk-through review?
a. What methods can be used to document the auditor's understanding of ICS components?b. Can documentation occur concurrently with obtaining an understanding? Explain.
a. What is the general nature of the questions included in internal control questionnaires?b. Identify several advantages of using questionnaires to document the auditor's understanding of relevant
a. What is a flowchart?b. What essential components of a system should be displayed in a flowchart?
a. How may narrative memoranda supplement other forms of documentation?b. Would a narrative memorandum ever be appropriate as the sole documentation of the auditor's understanding of the ICS?
The importance of internal control has gained increasing recognition among management, external auditors, regulators, and others.Requireda. What is internal control and what is it intended to provide
For each one of the following statements indicate whether the statement is true or false.a. Decisions about the nature of auditing procedures to be applied are confined to selecting the particular
The following questions relate to various aspects of audit programs. Select the best response.a. An audit program provides proof that 1. Sufficient competent evidential matter was obtained. 2. The
The following questions relate to various aspects of selecting audit procedures. Select the best response.a. The sequence of steps in gathering evidence as the basis of the auditor's opinion is 1.
The following list includes common auditing procedures. For each procedure: (1) describe the procedure; (2) identify the primary financial statement assertion, such as existence, for which the
As explained in Chapter 3, evidential matter obtained through the auditor's personal knowledge is more reliable than evidential matter obtained from internal sources, such as the client's accounting
The specific audit objectives for the inventory of a manufacturing company might include the following: a. Inventories included in the balance sheet physically exist. b. Inventory quantities
Important audit procedures for the balance accounts receivable usually include the following: a Confirm account balances with selected customers. b Inquire of management and read agreements and
The scope of audit procedures can be modified by varying the nature, timing, or extent of procedures selected. Explain how materiality at the account balance level may be a consideration that
Listed below is the balance sheet portion of the 19X6 trial balance of Russ & Co. and additional information on some of the account balances. (Allowance accounts are ignored for convenience.) You
Winters & Allen is a mail-order seller of party supplies and novelty items. It sells to both businesses and individuals, but the accounting processing and controls are the same for all sales
For the following account balances, what are some specific examples of items that might be considered individually significant because of their nature?a. Accounts receivableb. Inventoryc. Property
Martin & Co., a CPA firm, has adopted the following specific percentages for the indicated qualitative levels of risk:Minimum 30%Moderate 50%Maximum 100%Martin & Co. has also decided to use a 5
Benis & Co., a CPA firm, has adopted the following specific percentages for the indicated qualitative levels of risk: Minimum 30% Moderate 50% Maximum 100% Benis & Co.'s partners have decided to use
Coordination of the direction of testing can increase the efficiency of audit tests. If an auditor has adopted the strategy of testing asset and expense account balances directly for overstatement
Using the activity format for the balance sheet account cash, identify the indi- rect testing effects on the components of directly testing the ending balance for overstatement. Also, explain how the
Your client is the Mission Mountain Shopping Center Inc., a shopping center with 30 store tenants. All leases with the store tenants provide for a fixed rent plus a percentage of sales, net of sales
Meals Inc. presents the following items in its balance sheet:Meals Inc. is a small business with two employees in its accounting department, and for that reason its internal control structure is
In 19X1, Reid, who had been in the lumbering business for many years, incorporated his business as Reid Ltd. Reid became president of the company and Zilker, the chief accountant, was appointed
Your client, Zitzitz Inc., issues its own trading stamps along with the sale of merchandise. These stamps are redeemable at Zitzitz when a book is filled. Thus, with each sale Zitzitz creates a
Milenburg Inc., sells chemicals in large, costly returnable containers. Its procedures in accounting for the containers are as follows:1. When containers are purchased, their cost is charged to
What is the difference between a privity relationship and a primary beneficiary relationship?
What is the difference between a primary beneficiary relationship and a foreseen party relationship?
What is the difference between a foreseen party relationship and a foreseeable party relationship?
Describe six major differences between the type of audit conducted in 1915 and the type conducted today.
What common law relationships between auditors, clients, and third parties were established by the Ultramares case?
What statutory law relationships between auditors and certain third parties were created with the Securities Act of 1933?
What is the “due diligence” defense that may be used by auditors under the Securities Act of 1933? What are the ‘‘good faith” and “no knowledge” defenses that may be used under the
How did the Barchris case change the auditor’s working climate?
In what way is the auditor potentially affected by the Racketeer Influenced and Corrupt Organizations Actl
In what way did the Rusch Factors case change the relationship between auditors and third parties insofar as ordinary negligence under common law is concerned?
How does the Continental Vending case illustrate a different dimension of the auditor’s legal risk?
In what way did the Rosenblum v. Adler case extend the auditor’s liability for ordinary negligence under common law? In what way did the Credit Alliance case narrow the auditor’s liability?
In the 1136 Tenants' case, what was the difference between the client’s and the CPA’s view of the purpose of the professional services?
What did the management of Equity Funding Corporation do to falsify its records and cover up the fraud?
What is the differerfce between errors and irregularities?
Describe the auditor’s responsibility to detect and report illegal acts.
In the Report of the National Commission on Fraudulent Financial Reporting there were four major recommendations that directly affect the role of the auditor. What were these recommendations?
What is the difference between business failure and audit failure?
The Securities Act of 1933a. Extended the auditor’s liability for ordinary negligence under common law.b. Created foreseen and foreseeable parties.c. Reversed the decisions made in the Ultramares
In the Continental Vending case the defendants were charged witha. Violation of federal criminal statutes.b. Ordinary negligence under statutory law.c. Ordinary negligence under common law.d.
In the 1136 Tenants’ case all of the following were factors in the case excepta. Violation of federal criminal statutes.b. Due care.c. A clearly written engagement letter.d. Misunderstanding as to
In the Equity Funding case all of the following were factors in the case excepta. The integrity of management.b. Massive collusion by management.c. Liability for ordinary negligence.d. A
Read the following statements and indicate whether you agree or disagree with each one. Give your reasons for agreement or disagreement. Support your answers with references to applicable cases
A colleague has read about the legal cases with which auditors have been involved in recent years. During a discussion, you consider it beneficial to summarize some highlights of auditors' legal
Answer the following questions or discuss the following statements.a. It seems that every time a legal challenge is made to an audit, CPAs either lose the case or are embarrassed about the facts
Indicate whether you think the following third-party groups would normally represent a (1) primary beneficiary, (2) foreseen party, or (3) foreseeable party. Give reasons for your answers.a. A
Use and Dispose Company was organized to manufacture and sell inexpensive golf clubs that can be used during the golf round and then thrown away at the end of the round. In order to “keep the
Explain the limitations that auditors face when they perform the attest function.
What three assurances can auditors give to the parties that rely on financial statements?
What is materiality?
Why is it necessary for the auditors to establish a threshold of materiality?
What factors must auditors consider when making materiality decisions?
In planning an audit and evaluating audit evidence what consideration must be coupled with materiality?
What is the difference between overall planned audit risk and the individual audit risks?
What are the following risks?a. Inherent riskb. Control riskc. Detection risk
What is the difference between the following?a. Non sampling riskb. Sampling risk
Under what conditions would the achieved individual audit risk for an account be the same as the individual audit risk that is used to plan the audit of that account?
What situation would have to exist for the achieved overall audit risk to exceed the planned overall audit risk?
Describe four audit procedures that do not require the use of audit sampling.
What five questions need to be answered in planning an audit sample?
Describe four advantages of using statistical sampling.
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