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business
principles of auditing

Questions and Answers of Principles of Auditing

How might Li & Fung’s reputation for good corporate governance impact its ongoing business?
As Li & Fung’s auditor, which areas of the business would require the greatest test of controls?
Which are the most significant substantive tests?
Which of these is the most important responsibility of a board of directors?(A) Setting corporate strategy, overall direction, mission, or vision.(B) Caring for shareholder interest.(C) Reviewing and
The corporation is fundamentally governed by __________ overseeing __________ with the concurrence of __________.(A) The shareholders; top management; the board of directors.(B) Top management; the
What audit procedures should have been undertaken at Vivendi to assure proper disclosures were made?
Why is it not in the shareholders’ best interest to use EBITDA reporting?
Discuss if management-determined measurements like “Operational Free Cash Flow” should be allowed in reporting?
The role(s) of the Board of Directors in a company’s strategy-making, strategyimplementing process include:(A) Collaborating closely with senior management in crafting the company’s strategic
Which of the following is not one of the matters auditors are expected to communicate about with the audit committee?(A) Management’s process of generating accounting estimates.(B) Auditor’s
What are the main problems with the corporate governance structure describe above?
Given all the related party transactions, what audit procedures would you recommend?
What were the warning signs of financial decline that the auditors should have addressed in their procedures?
Describe why assessment of the corporate governance model is important to the audit?
What types of strategies and actions could the board of directors initiate which could have changed the outcome?
Under the Sarbanes-Oxley Act, which of the following companies is not subject to executive certification requirements?(A) US publicly-traded company based outside the United States.(B) Banks and
Which of the following do Combined Code rules and SEC regulations require of the audit committee of a publicly traded corporation?(A) Report by the auditor of all adjustments the auditor thinks
Explain why the concept of corporate governance is being discussed all over the globe at the beginning of the twenty-first century.
Describe the differences between a market-oriented versus a network-oriented corporate governance structure.
Should a corporate governance code be developed by governmental bodies and enforced by law or should a code be developed by private institutions as companies, shareholder representatives, lawyers and
Transparency is an important element of good corporate governance. Do you think a maximum level of transparency exists or should the company be able and willing to communicate all information at the
What is meant by the statement: “Corporate governance is not an end in itself?”
Using the example of basketball, explain the nature of corporate governance in terms of a basketball team.
Bakka Bee, a construction firm in Toronto Canada. They are a firm with 200 employees in five countries. One of their divisions – in Peru – has encountered difficulties and may have to be
Pick one US-based company and one European company and compare and contrast their board of directors and other supervisory boards.
Royal Shell publishes a “Triple Bottom Line Report” in which it reports about economic, social and environmental issues. This report (called The Shell Report) can be found on the internet
Describe the system of oversight of the audit profession in your country. Compare this system with the PCAOB standards. Discuss differences. US students should analyze the oversight system in the UK
Choose one of the key provisions of the Combined Code and discuss what the impact of that provision on the company should be.
Appendix A lists audit procedures that the auditor must undertake to ensure that the board has a formal schedule of matters specifically reserved to it. For each audit procedure:A. List the source of
Explain how information asymmetry between principals and agents calls for the basic function of the auditor.
What is the responsibility of a bank’s board of directors and management?
Read the following cases and describe how IAPS 1004 would apply to each:1 Lincoln Savings and Loan (Chapter 3, Concept and Company 3.2).2 Resona Bank (Chapter 5, Concept and Company 5.1).3 Penn
Which of the following is most likely to be unique to the audit work of certified accountants as compared to work performed by practitioners of other professions?(A) Due professional care.(B)
Discuss ways that a buying spree like that of Mr Van der Hoeven can create problems for the group auditor?
What pressures may be applied to the management of newly acquired divisions that would encourage misstatement of income?
What special audit procedures should be applied to an audit of an acquisitive company?
The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:(A) Evidence to be gathered to provide
An auditor should design the written audit program so that:(A) All material transactions will be selected for substantive testing.(B) Substantive tests prior to the balance sheet date will be
What procedures should an auditor carry out to determine the validity of a significant source of company revenue?
What actions of Minkow and the company’s audit history would have caused an auditor to become suspicious?
How does signing a confidentiality agreement affect auditor substantive procedures?
An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the entity’s:(A) Minutes of board of directors meetings.(B) Transfer agent’s records.(C) Canceled stock
In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of:(A) Existence or occurrence.(B) Presentation and disclosure.(C)
What are the typical audit procedures to test for existence of revenue?
What additional procedures would an auditor perform if a majority of sales came from a single customer?
What aspect of ComROAD’s business model made revenue recognition fraud relatively easy?
Did the existence of the Neuer reduce scrutiny of revenue?
Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?(A) Review the cash
When auditing inventories, an auditor would least likely verify that:(A) The financial statement presentation of inventories is appropriate.(B) Damaged goods and obsolete items have been properly
In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management’s financial
Audit Planning Memorandum-Strategy Part. The following are three situations in which you are required to develop an audit strategy and prepare a partial strategy memorandum:1 You are on the first
Confirmation of Accounts Receivables. You have been assigned to the first audit of the accounts of the Super Blinchiki Company of St. Petersburg, Russia, for the year ending March 31, 20X8. The
Audit of Inventory. Late in December, the Registeraccountant (RA) firm of Radbod &van Weg accepted an audit engagement at Brandewyn Juwelen, BV, a company that deals largely in diamonds. Brandewyn
Audit of Assets. Yarilo Company of Vinnista, Ukraine, owns and operates gas wells which are accounted for in three classifications:1 Producing – for wells currently producing; there are
Audit of Investments. For several years you have made the annual audit for Sichou Jinhuangse Company of Nanjing, China. This company is not a dealer in securities. A list of presently held securities
Audit firms are expected to report on the monitoring of its quality control systems at least annually. What is included in that communication? What should supervisory personnel monitor and do in each
Subsequent Facts and Events. The following unrelated events occurred after the balance sheet date but before the audit report was prepared:1 The granting of a retrospective pay increase to selected
Board of Directors Disclosures. The board of directors of Celestial City Corporation of Taejon, Korea, is issuing a corporate governance report. In this audit year Celestial City lost 1,280,000,000
Going Concern. When an auditor finds the ability of a company to continue as a going concern is questionable, the auditor will use certain audit procedures to obtain further evidence. Jocques
How are work papers important to proving that the audit was done correctly?
What would an auditor accomplish by altering or destroying the work papers?
Outside of documenting the audit, how else may working papers be used?
Legal Aspects of Working Papers. Cisse and Kamotho, Kenya Certified Public Accountants (CPA(K)), were employed for several years by the Masama Balira Company of Kenya to make annual audits. As a
Preparation of Work Papers. You are instructing an inexperienced staff accountant on her first auditing assignment. She is to examine an account. An analysis of the account has been prepared by the
Which of the following statements is a basic element of the auditor’s standard report?(A) The disclosures provide reasonable assurance that the financial statements are free of material
Which paragraphs of an auditor’s standard report on financial statements should refer to International Standards on Auditing (ISAs) and International Financial Reporting Standards (IFRS)? ISA IFRS
How did each one of the four accounting fraud schemes impact Livant’s financial statements?
What audit procedures might be used to discover these misstatements?
When financial statements contain a departure from IFRS because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should explain the unusual circumstances in a
To what extent is it possible for an auditor to rely on management claims in the management representations letter to determine the appropriateness of a material account balance?
If evidence is inconsistent with management representations what additional audit procedures should the auditor consider?
What tests should an auditor perform to find evidence concerning misstatement of executive compensation expense?
Are public statements by the CEO to investors considered a disclosure that requires the attention of the auditor?
If the Sarbanes-Oxley Act, Section 402 Enhanced Conflict Provisions was in effect in 2001, would that have made a difference to the disclosure requirements?
For which of the following events would an auditor issue a report that does not make any reference to consistency?(A) A change in the method of accounting for inventories.(B) A change from an
What circumstances might result in modifications to the wording of a standard unqualified opinion? What circumstances lead to adding an explanatory paragraph? What does this paragraph entail?
How can XBRL be used in an ERP system?
Limitation on Scope. Lorts Corporation of Maastricht, the Netherlands, (whose fiscal year will end December 31, 20X3) informs you on December 18, 20X3 that it has a serious shortage of working
Directors Report on Corporate Governance. Nordtek, AS, a manufacturer of fine skiing equipment based in Skien, Norway, has manuals of policies and procedures for monitoring and reporting on internal
Embedded Audit Modules (EAM). EAM are database software routines that are placed at predetermined points to gather information about transactions or events within the system that auditors deem to be
Material misstatements or omissions in Audit Reports: Auditors are required to report internal control weaknesses to management. The auditors however have no responsibility to report internal control
Which of the following best illustrates the concept of sampling risk?(A) A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest.(B) An
An advantage of using statistical over non-statistical sampling methods in tests of controls is that the statistical methods:(A) Can more easily convert the sample into a dual-purpose test useful for
The tolerable error for a test of a control is generally:(A) Lower than the expected rate of errors in the related accounting records.(B) Higher than the expected rate of errors in the related
Name the factors that an auditor typically takes into consideration when determining the necessary sample size.
What is the difference between the significance level of a test and the power of a test?
Is Type II error also part of the audit risk?
When projecting errors for a non-statistical sampling method, the auditor can choose between extrapolating over the number of items in the population and extrapolating over the book value in the
Why is it difficult to determine the sample size for the estimate of the population error with a given confidence and pre-determined precision.
To determine the completeness of accounts payable at year-end, the auditor decides to define the sampling population as the payments after year-end. Why does this test have limited value?
What are the requirements for a representative sampling technique to qualify as a“statistical” sample?
Appendices 1 and 2 to ISA 530 list a number of factors that influence sample size. Are these factors only relevant for statistical samples?
Some people claim that an audit risk of 5 percent implies that 5 percent of financial statements with unqualified opinions contain material errors. What is your view on this?
Sampling for attributes is often used to allow an auditor to reach a conclusion concerning a rate of occurrence in a population. A common use in auditing is to test the rate of deviation from a
Rong & Wright, CA, of Hong Kong has decided to rely on an audit client’s affecting receivables. Rong & Wright plans to use sampling to obtain substantive evidence concerning the reasonableness of
International Standards on Quality Control (ISQC) apply to:(A) Auditing services only.(B) Auditing and management advisory services.(C) Auditing and tax services.(D) Auditing and accounting and
One of a certified audit firm’s basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this basic objective is provided
The Sarbanes-Oxley Act requires that every registered public accounting firm auditing publicly traded companies include in their quality control policies standards relating to all of the following
Which of the following statements ordinarily is included among the written client representations obtained by the auditor?(A) Compensating balances and other arrangements involving restrictions on
Who is responsible for the financial statements and why is that the case?

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