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principles of auditing and other assurance services

Questions and Answers of Principles Of Auditing And Other Assurance Services

AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls
In auditing ICFR for a public company client, Emily finds that the com- pany has a significant subsidiary located in a foreign country. Emily's accounting firm has no offices in that country, and the
Which of the following statements concerning control deficiencies is true?a. The auditor should communicate to management, in writing, all con- trol deficiencies in internal control identified during
Significant deficiencies and material weaknesses must be communicated to an entity's audit committee because they representa. Material fraud or illegal acts perpetrated by high-level management.b.
Which of the following most likely represents a weakness in internal con- trol of an IT system?a. The systems analyst reviews output and controls the distribution of output from the IT department.b.
For each of the following independent situations, indicate the type of report on ICFR you would issue. Justify your report choice.a. Johnson Company's management does not have an adequate antifraud
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor toa. Eliminate the risk of nonsampling errors.b. Reduce audit risk and materiality to a
Samples to test internal controls are intended to provide a basis for an auditor to conclude whethera. The controls are operating effectively.b. The financial statements are materially misstated.c.
Which of the following combinations results in the greatest decrease in sample size in an attribute sample for a test of controls? Desired Confidence Level Tolerable Deviation Rate Expected
In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because thea. Tolerable deviation rate (7 percent) was less than the computed
The following table depicts the auditor's estimated computed upper deviation rate compared with the tolerable deviation rate, and it also depicts the true population deviation rate compared with the
Which of the following statements is correct concerning statistical sam- pling in tests of controls?a. Deviations from controls at a given rate usually result in misstate- ments at a higher rate.b.
Match the term to the definition. a. Attribute sampling b. Desired confidence level c. Allowance for sampling risk d. Sampling risk e. Sampling population f. Nonstatistical sampling g. Tolerable
For the control activities to be effective, employees maintaining the ac- counts receivable subsidiary ledger should not also approvea. Employee overtime wages.b. Credit granted to customers.c.
An independent audit aids in the communication of economic data because the audita. Confirms the exact accuracy of management’s financial representations.b. Lends credibility to the financial
Which of the following best describes relationships among auditing, attest, and assurance services?a. Attest is a type of auditing service.b. Auditing and attest services represent two distinctly
Which of the following statements relating to attest and assurance services is not correct?a. Independence is an important attribute of assurance service providers.b. Assurance services can be
For what primary purpose does the auditor obtain an understanding of the entity and its environment?a. To determine the audit fee.b. To decide which facts about the entity to include in the audit
Which of the following statements best describes the role of materiality in a financial statement audit?a. Materiality refers to the “material” from which audit evidence is developed.b. The
Which of the following is the most important reason for an auditor to gain an understanding of an audit client’s system of internal control over financial reporting?a. Understanding a client’s
Preplanning the audit includes:a. Understanding the client and the client’s industry.b. Determining audit engagement team requirements.c. Ensuring the independence of the audit team and audit
Which of the following statements best describes what is meant by an unqualified audit opinion?a. Issuance of an unqualified auditor’s report indicates that in the auditor’s opinion the
A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is moderately material, but the auditor does not consider it to be
Which of the following best places the events of the last several years in proper sequence?a. Sarbanes-Oxley Act, increased consulting services to audit clients, Enron and other scandals, prohibition
Which of the following best describes the relationship between business obkjectives, strategies, processes, controls, and transactions?a. To achieve its objectives, a business formulates strategies
Which of the following statements best describes management's and the external auditor's respective levels of responsibility for a public company's financial statements?a. Management and the external
The Public Company Accounting Oversight Boarda. Is a quasi-governmental organization that has legal authority to set auditing standards for audits of public companies.b. Is a quasi-governmental
Which of the following is not a part of the role of internal auditors?a. Assisting the external auditors.b. Providing reports on the reliability of financial statements to investors and creditors.c.
Operational auditing is oriented primarily towarda. Future improvements to accomplish the goals of management.b. The accuracy of data reflected in management's financial records.c. Verification that
Which of the following would be considered an assurance service engagement?I. Expressing an opinion about the reliability of a client's financial statements.II. Reviewing and commenting on a
List four qualitative factors that the auditor should consider when evaluating the unadjusted misstatements detected during the audit.
The existence of audit risk is recognized by the statement in the auditor's standard report that the auditora. Obtains reasonable assurance about whether the financial statements are free of material
Auditing standards require auditors to make certain inquiries of manage- ment regarding fraud. Which of the following inquiries is required?a. Whether management has ever intentionally violated the
Which of the following is an example of fraudulent financial reporting?a. Company management falsifies inventory count tags, thereby overstat- ing ending inventory and understating cost of sales.b.
When is a duty to disclose fraud to parties other than the client's senior management and its audit committee most likely to exist?a. When the amount is material.b. When the fraud results from
As lower acceptable levels of both audit risk and materiality are estab- lished, the auditor should plan more work on individual accounts toa. Find smaller errors.b. Find larger errors.c. Increase
In testing the existence assertion for an asset, an auditor ordinarily works from thea. Financial statements to the potentially unrecorded items.b. Potentially unrecorded items to the financial
Which of the following statements concerning audit evidence is correct?a. To be appropriate, audit evidence should be either persuasive or rel- evant but need not be both.b. The measure of the
Which of the following types of audit evidence is the least reliable?a. Prenumbered purchase order forms prepared by the client.b. Bank statements obtained from the client.c. Test counts of inventory
Audit evidence can come in different forms with different degrees of reliability. Which of the following is the most persuasive type of evidence?a. Bank statements obtained from the client.b.
An auditor would be least likely to use confirmations in connection with the examination ofa. Inventory held in a third-party warehouse.b. Refundable income taxes.c. Long-term debt.d. Stockholders'
The permanent file section of the working papers that is kept for each audit client most likely containsa. Review notes pertaining to questions and comments regarding the audit work performed.b. A
An audit document that reflects the major components of an amount re- ported in the financial statements is referred to as a(n)a. Lead schedule.b. Supporting schedule.c. Audit control account.d.
A written understanding between the auditor and the client concerning the auditor's responsibility for the discovery of illegal acts is usually set forth in a(n)a. Internal control letter.b. Letter
An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement ifa. The payments violated the client's policies regarding
The assurance bucket is filled with all of the following types of evidence excepta. Test of controls.b. The audit report.c. Substantive analytical procedures.d. Tests of details.
Which of the following is not a component of an entity's internal control system?a. Control risk.b. The entity's risk assessment process.c. Control activities.d. Control environment.
In which of the following situations would an auditor most likely use a reliance strategy?a. The client has been slow to update its IT system to reflect changes in billing practices.b. The auditor
Assessing control risk below maximum involves all of the following excepta. Identifying specific controls to rely on.b. Concluding that controls are ineffective.c. Performing tests of controls.d.
Which of the following audit techniques would most likely provide an auditor with the most assurance about the effectiveness of the operation of a control?a. Inquiry of client personnel.b.
Audit evidence concerning proper segregation of duties ordinarily is best obtained bya. Inspection of documents prepared by a third party, but which contain the initials of those applying client
Reports by the service organization's auditor typicallya. Provide reasonable assurance that their financial statements are free of material misstatements.b. Ensure that the client will not have any
An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor'sa. Program for tests of controls.b. Understanding of the system.c. Understanding of
An auditor anticipates assessing control risk at a low level in an IT envi- ronment. Under these circumstances, on which of the following controls would the auditor initially focus?a. Data capture
Jayne Phillips, CPA has been engaged by the town council of Granger to perform an audit of the town's June 30, 1999 financial statements in accordance with generally accepted auditing standards. By
The City of Central Falls has engaged Robert Cohen, CPA to audit the June 30, 1999 financial statements of the City's Water Department under the GAO's Government Auditing Standards. Cohen's report
Michael Cunningham, CPA is preparing a report on internal control in conjunction with an audit of the City of Warwick's June 30, 1999 financial statements. The audit is being conducted in accordance
Owing to a small federal grant from the Department of Housing and Urban Development(HUD) to the Town of Stillman, Nadine Gordimer, CPA has performed grant audits for the town in each of the past five
Wil Stevens is executive vice president of a major automobile manufacturing company. Stevens was recently elected Mayor of Detroit. Prior to assuming office, he calls on you, his independent auditor,
A public accounting firm has been engaged to perform the audit of a local, federally funded Housing Allowance Program. The objective of the program is to increase the housing standards of Agana
As a GAO auditor, you have been assigned to perform an audit of a Department of Education School Breakfast Program. The Department had instructed all schools to order commodities in economical
Bird Machine Company is considering developing an internal audit department. A few years ago, the company began an expansion program that included acquiring new businesses, some of which are located
Amy Baat, a local real estate broker, has been appointed to the board of directors of the PennMed Corporation. At a recent board meeting, Baat discovered two planned expenditures for auditing: The
Many internal audit departments report to a level of authority below either the board of directors or the chief executive officer. But these cases raise some doubt about the internal auditors'
A consulting professional in a public accounting firm, you have been engaged to establish an internal audit function in the Newman Crosby Corporation, a commercial manufacturer of fabricated steel
Over the past several years. Hobble, Inc. has expanded, diversified, and grown both in sales and in profits. Two years ago Hobble's management established an internal audit department that is
The internal auditing department of a large service entity is responsible to the controller who, in turn, is responsible to the president. As part of the internal audit responsibility, regular audits
During the audit of purchasing and inventory operations, an internal auditor discovers that significant quantities of purchased materials are neither in stock nor accounted for. Stock records,
The agenda of a forthcoming meeting of the audit committee of a board of directors indicates that you are to discuss coordination between independent and internal auditors.Required:1. What are the
The report on a nongovernmental entity's audited financial statements captures an independent auditor's opinion on financial position, results of operations, and cash flows in a single, critical
Just as financial statement auditing varies by industry, so too does internal auditing, in part because the risks vary from industry to industry. For example, the risks related to accounting
Since the Exxon Valdez incident brought surface contamination to the evening news, the press has been replete with references to environmental disasters, making most everyone conscious of the
Identify the major activities associated with a company's Payroll, Personnel, and Treasury Departments.
How can management assure that payroll checks are distributed only to bona fide employees?
How can management mitigate the likelihood of department managers processing payroll checks for terminated employees or processing unauthorized promotions and transfers?
Explain why Personnel employees should be separated from payroll preparation, and why Personnel and Payroll employees should be separated from cash disbursements.
How might an auditor perform a transaction walk-through when considering controls over personnel and payroll?
What source does an auditor use as the starting point for tests of personnel and payroll activities?
Why are payroll preparation accuracy and appropriate account distribution of major concern to an auditor?
How does an auditor test whether employees whose names appear on the payroll register are bona fide, i.e., actually employed by the company?
How can management control against paychecks being prepared for unauthorized or fictitious employees?
How can an auditor test the authenticity of employees to whom payroll checks are disbursed?
Why does the accounting for postretirement health care obligations create so much more difficulty for accountants and auditors than the accounting for and auditing of payroll expense?
Which of the following statements best explains why the accuracy of payroll calculations and of payroll account distribution is critical to an auditor?a. Employees will complain to management if
Tests of controls over personnel and payroll focus on the preparation, distribution, and recording of earned salaries and wages. Which of the following is the primary source from which tests of
Why does an auditor examine postings to employee cumulative earnings records?a. Undetected errors would accumulate across years, making subsequent payroll accounts misstated.b. Cumulative earnings
On a surprise basis, an auditor may elect to distribute paychecks to employees personally. What is the primary purpose of this audit procedure?a. To assure that no extra payroll checks are prepared
In determining whether control procedures are potentially reliable in assessing control risk below the maximum, an auditor performs four tasks, listed below in random order:1. Design tests of
After completing tests of controls, an auditor concludes from available evidence that control risk can be assessed below the maximum and detection risk above the minimum. Under these conditions:a.
Which of the following financial statement assertions is of least concern to an auditor when testing payroll?a. Occurrence.b. Valuation.c. Completeness.d. Allocation.Chooses the correct answer.
Management has incentives to overstate the discounted present value of future health care obligations because the effect is to:a. Understate investment performance.b. Understate net income.c.
Current generally accepted accounting principles require that the discount rate for calculating the present value of future postretirement health care benefits be based on:a. The current rate of
The transition obligation in accounting for postretirement health care benefits is the difference between:a. The accumulated postretirement obligation and the value of the assets funded to date.b.
You are considering the controls over a client's personnel and payroll activities. System documentation was accomplished with a questionnaire and a narrative memorandum and, in conjunction with a
An auditor's audit working papers include the following narrative description of a segment of the Croyden, Inc., factory payroll system and the flowchart presented on the following two
During your audit of Fletcher Corporation's June 30, 1999, financial statements, you become aware of the following control procedures over Fletcher's personnel and payroll activities:1. All
The Linscott Supply Company employs about 50 production workers. Based on interviews, the factory supervisor hires or rejects job applicants. New hires prepare a W-4 form (Employee's Withholding
Early in your audit of the Kimberly Corporation, you note that the factory supervisor approves time cards for hours worked and for hourly rates and also distributes the payroll checks.Required:1.
When auditing within the expenditure/disbursement cycle, auditors often rely predominantly on interim tests of controls rather than year end substantive tests of details.In fact, in many cases, year
Following are selected questions from an internal control questionnaire relating to a company's personnel and payroll functions. A Yes response would indicate a potential strength of the system, and

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