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business
principles of auditing

Questions and Answers of Principles of Auditing

When the financial statements contain a departure from generally accepted accounting principles, the effect of which is material, the auditor shoulda. Qualify the opinion and describe the departure
When reporting on comparative financial statements, an auditor ordinarily should change the previously issued opinion on the prior year’s financial statements ifa. The prior year’s opinion was
Brown & Brown, CPAs, was engaged by the board of directors of Cook Indus¬ tries, Inc. to audit Cook’s calendar year 19X5 financial statements. The following report was drafted by an audit
Your client, S Company is a major manufacturer of widgets. Your audit report for the previous year was unqualified. During the current year, several class- action suits were filed against the company
Q Company is a gas distribution company that is regulated by the state public service commission. The commission must approve all rate changes made by Q Company, but Q Company is allowed to collect
On September 30, 19X5, White & Co., CPAs, were engaged to audit the consolidated financial statements of National Motors, Inc. for the year ended December 31, 19X5. The consolidated financial
The auditors’ report below was drafted by a staff accountant of Turner & Turner, CPAs, at the completion of the audit of the financial statements of Lyon Computers, Inc., for the year ended March
During your audit work as of December 31, 19X7, you discovered a lawsuit against your client, Alpha Corporation, asserting a material claim for negligence in producing defective toys. The management
Bangi Chemicals Ltd make chemicals for the defence industry. They had no subsidiary companies but in mid 2X10, they acquired 60 per cent of the share capital of an American company for £6m paid
How should a principal auditor evaluate the work of a component auditor?
(a) Explain the role of ‘support letters’ (also called ‘comfort letters’) as evidence in the audit of financial statements.(b) You are an audit manager in Tickett & Run, a firm of Chartered
Tickitt & Run are the auditors to AHM Publishing Co. Ltd, publishers of textbooks. They carried out the audit for the year ended 31 December 2X09 and signed an unqualified audit report. Shortly after
Tickitt & Run, the auditors to Daffodil Ltd, gave an unqualified report on 14 January 2X11 on the accounts for the year ending 30 November 2X10. These accounts were seen by The Wednesfield Bank PLC
How can an auditor be liable under the law of Tort?
You are an audit partner with Tickett & Run and three months ago you signed off the audit of Blastypot plc, a large engineering group with several subsidiaries. The turnover of the group is £750m
Discuss how regression analysis may be used in the audit of revenue and expense.
Name three types of transactions an auditor must be alert to for proper classification and disclosure.
Why are some auditors not satisfied with letters received from legal counsel?
Before expressing an opinion concerning the results of operations, the auditor would best proceed with the audit of the income statement bya. Applying a rigid measurement standard designed to test
With respect to contingent liabilities, the auditor may request confirmation from a bank regarding notes receivablea. Held by the bank in a custodial account.b. Held by the bank for collection.c.
Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s subsequent events?a. Reconcile bank activity for the month after the balance sheet date
A written representation from a client’s management which, among other matters, acknowledges responsibility for the fair presentation of financial statements, should normally be signed by thea.
Which of the following expressions is least likely to be included in a client’s representation letter?a. No events have occurred subsequent to the balance sheet date that require adjustments to, or
Brown accepted an engagement to audit the 19X5 financial statements of XYZ Company. XYZ completed the preparation of the 19X5 financial statements on February 13, 19X6, and Brown began the field work
If a lawyer refuses to furnish corroborating information regarding litigation, claims, and assessments, the auditor shoulda. Honor the confidentiality of the client-lawyer relationship.b. Seek to
An attorney is responding to an independent auditor as a result of the audit client’s letter of inquiry. The attorney may appropriately limit the response toa. Asserted claims and litigation.b.
You have decided to use regression analysis in your analytical audit of sales commission expense. Using the monthly balances of the prior three years’ amounts of sales (independent variable) and
What are computer-assisted audit programs?
What is the common trait of all the computer-assisted audit program capabilities listed in the chapter?
Reproduce and label the flowchart or diagram that shows the general method used to operate a computer-assisted audit program.
Name two types of storage devices that can be used for client files that are processed with computer-assisted audit programs.
Take the following examples of output produced by computer-assisted audit programs and list a possible audit procedure that would be performed with each item of output.a. Listing of accounts
The purpose of using computer-assisted audit programs is to test and analyze a client’s computera. Equipment.b. Systems.c. Records.d. Processing logic.
Using microcomputers in auditing may affect the methods used to review the work of staff assistants becausea. Supervisory personnel may not understand the capabilities and limitations of
The two requirements crucial to achieving audit efficiency and effectiveness with a microcomputer are selectinga. The appropriate audit tasks for microcomputer applications and the appropriate
Which of the following is true of computer-assisted audit programs?a. They can be used only in auditing online computer systems.b. They can be used on any computer without modification.c. They enable
The most important function of a computer-assisted audit program is the capability toa. Select a sample of items for testing.b. Access information stored on computer files.c. Evaluate sample test
Which of the following audit procedures would an auditor be least likely to perform using a computer-assisted audit program?a. Searching records of accounts receivable balances for credit balances.b.
The least likely use by the auditor of a computer-assisted audit program is toa. Perform analytical procedures on the client’s data.b. Identify weaknesses in the client’s computer controls.c.
Refer to the program flowchart to read accounts receivable master files. The following is an explanation of the flowchart logic with certain steps left blank. Fill in the blank steps. a. Start. b.
Refer to the master file data for the auditor’s program. Assume the following information about three customer accounts.a. Customer No. 500 has an \($8,000\) balance, of which \($6,000\) is
Microcomputer software has been developed to improve the efficiency and effectiveness of the audit. Electronic spreadsheets and other software packages are available to aid in the performance of
Tickitt & Run are auditors of the Zombrit Group PLC. The accounts for the year ending 31.12.2X10 are being subjected to the final review. The following matters have been noted by the audit
Angela Goodbody is a partner in Tickitt & Run and has come to the audit of E-musica Ltd to carry out a hot review of the audit which is in progress for the year ended 31 March 2X11.E-musica have
Your firm is the external auditor of Octavia Ltd (Octavia). The team conducting the audit for the year ended 31 December 2X10 has recently returned to the office following completion of the audit
Toker & have used me a State Masiname or ended 3 December 2010 They asked one of the audit staff to draft the audit report and he produced this:A roost semnation on a teer be to the amount and does
What is an emphasis of matter report used for?
(a) Explain why quality control may be difficult to implement in a smaller audit firm and illustrate how such difficulties may be overcome.(b) Kite Associates is an association of small accounting
Dunbar Manufacturing PLC is a multi-product manufacturing company with four factories around the country.The auditors, Tickitt & Run, have completed the interim audit for the year ending 31 December
Stopwatch PLC’s main customers are the maior television networks within the UK. The company’s creative team present an idea for a television programme to the network and, if successful, the
What two methods can be used to measure variation in a population?
What factors can be used to control audit risk?
If other factors are held constant, what happens to the sample size of substantive tests of details (becomes larger or smaller) whena. Reliance on the internal control structure increases?b. Reliance
Explain how the auditor might determine tolerable error.
In classical statistical sampling, what three steps are used to obtain the sample results?
Explain how the desired allowance for sampling risk is determined in classical statistical sampling (use numbers if necessary).
Audit risk is determined by all of the following excepta. Tolerance risk.b. Inherent risk.c. Control risk.d. Detection risk.
To determine the number of items to be selected in a sample for a particular substantive test of details, the auditor should consider all of the following ex¬ cept thea. Tolerable error.b. Deviation
Hill has decided to use Probability Proportional to Size (PPS) sampling, some¬ times called dollar-unit sampling, in the audit of a client’s accounts receivable balances. Hill plans to use the
An important statistic to consider when using a classical statistical sampling audit plan is the population variability. The population variability is measured by thea. Sample mean.b. Standard
An auditor selects a preliminary sample of 100 items out of a population of 1,000 items. The sample statistics generate an arithmetic mean of \($60\), a standard deviation of \($6\), and a standard
During the course of an audit engagement, Mr. Command, the senior, decided to use non-statistical sampling on a certain substantive test. The sampling plan included the following: Required: a. If the
Assume that a population has the following characteristics: Number of items in the population-300 Population recorded amount-$600,000 Sample size-100
The following list of tests is typical of those usually performed by auditors in gathering evidence to ascertain the fairness of financial statement balances. For each listed test, indicate whether
Explain why the audit procedures applied to cash are usually more extensive than might seem warranted by the size of the cash balance.
List two requests an auditor will make of a bank in connection with his or her audit of cash.
What is the purpose of obtaining authenticated deposit slips from the bank? Explain the limitations on the effectiveness of this procedure.
What is the purpose of a block reconciliation or proof of cash?
To which audit objective are the procedures for the test of the allowance for doubtful accounts related?
To which audit objective is the confirmation of accounts receivable related?
As one of the year-end audit procedures, the auditor instructed the client’s personnel to prepare a standard bank confirmation request for a bank account that had been closed during the year. After
An unrecorded check issued during the last week of the year would most likely be discovered by the auditor when thea. Check register for the next month is reviewed.b. Bank confirmation is reviewed.c.
Which of the following cash transfers results in a misstatement of cash at December 31, 19X7? Disbursement Bank Transfer Schedule Receipt Recorded Paid by Recorded Received Transfer in books bank in
The auditor should ordinarily mail confirmation requests to all banks with which the client has conducted business during the year, including those with zero balances becausea. This procedure will
In the confirmation of accounts receivable the auditor would most likelya. Require confirmation of all receivables from agencies of the federal government.b. Seek to obtain positive confirmations for
When scheduling the audit work, the auditor should consider confirming accounts receivable balances at an interim date ifa. Internal control structure policies and procedures for the existence
Lapping would most likely be detected bya. Examination of canceled checks clearing in the cutoff bank statement.b. Confirming year-end bank balances.c. Investigating responses to accounts receivable
An aged trial balance of accounts receivable is usually used by the auditor toa. Verify the validity of recorded receivables.b. Ensure that all accounts are promptly credited.c. Evaluate the
Once a CPA has determined that accounts receivable have increased because of slow collections in a “tight money” environment, the CPA would be likely toa. Increase the balance in the allowance
Com-See-Me, a retail furniture company, made a practice of assigning certain customer account balances to a local bank which, in turn, advanced the furniture company money. When the designated
What is the purpose of the auditor’s review of the client’s written physical inventory instructions?
Comment on the following statement: “During the physical inventory, the auditor should make and record as many test counts as possible because his or her primary concern is to count as large a
Why is the subject of obsolete inventory discussed with top management and included in the management representation letter?
What is the purpose of a confirmation control schedule?
What background knowledge must an auditor possess to effectively audit income tax liability and expense?
Which of the following is the most effective internal control structure procedure to detect vouchers that were prepared for the payment of goods that were not received?a. Count goods upon receipt in
An inventory turnover analysis is useful to the auditor because it may detect a. Inadequacies in inventory pricing.b. Methods of avoiding cyclical holding costs.c. The existence of obsolete
An auditor would be most likely to learn of slow-moving inventory througha. Inquiry of sales personnel.b. Inquiry of stores personnel.c. Review of perpetual inventory records.d. Physical observation
If the perpetual inventory records show lower quantities of inventory than the physical count, an explanation of the difference might be unrecordeda. Purchases.b. Purchase discounts.c. Sales.d. Sales
In a manufacturing company, which one of the following audit procedures would give the least assurance of the valuation assertion for inventory at the audit date?a. Testing the computations of
Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regu¬ lar sales. Which of the following
An examination of the balance in the accounts payable account is ordinarily not designed toa. Verify that accounts payable were properly authorized.b. Detect accounts payable that are substantially
To efficiently perform an accounts payable cutoff test, an auditor will most likelya. Compare cutoff reports with purchase orders.b. Compare vendors’ invoices with vendors’ statements.c.
Which of the following audit procedures is least likely to detect an unrecorded liability?a. Analyzing and recomputing interest expense.b. Obtaining standard bank confirmations.c. Obtaining accounts
The auditor is most likely to audit accrued commissions payable in conjunction with thea. Review of post balance sheet date disbursements.b. Verification of contingent liabilities.c. Sales cutoff
Explain how and why an auditor usually tests depreciation expense on an overall basis.
What procedures does the auditor use in his or her search for mortgages and liens on property and equipment?
How is the audit of accrued interest payable related to an audit working paper in the cash section?
Why does the concept of materiality not apply to violations of a debt agreement?
Ineffective internal control structure policies and procedures for recording retirements of equipment may cause an auditor toa. Trace additions to the “other assets” account to search for

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