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principles of auditing
Questions and Answers of
Principles of Auditing
Which of the following audit procedures would be least likely to lead the auditor to find unrecorded fixed asset disposals?a. Review of depreciation expense.b. Examination of insurance policies.c.
When an auditor is unable to inspect and count a client’s investment securities until after the balance-sheet date, the bank where the securities are held in a safe deposit box should be asked toa.
If a company employs a capital stock registrar and/or transfer agent, the registrar or agent, or both, should be requested to confirm directly to the auditor the number of shares of each class of
Your new staff assistant informed you that he has completed the audit of depreciation expense, and on review of his work you find that it consisted of checking the clerical accuracy of the
a. What is meant by the term assessing control risk?b. Control risk is assessed in terms of what?
Enumerate five steps involved in the process of assessing control risk.
How are potential misstatements and necessary controls identified in a typical audit?
a. Explain the role of evidence obtained from procedures to obtain an understanding in assessing control risk.b. Explain the role of evidence obtained from tests of controls in assessing control risk.
How are guidelines concerning the tolerable frequency of deviations from controls used in assessing control risk?
Whaf^ualitatwe1 factors should be considered in forming a conclusion about the effectiveness of a control policy or procedure?
a. Tests of controls only relate to the effectiveness of the operation of a control. Do you agree? Explain.b. On what three questions do tests of controls of effectiveness of operation focus?
Distinguish between (1) concurrent and (2) additional or planned tests of controls.b. Indicate the range of assessed levels of control risk that evidence from each type of test of controls may
a. Which audit procedures are commonly used in tests of controls?b. Which procedure provides the best evidence of the operating effectiveness of a control? Why?
What effect will the auditor's planned assessed level of control risk have on the extent of tests of controls?b. What factors should be considered by the auditor in using evidence of effectiveness
a. Is it necessary for the auditor to obtain evidence of effectiveness for the entire year covered by the financial statements?b. What actions should be taken by the auditor when significant changes
What factors should be considered by the auditor in evaluating the work done by internal auditors under aa. Coordination of work arrangement?b. Direct assistance arrangement?
What are dual-purpose tests?
Explain the process for assessing control risk fora. Account balance assertions affected by a single transaction class.b. Account balance assertions affected by multiple transaction classes.
How may the auditor assess the level of control risk for an account balance assertion when the assessed levels of control risk for multiple related transaction class assertions are not all the same?
What are the requirements for documenting the assessed level of control risk for an assertion?
What form does the documentation often take in practice?
What responsibility does the auditor have for communicating internal control structure related matters?
Differentiate the terms reportable condition and material weakness.
Your firm has been engaged to audit the financial statements of the Haven Company. In obtaining an understanding of internal controls pertaining to cash disbursements transactions, the following
In your audit of the Megan Company, you identify the following potential misstatements that could occur for financial statement assertions in accounts affected by cash disbursements transactions:1.
For each of the two preliminary audit strategies, state the appropriate levels of (1) planned detection risk and (2) substantive tests.
When and how does the auditor evaluate the planned level of substantive tests that was specified as the fourth component of the audit strategy for an assertion?
When and how does an auditor determine a revised or final acceptable level of detection risk for an assertion?
When more than one substantive test is performed to obtain evidence about a particular assertion, should the same acceptable level of detection risk be specified for each test? Explain.
a. What is the purpose of substantive tests?b. What is involved in designing substantive tests?
a. What are the advantages and disadvantages of using analytical procedures as substantive tests?b. What factors affect the expected effectiveness and efficiency of analytical procedures as
a. What are the primary audit procedures used in performing tests of details of transactions?b. How does the cost of tests of details of transactions compare with the cost of the other two types of
a. Contrast the focus of tests of details of balances versus tests of details of transactions.b. What is the relative effectiveness and costliness of tests of details of balances?
a. What factors should be considered by the auditor in deciding whether to perform substantive tests prior to the balance sheet date?b. How may the auditor control the potential added audit risk for
What is the relationship between the acceptable level of detection risk and the extent of substantive tests?
How should the auditor's decisions regarding the design of substantive tests to be performed be documented in the working papers?
a. List five steps in completing preliminary planning before specifying the substantive tests to be included in an audit program,b. List six steps in the general framework for specifying substantive
Identify several differences in preparing audit programs for initial engagements versus recurring engagements.
The role of analytical procedures relative to tests of details may be greater for income statement accounts than balance sheet accounts.Why?
What circumstances may result in applying tests of details directly to income statement accounts?
a. What are the auditor's objectives in auditing related party transactions?b. Identify the substantive tests that may be used in auditing related party transactions.
Contrast tests of controls and substantive tests as to (a) types, (b) purpose, (c) nature of test measurement, (d) applicable audit procedures,(e) timing, (f) audit risk component, (g) primary field
All of the internal control work in the audit of the Hurst Corporation has been completed, and the final assessed levels of control risk have been compared with the planned assessed levels of control
Final acceptable levels of detection risk have been determined for several assertions. The auditor is prepared to proceed with designing specific substantive tests.Requireda. What is the purpose of
After determining the acceptable level of detection risk for specified assertions for a new audit client and completing all other preliminary planning steps, the auditor develops an audit program for
Warren Boyd, a beginning staff accountant, believes that audit sampling applies only to tests of controls, but may be used with all auditing procedures relating to tests of controls. Is Warren
Mary Todd is uncertain about several relationships pertaining to audit sampling. As Mary's supervisor, explain the application of audit sampling to (1) GAAS and (2) the components of audit risk.
a. Distinguish between sampling risk and nonsampling risk.b. Explain the types of sampling risk that may occur in auditing and their potential effects on the audit.
a. What are the basic similarities and differences between statistical and nonstatistical sampling?b. Identify the benefits to the auditor in using statistical sampling.
a. Indicate the types of statistical sampling techniques that may be used in auditing.b. Explain the essential differences between the techniques.
a. State the steps in a sampling plan for tests of controls.b. Identify the phases of an audit to which each step applies.
a. Define an attribute of interest.b. What evidence should exist for attributes?
Identify four factors that may affect the auditor's identification of the population to be sampled.
a. Define the sampling unit,b. Identify the different kinds of sampling units that may be selected.
a. Why does the auditor normally specify a low level for the risk of assessing control risk too low?b. What effect does the risk of assessing control risk too low have on sample size?
a. Define the term tolerable deviation rate and indicate the factors that should be considered in deciding on the tolerable rate,b. What effect does this rate have on sample size?
a. Indicate the information that may be used by the auditor to estimate the expected population deviation rate,b. What effect does this factor have on sample size?
a. Identify and briefly explain the sample selection methods that may be used in statistical sampling.b. Using Figure 11-7, select the first five vouchers from a population of 8,000 vouchers
a. What is involved in executing a sampling plan?b. Give several examples of deviations from prescribed controls.
a. Why might the auditor select some extra sample items when sampling from a population of documents?b. State what is meant by a nonapplicable item and give an example.
a. Identify the three steps involved in quantitatively evaluating sample results.b. Indicate the steps involved in using sample evaluation tables.
a. What factors should be considered in qualitatively evaluating sample results?b. What alternative courses of action should be considered when sample results do not support the auditor's planned
Contrast the method of (a) determining sample size and (b) evaluating sample results between a nonstatistical and a statistical sampling plan.
Distinguish between block and haphazard sampling selection and identify the circumstances under which each method may produce a representative sample.
In the audit of the Joan Company, the auditor specifies 10 attributes of interest. The statistical parameters for each condition and the number of deviations found in the sample are as
a. What is the principal hardware component in an EDP system?b. What hardware components are peripheral to the principal hardware component?
a. Explain the nature and functions of computer software.b. Distinguish between systems programs and application programs.
a. Distinguish between the traditional file and database methods of organizing data.b. Distinguish between sequential and direct access processing.
Indicate five characteristics that distinguish computer processing from manual processing.
a. Identify five types of general controls and state their common attribute.b. Identify the customary positions in an EDP department and the primary applications of segregation of duties in EDP.
a. What are documentation controls in an EDP department?b. Why is documentation important to management and the auditor?c. What items should be included in documentation for an EDP department?
a. Explain the purposes and nature of access controls.b. Enumerate the access controls that may be used in an on-line entry system.
a. Indicate the scope of data and procedural controls,b. Describe the activities of a data control group.
a. Indicate the purpose of each of the three types of application controls,b. Identify the categories of controls pertaining to the conversion of data.
What knowledge of the EDP system should the auditor acquire in obtaining an understanding?
a. Under what circumstances can tests of controls be performed without the use of the computer? b. What are the advantages and disadvantages of auditing around the computer?
a. Under what circumstances may it be advantageous to test controls with the computer?b. What are the disadvantages of auditing through the computer?
a. What is generalized audit software?b. Explain how generalized audit software can be used in (1) tests of controls and (2) substantive tests.
a. Identify four circumstances that may cause weaknesses in general controls in small computer systems.b. Indicate three areas pertaining to application controls that may require special
a. Describe the types of computer service organizations that may be used by an entity.b. Indicate the effects of service organizations on the auditor's consideration of the ICS.
In the design and operation of an information system, three types of controls must be addressed—managerial controls, internal controls, and data or applica¬ tion controls. Managerial controls and
In considering the ICS for the Aliva Company, Joan Davies, CPA, develops an internal control questionnaire for EDP general controls that includes the following questions: 1. Is there adequate
a. How are specific audit objectives derived for the revenue cycle?b. State the specific audit objectives for credit sales transactions.
a. State the applicability of several control environment factors to revenue cycle assertions.b. What is the primary source document for each of the three major transaction classes in the manual
Indicate several potential misstatements and related necessary controls ina. The shipping function.b. The billing function.
For the billing function, identify:a. Several potential misstatements.b. Necessary controls to prevent or detect the misstatements identified in a.c. Potential tests of the controls identified in b.
Identify three controls that may help to reduce control risk pertaining to each of the following assertions for credit sales transactions:a. Existence or occurrence.b. Completeness.c. Valuation or
Vouching recorded sales to supporting documents is a test often performed by auditors as a dual purpose test. Explain.
What functions are involved in the processing of cash receipts transactions?
a. Describe two important controls pertaining to cash sales and indicate the transaction class audit objective(s) to which they relate,b. Describe two important controls pertaining to the initial
a. What is a lockbox system, and how can it affect control risk for cash receipts transactions?b. What is the meaning of deposited intact daily, and how does this control affect control risk for cash
Identify four controls that can aid in preventing or detecting errors or irregularities in recording cash receipts.
a. Identify the functions pertaining to sales adjustments transactions.b. State three types of controls pertaining to sales adjustments transactions and identify their common focus.
State several financial ratios and their formulas that can be used by the auditor in applying analytical procedures to accounts receivable.
What is involved in vouching recorded receivables transactions to supporting documentation and to what specific account balance audit objectives does the evidence pertain?
What cutoff tests are performed for accounts receivable, how are they performed, and to what account balance audit objectives does the evidence pertain?
a. Under what circumstances may it not be necessary to confirm accounts receivable?b. What factors should be considered in determining the form of the confirmation request?c. When positive
State the audit objectives for expenditure cycle transactions and balances that relate to each financial statement assertion category.
a. Is materiality likely to be a factor in auditing expenditure cycle transactions? Why?b. What strategy will usually be adopted by the auditor in planning the audit for this cycle? Why?
a. State the functions that apply to purchases transactions.b. For each purchasing function, indicate (1) the department that per¬forms the function and (2) the principal document or record, if any,
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