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principles of auditing

Questions and Answers of Principles of Auditing

Lerna Corporation (whose fiscal year will end December 31, 19X8) informs you on December 18, 19X8 that it has a serious shortage of working capital because of heavy operating losses incurred since
The processing operations of Gaylord Company, your client, require a basic raw material, colgum, which is imported and refined by domestic suppliers. Colgum is combined with other raw materials of
You are engaged as the auditor for an employees' profitsharing pension trust which has been in existence for a number of years. Each qualified employee has an equity in the trust which the employee
The Landa Manufacturing Company was incorporated and began business on January 1, 19X3. It has been successful and now requires a bank loan for additional working capital to finance expansion. The
Prior to the current year, CA had been the auditor of all the company's subsidiaries. However, during the current year, the company had acquired five new subsidiary companies whose accounts will be
The consolidated profit of Y Ltd. and its subsidiaries for the year ended December 31, 19X6 is \($490,000.\) During the audit of X Ltd., one of the subsidiaries, CA notices that there is \($5,000\)
You are finishing your audit of the financial statements of Pecan Corporation for the year ended September 30, 19X4. The corporation's report to stockholders, which will include your standard report,
The Trevor Corporation commenced doing business on January 1, 19X1. It pro- duces one product, which is sold to a single customer, Redford Corporation. R. Redford is president of both corporations
Track Corporation acquired a large tract of land in a small town approximately 10 miles from Phoenix City. The company executed a firm contract on November 15, 19X8 for the construction of a 1-mile
You have performed an audit, in conformity with generally accepted auditing standards, of the financial statements of the Aurora Manufacturing Corporation for the year ended December 31, 19X7. These
In the review of the preliminary draft of the 19X6 annual report, CA notices that the president states in a message to shareholders that "the financial statements show an increase in operating
In a press release the XS Company stated that its consolidated profit for the first quarter ended March 31, 19X7 was \($754,000.\) Although CA had nothing to do with the preparation of this figure,
The shares of S Ltd., a manufacturing company, have recently been listed on a Canadian stock exchange. In anticipation of preparing the first quarterly interim report to shareholders, the comptroller
On January 10, 19X8, you were engaged to audit the financial statements of Caten Equipment Corporation for the year ended December 31, 19X7. Caten has sold trucks and truck parts and accessories for
Your client, the Bambi Corporation, manufacturers baby carriages as its only product. The corporation maintains perpetual inventory records in quantities and values and also takes a complete physical
During the month of April, you are engaged to audit the balance sheet of a new client as of March 31. The client manufactures steel casting and forgings. A physical count of all inventories is made
Assume that a CPA is expressing an opinion on Azalea Company's financial statements for the year ended September 30, 19X3, that the CPA completed field work on October 21, 19X3, and that the CPA now
Your client is involved in litigation involving a claim for damages that would be material with respect to its financial position if the plaintiff prevails. In response to your client's request for a
As is customary in completing your audit, you request the client to furnish you with a comprehensive representation letter. Your client, J. Hawler, who operates the business as a sole proprietor,
Since the management of a company is responsible for its financial statements and the auditor is responsible only for the report, management may choose the form of presentation and the degree of
For each one of the following statements indicate whether the statement is true or false.a. Use of a computer for significant accounting applications does not in any way change specific audit
The following questions relate to the control risk assessment in computerized systems. Select the best response.a. In obtaining an understanding of a client's EDP controls, the auditor will encounter
The following questions relate to the use of computer-assisted audit techniques. Select the best response.a. Which of the following is true of generalized audit software packages?1. They can be used
On page 324 is a flowchart that depicts the payroll processing function of Campbell Company. Write your own word descriptions for each of the numbered blank symbols. C Supervisor Payroll department
Carl Applewhite has been the auditor for a number of years of Reardon Ltd., a large merchandising concern which carries over 50,000 different items in inventory. During the current fiscal year the
Carla Andress is the auditor of Alexis Company, Ltd., a large manufacturing company with several plants across Canada. The company has used EDP equipment since 19X3 to process most of its accounting
The assets of Capital Western Wear Shop at May 31, 19X7, are listed below:During the course of your annual audit of the company's financial statements, the owner will not permit circularization of
You have been engaged by San Jacinto Savings and Loan Association to audit its financial statements for the year ended December 31, 19X6. The CPA who audited the financial statements at December 31,
When auditing an electronic data processing system, the CPA must be aware of the different types of controls. The controls include those incorporated in application programs and those built into the
The independent auditor assesses the level of control risk to determine the extent to which various auditing procedures must be employed. A client who uses a computer should provide the CPA with a
What are the relative advantages and disadvantages of generalized audit software versus special programs written for a particular application?
A staff accountant has read several articles on the use of computers in auditing. She has read about test data and computer audit programs but does not fully understand what they are, when they are
Below is a flowchart representing the process of using test data for auditing purposes. It is only partially labeled. Complete the flowchart by labeling each blank symbol. SIMULATED TRANSACTIONS C
Roger Peters, CPA, has audited the financial statements of the Solt Manufacturing Company for several years and is making preliminary plans for the audit for the year ended June 30, 19X2. During this
For each one of the following statements indicate whether the statement is true or false.a. It is usually important to trace and document the flow of all copies of sales invoices created when a
The following questions relate to the revenue, receivables, receipts cycle. Select the best response. a. At which point in an ordinary sales transaction of a wholesaling business would a lack of
The following questions relate to the expenditures, payables, disbursements cycle. Select the best response. a. Which of the following is a primary function of the purchasing department?1.
The following questions relate to direct tests of balances for accounts receivable and accounts payable. Select the best response. a. Which of the following is the best argument against the use of
Prepare a single flowchart of the order receiving, shipping, billing, and collection functions of the following small company. The customer billing and collection functions of the Pigskin Company, a
The customer billing and collection functions of the Trinity Company, a small paint manufacturer, are attended to by a receptionist, an accounts receivable clerk, and a cashier who also serves as a
You are engaged in your first audit of the Pesky Pest Control Company for the year ended December 31, 19X6. The company began doing business in January 19X6 and provides pest control services for
To improve the current financial position as stated in the year-end balance sheet, a great many checks were written to vendors and entered in the check register about December 27. This action reduced
The Bimbo Appliance Company, a manufacturer of minor electrical appliances, deals exclusively with 20 distributors situated at focal points throughout the country. At December 31, the balance sheet
You are making an audit of the accounts of the Lamp Corporation. Accounts receivable represent a significant proportion of the total assets of the company. At the beginning of the audit you mailed
You have been assigned to the first audit of the accounts of the Holland Company for the year ending March 31, 19X8. The accounts receivable were circularized at December 31, 19X7, and at that date
Concho Corporation uses a perpetual inventory system and has already adjusted inventory to actual. In testing sales cutoff as 12/31/X4, you find the following situation. Prepare any necessary
Sioux Valley Rural Electric Power Cooperative issues books of sight drafts to the foremen of its 10 field crews. The foremen use the drafts to pay the expenses of the field crews when they are on
You were in the final stages of your audit of the financial statements of Pakonite Corporation for the year ended December 31, 19X7, when you were consulted by the corporation's president, who
For each one of the following statements indicate whether the statement is true or false.a. The extent of the auditor's observation of the client's physical inventory is significantly influenced by
The following questions relate to audit procedures for inventories. Select the best response.a. For several years a client's physical inventory count has been lower than what was shown on the books
The following questions relate to audit procedures for investments. Select the best response.a. The auditor should insist that a representative of the client be present during physical examination of
The following questions relate to audit procedures for property and equipment. Select the best response. a. In the examination of property, plant, and equipment, the auditor tries to determine all
The following questions relate to audit procedures for long-term obligations and stockholders' equity.a. The auditor can best verify a client's bond sinking fund transactions and year-end balance
Rocks Ltd. quarries limestone, crushes it to standard commercial size, stockpiles it, and eventually ships it to customers by rail. Production is measured by the number of quarry truckloads fed to
A processor of frozen foods carries an inventory of finished products consisting of 50 different types of items valued at approximately $2,000,000. About $750,000 of this value represents stock
The Jumbolith Press Company is engaged in the manufacture of large-sized presses under specific contracts and in accordance with customers' specifications. Customers are required to advance 25
On May 15, 19X2, you are engaged to make an audit of Boro Corporation, whose records you have not previously audited. Your client is a retail coal dealer with a fiscal year ending May 31. Perpetual
Monola uses a perpetual inventory system and has taken a physical inventory on December 31, 19X4. The inventory account has been adjusted to the actual figure per the count. In testing purchases
In auditing a company engaged in wholesaling goods, you find that a very substantial part of the inventory of merchandise is on consignment to customers in other cities and at independent warehouses
You have been engaged by the management of Alden to review its internal control structure for the purchase, receipt, storage, and issue of raw materials. You have prepared the following comments
Concho Corporation uses a perpetual inventory system and has already adjusted inventory to actual. In testing sales cutoff at 12/31/X4, you find the following situation. Prepare any necessary
Your client, a distiller of alcohol, suggests that it is not necessary for you to observe the taking of physical inventories at his plants. The client points out that the Treasury Department's
Decker, CPA, is performing an audit of the financial statements of Allright Whole- sale Sales for the year ended December 31, 19X0. Allright has been in business for many years and has never had its
The schedule on page 439 was prepared by the controller of World Manufacturing for use by the independent auditors during their audit of World's year-end financial statements. All procedures
Kent, CPA, who is engaged in the audit of the financial statements of Bass Corporation for the year ended December 31, 19X2, is about to commence an audit of the noncurrent investment securities.
During your first audit of the financial statement of the Luh Corporation, you find the following accounts and balances among the various other items in the trial balance.Assuming that each of these
You are in charge of the audit of the financial statements of the Tomed Corporation for the year ended December 31, 19X4. The corporation has had the policy of investing its surplus funds in
During your audit of the financial statements of the Dolomite Corporation for the year ended December 31, 19X1, you determine that the company's surplus funds have been temporarily invested in
You are engaged in the audit of the accounts and records of an investment company. You find that during the year the company has purchased from a bank the mortgage notes of several individuals. Some
For several years you have made the annual audit for the Winsford Company. This company is not a dealer in securities. A list of presently held securities is kept, but an investment register is not
C. A. Mellon has been appointed auditor of Mamolite Inc. and its subsidiary companies for the year ended May 31, 19X4, replacing another CPA who had retired. No information is available from the
Big Bend Iron Corporation operates a small iron castings shop. As a part of the audit, you have been assigned the task of testing depreciation expense on equipment in this shop. The shop manager
You have been engaged to make an audit of the financial records of a new client, the Ana Manufacturing Corporation, for its fiscal year ended December 31, 19X5. Among the fixed assets group are the
Gasco owns and operates gas wells which are accounted for in three classifications: 1 Producing for wells currently producing, there are engineers' estimates of the gas reserves. Each well is
In your audit of the financial statements of Scotia Corporation at December 31, 19X1, you observe the contents of certain accounts and other pertinent information as follows:You learn that on June 15
While auditing an urban bus company in a city of 50,000 population, you encounter the following situation:1 You have checked an authorization for the purchase of five engines to replace the engines
During the audit of Pecos Land and Cattle Company for the year 19X1 you discover the following general ledger accounts. Prepare any necessary adjusting journal entries. Notes payable Acct. 304 Date
Andrews, CPA, has been engaged to audit the financial statements of Broadwall Corporation for the year ended December 31, 19X1. During the year, Broadwall obtained a long-term loan from a local bank
Bunn is a Canadian manufacturing company, with a June 30 fiscal year-end. Until recently, the company had financed its operations with equity capital, supplemented by bank loans and other current
The following covenants are extracted from the indenture of a bond issue. The indenture provides that failure to comply with its terms in any respect automatically advances the due date of the loan
You are meeting with executives of Comal Cosmetics Corporation to arrange your firm's engagement to audit the corporation's financial statements for the year ended December 31, 19X8. One executive
Ancira is a mail-order house that sells a single product which it produces in its completely automated plant. The only major expenses of the company are depreciation on plant and equipment and
Bowen has been the auditor of Talltale Corporation for many years. The company's financial statements at December 31, 19X9, include the following amounts:Indicate the audit procedures required to
For each of the following statements indicate whether the statement is true or false.a. The auditor cannot be responsible for knowledge of events that occur after the date of the financial
The following questions relate to the auditor's responsibility with respect to subsequent events. Select the best response. a. "Subsequent events" for reporting purposes are defined as events which
The following questions relate the the auditor's responsibility for obtaining written representations from the client's management. Select the best response.a. A representation letter issued by a
Substantive tests of balances include tests of transactions and events recorded after the balance sheet date. For the following accounts, explain the nature and purpose of procedures involving
You are making an annual audit for the purpose of rendering an opinion on financial statements for use in an annual report to stockholders. Answer the following questions concerning events subsequent
You are in the process of "winding up" the field work on Charleston Stove Corporation, a company engaged in the manufacture and sale of kerosene space-heating stoves. The company had total assets at
The following events occurred in different cases, but in each instance the event happened after the close of the fiscal year under audit, but before all representatives of the auditor had left the
In an audit of the Cotula Corporation as at December 31, 19X4, you have learned that the following situation exists. No entry in respect thereto has been made in the accounting records. What entry
Legal expenses are normally not a material item in the financial statements. Nevertheless, auditors typically examine legal expenses in detail. Why?
In response to your client's request for a legal representation letter the attorney has furnished the following opinion with respect to litigation brought against the client: It is our opinion, based
In the course of auditing the financial statements of the Lowe Company for the year ended December 31, 19X2, you request that your client's attorney furnish a legal representation letter. The
One of your clients in an attempt to control the expenses for legal fees has engaged a house counsel-an attorney deriving substantially all income from the company. The client is convinced of the
You are considering obtaining written representations from the client concerning the financial statements and matters pertinent to them.1. What are the reasons for obtaining written representations
You are the senior accountant in the audit of the Great Midwest Grain Corporation, whose business primarily involves the purchase, storage, and sale of grain products. The corporation owns several
If errors of relatively small amounts are found in an audit test, can the auditor ignore such errors without further work on the basis that the errors are immaterial relative to the financial
Your audit discloses a lawsuit pending against your client, Neece Corporation, on a patent owned by Neece which the client's attorney is hopeful of winning. The patent is 70 percent amortized and the
A Ltd., a manufacturing company with total assets of about $7 million and 500,000 shares outstanding, is situated just outside a medium-sized Canadian city. In early 19X9, the local newspaper

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