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principles of auditing

Questions and Answers of Principles of Auditing

You are the senior on an audit engagement. One of the staff accountants asks you why the public accounting firm for which you both work has established a report review department since the staff
On February 24, 19X9 you completed field work for the audit of the financial statements of Goldman Enterprises for the year ended December 31, 19X8. Goldman Enterprises is headed by P.B. Goldman, an
Why are auditors concerned with related parties during the planning process?
The auditor will not ordinarily initiate discussion with the audit committee concerning thea. Extent to which the work of internal auditors will influence the scope of the audit.b. Extent to which
Which of the following should an auditor obtain from the predecessor auditor prior to accepting an audit engagement?a. Analysis of balance sheet accounts.b. Analysis of income statement accounts.c.
What three decisions must be made about substantive tests when they are designed?
The general framework of an audit includes all of the following steps excepta. Planning the audit.b. Gathering the necessary evidence to form an opinion.c. Issuing a letter on controls to
How does an auditor make a preliminary judgment about materiality during the planning phase?
In the Hochfelder case all of the following were factors in the case excepta. The Securities Exchange Act of 1934.Data From Exchange Act 1934 When the Securities Act was passed, the Interstate
Refer to the example of an auditor’s report issued in 1915. List the differences between the report styles in 1915 and today (refer to Chapter 1). Indicate in what ways this report would be
Try-Hard Company was organized in early January of 19X7. The company is in the business of taking computer chips from discarded personal computers and making vases and other items that are used to
What client actions might cause a CPA to terminate an existing client relationship?
How do auditors often determine their anticipated reliance on the internal control structure?
Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA shoulda. Reduce audit risk by lowering the
An auditor who is planning the work to be performed concerning possible related party transactions shoulda. Assume that transactions with related parties are not properly stated.b. Determine whether
An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the
Which of the following audit risk components may be assessed in nonquantitative terms? Inherent Control Detection Risk Risk Risk a. Yes Yes No b. Yes No Yes C. No Yes Yes d. Yes Yes Yes
An audit program provides proof thata. Sufficient competent evidential matter was obtained.b. The work was adequately planned.c. There was compliance with generally accepted standards of reporting.d.
While planning the audit of Vicky King International Enterprises (VKIE), Jane Baldwin, CPA, is evaluating the preliminary levels of audit risk and materiality that should be used. VKIE is a public
Before applying principal substantive tests to the details of asset and liability accounts at an interim date, the auditor shoulda. Assess the difficulty in controlling incremental risk.b.
Jane Grote, CPA, has conducted audits for more than 30 years and, because of her extensive experience, does not believe she needs an audit program to know what audit procedures to perform. Tom
Describe the four sections in the general framework of an audit.
All techniques auditors use to gather evidence have three steps in common. Describe these steps.
Define the following terms:a. A primarily substantive approach.b. A lower control risk approach.
With which part of the internal control structure is the auditor specifically concerned?
Describe the steps in Figure 8.2, which is the flowchart for the primarily substantive approach.Data From Figure 8.2 For the appropriate assertions, obtain an understanding of relevant internal
What is the relationship between the auditor’s evaluation of internal control structure policies and procedures for a given assertion and substantive tests relating to the same assertion?
Give three reasons why the auditor might use the primarily substantive approach.
Why is the control environment applicable to many of the assertions relating to an account balance or class of transactions?
Why should the auditor obtain some knowledge of the accounting system for planning the level of substantive tests?
Give three examples of control procedures.
At what levels are control risk likely to be assessed when the primarily substantive approach is used?
Describe the relationship between the assessment of control risk and the level of substantive tests.
Describe the steps in Figure 8.4, which is the flowchart for the lower control risk approach.Data From Figure 8.4 No For the appropriate assertions, obtain an un- derstanding of relevant internal
Give two reasons why the auditor might use the lower control risk approach.
All of the following relate to assertions excepta. Operating expenses of an entity have occurred.b. All inventory items that should be presented in the financial statements are so included.c.
Which of the following is not a part of the internal control structure?a. The control environment.b. The accounting system.c. The control procedures.d. The control risk.
Which of the following is not a reason for using the primarily substantive approach?a. Internal control structure policies or procedures are not relevant to the assertion.b. Internal control
Which of the following sets of statements are not consistent with each other?a. Control risk assessment is at the maximum. There is a very high level of substantive tests.b. Control risk assessment
In practice, separate audit strategies might not be developed for all assertions for every account balance and class of transactions becausea. The dollar amount of some accounts is significant enough
What must exist for financial statement assertions to be valid?
Name the six matters the auditor often considers in obtaining an understanding of the control environment.
Identify the four ways that control procedures provide additional assurance that a company’s objectives will be achieved.
What are the six factors that determine the auditor’s required level of understanding of the internal control structure policies and procedures?
Explain the relationship between the audit strategy and the necessary level of understanding of the internal control structure.
In a general sense, why does the auditor acquire an understanding of the internal control structure?
What information is the auditor interested in obtaining about the internal control structure policies and procedures of each financial statement assertion under examination?
What type of audit procedure is performed when the auditor evaluates the effectiveness of the design and operation of relevant policies and procedures of the internal control structure?
Why may there be little documentary support for some parts of the control envi¬ ronment?
In obtaining knowledge of the accounting system, four questions need to be answered. What are these four questions?
For some financial statement assertions, the knowledge of control procedures gained from studying the control environment and accounting system may be sufficient to assess control risk and design
In any audit, the auditor must acquire enough knowledge of the internal control structure for each relevant financial statement assertion to perform two proce¬ dures. Describe these two procedures.
The required level of understanding of the internal control structure depends on all of the following factors excepta. The complexity of the system that processes the transactions.b. The auditor’s
Which of the following is not a part of the internal control structure?a. The control environment.b. The accounting system.c. The control procedures.d. The control risk.
The best internal control structure procedure for establishing control over incoming merchandise is toa. Send one copy of the purchase requisition to accounts payable.b. Have the purchasing agent
The best internal control structure procedure to ensure that a vendor invoice is not paid twice is toa. Cancel the vendor invoice and supporting documents when the check is signed.b. Approve the
The best internal control structure procedure to ensure that payroll checks are not being paid to improper or nonexistent employees is toa. Prepare one check for the total amount of the payroll.b.
The primary purpose of the auditor acquiring an understanding of the internal control structure is toa. Determine whether documents and records are reliable.b. Make constructive suggestions to
In the control environment, proper segregation of duties calls for separation of thea. Authorization, recording, and custodial functions.b. Authorization, execution, and payment functions.c.
Described below are some characteristics of the three elements of a company’s internal control structure.Required:Identify each description as relating to the control environment, accounting
What are concurrent tests and why are they sometimes used?
Reperformance of client procedures is more closely associated with which of the following?a. Design of substantive tests.b. Understanding information in client documents.c. Flowchart accuracy.d.
A common procedure in the test of controls for payroll transactions involves tracing selected items from the payroll journal to employee time cards that have been approved by supervisory personnel.
An auditor performs a test of controls to determine whether all merchandise for which the client was billed was received. The population for this test consists of alla. Merchandise received.b.
In the evaluation of the internal control structure policies and procedures relating to the occurrence and completeness of certain payroll transactions, the assess¬ ment of control risk for the
A test of controls on an internal control structure policy that involves segregation of duties and leaves no documentary trail isa. Inspection.b. Observation.c. Reperformance.d. Reconciliation.
An auditor who uses statistical sampling for a test of controls, should consider raising the assessed level of control risk when thea. Sample rate of deviations is less than the expected rate of
Levelland, Inc., a client of your firm for several years, uses a voucher system for processing all cash disbursements, which number about 500 each month. After carefully reviewing the company’s
During the course of obtaining an understanding of a client’s internal control structure, Mr. Inves, CPA, discovered that, in a number of instances, the pertinent information had not been posted
First Federal S & L has an online real-time system, with terminals installed in all of its branches. This system will not accept a customer’s cash withdrawal instructions in excess of \($1,000\)
A computer input control is designed to ensure thata. Machine processing is accurate.b. Only authorized personnel have access to the computer area.c. Computer processing has been performed as
Which of the following is an example of a check digit?a. An agreement of the total number of employees to the total number of checks printed by the computer.b. A logic test that ensures all employee
Which of the following activities would most likely be performed in the computer department?a. Conversion of information to machine-readable form.b. Initiation of changes to master records.c.
For control purposes, which of the following should be organizationally segregated from the computer operations functions?a. Surveillance of CRT messages.b. Data conversion.c. Systems development.d.
In its computer processing system a company might use check digits to detect which of the following errors?a. Recording an invalid customer’s identification charge account number.b. Assigning a
In a credit sales and cash receipts system flowchart symbol X could representa. Auditor’s test data.b. Remittance advices from customers.c. Error reports.d. Credit authorization forms.
Examine the flowchart for the online system shown in Figure 11.3, and do the following.a. Describe the data entered into the minicomputer terminals by each of the five departments.b. For each of the
Mr. Traditional had a modest accounting practice consisting, for the most part, of local clients. None of the firms he serviced had a computer system, although several of them had talked of obtaining
What two attributes of controls do tests of controls measure?
Why might computer programs be tested even though auditing standards do not require it?
Why is the use of test data an example of testing through the computer?
Which of the following client computer systems generally can be audited without examining or directly testing the computer programs of the system?a. A system that affects a number of essential master
Which of the following tests of computer programs involve processing of the client’s actual data by the client’s and the auditor’s computer programs?a. Parallel simulation.b. Generalized audit
Tests of controls of a computer systema. Can be performed using actual transactions or simulated transactions.b. Can be performed using only actual transactions because testing of simulated
In a daily computer run to update checking account balances and print basic details on any customer’s account that was overdrawn, the overdrawn account of the computer programmer was never printed.
When auditing “around” the computer, the independent auditor focuses solely upon the source documents anda. Test data.b. Computer processing.c. Computer output.d. Compliance techniques.
For each weakness noted in the question, indicate a general control or an application control that would overcome that weakness and how that control could be tested. Be specific in discussing the
For each one of the following statements indicate whether the statement is true or false.a. When the auditor's approach to substantiating an account balance is to apply an audit procedure to less
The following questions relate to the selection of audit samples. Select the best response.a. Which of the following statistical selection techniques is least desirable for use by an auditor?1.
The following questions relate to use of audit sampling for tests of transaction classes. Select the best response.a. Given random selection, the same sample size, and the same tolerable rate for the
The Dorans Dairy's principal activity is buying milk from dairy farmers, processing the milk, and delivering the milk to retail customers. You are engaged in auditing the retail accounts receivable
The following is a list of audit procedures that might be applied to sales transactions. Identify those procedures that would be applied using audit samplinga. Scan the accounting records to identify
The following is a list of audit procedures that might be applied to property and equipment. Identify those procedures that might be applied using audit sampling.a. Inquire about procedures followed
An auditor has analyzed additions to property and equipment for the year as follows:The auditor plans to substantiate all the additions above $10,000 and rely on analytical procedures for the
An auditor is selecting shipping documents as part of testing sales transactions. There were 3,000 shipping documents issued during the period being tested and the auditor has judgmentally decided to
The sample size for a test of a transaction class should be based on the auditor's consideration of 1. Tolerable rate 2. Risk of assessing control risk too low 3. Expected rate Required: For
The questions below relate to estimating the sample size necessary for tests of transaction classes given the specified decisions for the considerations that affect sample size.Required:a. For each
For the sample sizes calculated in Problem 7-11 above, assume that application of the planned audit test to the items selected produced the following results:Required:a. What is the maximum deviation
Shoe & Shoe, a CPA firm, wants to adopt a sampling plan for tests of transaction classes based on the Poisson distribution, with the following specifications:A risk of assessing control risk too low
Martin, a CPA, has selected a sample of 50 cash disbursement transactions and has found the following sample results: Two vouchers are not initialed to indicate that the supporting documents were

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