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business
principles of auditing
Questions and Answers of
Principles of Auditing
How may the auditor vary his or her work on bank reconciliations based on the applicable acceptable level of detection risk?
Identify several considerations the auditor should make regarding management's presentation and disclosure of cash balances.
a. What is lapping?b. What circumstance is conducive to lapping?
a. What precautions are taken by the embezzler to prevent detection of lapping?b. What tests can the auditor use to detect lapping?
What internal control features are applicable to petty cash?
Identify the tests of details that an auditor may use in auditing petty cash.
What internal controls are applicable to a payroll bank account?
Identify the tests of details that an auditor may use in auditing a payroll bank account.
a. Describe the nature of the investment cycle.b. Does the investing cycle interface with any other cycles? Explain.
State the audit objectives for each of the management assertions that pertain to the investing cycle.
Describe the applicability of internal control structure components to the investing cycle.
a. Describe the nature of the financing cycle.b. Identify other cycles that interface with the financing cycle.
State the specific audit objectives that apply to the financing cycle.
Indicate the materiality, audit risk, and audit strategy matters that relate to the financing cycle.
Discuss the applicability of the internal control structure components to financing cycle transactions.
What factors pertain to determining the acceptable level of detection risk for long-term debt transactions?
Describe the nature of each of the following substantive tests and indicate the assertions to which each relates:a. Vouch entries to long-term debt accounts.b. Confirm debt.c. Recalculate interest
Identify the ratios that may be used in applying analytical procedures to stockholders' equity balances.
Define a special report according to AU Section 623.
Discuss the format of a report on condensed financial statements. What type of assurance is provided?
Discuss the CPA's responsibility if disclosures in interim financial statements are not adequate. What basis does the CPA use in evaluating the adequacy of disclosures in interim financial statements?
What understanding of a client’s affairs must a CPA have to compile financial statements?
What type of report should CPAs issue on financial statements if they have performed all necessary audit procedures but they are not independent?
Negative assurance may be expressed when an accountant is requested to report on thea. Compilation of prospective financial statements.b. Compliance with the provisions of the Foreign Corrupt
An auditor who conducts an audit in accordance with generally accepted auditing standards and concludes that the financial statements are fairly presented in accordance with a comprehensive basis of
Reports are considered special reports when issued in connection witha. Compliance with aspects of regulatory requirements related to audited financial statements.b. Pro forma financial presentations
Which of the following is a prospective financial statement for general use upon which an accountant may appropriately report?a. Financial projection.b. Partial presentation.c. Financial forecast.d.
The party responsible for assumptions identified in the preparation of prospective financial statements is usuallya. The client’s management.b. A third-party lending institution.c. The reporting
An accountant who reviews the financial statements of a nonpublic entity should issue a report stating that a reviewa. Is substantially less in scope than an audit.b. Provides negative assurance that
Performing inquiry and analytical procedures is the primary basis for an accountant to issue a (an)a. Compilation report on financial statements for a nonpublic entity in its first year of
When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receivea. Positive assurance on supplementary
Comfort letters ordinarily are addressed toa. The Securities and Exchange Commission.b. Underwriters of securities.c. Creditor financial institutions.d. The client’s audit committee.
During a compilation of a nonpublic entity’s financial statements, an accountant would be least likely toa. Omit substantially all of the disclosures required by generally accepted ac¬ counting
Compiled financial statements should be accompanied by a report stating all the following excepta. The accountant does not express an opinion or any other form of assurance on the financial
When an accountant compiles a nonpublic entity’s financial statements that omit substantially all disclosures required by generally accepted accounting principles, the accountant should indicate in
When an accountant compiles projected financial statements, the accountant’s report should include a separate paragraph thata. Describes the differences between a projection and a forecast.b.
An accountant’s standard report on a compilation of a projection should not includea. A separate paragraph that describes the limitations on the presentation’s use¬ fulness.b. A statement that a
When an independent CPA is associated with the financial statements of a publicly held entity but has not audited or reviewed such statements, the appropriate form of report to be issued must include
If information accompanying the basic financial statements in an auditor- submitted document has been subjected to auditing procedures, the auditor may express an opinion that the accompanying
On March 12, 19X5, Brown & Brown, CPAs, completed the audit of the financial statements of Modern Museum, Inc., for the year ended December 31, 19X4. Modern Museum presents comparative financial
Walter Kunitake, CPA, has been asked by the management of Russell Company, a nonpublic real estate agency, to compile a set of financial statements as of the company’s year end, November 30,
Tickitt & Run are the auditors of BigBoy PLC and have been asked as a special-purpose audit engagement to express an opinion on the present liquidity of the company and, in particular, the ability of
Imperiol, a limited liability company, manufactures and distributes electrical and telecommunications accessories, household durables (e.g. sink and shower units) and building systems (e.g.
Why does the audit report contain a statement that the financial statements are representations of management?
Name five sources of generally accepted accounting principles other than the pronouncements of the rule-making bodies.
How is the standard audit report adapted to apply to consolidated financial statements?
The fourth standard of reporting requires the auditor’s report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an
How are management’s responsibility and the auditor’s responsibility represented in the standard auditor’s report? Management's responsibility Auditor's responsibility a. Explicitly Explicitly
Which of the following would not be required for financial statements to be “presented fairly” in conformity with generally accepted accounting principles?a. That generally accepted accounting
The auditor’s report should be dated as of the date on which thea. Report is delivered to the client.b. Fiscal period under audit ends.c. Field work is completed.d. Review of the working papers is
If a publicly held entity declines to include in its financial report supplementary information required by the FASB, the auditor should issuea. Either an adverse opinion or an “except for”
Soon after Boyd’s audit report was issued, Boyd learned of certain related party transactions that occurred during the year under audit. These transactions were not disclosed in the notes to the
Unaudited financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and I. The
After issuance of the auditor’s report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by that report unlessa. A final resolution
If a document containing the auditor’s report includes a statement by management taking responsibility for the financial statements, the auditor's reporta. Should omit reference to management’s
You recently hired an accounting major, a graduate of a local university, to assist you in your CPA practice. She has been assisting you in the audit of the balance sheet of a small client. When you
The Commission on Auditor’s Responsibilities recommended the following form of audit report:Report of Independent Auditors Financial Statements The accompanying consolidated balance sheet of XYZ
What are examples of uncertainties that might affect the auditor’s report?
Describe how auditors may use FASB Statement No. 5 as guidance in determining whether and how to modify the audit report.
The principal auditor is satisfied with the independence and professional reputation of the other auditor who has audited the financial statements of a subsidiary. To indicate the division of
When a principal auditor decides to make reference to another auditor’s examination, the principal auditor's report should always indicate clearly, in the introductory, scope, and opinion
Management of Hill Company has decided not to account for a material transaction in accordance with the provisions of an FASB Standard. In setting forth its reasons in a note to the financial
When there is a significant change in accounting principle, an auditor’s report should refer to the lack of consistency ina. The scope paragraph.b. An explanatory paragraph between the scope
Green Company uses the first-in, first-out method of costing for its international subsidiary’s inventory and the last-in. first-out method of costing for its domestic inventory. The different
If an auditor believes there is a remote probability that resolution of an uncertainty will have a material effect on the financial statements, the auditor should issue a(an)a. Disclaimer of
An auditor did not observe a client’s taking of beginning physical inventory and was unable to become satisfied about the inventory by means of other auditing procedures. Assuming no other
The refusal of a client’s attorney to provide a representation on the legality of a particular act committed by the client is generallya. Sufficient reason to issue an adverse opinion.b. Considered
A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when managementa. Presents financial statements that are prepared in accordance with the cash
An auditor should disclose the substantive reasons for expressing an adverse opinion in an explanatory paragrapha. Preceding the scope paragraph.b. Preceding the opinion paragraph.c. Following the
The management of a client company believes that the statement of cash flows is not a useful document and refuses to include one in the annual report to stockholders. As a result of this
When financial statements are presented that are not in conformity with generally accepted accounting principles, an auditor may issue a(an) "Except for" opinion Disclaimer of opinion a. Yes Yes b.
An auditor’s report includes the following statement: “The financial statements do not present fairly the financial position, results of operations, or cash flows in conformity with generally
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?
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