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business
principles of auditing

Questions and Answers of Principles of Auditing

Should an auditor sign a statement vouching for the accuracy of his work? Why?
What audit procedures could the auditor undertake to detect the Adelphia related-party transactions?
What kind of control environment encourages related-party transactions?
At what point would the auditor report related-party dealings to the board of directors?
When auditing related-party transactions, an auditor places primary emphasis on:(A) Ascertaining the rights and obligations of the related parties.(B) Confirming the existence of the related
Why should the problems with the mining lease be disclosed, even though it had no current impact on Arabian?
After Grant Thornton learned of the lease problem, what were their options in relation to their prior audit opinions?
Why do you think Grant Thornton resigned as auditor?
After an audit report containing an unqualified opinion on a non-public client’s financial statements was issued, the client decided to sell the shares of a subsidiary that accounts for 30 percent
Are the following disclosures included in the financial statements or notes?(a) The accounting policies adopted in measuring inventories, including the cost formula used.(b) The total carrying amount
Do the financial statements disclose either:(a) the cost of inventories recognized as an expense during the period; or(b) the operating costs, applicable to revenues, recognized as an expense during
An auditor’s working papers serve mainly to:(A) Provide the principal support for the auditor’s report.(B) Satisfy the auditor’s responsibilities concerning the Code of Professional Conduct.(C)
Which of the following conditions or events are most likely to cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?(A) Cash flows from operating
The objective of tests of details of classes of transactions performed as substantive tests is to:(A) Comply with International Financial Reporting Standards.(B) Attain assurance about the
An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management’s financial statement assertion of:(A)
In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management’s financial
Cutoff tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management’s assertion of:(A)
What alternative audit procedures could the Andersen auditors perform when (or if) they found the inconsistencies in conformations and bills of lading?
Why do you think the staff auditor accepted the explanation of the $7 million discrepancy by the Mattel employee?
Why was it not followed up?
Auditors try to identify predictable relationships when using analytical procedures.Relationships involving transactions from which of the following accounts most likely would yield the most
What procedures can Kmart’s independent auditor use to uncover the side agreement?
What circumstances should have alerted Kmart’s management and internal auditors to possible problems?
When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and:(A) Observing the
Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?(A) Including a list of items or invoices that constitute the account
What audit procedures should auditors use in confirming a very material cash balance?
If a primary auditor is significantly dependent on the work of another auditor, what reviews and substantive tests should they conduct?
Define the three major sources of documentary evidence. List them in the order of their reliability.
List the major financial statement assertions. Define the assertions about account balances at the period end.
Management Assertions and Audit Objectives. The following are management assertions(1 through 9). and audit objectives applied to the audit of accounts payable ((a) through(h)).Management Assertion 1
Sufficient Appropriate Audit Evidence. The auditor finds it necessary to rely on audit evidence that is persuasive rather than conclusive and will often seek audit evidence from different sources or
Substantive Tests – Analytical Procedures, Balances and Transactions. Substantive tests include (1) tests of the details of transactions, (2) tests of the details of balances, and (3) analytical
Tests of Balances. Your client is the Nicholas van Myra Central, a shopping center with 30 store tenants. All leases with the store tenants provide for a fixed rent plus a percentage of sales, net of
Evidence Gathering Techniques. An auditor obtains audit evidence by one or more of the following evidence gathering techniques: inquiry, observation, inspection, reperformance, recalculation,
Substantive Tests: Balances and Transactions. As part of systematic process of gathering and evaluating evidence regarding assertions about economic actions and events, tests of balances and tests of
Do corporations believe fraud a problem according to KPMG reports? Explain.
Internal control is geared to the achievement of objectives in one or more separate overlapping categories.Required:A. Define these four categories of objectives.B. For each objective give an example
Components of Internal Control. Internal control consists of five interrelated components.These are derived from the way management runs a business, and are integrated with the management
Risk Assessment. OK Yen, Ltd. is a Japanese electronics games and amusements company specializing in pachinko games. Pachinko parlors are a big industry in Japan, whose 18,000 pachinko parlors in
Information and Communications. The firm of Hayes & Hu, Ltd., personal financial advisors in the Notting Hill area of London, has asked Joseph Smallman, Chartered Accountant (CA), to recommend a
Monitoring. Monitoring is done in two ways: through ongoing activities and individual evaluations.Required:A. From what sources does ongoing monitoring come? What issues might be considered?B. When
When planning an audit, the auditor’s knowledge about the design of relevant internal controls should be used to(A) Assess the efficiency of internal controls over operations.(B) Identify the types
Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?(A) Are assets that collateralize notes payable critically needed for the
How would you assess the RAC control and the PRC control: weak or strong? Why?
Why would the RAC control be considered material to the financial statements?
What tests of control would you recommend to determine if the RAC was effective in operation?
The auditor’s primary reason for assessing control risk is that control risk assessment(A) Affects the level of detection risk that the auditor may accept.(B) Shows the auditor where inherent risk
An auditor is most likely to assess control risk at the maximum if the payroll department supervisor is responsible for:(A) Examining authorization forms for new employees.(B) Comparing payroll
In determining the effectiveness of an entity’s internal controls relating to the existence or occurrence assertion for payroll transactions, an auditor most likely would inquire about and:(A)
An auditor wishes to perform tests of controls on cash disbursments procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by(A)
What are the tests of control that might have shown where the problems were?
When the control environment is corrupt, what problems would an auditor experience in uncovering fraud?
In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:(A) Inquiry and analytical procedures.(B) Reperformance and observation.(C) Comparison and
After assessing control risk at below the maximum level, an auditor desires to seek a further reduction in the assessed level of control risk. At this time, the auditor would consider whether:(A) It
What are the three steps to assessing internal control risk?
What are procedures to obtain an understanding? Give an example. According to ISA 315 what audit processes require documentation?
What are the four common techniques for documenting the internal control structure?Describe each.
What is the purpose of the overall audit strategy? What are the considerations in an audit strategy?
What audit responses are included in overall responses to address the assessed risks of material misstatements?
Define planning memorandum. What sections are typically contained in a planning memorandum?
Define audit plan (program). What is included in an audit program (plan)? What determines for each account balance and audit objective how much evidence should be gathered?
Understanding of Accounting and Internal Control. The auditor should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit
Weaknesses in Internal Control. The Art Appreciation Society of Gateshead, UK, operates a museum for the benefit and enjoyment of the community. During hours when the museum is open to the public,
Katmir is a manufacturer of mattresses in Kordofan Sudan. The company is 100 percent owned by the Alnashar family and all of the management are related to the founder, El Hussein Alnashar, who all
Audit Planning Memorandum. Read the case of Constantijn & Nianias, Soma Orkaton Logistons (SOLs), audit of Eidola Company, below. Eidola has asked Constantijn & Nianias to do their income tax
Audit Program. The following are ten audit procedures taken from an audit program:1 Review board of directors’ minutes to verify approval of equipment purchases.2 Discuss with the cash
Tests of Controls. Auditors generally begin tests of controls by interviewing appropriate personnel who either perform or monitor control procedures. During these interviews, the auditors may also
Control Procedures and Audit Procedures for Computer Fraud.Required:For each of the following situations involving computer fraud, briefly describe:A. A control procedure that would have been
Control Procedures. Dreyfet department store maintains on-line prices on minicomputers in stores connected to the automatic cash registers For most products the product and price are read into the
A basic premise underlying the application of analytical procedures is that:(A) The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations.(B) Statistical
What analytical procedures can be performed to determine if inventory is misstated?
What indicators other than financial hinted that there might be problems?
Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and expenses?(A) The current year’s accounts receivable with the prior year’s accounts
What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonpublic entity?(A) Trend
Review the Peregrine financial statements and determine what analytical procedures could be used to predict the revenue recognition fraud. Are there other indicators that a revenue recognition fraud
Which of the following would not be considered an analytical procedure?(A) Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours
Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?(A) Relationships involving balance sheet accounts.(B) Transactions subject to
Describe the four-phase process for analytical review.
What techniques are used to corroborate an explanation?
What should an auditor do to investigate significant fluctuations found with analytical procedures?
Four Phase Analytical Review Process. Based on Concept and a Company 9.2“Peregrine Systems – the 37th of December,” discuss what you would imagine each phase of the four phase analytical review
Expectation Sources. Based on the comparison of last year’s results from Wal-Mart, Costco, Target and the retail industry, what would your expectations be about Target’s revenue growth, gross
Using ACL software* and the ACL practice project file “Workbook.acl” perform the following procedures:Required:A. Open the Accounts Receivable file (Ar.fil), then (1) Determine the number (count)
Start Microsoft Access and open the Northwind Sample Database.Required:A. Sort the Product table by unit price, reorder point, units in stock.B. Do a visual inspection and sort the other tables. Are
Go to http://ecampus.bentley.edu/dept/ac/norwood/ and click to download the following:Norwood Office Supplies Case, Appendix B Assignment #1, and Case Study Files. Start ACL* and prepare Assignment
Request “Data Warehousing Practice Set DW Inc.” from rhayes@calstatela.edu and do the exercises using Access and Microsoft Analysis Services.
In obtaining an understanding of an entity’s internal controls that are relevant to audit planning, an auditor is required to obtain knowledge about the:(A) Design of relevant internal controls
Discuss of the events given – which were significant risks and which were business risks.
How could Bristol Myers have avoided these risks?
The risk that an auditor will conclude, based on substantive tests, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as:(A)
Relationship between control risk and detection risk is ordinarily:(A) Parallel.(B) Inverse.(C) Direct.(D) Equal.
The audit program usually cannot be finalized until the:(A) Consideration of the entity’s internal control has been completed.(B) Engagement letter has been signed by the auditor and the client.(C)
Which of the following relatively small misstatements most likely could have a material effect on an entity’s financial statements?(A) An illegal payment to a foreign official that was not
What analysis do you think the engagement team did to determine the amount of the PAJEs?
By what reasoning did the audit team determine the accounting practices that gave rise to other known and likely misstatements mentioned that did not need adjustment?
What items do you think the senior partners discussed when determining that Andersen would issue an unqualified opinion?
Describe the approach to auditing risk given in ISAs 315, 330, and 500.
How is materiality defined in IFAC’s Glossary of Terms?
Nature of the Entity. To get information about the core processes of the entity an auditor examines its business operations, investments, capital structure and financing activities, and financial
Risk assessment procedures should, at a minimum, be a combination of inquires of management and others within the entity, analytical procedures, and observation and inspection.Required:Give the

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