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principles of auditing

Questions and Answers of Principles of Auditing

State the rule on commissions.
What is the AICPA trying to discourage with the rule on commissions?
What is the purpose of the rule on the form of practice?
During the 1970s and 1980s, all of the rules of conduct listed below were either substantially modified or eliminated excepta. Advertising and solicitation.b. Independence.c. Competitive bidding.d.
In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor of a broker age firma. Which owes the CPA audit fees
In which of the following instances would the independence of the CPA not be considered to be impaired? The CPA has been retained as the auditor Of aa. Charitable organization in which an employee of
Under which of the following circumstances would the independence of a CPA be considered impaired if the CPA, who is also an attorney, serves as auditor and provides legal services to the same
Inclusion of which of the following in a promotional brochure published by a CPA firm would be most likely to be considered by many CPAs to be a violation of the AICPA Rules of Professional
In which of the following circumstances would a CPA who audits XM Corporation lack independence?a. The CPA and XM’s president are both on the board of directors of COD Corporation.b. The CPA and
A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities were not material to the CPA but were material to the
The code of conduct of the profession would most likely be considered to be violated if a CPAa. Owns a building and leases a portion of the space to an audit client.b. Has an insured account with a
The AICPA Code of Professional Conduct states that a CPA shall not disclose any confidential information obtained in the course of a professional engagement except with the consent of the client.
The CPA should not undertake an engagement that requires independence if his or her fee is to be based ona. The findings of a tax authority.b. A percentage of audited net income.c. Per diem rates
A CPA s audit report on a client s balance sheet, income statement, and statement of cash flows was sent to the stockholders. The client now wishes to present only the balance sheet along with an
Many CPAs believe that the AICPA Code of Professional Conduct has been violated when the CPA represents that specific consulting services will be performed for a stated fee and it is apparent at the
Which of the following is required for a firm to designate itself “Member of the American Institute of Certified Public Accountants” on its letterhead?a. At least one of the partners must be a
As a CPA, you are encountering some difficult questions from professional asso¬ ciates about ethical concepts. Here are some examples.a. Why does the accounting profession prohibit CPAs from owning
For a number of years, Mr. Alserv, a CPA, has performed bookkeeping services for a corporate client, including the recording ofthe journal entries and the posting of the accounts. Mr. Alserv also
According to the Committee on Basic Auditing Concepts, what are the four conditions that create a demand for auditing?
Distinguish among the characteristics of local, regional, and national CPA firms.
State the following:a. The five attestation general standards.b. The two attestation standards of field work.c. The four attestation standards of reporting.
Describe the five-stage process of issuing Auditing Standards Board pronouncements.
What are the three common components of the states' rules on becoming a CPA?
Describe the differences between a state board of public accountancy, a state society of certified public accountants, and the American Institute of Certified Public Accountants.
What is the purpose of the Securities and Exchange Commission?
What is the definition of internal auditing?
To whom does the General Accounting Office report and what is its broad responsibility?
What was the purpose of the Commission on Auditor's Responsibilities?
The essence of financial statement auditing is toa. Detect all fraud.b. Examine individual transactions so that the auditor may certify as to their validity.c. Determine whether the client's
Which of the following types of audits is performed to determine whether a person or entity has adhered to policies, laws, and regulations?a. Operational audit.b. Compliance audit.c. Financial
The independent auditor lends credibility to client financial statements bya. Stating that the financial statements are stated in accordance with generally accepted auditing standards.b. Maintaining
Which of the following best describes the reason why an independent auditor reports on financial statements?a. A management fraud will be detected by independent auditors.b. Different interests may
The independent audit is important to readers of financial statements because ita. Determines how management will operate the company whose financial statements are audited.b. Measures and
What is the general character of the two attestation standards of field work?a. Criteria for determining by whom an engagement should be performed.b. Criteria for adequate planning, proper
What is the general character of the three generally accepted auditing standards classified as general standards?a. Criteria for evaluating competence, independence, and professional care of
A CPA is most likely to refer to one or more of the four auditing standards of reporting in determininga. The nature of the CPA's opinion qualification.b. The scope of the CPA's auditing
Competence as a certified public accountant includes all of the following excepta. Having the technical qualifications to perform an engagement.b. Possessing the ability to supervise and evaluate the
An investor is reading the financial statements of Sundby Corporation and observes that the statements are accompanied by an unqualified auditor's report. From this, the investor may conclude thata.
CPA firms should establish quality control policies and procedures for professional development to provide reasonable assurance thata. Employees promoted possess the appropriate characteristics to
A primary purpose of an operational audit is to providea. The results of internal examinations of financial and accounting matters to a company's top-level management.b. A measure of management
For purposes of this discussion, assume that auditing postulates form a theoretical foundation for the audit function. From postulates come auditing standards.Required:a. Take the eight auditing
Timmon's Bakery completed its first year of operations and must select the generally accepted accounting principles it will use in the preparation of its financial statements. Depending on the
A client who recently received a financial statement audit is somewhat confused about the meaning of the independent auditor's report. She understands that "everything is okay," but she is not
Read the following audit report for a financial statement audit. Indicate where it appears that generally accepted auditing standards were violated either in the conduct of the audit or the style of
Read and compare the attestation standards and the generally accepted auditing standards, both of which are listed side by side on pages \(19-21\) in the chapter.Required:a. For the noted
What is risk? How does management generally perceive the dimensions of risk?
Why might a management action to do nothing in response to a new product introduction by a competitor be considered risky?
What are the major elements of risk assessment?
How does an organization go about identifying, measuring, and prioritizing risks? Who is responsible for the assessment of risk in an organization?
What are the major risk management approaches?
What roles do the external auditor and the internal auditor play in monitoring risks in an organization?
What is the role of the audit committee and the board of directors in assessing, managing, or monjtoring risk? Explain.
What are the major electronic sources of information an auditor can utilize to assess risks associated with an audit client?
What are the major non-electronic sources of information an auditor can utilize to assess risks associated with an audit client?
How would business risk analysis have helped the auditors in the Lincoln Savings & Loan audit?
What information was generally available about the company CDNow prior to the 1999 audit? How would that information affect the nature of the audit?
How does the auditor manage residual audit risk?
In preparing the audit for a new client, the audit manager has asked the auditor to read the revolving loan contract with the First National Bank and the bond indenture. Identify the information that
How does the auditor’s assessment of business risk affect (1) the assignment of personnel to an engagement and (2) the auditor’s responsibility for conducting the audit to search for material
Does the auditor’s responsibility for detecting errors differ from the auditor’s responsibility for detecting fraud? Explain.
How does a financial defalcation differ from fraudulent financial reporting? Explain. Do the auditor’s responsibilities differ for detecting these two types of client fraud?
What are the major findings of the COSO report on financial fraud occurring in U.S. publicly held companies?
Whatis the auditor’s responsibility to assess the quality of accounting principles used by the client? What factors should an auditor look at in determining the quality of accounting choices made
If a material financial fraud is detected, it should be reporteda. To management at least one level above where it occurredb. To the audit committeec. As a separate line item and adequately footnoted
Which of the following best describes the auditor’s responsibility for detecting financial fraud versus detecting a defalcation?a. There is more responsibility for detecting financial fraud because
Business risk is often viewed by management as containing the following attributes:a. A continuum representing both risks and opportunitiesb. Payoffs that can be both positive and negativec.
Which of the following statements is correct regarding the relationship of the auditor’s understanding and assessment of the business risk associated with a client and the auditor’s management of
Which of the following statements regarding analytical review procedures is not correct Analytical proceduresa. Can be effective in auditing account balances when control risk is low and there is a
Which of the following is correct regarding the responsibilities for the quality of accounting principles used in a company’s annual financial statements?I. Financial statements are the
Residual audit risk is most closely related to the concept of:a. Control riskb. Audit riskc. Detection riskd. Inherent risk
The auditor increasingly relies on electronic sources of information to keep up-to-date on industry developments, new trends in the economy, regulatory requirements, and other coverage of the client
Ratio analysis often is employed to gain insight into the financial risks associated with an audit client. The calculation of ratios can lead to a better understanding of a firm’s financial
Studies of fraudulent financial reporting indicate that most frauds are associated with either organizational or personal factors that often are readily apparent to outsiders who are able to take a
During the planning of the audit, the auditor becomes aware of the situations described here.Required:For each of the situations described:a. What is the risk associated with the scenario?b. Indicate
The following quote is from “Six Common Myths about Fraud,” Journal of Accountancy (February 1990, 82-88), by Joseph Wells: Opportunity almost always relates to position. Managers are no more or
Kent, CPA, is the engagement partner on the financial statement audit of Super Computer Services Co. (SCS) for the year ended April 30, 2002. On May 6, 2002, Smith, the senior auditor assigned to the
Auditors cannot effectively audit clients unless they fully understand the client’s industry and the risks inherent in it that may affect their client. Therefore, an important part of every audit
Define the term internal controls as used in an auditing context. What are the main components of an organization’s internal control system?
Why are the SEC and other regulatory agencies pushing for more external reporting on a company’s internal controls?
What is the difference between a standard external audit report on internal control and the newly designed SysTrust report on computer controls? Why is this difference important?
Is the internal audit function an integral part of an organization’s control system?Explain.
How does management gain assurance about the quality of its control system? Does management have a reporting responsibility regarding the quality of the company’s controls?
What is a reportable condition as defined in conjunction with the auditor’s responsibilities to communicate deficiencies in internal controls to the audit committee?How does the auditor identify
Describe how the objectives approach to evaluating the adequacy of controls in an accounting application is implemented.
Define the term accounting control activity. Identify how the auditor determines whether a particular control is a key control, that is, a control procedure that is critical to the proper processing
What is meant by monitoring? Give an example of a monitoring control. Explain how the concept of monitoring may change the auditor’s approach to evaluating an organization’s internal accounting
What are the implications to the conduct of an audit if the auditor concludes that an organization’s control environment does not promote a strong control conscientiousness on the part of
What are the advantages and disadvantages of using a questionnaire compared to a flowchart for documenting and assessing control risk? What are the relative advantages of a flowchart over a
How does an auditor gather information on an organization’s control environment? How is the information on the client’s control environment documented?
Are auditors required to evaluate internal controls and the attendant control risk on every audit? What documentation is required if the auditor evaluates control risk as high and chooses to plan the
How should an auditor use previous-year audit documentation in performing the control risk assessment for the current year? What are the advantages and disadvantages of using previous-year
Which of the following is a correct statement regarding the auditor’s assessment of an organization’s control environment?a. The control environment ought to be assessed by the auditor, even
Which of the following items, if omitted, would constitute an important weakness in the preparation of an auditor-developed flowchart to document internal controls of an important accounting
Segregation of duties is best accomplished when the auditor can determine thata. Employees perform only one job; for example, someone working on accounts payable does not have access to other
Authorization of transactions in a computerized, mostly paperless, processing environment can take place in the form ofa. Computerized authorization in the form of user-approved blanket
During the review of a small-business client’s internal controls, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following
The accounts payable department receives the purchase order form to accomplish all of the following excepta. Compare invoice price to purchase order price.b. Ensure that the purchase had been
Authorization of transactions is considered an important accounting control. The movement to computerized and paperless accounting systems poses new problems for management in implementing
The auditing standards describe an organization’s internal controls as consisting of five elements.Required:a. Briefly describe the relationship among the five components of an organization’s
In this chapter, we talk about three kinds of reports on internal controls:• Reports to management of significant deficiencies in the design and/or operation of internal controls (reportable

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