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principles of auditing

Questions and Answers of Principles of Auditing

If a company’s control risk is low, the auditor needs to gather evidence on the operating effectiveness of the controls.Required:a. For each of the following control activities, indicate the audit
Taylor, CPA, has been engaged to audit the financial statements of Johnson’s Coat Outlet, Inc., a medium-size mail-order retail store that sells a wide variety of coats to the
Green, CPA, has been engaged to audit the financial statements of Star Manufacturing, Inc., a medium-size entity that produces a wide variety of household goods. All acquisitions of materials are
Auditing standards require the auditor to communicate reportable conditions in an organization’s internal controls to the audit committee or its equivalent.Required:a. Define the term reportable
Shelley Romano is explaining the procedures used to document control risk to a new staff assistant. There is considerable discussion about the nature of documentation required for various levels of
It has been alleged that several recent corporate failures have been largely due to the lack of adequate controls in the organization. For example, it has been alleged that many of the savings and
As the internal auditor for a large savings and loan association, you are concerned about segregation of duties for a wholly owned real estate investment subsidiary. The subsidiary, despite several
Describe client/server computing. What are the major elements of client/server computing? What are the major audit risks associated with client/server computing?
Distinguish between operating, application, and communications software. What is the relative importance of each type of software to the auditor?
What is a firewall? What major tasks should be built into a firewall?
What is the difference between a Web server and a back-office server? Why is the distinction important to the design of a computing system and the design of controls built into the computer system?
What is a denial-of-service attack? How might a company detect a denial-of-service attack?
What are application control procedures? How do they differ from general controls in a computerized environment?
One of your colleagues states that application controls are stronger in online systems than they are in batch systems. Do you agree or disagree with the statement?Give the rationale for your answer.
Briefly identify how an internal audit department with a strong computer audit orientation might affect the audit plan for a heavily computerized client.
The chapter referred to tables, such as a payroll wage-rate table. What are the functions of such tables? What controls should be instituted to ensure the accuracy of the tables?
Describe what is meant by the terms economic interdependence and total systems dependence as they apply to EDI. Describe how the auditor should determine the implications of these two risk concepts
Explain the importance of the following to a company utilizing EDI:a. Formal trading partner agreementb. Bar codingc. Formal protocol for message acknowledgmentd. Exception reports
An audit trail in an EDI environment takes the form of a computer log, but may serve as the equivalent of the storage of source documents in a typical paper-based information system. Assume a company
The auditor for a retail company that uses EDI wishes to establish that orders are placed only by those within the company having the authority to place orders. The company uses access control
How does electronic commerce differ from EDI? What are the implications of these differences to the control and auditability of a company?
What should a firewall accomplish?
A company involved in e-commerce would expect a firewall to do all of the following except:a. Intercept traffic that meets specific criteria and send the traffic back to the originator of the
Which of the following errors would be detected by batch controls?a. A fictitious employee was added to the processing of the weekly time cards by the computer operator.b. An employee who worked only
Which of the following is not correct concerning the processing of transactions through the online input of transactions at a computer terminal?a. Batch controls cannot be used.b. Oral verification
Which of the following statements are correct regarding good control procedures over program change control?I. A programmer should be able to make changes to a program only while it is in the
Batch controls are designed to provide assurance that:a. Only authorized transactions are processed.b. All submitted transactions are processed or otherwise accounted for.c. Edit controls are working
To obtain evidence that user identification and password control procedures are functioning as designed, an auditor would most likelya. Attempt to sign onto the system using invalid user
All administrative and professional staff in a corporate legal department prepare documents on terminals connected to a network file server. The best control over unauthorized access to sensitive
Re-Tool Corporation, one of the firm’s larger audit clients, has a data processing staff of approximately 75 individuals. Past audits have indicated that the general control environment is
You have been assigned to the audit of Mid-State Electronics Corporation, a medium-size distributor of electronics equipment serving a geographic area within a radius of 150 miles. MidState has
Auditors are justifiably concerned that the movement to EDI will result in potential new risks to audit clients. Two of these new risks, described in the chapter, are economic interdependence and
The auditor should evaluate the ability of an organization to continue to operate should the data processing center be destroyed.Most organizations have reacted to the risk by developing
Explain how the auditor’s assessment of management integrity and competence, the client’s business environment, and the auditor’s knowledge of the reliability of the client’s information
Conceptually, is it possible to complete an audit by (1) understanding the client and the industry and (2) assessing environment risk? Is such an approach acceptable according to auditing standards?
What is testimonial evidence? Identify the types of testimonial evidence the auditor obtains during an audit. For each type listed, identify the factors that affect its perceived reliability and
The third standard of fieldwork requires the auditor to gather sufficient competent evidential matter to afford a reasonable basis for an opinion regarding the financial statements. Explain how the
Distinguish between internal and external documentation as a form of audit evidence. Give two examples of each.
Johnson Company is a medium-size manufacturing client that has expanded its operations over the past few years by acquiring smaller companies that had complementary products or that manufactured
Ten major types of audit procedures are identified as part of the audit evidence-gathering process. These procedures are Observation Physical examination Examination of documents Inquiry of company
During the investigation of the Building and Land accounts, the internal auditor notices that one of the buildings was sold last year for a very large profit as authorized by the board of directors.
A major development of computer processing is referred to as image processing. It is the process of making copies of paper documents and storing them in computerized form.Required:Review periodicals
Which of the following combinations results in a decrease in sample size in a sample for attributes? Risk of Assessing Control Risk Too Low a. Increase b. Decrease c. Increase d. Increase Tolerable
Whatare the nine major steps utilized in a comprehensive approach to information system auditing? Explain why each step is important.
Why are data transmission controls so important? What are the key controls the auditor would expect to be present to ensure proper data transmission?
Identify four monitoring controls the auditor would expect to find in a welldesigned computer system. Explain the objective of each control identified.
Why will the audit profession move toward more testing of the systems processing as opposed to direct testing of account balances? Explain your rationale.
What is the difference between(a) independently testing the correctness of processing(b) independently testing the reliability of data?
What are the major objectives addressed by the test data method? When should test data be used; that is, when does test data have a competitive advantage over other audit approaches? What are the
What are the significant differences between the test data approach and the ITF approach? What deficiencies of the test data approach does the ITF overcome?
How does an auditor using an ITF keep from contaminating client files with data designed to test the client’s processing? Describe the two approaches most often used.
A staff auditor is discussing the use of concurrent audit techniques with a partner during the course of an audit engagement on a client with a relatively unsophisticated computer system. The partner
How do concurrent audit techniques differ from the more static audit techniques, such as test data or GAS? What audit objectives are accomplished by the concurrent audit techniques that might not be
Embedded audit modules were recommended as an approach that could work well in various environments. Briefly describe an embedded audit module, how it works, and the audit objectives that it could
Briefly explain how the SCARF audit approach works and the objectives that it addresses.
The tagging and tracing audit approach requires the auditor to develop modules that are incorporated into the application program. An embedded audit module also requires modules to be developed in
Does PC-based audit software, such as IDEA, have the ability to handle the records that would be associated with large clients like Ford Motor Company or Pillsbury?Explain.
An auditor decides to use IDEA to test the details of a material account balance. How can the auditor be sure that he or she has captured the detail file that supports the general ledger account
Identify one task, or one computer environment, in which the auditor would most likely prefer to use customized audit software as opposed to GAS.
Can auditors use one GAS, for example, IDEA, on different computerized files, such as accounts receivable and inventory files, that have different record formats? Explain.
What is a trading partner agreement? Why is it important that the auditor review all major trading partner agreements when auditing an e-business client?
How does e-business differ from e-commerce? What are the audit implications associated with these differences?
Will audit software continue to be used heavily in e-business and e-commerce clients? Explain.
Identify five ways in which an auditor might utilize spreadsheet software in conducting an audit.
What are the relative advantages of electronic audit documentation over paper-based documents? Do you see any practical disadvantages to electronic documents?
What is groupware? How can groupware be utilized to increase the efficiency of an audit? Explain and give an example.
What is an intelligent agent? Identify two major ways in which intelligent agents might be utilized to enhance the efficiency of an audit engagement.
What is an expert system? How might one be utilized in an audit engagement? What are the relative advantages and disadvantages of expert systems?
A significant advantage of the ITF over the test data approach is that the ITFa. Tests the operation of manual controls that are contained in an accounting application.b. Tests transactions
Which of the following would not be an appropriate use of IDEA software?a. Developing an aging report of accounts receivable.b. Reading a complete master file for an overall integrity review.c.
An auditor would most likely develop customized software rather than using GAS in which of the following situations?a. The client utilizes a database management system for inventory.b. The client’s
EDI refers toa. The electronic transfer of documents between organizations (e.g., sending invoices electronically between organizations).b. The transfer of files between a division of a company and
A concurrent audit technique such as tagging and tracing would be effective in addressing all of the following audit objectives except:a. Ensuring that submitted transactions have been fully
A company has a computer program that performs the processing for several different departments or divisions of the company, drawing on information stored in tables for specific rates, and so on. One
Which of the following statements regarding EDI and its audit implications are correct?I. EDI, when used effectively, will result in the elimination of most paper documents currently used for control
The tagging and tracing approach would most likely be considered for implementation when:a. The auditor wishes to select actual transactions to be printed out to an audit file for subsequent audit
Which of the following statements are correct regarding the potential audit use of embedded audit modules? Embedded audit techniques:I. Are designed by internal auditors, therefore they are of
Public accounting firms are likely to use expert systems toa. Supplement the auditor’s judgment in areas where defined answers are not clearcut.b. Ensure that all major aspects of a judgment are
Process tracing software can be used with test data to investigate an application for fraud because process tracing software cana. Be used to trace a transaction from its origination through to the
Which of the following procedures is least likely to be performed by an auditor using GAS? sa. Selection and printing of accounts receivable confirmations from a client’s master file.b. Evaluation
Detailed testing of controls in a computer system through the use of test data or an TFa. Can be performed using either real or simulated transactions.b. Is not convincing because many of the
Auditors have various EDP audit techniques available to aid in testing computer-based systems. Included in these audit techniques are (1) test data, (2) integrated test facility (ITF), (3) tagging
Levi-Strauss (Levi) is a large supplier of jeans to Wal-Mart and was one of the first to sign the vendor-managed inventory agreement. As part of the agreement, Wal-Mart agrees to provide important
It has been stated that internal auditors have developed computer audit approaches that should be considered by the external auditor in planning the conduct of an audit of a client who has a highly
An auditor is likely to encounter clients who have implemented all of their accounting on a personal computer system.Required:a. Write a brief internal control questionnaire to assist the auditor in
EDI has been described as a major change in the way organizations will process transactions in the future. Most paper will be eliminated, and the auditor will need to use new audit techniques to gain
Audit Techniques and Fraud Investigation) Computer-assisted audit techniques can be useful to the auditor in investigating alleged fraud.Required:Following is a list of scenarios in which fraud is
Recent advances in computing technology have allowed the auditors to gain efficiency by bringing the technology to the audit.Required:Briefly explain how each of the following technologies can assist
Firewalls are an integral part of every e-commerce company. The auditor decides to gain assurance on the functioning of a firewall that the client had implemented late in the last quarter of the
Review published research and write a report on the development of e-commerce. Interview at least one company in your area that has implemented e-commerce to determine the types of applications used,
Priceline.com is one of the e-tailers (e-commerce retailer) that have grown over the past few years. Priceline.com operates much like an online wholesale travel agent. It allows consumers to bid for
What are the major accounts in the revenue cycle? Briefly identify the relationships between them.
Automated cash registers can contribute effectively to the control structure of a retail organization. Briefly indicate the control procedures the auditor would expect to find in an automated cash
What are the key pieces of control information captured on a sales order? How would the gathering and use of such control information change when a sales order is captured immediately into a computer
We normally think about invoices being transmitted to customers through the mail.How else might invoices be transmitted to customers? What are the implications of these alternative means of
Briefly describe the difference between the roles played by the (1) credit card issuer and (2) the merchant bank in processing credit card transactions such as VISA or MasterCard. Address specific
What is a bill of lading? What audit evidence does it provide?
Explain the factors that would tend to cause some sales transactions to have higher risk than other transactions?
What factors are most likely to affect the inherent risk of a sales transaction? How would a high level of inherent risk affect the development of an audit of sales? Explain, using a specific example.
What important control functions are served by mailing monthly statements to customers? Why is it important that a separate section of the accounts receivable department be set up to handle customer

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