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business
principles of auditing

Questions and Answers of Principles of Auditing

Whatare the major factors that most likely determine the auditor’s assessment of the control environment affecting the recording of sales? How does the auditor normally gather information on the
If sales orders are entered online to the computer system, prenumbered paperbased documents will not be prepared. What control procedures should be designed into the computer application to
What is a dual-purpose test?
Why is emphasis usually given to direct tests of the accounts receivable balance rather than the transactions that created that balance?
When should revenue normally be recognized fora. A construction contractor?b. An airline?c. A manufacturer?d. A mail-order retailer?
Identify and describe the three types of analytical procedures an auditor might use for the revenue cycle.
The auditor is concerned that fictitious sales have been recorded. The best audit procedure to identify the existence of the fictitious sales would be toa. Select a sample of recorded invoices and
Which of the following would not represent a factor the auditor would consider when assessing the inherent risk associated with a sales transaction?a. The existence of terms that specify the right of
The auditor generally makes a decision not to test the effectiveness of controls in operation whena. The preliminary assessment of control risk is at the maximum.b. It is more cost efficient to
A restaurant food chain has more than 680 restaurants. All food orders for each restaurant are required to be input into an electronic device, which records all food orders by food servers and
Which of the following controls would be least effective in ensuring that the correct product is shipped and billed at the approved price?a. Self-checking digits are used on all product numbers, and
The auditor wants to determine that only the marketing manager has approved changes to the product price file. Which of the following audit procedures would provide the most persuasive evidence that
To determine whether internal controls operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by
A manufacturing client received a substantial amount of goods returned during the last month of the fiscal year and the first month after year-end. The client recorded the returns when credit memos
The confirmation of customers’ accounts receivable rarely provides reliable evidence about the completeness assertion becausea. Many customers merely sign and return the confirmation without
Field, CPA, is auditing the financial statements of Miller Mailorder, Inc. (MMI) for the year ended January 31, 2002. Field has compiled a list of possible errors and irregularities that may result
Bert Finney, CPA, was engaged to conduct an audit of the financial statements of Clayton Realty Corporation for the month ending January 31, 2004. The examination of monthly rent reconciliations is a
You are engaged in your first audit of the Licitra Pest Control Company for the year ended December 31, 2003. The company began doing business in January 2003 and provides pest control services for
Sean Edwards, CPA, is engaged to audit the financial statements of Matthews Wholesaling for the year ended December 31, 2001. Edwards obtained and documented an understanding of the internal controls
The following sales were selected for a cutoff test of Genius Monitors, Inc., for the 31 December 2003 financial statements. All sales are credit sales and are FOB shipping point. They are recorded
Confirmation of accounts receivable balances is a generally accepted auditing procedure when it is reasonable and practical.Required:a. Describe the conditions that should exist for confirmations of
You are auditing the estimated liability for warranty expense of an automobile manufacturer for the year ended December 31, 2003. The automobiles carry a five-year or 50,000 mile warranty (whichever
You are auditing Accounts Receivable of HUSKY Corp. as of December 31, 2002. The Accounts Receivable general ledger balance is $4,263,919.52. Download the data files from the IDEA Software CD. The
Many management frauds involve improper recording of revenue. Using The Wall Street Journal, Business Week, the SEC’s Audit and Accounting Enforcement Releases (website ), and similar sources, find
Why is it important that misstatements be carefully defined when planning a sample?
Why is it important to determine the completeness of the physical representation of the population (such as a trial balance of accounts receivable) from which a sample is to be selected?
Why is it so important to specify the audit objective before planning a sampling application?
What sampling methods are available for substantive testing, and under what conditions should each be used?
What is the UML, and how is it determined?
Do the professional standards require or support the use of nonstatistical sampling for substantive testing? Explain the circumstances in which nonstatistical sampling might be used.
When planning a sample, what is meant by the precision of a statistical sample? How does precision affect the sample size?
How does the definition of the population in PPS sampling differ from the definition for classical sampling?
What information is needed to determine the sample size for a classical sampling method that is not required for PPS sampling?
Why is the estimated standard deviation for MPU sampling usually larger than for ratio or difference estimation sampling? How can it be reduced for MPU sampling?
How does the selection of a sample differ between the classical variables sampling and PPS sampling? What are the potential implications of this difference on the detection of understatements in the
How do the decision rules for determining whether an account balance may contain a material misstatement differ between the classical sampling methods and PPS sampling?
Is the risk of incorrect acceptance utilized for both PPS sampling and classical sampling, or for just one of the methods? Explain.
What are the advantages of PPS sampling over other statistical methods?
An advantage of using statistical sampling techniques is that such techniquesa. Mathematically measure riskb. Eliminate the need for judgmental decisionsc. Define the values of precision and
The use of PPS sampling would be inefficient ifa. Bank accounts are being audited.b. Statistical inferences are to be made.c. Each account is of equal importance.d. The number of sampling units is
In a PPS sample with a sampling interval of \($10,000,\) an auditor discovered that a selected account receivable with a recorded amount of \($5,000\) had an audit amount of \($2,000.\) The projected
A CPA examining inventory may appropriately apply sampling for attributes to estimate thea. Average price of inventory itemsb. Percentage of slow-moving inventory itemsc. Dollar value of inventoryd.
In an application of MPU sampling, the following information has been obtained:The appropriate conclusion would be that the reported book value isa. Acceptable only if the risk of incorrect rejection
In variables estimation sampling, the sample standard deviation is used to calculate thea. Point estimate of central tendencyb. Tainting of the sample intervalc. Reliability or desired confidence
Using statistical sampling to assist in verifying the year-end accounts payable balance, an auditor has accumulated the following data:Using the ratio estimation technique, the auditor’s estimate
The major reason that the difference and ratio estimation methods would be expected to produce audit efficiency is that thea. Number of members of the populations of differences or ratios is smaller
The inventory of a subsidiary consists of 14,980 items valued at $19,625,000. The inventory data are not available in computer-readable form, but are contained in 217 pages of printout with 60 lines
An auditor is performing substantive tests of pricing and extensions of perpetual inventory balances consisting of a large number of items. Experience indicates numerous pricing and extension
Which of the following most likely would be an advantage in using classical variables sampling rather than PPS sampling?a. An estimate of the standard deviation of the population’s recorded amounts
You are auditing Accounts Receivable of HUSKY Corp. as of December 31, 2002. The Accounts Receivable general ledger balance is \($4,263,919.52.\) If you have not already done so, download the data
You are deciding which statistical sampling method to use. Indicate which of the methods described in this chapter is most appropriate in each of the following circumstances. Explain your
The following information relates to a nonstatistical sample used for a price test of inventory:Required:a. What is the best estimate of the total misstatement if the sample projection is based on
You have decided to use unstratified mean-per-unit sampling.Required:Indicate the effect on sample size (increase, decrease, no effect, or indeterminate)for each of the following changes, and explain
You are to sample accounts receivable balances using a classical method. There are 1,500 customers and the book value is \($3,000,000.\) The desired risk of incorrect rejection is 5 percent, risk of
You are doing a price test of inventory using difference estimation sampling. The book value of the 2,500 items in inventory is \($9,000,000.\) You randomly selected 81 items that had a book value of
Mead, CPA, was engaged to audit Jiffy Co.’s financial statements for the year ended August 31, 2002. Mead is applying the following sampling procedures.During the prior years’ audits, Mead used
Describe the relationships among a corporation’s management, board of directors, the audit committee, and external auditors related to the financial reporting process.
What is an audit committee? What are the major responsibilities of an audit committee?
What information should the external auditor communicate to an audit committee each year?
Why are many public figures concerned about the competitiveness of the public accounting profession and the growth of consulting revenues?
What sets public accountants apart from other professionals who might perform attestation services?
Describe the three categories of attestation standards.
What is the most important auditing standard? Explain.
What role might the concept of due professional care play in litigation that is brought against a public accounting firm?
In what situations do the “Government Auditing Standards” apply?
Briefly describe the sections of the AICPA Code of Professional Conduct. What are the major purposes of each section? Are any sections more important than others?Explain.
Briefly describe the three components that comprise the framework for assuring quality of professional auditing services.
What are the purposes of the Quality Control Standards?
Describe the following:a. External peer reviewsb. Concurring partner reviewsc. Interoffice reviews
Users can reasonably expect audited financial statements to be:a. Complete, with adequate disclosures of all items of a material financial nature.b. Presented fairly according to the substance of
An audit committee should do all of the following excepta. Recommend the retention or dismissal of the outside auditors.b. Determine whether material financial fraud ought to be reported in a
If requested to perform an audit engagement for a nonpublic entity in which an auditor has an immaterial direct financial interest, the auditor isa. Independent because the financial interest is
A violation of the profession’s ethical standards would most likely have occurred when a CPAa. Purchased a bookkeeping firm’s practice of monthly write-ups for a percentage of fees received over
In which of the following situations would a CPA’s independence be considered to be impaired?I. The CPA maintains a checking account that is fully insured by a government deposit insurance agency
The investment banking profession issues“fairness letters” on proposed mergers or acquisitions. Essentially, the board of directors of an organization that might be a takeover candidate asked the
Auditing is viewed as an integral part an organization’s corporate governance.Required:a. What is corporate governance?b. How does the audit contribute to corporate governance?c. What role does
Audit committees have been proposed as an important group to support the independence of the external auditor. The NYSE has made it mandatory for all companies listed on it to have an audit committee
Most public accounting firms perform consulting services for their clients. Additionally, many CPA firms have now developed software products that they sell to clients. In some cases, CPA firms have
Although professional guidance is provided to assist CPAs in making judgments about the appropriate response to individual situations, many situations tend to be in a “gray” area. Following are
In the early 1990s, KPMG established a separate company named KPMG Baymark as an investment banking unit to secure millions of dollars in deal fees otherwise beyond the grasp of the firm when it acts
An audit committee’s effectiveness in promoting the independence of the auditing firm supposedly comes from acting as a surrogate for the shareholders. Their effectiveness, in part, is attributed
This chapter covered the AICPA’s auditing standards (GAAS). Go to the ISACA’s website and write a report describing the similarities and differences in those standards compared to those of the
Why is it important to understand the nature of the client’s business when conducting an audit of financial statement accounts?
How does an auditor go about tae and then analyzing the business risks a client faces?
Define the accounting concept of materiality. How does the concept of the reasonable person affect the auditor’s determination of materiality?
Can an audit be conducted efficiently without specifying materiality before starting specific audit procedures? Explain. What is the risk to the audit if materiality is not specified in advance of
Can materiality be set just for the overall financial statements, or must it also be allocated to individual account balances for planning purposes? Explain.
What is the relationship between materiality and management's assertions about financial account balances?
Assume the auditor finds a misstatement that is not material, and there is no disagreement about the dollar amount of the misstatement. Should an adjusting journal entry be made to correct the
Given the following potential errors by the auditor, explain why one is more important than the other:a. The auditor issues an unqualified audit opinion on financial statements that are materially
Define the following terms and briefly indicate their importance to planning an audit engagement: audit risk, inherent risk, control risk, environment risk, and detection risk.
Define the term engagement risk. What factors does the auditor look at in establishing engagement risk?
Explain the relationship between the auditor’s assessment of engagement risk and the auditor’s determination of audit risk.
Explain the relationship between audit risk and materiality. Does the auditor design the audit to control for both audit risk and materiality?
What is control risk? How does the auditor assess control risk on an engagement? How are the concepts of inherent risk and control risk related?
Why are the financial statements referred to as the embodiment of “management’s assertions” about the financial results of a company? What does the concept of management assertions imply
Explain the importance of management assertions as a framework for identifying risk and performing an audit. Define each of the following assertions and give an example of each:• Existence or
An auditor is concerned that accounts receivable and inventory may be overstated because the reported assets do not exist or they are not properly valued. Identify two procedures the auditor might
How might assertions for an audit of customer service of a dot.com company differ from the assertions tested in an audit of a company’s financial statements?
Explain how each of the following broad concepts affects the nature and amount of audit evidence gathered:• Relevance • Persuasiveness • Sufficiency • Relationship among procedures

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