Questions and Answers of Principles Of External Auditing

Playful Ltd manufactures children’s toys. It prides itself on being an innovative company, regularly developing new products. At the end of 19X8, it has 30 different lines in stock. Green & Co.,
Golden Foods (GF) Ltd makes pies, pastries and pizzas, which it sells to retailers under its own brand-name and also supplies to a major supermarket chain. It has two sites: the bakery and its head
Massive Motors Ltd (MM) is part of the Massive Group plc, which has a consolidated turnover of £200 million. MM operates a chain of garages throughout the UK which sell petrol and carry out repairs
Holiday Holdings Ltd (HH) is a group of companies in the leisure industry.Its subsidiaries include Lyndon Hotel Ltd and the Park Leisure Complex Ltd.Because of pressure on audit fees, the auditors of
Fantasy Fashions Ltd (Fantasy) is a private company manufacturing clothes which it sells wholesale. It has few accounting systems, so the audit by Pinkerton & Co. tends to be largely substantive. The
Brighter Alloys Ltd (BA), a company based in the city of Bruddersford, deals in alloys used in the steel industry. It was founded in 1969 by Jack Brightman. In 1979 he and his family sold their
Sunrise Holdings ple was formed in 1980 by Ted Stainer. The group has expanded through acquisitions of chains of shops, including women’s and children’s clothes shops. In July 1994, Sunrise
Homejoy Products is the UK subsidiary of the European Schoenheim Group, whose headquarters are in Frankfurt. Homejoy’s UK sites and operations are summarized below:Bletchley factory employing 600
Tick & Co. are auditors of Pen & Paper ple (P&P), a chain of 32 stationery shops located throughout the UK, and is currently planning the 19X7 audit.The management of P&P has made it clear that it
Finch & Co. is a six-partner firm of chartered accountants, with an office in the small town of Bulhampton. Since the firm was founded in 1950, it has provided audit, tax and accountancy services to
Kemico Ltd manufactures a variety of chemicals which it supplies in bulk to industrial customers. Its factory at Gritborough employs 50 people, and its annual turnover in 1995 was £7.5M. During
Gwynn & Co. is a small firm of chartered accountants in Cardiff. The audit partner has been asked to make a proposal to Alhambra Bingo Clubs(ABC), a Cardiff-based company, which wants to change
Elliott Transmitters (ET) imports and sells special telephone equipment such as portable telephones and car phones and also walkie-talkies. Its customers include chain stores, mail order companies
Luca and Co. are the auditors of Softdream Limited, which owns a frozen food warehouse and a chain of three retail outlets in the town of Glory. The warehouse supplies a wide range of frozen foods to
Esparto Ltd (E) is a paper and cardboard manufacturing company whose year-end is 31 March 1989. The auditors are visiting the company early in January 1989 in order to plan their audit approach for
The Enormous Electrical Company Ltd (EE) was formed in March 19X8 by the merger of two smaller companies. It retails household electrical appliances of all kinds through a chain of thirty shops which
Technical Wizardry Ltd (TW) was originally set up in 1937 as the Typewriter Wholesaling Co. Ltd. The change of name reflects its strategy of moving into a new market in response to the decline in
Warehousemasters Ltd (W) specializes in the design, manufacture and installation of tailor-made storage equipment. Its products and services range from a few yards of shelving to the design and
Britlings Brewery (BB) is a relatively small, independent brewing company based in Sheffield, where the brewery and head office are located. Britlings owns 270- public houses in Yorkshire and
Mrs Beeton’s Kitchens Ltd (MBK) specializes in the design and installation of fitted kitchens. Fitting consultants visit a customer’s home, measure the kitchen and quote a price based on the type
How often are registered public accounting firms required to undergo a PCAOB quality review?
Are nonregistered public accounting firms required to have external peer reviews? Explain.
Use the same facts as in question 17-28. Under proportionate liability, the auditor would be responsible for damages of:a. $$1$ millionb. $$750,000 $c. $$270,000 $d. $$150,000 $Data From
Identify the different parties that might perform internal audit work. Why might there be so many different parties performing internal audit work?a. Consulting activities, by definition, impair the
Which of the following statements regarding assurance services is/are true with respect to internal auditors? I. Assurance services by internal auditors can be provided only to internal man- agement
Which of the following statements is/are true regarding independence and ob- jectivity as applied to internal auditing? I. Independence is a departmental feature that affects the scope of audits.II.
The Public Company Accounting Oversight Board now has the responsibility for issuing standards for audits of public companies. At the time of writing this edition of the text-book, it had just issued
A company keeps its fixed-asset records on a computer system. A unique, nine- digit, fixed-asset identification number identifies each record in the file. The re- maining fields describe the asset,
Which of the following is true of capitalized leases as compared to operating leases?a. Only rent expense is reflected in the income statement.b. The leased asset does not appear on the balance
An audit client will often use a specialist to assist in the valuation of selected as- sets and liabilities. Which of the following is an accurate description of the audi- tor's responsibilities for
In accounting for an acquisition, the auditor must determine that there are sepa- rate valuations for all of the following except: a. All the specifically identifiable intangible assets, including
In determining the potential impairment of goodwill, which of the following would not be an appropriate methodology to estimate the fair value of a report- ing entity? Assume the reporting entity is
If a company overpays for the purchase of another company, as took place when the merger of AOL and Time-Warner took place, what steps should the auditor take to be sure the results are fairly
Which of the following is not considered a related entity transaction for account- ing purposes? A transaction between:a. A company and a separate entity controlled by the sister-in-law of the com-
Which of the following statements is correct regarding transactions between a company and a major customer that accounts for more than 10 percent of the company's sales? a. The profit from such
Which of the following is not a procedure that an auditor would use in perform- ing an audit designed to identify and account for related entity transactions?a. Send confirmations to all customers
An auditor accepted an engagement to audit the 2006 financial statements of EFG Corporation and began the fieldwork on September 30, 2006. EFG gave the auditor the 2006 financial statements on
Identify the alternative methods an auditor can use to test the effectiveness of controls.
An auditor should gain an understanding of: a. Internal controls related to revenue recognition. b. Computer applications for recording sales. c. Key revenue related documents. d. All of the
To test the completeness of sales, the auditor would select a sample of transactions from the population represented by the:a. Customer order file. b. Open invoice file. c. Bill of lading file. d.
A customer confirmed its balance by fax. Which of the following would not reduce the risk associated with the response?a. Consider the fax response to be an exception.b. Examine subsequent
The auditor's analytical procedures are facilitated if the client:a. Uses a standard cost system that produces variance reports.b. Segregates obsolete inventory before the physical inventory count.c.
One of the firm's largest clients, Ropper Company, makes gas grills, gas stoves, and gas dryers. Its financial position has deteriorated, but its management is confident that the worst has passed.
The auditor should consider known control deficiencies as part of the process of planning the audit.Requireda. A list of internal control deficiencies that were found at a small manufacturing
Briefly define the following communication controls, and describe how they work:a. Encryptionb. Callbackc. Echo check
Why is ITF normally implemented by internal auditors rather than external au- ditors?
Assume that an internal audit department develops an integrated test facility (ITF) for use in performing continuous audits of the organization's mortgage pro- cessing system. The ITF has been in use
What kinds of system interdependencies are there in a vendor-managed inven- tory system like the one described in the text that exists between Wal-Mart and many of its larger vendors?
How can a tagging and tracing technique be used with an e-business client if the tagged transaction cannot be traced through the trading partners' computing sys- tem?
In an automated payroll system, all employees in the finishing department were paid at the rate of $7.45 per hour when the authorized rate was $7.15 per hour.Which of the following controls would
A deposit for Julie A. Smith at the local bank was inadvertently recorded as a de- posit in the account of June A. Smith. The control that would most likely have detected the error in depositing the
Which of the following independent errors would not be detected by batch con- trols? a. The computer operator added a fictitious employee to the processing of the weekly time cards. b. An employee
A mail-order retail organization sells complex electronic equipment through its catalogs. Orders are taken over phone lines and transmitted via terminal to the company's main warehouse for
What factors determine the reliability of audit evidence? Give an example of two types of evidence, one that is more reliable and one that is less reliable.
What assertions are tested by confirmations sent to customers?
Which of the following is the least persuasive documentation in support of an auditor’sopinion?a. Schedules of details of physical inventory counts conducted by the clientb. Notation of inferences
An auditor determines that management integrity is high, the risk of account misstatements is low, and the client’s information system is reliable. Which of the following conclusions can be reached
A test of an asset for overstatement provides corresponding evidence on: Expense a. Overstatement b. Understatement c. Understatement d. Overstatement Revenue Overstatement Overstatement Liability
Observation is considered a reliable audit procedure but one that is limited in its usefulness. Which of the following does not represent a limitation of the use of observation as an audit
Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concern about the receivables’:a. Valuation.b.
An auditor observes inventory held by the client and notes that some of the inventory appears to be old, but in good condition. Which of the following conclusions is justified by the audit
Which of the following statements is not true concerning the auditor's documentation?a. The auditor should document the reasoning process and conclusions reached for significant account balances even
During the investigation of the Building and Land accounts, the auditor notes that one of the buildings was sold last year for a very large profit as authorized by the board of directors. The audit
Which of the following statements regarding the incidence of fraud is incorrect?a. Fraud is estimated to cost U.S. businesses less than one cent on the dollar.b. Defalcations occur more often than
Fraudulent financial reporting includes all of the following except: a. Misappropriation of assets for personal use. b. Manipulation, falsification, or alteration of accounting records or
Which of the following statements is/are correct regarding the auditor’s use of materiality as it applies to a financial statement audit:a. The auditor is required to report all incidences of
An auditor discovers a material defalcation involving the theft of $500,000 of inventory. Restitution will not be made. Which of the following statements is not correct regarding the auditor’s
Which of the following is not a correct statement regarding the use of brainstorming as part of a financial statement audit?a. It is required as a normal part of every engagement.b. It should include
The auditor notes the following changes in ratios:From just this information, the auditor should conclude all of the following about fraud risk except:a. Inventory has declined in quality because of
Which of the following would not be considered a motivation to commit fraud?a. Personal financial problemsb. Stock compensation programsc. Poor internal controlsd. Tight debt covenants
The accounting profession may have contributed to the downfall of Enron and the large public losses in all of the following ways except:a. Accounting became very rule-oriented and created a group of
The largest form of defalcation (both in dollars and frequency) is:a. Theft of cash directly from the company.b. Theft of cash through disbursement schemes.c. Theft of inventory and small tools.d.
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
(Internal Control Questionnaire-Purchases) 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
What is a control risk assessment? What is the importance of a control risk assess- ment in an audit engagement?
What are the requirements for the auditor to assess an entity's control environ- ment? Assume the auditor finds significant weaknesses in the entity's control en- vironment. Answer the following
The audit report described by the PCAOB is developed as part of an "integrated audit." Explain what is meant by the term "integrated audit."
What are the major elements of the auditor's report on management's assessment of internal control?
What kind of report should the auditor prepare if the auditor concludes that management's report on internal control omits significant deficiencies in either the design or operation of the entity's
Does the auditor's report on internal control cover all internal controls or only those over financial reporting? Explain the difference.
Assume an auditor concludes that there are material deficiencies in an organiza- tion's internal controls over financial reporting. Management agrees and reports the weaknesses in its report to
How should auditors use prior-year audit documentation in performing the con- trol risk assessment for the current year? What are the advantages and disadvan- tages of using prior-year documentation
How does the auditor determine which controls need to be tested?
Describe a dual-purpose test. What is the purpose of such a test? Give an example of such a test.
What are the implications to the conduct of an audit and the auditor's assessment of internal control over financial reporting if the auditor concludes that an orga- nization's control environment
The auditor concludes that a public company has significant deficiencies in its in- ternal controls over financial reporting. Which of the following is a proper re- sponse to this finding? a. Report
Which of the following would be considered a significant deficiency in an organization's control environment? a. The internal audit function is outsourced to a public accounting firm that is not
An auditor finishes the audit of a company's financial statements and discovers a material misstatement that was due to recording revenue on a transaction to a regular customer twice. The client
Which of the following would not be considered an advantage of using an internal control questionnaire in understanding and documenting the controls in an important accounting application?
Which of the following controls would be most effective in assisting the organi- zation in achieving the completeness objective? a. All employee time cards should be collected by the supervisor and
Proper implementation of reconciliation controls would be effective in detecting all of the following errors except: a. Transactions were appropriately posted to individual subsidiary accounts, but
Which of the following statements would not be correct regarding the authori- zation function as implemented in an organization? a. Blanket authorizations can be implemented in computer systems on
Authorization of transactions in a computerized processing environment can take place in the form of: a. Computerized authorization in the form of user-approved blanket authoriza- tions. b.
The accounts payable department receives the purchase order form to accomplish all of the following except. a. Compare invoice price to purchase order price. b. Ensure that the purchase had been
Assume that you were given these five options to describe the tone at the top: Excellent Moderate Indifferent Nonexistent Machiavellian (do whatever it takes)Requireda. How would the auditor go
Brown Company provides the follow- ing office support services for more than 100 small clients: 1. Supplying temporary personnel 2. Providing monthly bookkeeping services 3. Designing and printing
With your instructor's consent, identify a company and perform a background review of it to identify high-risk areas for an upcoming audit. Utilize all the electronic sources that have information
Who is the audit client? Why is it important that the auditor understand who the true audit client is and why that party is the audit client?
Explain how "privileged communication" differs from confidential information.
Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for en- suring their observance?a. Vigorous

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