Question 1

Recent landscape changes in accounting and auditing developed from corporate fraud and, arguably, auditor failure. In order to continually lead and adapt to the dynamics of regulation, principles based accounting practices and auditing standards, what types of skills and traits are auditors required to possess?

Question 2

John Beasley is interviewing with public audit firms to become an auditor. John does not believe that fraud is a "big deal" in client organizations and argues that most individuals in management of companies are "honest people". He believes that auditors are becoming too cynical.

Describe your response to John's attitude and discuss the major types of fraud that occur in companies.

Question 3

One of the elements of an organization's control system is the "control environment." Identify at least three factors that the auditor should consider when reviewing the control environment and discuss how the auditor would relate this review to the assessment of control risk.

Question 4

Following is a list of audit procedures performed. For each procedure, identify the assertion(s) being tested.

Auditing procedures performed

a. Calculate the ratio of Cost of Goods Sold to Sales as a test of overall reasonableness of the balance for Cost of Goods Sold.

b. Trace a sales transaction from the origination of an incoming sales order to the shipment of merchandise to an invoice and to the proper recording in the sales journal.

c. Test the accuracy of the sales invoice by multiplying the number of items shipped by the authorized price list to determine extended cost. Foot the total and reconcile it with the total invoiced.

d. Select recorded sales invoices and trace the corresponding shipping documents to verify the existence of goods shipped.

e. Examine cancelled cheques returned with the clients January bank statement as support of outstanding cheques listed on the clients December year-end bank reconciliation.

f. Perform test counts of the clients marketable securities held in a safe deposit box.

g. Tour the plant to determine that a major equipment acquisition was received and is in working condition.

h. Review a lease contract to determine the items it covers and its major provisions.

i. Request a statement from a major customer as to its agreement or disagreement with a year- end receivable balance shown to be due to the audit client.

j. Develop a spreadsheet to calculate an independent estimate of the clients warranty liability (reserve) based on production data and current warranty repair expenditures.

k. Develop a spreadsheet to independently test the calculations made by the client in computing a warranty liability (reserve).

l. Meet with the clients internal legal department to determine its assessment of the potential outcome of pending litigation regarding a patent infringement suit against the company.

m. Review all major past-due accounts receivable with the credit manager to determine whether the clients allowance for doubtful debts is adequate.

n. Make test counts of inventory items and record the items in the audit documentation for subsequent tests.

o. Obtain information about the clients processing system and associated controls by asking the clients personnel to fill out a questionnaire.

p. Examine board of directors minutes for the approval of a major bond issued during the year.

q. Have the clients outside law firm send a letter directly to the auditor providing a description of any differences between the lawyers assessment of litigation and that of the client.