Assume you are the senior partner in an audit firm which is considering submitting a tender for the audit of a large company. Outline what information you might want to collect about the company before making a final decision about whether to submit a tender.
> The division of management assertions into genuine, accurate and complete is a useful aid to auditors. Discuss.
> Set out in Figure 9.6 is a systems flowchart for a production payroll system. Explain what is happening in the two routines ‘transaction file update’ and ‘salary run’. In addition, e
> As organizations have become more dependent on the reliability of information systems, they have become more aware of the need to maintain quality of systems and the data/information derived from them. If you were asked to set up a quality standards grou
> An important objective of the business risk approach is to make the audit more profitable by cutting down on the amount of evidence obtained by substantive tests of detail. Discuss.
> Insufficient attention is being paid to the needs, nature and size of the multinational companies the Big Four presently audit when there is discussion of the ways in which competition for such audits can be enhanced. Discuss.
> The audit expectations gap will never be closed. Discuss.
> The willingness of large audit firms to provide forensic audit services indicates that they have the ability and techniques available to detect fraud. It would seem a short step to suggest that auditors should have a greater responsibility for fraud dete
> This question is based on an ACCA question in their Advanced Audit and Assurance Paper P7, June 2012. Snipe Ltd has in place a defined benefit pension plan for its employees. An actuarial valuation on 31 January 2018 indicated that the plan is in deficit
> Consider whether the following statements are true or false: a. The same standards of independence need not be applied in assurance engagements as in the statutory audit of financial statements. b. A review engagement results in a conclusion in the assur
> Lundin plc operates a number of divisions, but the board of directors has been considering closing those that no longer fit into the future plans of the company. On 30 November 2020 (year-end is 31 December 2020), the board decided to close two of the di
> Blackford Ltd is a company engaged in two diverse activities, the manufacture of lawnmowers and trading in the hardware sector, selling its lawnmowers through its own hardware outlets. The company decided to discontinue its loss-making lawnmower operatio
> Consider the following items of income and expense and state: whether they bear a relationship to each other or not; if they are related in any way, in what way they should move in relation to each other; the reasons for your answer in each case. a. New
> Crail Limited analytical review. The profit and loss account for the year ended 31 December 2020 and balance sheet at 31 December 2020 of Crail Limited, a trading company, are set out below. Required: Perform an analytical review of these figures and s
> Refer to questions 9.2 and 9.3 and explain how a data flow diagram would help the auditor to understand how the entity’s order entry system is operating. Why would a data flow diagram be better than a document flowchart for this purpose?
> Figure 8.1 showed that there are two broad levels of regulation and control relating to both external and internal environment. You are the auditor of an entity providing advice to clients on financial matters. You are aware that there have been serious
> Discuss what you understand by the following terms: a. foreseeability b. proximity c. assumption of responsibility
> New rules have been introduced by the European Parliament, and it is anticipated that these new rules will lead to considerable improvements in audit quality. Evaluate the extent to which new legislation can contribute towards improving audit quality.
> The trade payables figure in most companies is normally material in the context of the financial statements taken as a whole. What assertions do you think that management is implicitly making about the trade payables figure? Suggest one audit step for ea
> Explain why the civil society is just as interested in the way that large companies, including banks, behave as are the shareholders of those companies. What do you think is meant by the public interest?
> Why do you think that the collapse of Enron and other scandals affecting large companies may have resulted in a widening of the audit expectations gap? You may want to refer to contemporary reports and media articles emerging relating to the collapse of
> Explain how auditing theory might give useful insights into the practice of auditing. Your answer should make reference to the postulates and concepts of auditing.
> The following question is taken from the June 2011 F8 Paper – Audit and Assurance of the ACCA. We are only asking you to consider requirement (a) of the question. You are an audit manager in NAB & Co., a large audit firm which specializes in the audit of
> Discuss the arguments for and against requiring the mandatory rotation of auditors.
> World Com tried to maintain profit levels by treating revenue costs (over $3.8 billion) as capital expenditure. Explain what the impact would be if revenue costs (such as repairs to plant and machinery) were to be treated as capital assets. What do you t
> Describe the nature of an extranet and explain why it might be a useful means of achieving business objectives. You are auditor of an entity carrying on business using an extranet. Explain what controls you would expect to be in force to protect it.
> Suggest why auditors might be in a good position to provide a service giving assurance on the effectiveness of the company’s information and control system. Take a look at Table 1.1 while you are considering this matter.
> We have not discussed this at length yet, but can you at this stage suggest what benefits society should derive from a competent, independent and effective audit function?
> In Table 3.3 we suggested pressures against independence in respect of small audit firms and small auditees. To what extent do you believe that the IFAC Code and FRC Ethical Standard have been successful in dealing with the special circumstances of small
> Why do you think that the auditors will need a letter from management saying that they have provided them with all the books and records of the company? Try to think of a scenario where management might try to understate cash receipts for their own benef
> Describe the regulatory structure for monitoring audit quality in the UK.
> Discuss the major factors that might influence managers in engaging in earnings management. Consider audit procedures that might be appropriate where earnings management is suspected.
> Explain to your assistant what is meant by audit judgement and give examples of its application. How certain can you be that your judgement has produced the right answer?
> ‘It is very easy to apply the audit risk model. All you have to do is to multiply figures together to determine the amount of testing you have to do’. Discuss this statement.
> What are the main practical differences between the audit risk approach and the business risk approach to auditing?
> Take another look at both The County Hotel and Fine Faces and discuss the proposition that auditors are so willing to help management that they might forget that their primary duty is to form an opinion on the financial statements issued to and used by t
> Segregation of duties is a basic requirement of a good control system. Explain what is meant by this statement and show how segregation of duties in a modern computer system might differ from that in a manual system.
> In January 2018, Carillion, a major UK multinational construction and facilities management company, suddenly collapsed, leaving in its wake almost £7 billion of liabilities and only £29 million in cash. Astonishingly, in 2016, Carillion’s senior executi
> Why do you think it is important to have NEDs on the board?
> Good corporate governance is more likely to exist in companies where there are large institutional shareholders holding a substantial proportion of the shares than in companies where the shares are held by many individual investors. Discuss
> Discuss what are likely to be the main limitations a company faces in establishing an effective audit committee.
> Discuss how corporate governance mechanisms will impact on audit quality and the audit expectations gap.
> Explain why you believe auditors have been reluctant to report on the directors’ reviews of the effectiveness of internal controls.
> In 2014, Lord Myners set out the need to reform the Cooperative Group after near ruinous failure at the bank, describing ‘a dysfunctional board in which some directors did not know the difference between debits and credits’ and [were] ‘clearly out of the
> Audit evidence is required to be both sufficient and appropriate. Explain what is meant by this statement giving appropriate examples.
> The EU Audit Regulation (537/2014) states:’ In order to increase the confidence in … the statutory auditors and the audit firms carrying out the statutory audit of public interest entities, it is important that the transparency reporting by statutory aud
> Your firm has been external auditor of Elgol plc for some years. Elgol has an internal audit department engaged in both compliance and operational auditing. You have a high opinion of the quality of internal audit work and have established a good relatio
> You are the engagement partner of an audit assignment with an entity specializing in the provision of information technology services and software. At the beginning of the financial year the company entered into a contract with the government of China an
> We noted in the chapter that often the directors of a company exerted a considerable influence, more so when there is no audit committee, in determining which firm of auditors should be appointed. Give reasons why this is not an ideal state of affairs an
> A major criticism of the regulatory regime in the past was that it lacked independence from the accounting profession. Discuss the extent to which that criticism is still valid for the new regulatory regime introduced in 2012 as amended by SATCAR.
> Explain how a review engagement differs from an audit engagement. Explain why a report on a review engagement might be useful to the person requesting that the engagement be carried out.
> Obtain a recent annual report, such as that of Rolls-Royce plc, which we have cited in the text, and identify what elements in the audit report you believe are likely to be of most interest to investors.
> Discuss the extent to which you believe liability limitation agreements will be helpful in mitigating auditors’ exposure to large claims for negligence.
> The EU Audit Regulations (537/2014) states: ‘The public-interest function of statutory audit means that a broad community of people and institutions rely on the quality of a statutory auditor’s or an audit firm’s work. Good audit quality contributes to t
> You are a member of an internal audit department and have been asked the following questions by an audit assistant: a. Why is it that we check all purchases invoices daily to goods received notes and purchase orders when the definition of internal audit
> Dunino Limited is a company manufacturing, selling and laying carpet tiles, currently preparing financial statements at 31 December 2020. Under the terms of sale, Dunino gives a warranty, whereby it agrees to make good manufacturing or laying defects tha
> Obtain a recent annual report, such as that of Rolls-Royce plc, which we have cited in the text, and identify what elements in the audit report you believe are likely to be of most interest to investors.
> Consider a country operating under fixed exchange rates. The IS curve is given by equation (20.1) a. Explain the term (i* - πe). Why does the foreign nominal interest rate appear in the relation? b. Explain why when πe increases, t
> You are the economic adviser to a newly elected president. In four years he or she will face another election. Voters want a low unemployment rate and a low inflation rate. However, you believe that voting decisions are influenced heavily by the values o
> a. Download the series EXCHUS from the FRED database. This expresses the exchange rate between the yuan (one of the names for the Chinese currency) as the number of yuan per US dollar. Convert that exchange rate to the number of US cents per yuan so that
> Policy choices when the real exchange rate is “too high” and the nominal exchange rate is fixed an overvalued real exchange rate is a rate such that domestic goods are too expensive relative to foreign goods, net expor
> a. Go the Web site of The Economist (www.economist.com) and find data on 10-year interest rates. Look in the section “Markets & Data” and then the subsection “Economic and Financial Indicators.&ac
> a. Explain why, in equation (14.14), it is important that the stock is ex-dividend, that is, it has just paid its dividend and is expected to pay its next dividend in one year. b. Using of equation (14.14), explain the contribution of each component to t
> Suppose that in your country, the saving rate slowly declines from 12% in year t to 11% in year t+1 and 10% in year t+2. Suppose, moreover, that the depreciation rate, a. Using the production function given in the chapter, what happens to the steady-stat
> The Cobb-Douglas production function and the steady state. This problem is based on the material in the chapter appendix. Suppose that the economy’s production function is given by Y = KαN1 - α and assume that a = 1>3 a. Is this production function char
> The appendix to this chapter shows how data on output, capital, and labor can be used to construct estimates of the rate of growth of technological progress. We modify that approach in this problem to examine the growth of capital per worker. Y = K1/3 (A
> Consider the economy described in Problem 3 and assume that there is a fixed exchange rate, Suppose that financial investors worry that the level of debt is too high and that the government may devalue to stimulate output (and therefore tax revenues) to
> Assume that money demand takes the form where Y = 1,000 and r = 0.1. a. Assume that, in the short run, pe is constant and equal to 25%. Calculate the amount of seignorage for each annual rate of money growth, ∆M/M, listed. a. 25% , b.
> Consider a country with two political parties, Party A and Party B. Party A cares more about unemployment than Party B, In 2018 New Zealand rewrote the charter of its central bank to include high employment as well as low inflation as its goals. Why woul
> a. The World Bank reports gross domestic saving rate by country and year. Go to the World Bank website (https://data. worldbank.org/indicator/NY.GNS.ICTR.ZS) and find the most recent saving rates for Indonesia, India, South Korea (the Republic of Korea),
> Go to the World Bank’s website (http://data.worldbank.org/ indicator/NY.GDP.PCAP.KD), find the data on GDP per capita (in constant 2010 US$) for China and the euro area for the years 1960, 1980, 2000, and the latest year available. The euro area includes
> Between 1950 and 1973, France, Germany, and Japan all experienced growth rates that were at least two percentage points higher than those in the United States. Yet the most important technological advances of that period were made in the United States. H
> Consider the production function given in Problem 3. Assume that N is constant and equal to 1. Note that if z = xa , then gz ≈ a gx, where gz and gx are the growth rates of z and x (See Appendix 2 at the end of the book). a. Given the growth approximatio
> Consider the production function: Y = K + 2N a. Compute output when K = 10 and N = 20. b. If both capital and labor triple, what happens to output? c. How would you qualify the returns to scale for this production function? d. Write this production funct
> Assume that every month the average student in Japan and the average student in China buy the quantities and pay the prices indicated in the following table: a. Compute the Japanese consumption per student in yen. b. Compute the Chinese consumption per
> Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. On a logarithmic scale, a variable that increases at 5% per year will move along an upward-sloping line with a slope of 0.05. b.
> Consider the data in the Focus Box, “Deflation in the Great Depression.” a. Calculate real interest rates in each year making the assumption that the expected level of inflation is last year’s rate of inflation. The rate of inflation in 1928 was -1.7%. D
> Consider the data in the Focus Box, “Deflation in the Great Depression.” a. Do you believe that output had returned to its potential level in 1933? b. Which years suggest a deflation spiral as described in Figure 9-3?
> Suppose the economy is operating at the zero lower bound for the nominal policy rate; the initial equilibrium is at the positive target rate of inflation and the economy is resting at potential output but there is a large government deficit in period t.
> Okun’s Law is written as u - u(-1) = -0.4 (gY - 3%) a. What is the sign of u – u (-1) in a recession? What is the sign of u – u (-1) in a recovery? b. Explain where the 3% number comes from? c. Explain why the coefficient on the term (gY - 3%) is -0.4 an
> Suppose you are measuring annual GDP of a country by adding up the final value of all goods and services produced in the economy. Determine the effect on the country’s GDP for each of the following transactions. a. A seafood restaurant buys €100 worth of
> A shock to aggregate supply will also have different outcomes when there are different assumptions about the formation of the level of expected inflation. As in Question 4, one assumption is that the level of expected inflation equals lagged inflation. T
> This chapter assumes that expected inflation remains equal to the central bank’s target rate of inflation. In Chapter 8, in the discussion of the Phillips curve, it was noted that expected inflation was, for some time, equal to lagged inflation and was n
> The medium-run equilibrium is characterized by four conditions: Output is equal to potential output Y = Yn and the real policy rate rn must be chosen by the central bank so: The unemployment rate is equal to the natural rate u = un. The real policy inter
> Identifying if an economy is in medium run equilibrium and the necessary central bank action to return the economy to medium run equilibrium Here are values for a hypothetical economy Yn = 1000; un = 5%; rn = 2%; x = 1%; πe = 2% and
> President’s Trump’s complaints about Federal Reserve policy in 2018 made the news. On December 22, 2017 President Trump signed a bill, the Tax Cuts and Jobs Act that substantially reduced federal taxes in 2018. a. On November 20, 2018, Bloomberg reported
> Answer the following questions based on information found in the table below a. Is there evidence that the depression originating in the US diffused to every European country? Explain. b. Compare the relationship between production, price, and unemployme
> Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. The IS curve shifts to the right with an increase in G, to the right with an increase in T, and to the right with an increase in
> Using the rate of unemployment to predict inflation between 1996 and 2018 The estimated Phillips curve from Figure 8.5 is πt = 2.8% − 0.16 ut Fill in the table below using the Phillips curve above after collecting the data fr
> Consider each table below. Is the data presented consistent with the Phillips curve model of wage determination? Each table has a point A and a point B. Start your answer with true/false/uncertain. a. The natural rate of unemployment is 5%. b. The natu
> a. The equation of the Phillips curve from 1970 to 1995 is πt - πt - 1 = 7.4% - 1.2ut. Calculate and define the natural rate of unemployment using this curve. b. The equation of the Phillips curve from 1996 to 2018 is πt = 2.8% - 0.16ut Here the natural
> Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. US GDP was 38 times higher in 2018 than it was in 1960. b. When the unemployment rate is high, the participation rate is also li
> Suppose that the Phillips curve is given by Suppose that inflation in year t + 1 is zero. In year t, the central bank decides to keep the unemployment rate at 4% forever. a. Compute the rate of inflation for years t, t + 1, t + 2 and t + 3. Now suppose
> Suppose that the Phillips curve is given by and expected inflation is given by and suppose that θ is initially equal to 0, and that π is given and does not change. It could be zero or any positive value. Suppose that the rate o
> The text proposes the following model of expected Inflation a. Describe the process of the formation of expected inflation when θ = 0 b. Describe the process of the formation of expected inflation when θ = 0 c. How do you form
> a. The Phillips curve is Rewrite this relation as a relation between the deviation of the unemployment rate from the natural rate, inflation, and expected inflation. b. In the previous chapter, we derived the natural rate of unemployment. What condition
> Discuss the following statements. a. The Phillips curve implies that when an economy is operating below full capacity, a significant increase in aggregate demand is likely to cause a reduction in unemployment and an increase in inflation. b. Monetary pol
> Fill in the values in the table below for inflation and expected inflation using the 1960s. The data will come from FRED as they did in the last question. You will have the most success using a spreadsheet. From the 1960s: From the 1970s and 1980s: Fro
> Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. The original Phillips curve is the negative relation between unemployment and inflation that was first observed in the United Kin
> Go to the website maintained by the International Labour Organization (ILO). Select a labor overview report that provides the international definition of unemployment a. Does this definition differ from the one used by policy makers in your country? Expl
> According to the data presented in this chapter, about 44% of unemployed workers leave unemployment each month. a. Assume that the probability of leaving unemployment is the same for all unemployed persons, independent of how long they have been unemploy
