For each of the following situations, describe how the auditors’ report on internal control over financial reporting would be modified from the standard, unqualified report. Do not write the actual reports. a. The auditors have identified a material weakness in the processing of sales transactions. b. Because a relatively short period of time has passed since a control weakness was remediated, the auditors do not believe that sufficient evidence can be obtained with respect to the operating effectiveness of the entity’s internal control over financial reporting. c. Component auditors have audited a significant component of the group financial statements, including internal control over financial reporting relating to that component. They did not find a material weakness in internal control, and the group auditor believes the component auditor’s work can be relied on. d. The auditors believe that the entity’s management has not adequately disclosed a material weakness in its internal control over financial reporting.
> How frequently are firms required to have PCAOB inspections?
> Provide examples of procedures that firms have used to monitor their quality control policies and procedures.
> What factors should auditors consider in deciding whether to accept or continue the engagement with a particular client? What should firms do if they decide to withdraw from an engagement?
> Comment upon each of the following statements you heard in a conversation between two newly hired staff auditors. a. “Of course, I’m qualified to be assigned to this engagement. I have an accounting degree from a top university and was an honors graduate
> What is a system of quality control? Identify the six elements of a system of quality control.
> Your small business client, Phillip’s Computer Repair Shop, is experiencing financial difficulties and has to lay off one of its four employees in the accounting area. Phillip has asked you to determine what duties should be assigned to the three remaini
> What are the four types of audit opinions? What is the conclusion of each one?
> What is a financial reporting framework? How is it related to the auditors’ reporting responsibilities?
> How are the sufficiency and appropriateness of evidence related to detection risk?
> What options are available to the auditor for presenting reports on the entity’s financial statements and internal control over financial reporting?
> Distinguish between relevance and reliability as these concepts relate to audit evidence. How are relevance and reliability associated with the appropriateness of audit evidence?
> Define external, external-internal, and internal documentary evidence.
> What is the basic relationship between the effectiveness of the client’s internal control and the necessary effectiveness of substantive procedures?
> What is materiality? During what stages of the audit do auditors consider materiality?
> Define reasonable assurance. How does the audit team provide reasonable assurance in the engagement?
> Identify which of the major fundamental principles (responsibilities, performance, or reporting) is most closely related to each of the following: a. The need for auditors to consider their financial relationships with prospective clients. b. An auditor
> Auditors are required to obtain a sufficient understanding of each component of a client’s internal control. This understanding is used to assess control risk and plan the audit of the client’s financial statements. Required: a. For what purposes should
> The primary purpose for obtaining an understanding of the entity’s environment (including its internal control) in a financial statement audit is a. To determine the nature, timing, and extent of substantive procedures to be performed. b. To make consult
> Which of the following best demonstrates the concept of professional skepticism? a. Relying more extensively on external evidence rather than internal evidence. b. Focusing on items that have a more significant quantitative effect on the entity’s financi
> One of an accounting firm’s basic objectives is to provide professional services that conform to professional standards. Reasonable assurance of achieving this objective can be obtained by following a. Generally accepted auditing standards. b. Standards
> Which of the following categories of principles is most closely related to gathering audit evidence? a. Performance. b. Reasonable assurance. c. Reporting. d. Responsibilities.
> Which of the following principles is most closely associated with the auditors’ conclusion as to the fair presentation of the entity’s financial statements? a. Communication principle. b. Performance principle. c. Reporting principle. d. Responsibilities
> What are (a) an internal control deficiency, (b) a significant deficiency, and (c) a material weakness?
> Which of the following opinions would be issued if auditors believed that the entity’s financial statements were not presented in conformity with GAAP? a. Adverse opinion. b. Disclaimer of opinion. c. Qualified opinion. d. Unmodified opinion.
> Which of the following best describes the general contents of the introductory paragraph of the auditors’ report? a. A description of an audit examination, including the fact that the audit was conducted under standards established by the PCAOB. b. The a
> Which of the following combinations of standards and types of audits are most closely related to the activities of the Public Company Accounting Oversight Board? a. Develop Auditing Standards for the audits of nonpublic entities. b. Develop Auditing Stan
> The particular and specialized actions that auditors take to obtain evidence during a specific engagement are known as a. Audit procedures. b. Audit standards. c. Interpretive publications. d. Statements on Auditing Standards.
> Sorrell, CPA, is auditing the financial statements of Van Dyke as of December 31, 2017. Sorrell’s substantive procedures and other tests indicated that Van Dyke’s financial statements were prepared in accordance with g
> In each of the following, identify which of the elements of the fundamental principles is most applicable. In addition, discuss what action(s) (if any) you believe auditors should take with respect to these issues. a. An entity has contacted you about pe
> Which of the following is true with respect to PCAOB inspections of accounting firms? a. All firms performing audits of public companies are required to have annual inspections conducted by the PCAOB. b. PCAOB inspections review a sample of audits conduc
> The reporting principle requires auditors to express their opinion through the issuance of a written report. Required: a. What is the purpose of the auditors’ opinion and report? b. What are the major paragraph(s) in the auditors’ report on the examinat
> Respond to each of the following comments that you heard related to the audit of Swan Company, a public entity. a. “We don’t need to consider the risk of material misstatement in our work because we really can’t do anything to reduce that risk.” b. “Beca
> Identify how each of the following statements relates to the performance principle by considering which element(s) of the principle are related to that statement. (A statement may be related to more than one element.) Use the following elements in provid
> You have accepted the engagement of auditing the financial statements of the C. Reis Company, a small manufacturing firm that has been your client for several years. Because you were busy writing the report for another engagement, you sent a staff accoun
> Generally accepted auditing standards (the performance principle) require auditors to gather sufficient appropriate evidence on which to base an opinion. Required: a. Briefly define the characteristics “sufficient” and “appropriate” as they relate to au
> Your public accounting practice is located in a city of 15,000 people. The majority of your work, conducted by you and two assistants, consists of compiling clients’ monthly statements and preparing income tax returns for individuals from cash data and p
> Which of the following is not related to ethical requirements of auditors? a. Due care. b. Independence in appearance. c. Independence in fact. d. Professional judgment.
> Which of the following statements is not true with respect to the performance principle? a. Auditors are required to prepare a written audit plan during the planning stages of initial audits but are not required to do so in continuing audits. b. Audit te
> Assume that the local newspaper just ran the following headline and article: "Audit Results: Airport executives from Kentucky racked up $500K in lavish expenses, concert tickets, and even gentlemen’s club tabs" LEXINGTON, Ky. (AP)—A small commercial airp
> Which of the following concepts is least related to the standard of due care? a. Independence in fact. b. Professional skepticism. c. Prudent auditor. d. Reasonable assurance.
> Which of the following is most closely related to the relevance of audit evidence? a. Auditors decide to physically inspect investment securities held by a custodian instead of obtaining confirmations from the custodian. b. In addition to confirmations o
> AMI International is a large office products company. Headquarters management imposed pressure on operating division managers to meet profit forecasts. The division managers met these profit goals using several accounting manipulations involving the reco
> What is the difference between document examination and reperformance when conducting tests of controls?
> North, CPA, is planning an independent audit of the financial statements of General Company. In determining the nature, timing, and extent of the audit procedures, North is considering General’s internal audit function, which is staffed by Tyler. Requir
> You are a CPA in a regional public accounting firm that has 10 offices in three states. Mr. Shine has approached you with a request for an audit. He is president of Hitech Software and Games Inc., a five-year-old company that has recently grown to $500 m
> The president of Allpurpose Loan Company had a genuine dislike for external auditors. Almost any conflict generated a towering rage. Consequently, the company changed auditors often. The firm of Wells & Ratley (W&R), CPAs, was recently hired to audit the
> Assume that Smith & Smith, CPAs, audited Apollo Shoes Inc., last year. Now CEO Larry Lancaster wishes to engage Anderson, Olds, and Watershed, CPAs (AOW) to audit its annual financial statements. Lancaster is generally pleased with the services provided
> The preparation of audit documentation is an integral part of an auditor’s examination of financial statements. On a recurring engagement, auditors review the audit plans and audit documentation from the prior audit while planning the current audit to de
> What are some of the limitations to practicing public accounting across state and national boundaries?
> A CPA accumulates various types of evidence on which to base the opinion on financial statements. Among this evidence are confirmations from third parties. Required: a. What is an audit confirmation? b. What characteristics of the confirmation process a
> Auditors use different types of audit procedures to gather the evidence necessary to conclude that the risk of material misstatement for each relevant assertion has been reduced to an acceptably low level. List eight different types of procedures auditor
> Which of the following combinations would provide the auditor the most reliable evidence? Source of Evidence Effectiveness of Internal Control a. Internal More effective b. Internal Less effective c. External More effective d. External Less effectiv
> The eight general audit procedures produce evidence about the principal management assertions in financial statements. However, some procedures are useful for producing evidence about certain assertions, and other procedures are useful for producing evid
> Name some other types of auditors in addition to external, internal, and governmental auditors.
> What are the advantages and disadvantages of documenting internal control by using (1) an internal control questionnaire, (2) a narrative memorandum, and (3) a flowchart?
> Define what is meant by compliance auditing.
> What is operational auditing? How does the AICPA view operational auditing?
> What are some examples of assurance services performed on nonfinancial information?
> Why should auditors act as though there is always a potential conflict of interest between the auditor and the management of the enterprise under audit?
> Refer to the internal control questionnaire on a payroll system (Exhibit 5.15). a. Assume that the answer to each question is no. Prepare a table matching the questions to errors or frauds that could occur because of the absence of the control. Your colu
> What are the defining characteristics of (a) white-collar crime, (b) employee fraud, (c) embezzlement, (d) larceny, (e) defalcation, (f) management fraud, and (g) errors?
> What is the auditor’s responsibility regarding fraud risk?
> What is the primary difference between a material misstatement due to fraud or error?
> What is meant by the terms nature, timing, and extent of further audit procedures?
> How is the audit risk model used to plan the audit?
> Which of the following procedures would provide the most reliable audit evidence? a. Inquiries of the client’s internal audit staff. b. Inspection of prenumbered client purchase orders filed in the vouchers payable department. c. Inspection of vendor sal
> What are the components of the risk of material misstatement (RMM)? What are the components of the audit risk model?
> Define audit risk.
> What is the control environment?
> What is the purpose of an audit strategy memorandum? What information should it contain?
> How do the professional audit standards differ for (a) errors, (b) frauds, (c) direct-effect noncompliance, and (d) indirect-effect noncompliance?
> When are analytical procedures required, and when are they optional?
> What are some of the ratios that can be used in preliminary analytical procedures?
> What are the five steps involved with the use of preliminary analytical procedures?
> What is the purpose of performing preliminary analytical procedures in audit planning?
> What are some types of knowledge and understanding about a client’s business and industry that an auditor is expected to obtain? What are some of the methods and sources of information for understanding a client’s business and industry?
> The most reliable evidence regarding the existence of newly acquired computer equipment is a. Inquiry of management. b. Documentation prepared externally. c. Evaluation of the client’s procedures. d. Physical observation.
> What is the major concern for auditors related to evidence obtained from related parties?
> Why should auditors understand their clients’ performance measures when assessing inherent risk?
> If tests of controls induce the audit team to change the assessed level of control risk for fixed assets from 0.4 to 1.0 and audit risk (0.05) and inherent risk remain constant, the acceptable level of detection risk is most likely to a. Change from 0.1
> How does control risk affect the nature, timing, and extent of further audit procedures?
> The auditors assessed risk of material misstatement at 0.50 and said they wanted to achieve a 0.05 risk of failing to express a correct opinion on financial statements that were materially misstated. What detection risk do the auditors plan to use for pl
> The risk of material misstatement is composed of which audit risk components? a. Inherent risk and control risk. b. Control risk and detection risk. c. Inherent risk and detection risk. d. Inherent risk, control risk, and detection risk.
> The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client’s internal control is referred to as a. Inherent risk. b. Control risk. c. Detection risk. d. Risk of material misstatemen
> Which of the following circumstances would most likely cause an audit team to perform extended procedures? a. Supporting documents are produced when requested. b. The client made several large adjustments at or near year-end. c. The company has recently
> One of the typical characteristics of management fraud is a. Falsification of documents in order to misappropriate funds from an employer. b. Victimization of investors through the use of materially misleading financial statements. c. Illegal acts commit
> Auditing standards do not require auditors of financial statements to a. Understand the nature of errors and frauds. b. Assess the risk of occurrence of errors and frauds. c. Design audits to provide reasonable assurance of detecting errors and frauds. d
> Ordinarily, what source of evidence should least affect audit conclusions? a. External documentary evidence. b. Inquiry of management. c. Documentation prepared by the audit team. d. Inquiry of entity legal counsel.
> What is the primary objective of the fraud brainstorming session? a. Determine audit risk and materiality. b. Identify whether analytical procedures should be applied to the revenue accounts. c. Assess the potential for material misstatement due to fraud
> Which of the following matters relating to an entity’s operations would an auditor most likely consider as an inherent risk factor in planning an audit? a. The entity’s fiscal year ends on June 30. b. The entity enters into significant derivative transac
> Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? a. Inherent. b. Control. c. Detection. d. Sampling.
> An auditor’s analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by a. An error in recording amortization of the excess of the investor’s cost over the investment’s
> What are the primary reasons for conducting an evaluation of an audit client’s internal control?
> A primary objective of analytical procedures used in the final review stage of an audit is to a. Identify account balances that represent specific risks relevant to the audit. b. Gather evidence from tests of details to corroborate financial statement as
> Auditors perform analytical procedures in the planning stage of an audit for the purpose of a. Deciding the matters to cover in an engagement letter. b. Identifying unusual conditions that deserve more auditing effort. c. Determining which of the financi
> Which of the following statements best describes auditors’ responsibility for detecting a client’s noncompliance with a law or regulation? a. The responsibility for detecting noncompliance exactly parallels the responsibility for errors and fraud. b. Aud
> When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to a. Recommend remedial actions to the audit commit
> An audit committee is a. Composed of internal auditors. b. Composed of members of the audit team. c. Composed of members of a company’s board of directors who are not involved in the day-to-day operations of the company. d. A committee composed of person
> Martin is considering submitting a proposal to conduct the audit examination of Phillip Inc., a manufacturer and distributor of automotive parts to the large automobile manufacturers. Martin learned of this client opportunity through one of its staff acc
> When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following? a. Key factors that are consistent with prior periods. b. Assumptions that are similar to industry guidelines. c.
