For which expense accounts should the auditors obtain or prepare analyses to be used in preparation of the client’s income tax returns?
> Which types of deficiencies must be communicated to the audit committee?
> If an adverse internal control report is issued by the auditors, may an unqualified report be issued on the financial statements?
> What type of report on internal control is likely to be issued when management imposes a scope limitation?
> The auditors have completed an examination of internal control and are preparing to issue a report. Does the opinion paragraph on the client’s internal control conclude on internal control or management’s assessment of internal control?
> Provide three examples of findings by the auditors that are at least significant deficiencies and strong indicators of the existence of a material weakness in internal control.
> Distinguish between entity-level controls and controls designed to achieve specific control objectives.
> Provide an example of a situation in which the performance of tests of controls for the internal control audit might affect the performance of substantive procedures in a financial statement audit.
> The mean of the audited values in a sample is $20. The accounts in that sample have a mean book value of $21, and the entire population of 10,000 accounts has an average book value of $19. Using mean-per-unit sampling, calculate the estimated total audit
> Provide an example of a situation in which the performance of substantive procedures for the financial statement audit might affect the internal control audit.
> Identify management’s four overall responsibilities with respect to internal control over financial reporting that arise due to the Securities and Exchange Commission’s implementation of the Sarbanes-Oxley Act of 2002.
> What requirements exist when the auditors use the work of client personnel as a part of the evidence obtained for an audit of internal control? In which areas of the audit would one expect this to be most likely to occur?
> Comment on the following: “All controls should be tested either prior to or on the ‘as of’ date.”
> Comment on the following: “Inquiry alone does not provide sufficient evidence to support the operating effectiveness of a control.”
> Provide an example of a situation in which the design of controls may be effective but those controls do not operate effectively.
> Comment on the following: “Auditors must decide, based on cost considerations, whether to test the design effectiveness or operating effectiveness of controls.”
> A client operates out of 25 locations. Must the CPA perform tests related to internal control at each of these locations?
> When performing an integrated audit, auditors should identify significant accounts and disclosures. What makes an account significant? What factors should be considered in deciding whether an account is significant?
> When performing an audit of internal control over financial reporting, auditors may distinguish among the following types of transactions: routine, nonroutine, and accounting estimates. Distinguish between these three types of transactions and give an ex
> When using statistical sampling to evaluate results using mean-per-unit sampling, may one conclude at the tested risk levels that an account is not materially misstated whenever the projected misstatement is less than the tolerable misstatement?
> Auditors often perform walk-throughs in integrated audits. Describe the evidence that is typically provided by a walk-through.
> While performing a walk-through, auditors ordinarily make certain inquiries of employees. Provide three examples of such inquiries.
> Section 404 of the Sarbanes-Oxley Act of 2002 includes two sections. Describe those sections.
> Wade Corporation has been your audit client for several years. At the beginning of the current year, the company changed its method of inventory valuation from average cost to last-in, first-out (LIFO). The change, which had been under consideration for
> Explain three situations in which the wording of a report with an unmodified opinion might depart from the auditors’ standard report.
> When the current auditors make reference to the work of the component auditors, does this result in expression of a qualified opinion? Explain.
> Howard Green, a partner with Cary, Loeb, & Co., and his audit team have completed the audit of Baker Manufacturing. Determine the proper date of the audit report. ∙ December 31, 20X0: Baker’s year-end. ∙ February 15, 20X1: Green completed audit procedure
> Provide a list of the types of nonpublic company unmodified and modified audit opinions.
> Comment on whether you agree with the following and why: GAAP and GAAS represent two frequently used financial reporting frameworks.
> To which individuals and/or organizations is a public company audit report ordinarily addressed?
> Comment on the following: When using mean-per-unit sampling, increases in the tolerable misstatement result in an increased required sample size.
> Describe the reports containing audited financial statements that are customarily filed by a company subject to the reporting requirements of the SEC.
> What is the function of notes to financial statements?
> Assume that CPAs are attesting to comparative financial statements. Can the CPAs change their report on the prior year’s statements?
> Assume that CPAs are attesting to comparative financial statements. Can the CPAs express differing opinions on the sets of financial statements of two successive years?
> Comment on whether you agree with the following: In a nonpublic company audit report, the term “basis for modified opinion” paragraph is the same as the term “basis for qualified opinion” paragraph.
> Why are adverse opinions rare?
> The auditors know that the client’s accounting for deferred income taxes is not in accordance with generally accepted accounting principles, but because of a very significant scope limitation, they have not been able to determine the amount of the missta
> Describe the alterations from the standard report of a nonpublic company when a scope limitation has occurred and the auditors have issued a qualified opinion.
> Can the client change a set of financial statements to receive an unmodified opinion instead of an opinion qualified as to the adequacy of disclosure? Explain.
> What factors determine whether a misstatement is considered pervasive?
> Explain how the auditors may obtain an estimate of a population’s standard deviation to determine an appropriate sample size.
> Describe the difference between sampling risk and nonsampling risk.
> Comment on the following: “If the financial statements contain an immaterial departure from generally accepted accounting principles, the auditors issue a qualified opinion; if the financial statements contain a material departure from GAAP, the auditors
> What are the two circumstances that result in modified opinions?
> Comment on whether you agree with the following, and why: An audit report on comparative financial statements ordinarily compares current-year financial statements of two or mor companies with one another.
> What division of duties among independent departments is desirable to achieve maximum internal control over payroll?
> Describe how the auditors use analytical procedures in the examination of selling, general, and administrative expenses.
> What auditing procedure can you suggest for determining the reasonableness of selling, general, and administrative expenses?
> When you are first retained to audit the financial statements of Wabash Company, you inquire whether a budget is used to control costs and expenses. The controller, James Lowe, replies that he personally prepares such a budget each year but that he regar
> Identify three expense accounts that are verified during the audit of balance sheet accounts; also, identify the related balance sheet accounts.
> Identify three items often misclassified as miscellaneous revenue.
> In performing a substantive test of the book value of a population, auditors must be concerned with two aspects of sampling risk. What are these two aspects of sampling risk, and which aspect is of greater importance to auditors? Explain.
> Does incorrect required supplemental information included with audited financial statements result in a qualified or adverse audit opinion? Explain.
> When the auditors have audited the financial statements, what is their responsibility with respect to other information (not including required supplemental information) included in an annual report to shareholders?
> Describe a disclosure checklist. What is its purpose?
> Describe the manner in which the auditors evaluate their audit findings.
> What are subsequent events?
> What are general risk contingencies? Do such items require disclosure in the financial statements?
> What is the meaning of the term commitment? Give examples. Do commitments appear in financial statements? Explain.
> How are analytical procedures used in the verification of revenue?
> If the federal income tax returns for prior years have not as yet been reviewed by federal tax authorities, would you consider it necessary for the client to disclose this situation in a note to the financial statements? Explain.
> Explain how a loss contingency exists with respect to an unasserted claim. Should unasserted claims be disclosed in the financial statements?
> Describe what is meant by a sequential sampling plan.
> What is the usual procedure followed by the CPA in obtaining evidence regarding pending and threatened litigation against the client?
> What are loss contingencies? How are such items presented in the financial statements? Explain.
> List the audit procedures that should be completed near the date of the audit report.
> What is the purpose of analytical procedures performed as a part of the overall review?
> Should the auditors make a complete review of all correspondence in the client’s files? Explain.
> What specific procedures are suggested by the phrase “test of controls over payroll transactions”?
> You are asked by a client to outline the procedures you would recommend for handling of unclaimed wages. What procedures do you recommend?
> What safeguards should be employed when the inaccessibility of banking facilities makes it desirable to pay employees in cash?
> Identify three revenue accounts that are verified during the audit of balance sheet accounts; also, identify the related balance sheet accounts.
> Audit procedures for examination of accounts receivable and notes receivable often include investigation of selected transactions occurring after the balance sheet date as well as transactions occurring during the year under audit. Are the auditors conce
> What would be the difference between an attributes sampling plan and a variables sampling plan in a test of inventory extensions?
> In addition to verifying the recorded liabilities of a company, the auditors should also give consideration to the possibility that other unrecorded liabilities exist. What specific steps may be taken by the auditors to determine that all their client’s
> What is the principal reason for testing the reasonableness of the Interest Expense account in conjunction with the verification of notes payable?
> Is the confirmation of notes payable usually correlated with any other specific phase of the audit? Explain.
> Palmer Company has issued a number of notes payable during the year, and several of these notes are outstanding at the balance sheet date. What sources of information should the auditors use in preparing a working paper analysis of the notes payable?
> What information should be requested by the auditors from the trustee responsible for an issue of debentures payable?
> Most corporations with bonds payable outstanding utilize the services of a trustee. What relation, if any, does this practice have to the maintenance of adequate internal control?
> What errors are commonly encountered by the auditors in their examination of the capital and drawing accounts of a sole proprietor?
> Delta Company has issued stock options to four of its officers, permitting them to purchase 5,000 shares each of common stock at a price of $25 per share at any time during the next five years. The president asks you what effect, if any, the granting of
> Comment on the desirability of audit work on the owners’ equity accounts before the balance sheet date.
> Name three situations that might place a restriction on retained earnings, limiting or preventing dividend payments. Explain how the auditors might become aware of each such restricting factor.
> What relationship exists between the expected population deviation rate and sample size?
> In auditing the financial statements of Foster Company, you observe a debit entry for $200,000 labeled as Dividends in the Retained Earnings account. Explain in detail how you would verify this entry.
> In your second annual audit of a corporate client, you find a new account in the general ledger called Treasury Stock, which has a balance of $306,000. Describe the procedures you would follow to verify this item.
> Corporations sometimes issue their own capital stock in exchange for services and various assets other than cash. As an auditor, what evidence would you look for to determine the propriety of the values used in recording such transactions?
> Long-term creditors often insist upon placing certain restrictions upon the borrowing company for the term of the loan. Give three examples of such restrictions, and indicate how each restriction protects the long-term creditor.
> Your new client, Black Angus Valley Ranch, is a small corporation with fewer than 100 stockholders. It does not utilize the services of an independent stock registrar or transfer agent. For your first audit, you want to obtain or prepare a year-end list
> You have been retained to perform an audit of Valley Products, a small corporation that has not been audited during the previous 10 years of its existence. How will your work on the Capital Stock account in this initial audit differ from that required in
> Describe the ordinary role of paper stock certificates when a direct registration system (DRS) is utilized.
> In the audit of a small corporation that issues paper stock certificates and does not utilize the services of an independent stock registrar and stock transfer agent, what use is made of the stock certificate book by the auditors?
> What is the primary responsibility of an independent registrar with respect to capital stock?
> What do you consider to be the most important control a corporation can adopt with respect to capital stock transactions?
> If a sample of 100 items indicates a deviation rate of 3 percent, should the auditors conclude that the entire population also has approximately a 3 percent deviation rate?
> Compare the auditors’ examination of owners’ equity with their work on assets and current liabilities. Among other factors to be considered are the relative amounts of time involved and the character of the transactions to be inspected.
> Two assistant auditors were assigned by the auditor-in-charge to the verification of long-term liabilities. Some time later, they reported to the auditor-in-charge that they had determined that all long-term liabilities were properly recorded and that al
> Mansfield Corporation has outstanding an issue of 30-year bonds payable. There is no sinking fund for these bonds. Under what circumstances, if any, should this bond issue be classified as a current liability?
> “Auditors are not qualified to pass on the legality of a bond issue; this is a question for the company’s attorneys. It is therefore unnecessary for the auditors to inspect the bond indenture.” Criticize the quotation.
