‘If management review useful lives annually, impairment reviews will rarely be necessary.’ Give your views on this statement. What audit procedures should you carry out to see if an impairment review is necessary?
> Gino’s Restaurant is a popular restaurant in Boston, Massachusetts. The owner of the restaurant has been trying to better understand costs at the restaurant and has hired a student intern to conduct an activity-based costing study. The
> Mitchell Corporation manufactures a variety of products in a single facility. Consultants hired by the company to do an activity-based costing analysis have identified the following activities carried out in the company on a routine basis: a. Milling mac
> Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. It annually produces 60,000 units of EX300 and 12,500 units of TX500. The company’s conventional cost system all
> Refer to the information pertaining to Endless Mountain Company that is provided in Integration Exercise 11. In addition to the budget schedules that you prepared in Integration Exercise 11, insert a new tab in your Microsoft Excel worksheet titled &acir
> Refer to the information pertaining to Endless Mountain Company that is provided in Integration Exercise 11. Required: 1. Assume that the company expects to collect all of its credit sales in the quarter of sale rather than the original assumption that i
> Refer to the information pertaining to Endless Mountain Company that is provided in Integration Exercise 11. In addition to the budget schedules that you prepared in Integration Exercise 11, insert two new tabs in your Microsoft Excel worksheet titled &a
> Pacifica Industrial Products Corporation makes two products, Product H and Product L. Product H is expected to sell 40,000 units next year and Product L is expected to sell 8,000 units. A unit of either product requires 0.4 direct labor-hours. The compan
> Refer to the data for Carmono Company in Exercise 13–6. Required: Using the direct method, convert the company’s income statement to a cash basis.
> Northwest Hospital is a full-service hospital that provides everything from major surgery and emergency room care to outpatient clinics. Required: For each cost incurred at Northwest Hospital, indicate whether it would most likely be a direct cost or an
> Refer to the data for Pavolik Company in Exercise 13–4. Required: Use the direct method to convert the company’s income statement to a cash basis. Data from Exercise 13-4:
> Discuss some of the major reasons why companies prepare budgets.
> Sultan Company uses an activity-based costing system. At the beginning of the year, the company made the following estimates of cost and activity for its five activity cost pools: Required: 1. Compute the activity rate for each of the activity cost pools
> Refer to the data in Exercise 14–2 for Weller Corporation. Required: Compute the following financial data for this year: 1. Earnings per share. 2. Price-earnings ratio. 3. Dividend payout ratio. 4. Dividend yield ratio. 5. Book value pe
> Refer to the data in Exercise 14–2 for Weller Corporation. Required: Compute the following financial data for this year: 1. Gross margin percentage. 2. Net profit margin percentage. 3. Return on total assets. 4. Return on equity. Data
> Refer to the data in Exercise 14–2 for Weller Corporation. Required: Compute the following financial ratios for this year: 1. Times interest earned ratio. 2. Debt-to-equity ratio. 3. Equity multiplier. Data from Exercise 14-2: Comparat
> Refer to the data in Exercise 14–2 for Weller Corporation. Required: Compute the following financial data for this year: 1. Accounts receivable turnover. (Assume that all sales are on account.) 2. Average collection period. 3. Inventory
> The company actually washed 8,800 cars in August. Required: Using Exhibit 9–5 as your guide, prepare the company’s flexible budget for August. Data from Exhibit 9-5:
> Refer to the data in Exercise 9–13. Assume that instead of producing 4,000 units during the month, the company produced only 3,000 units, using 14,750 pounds of material. (The rest of the material purchased remained in raw materials inv
> The auto repair shop of Quality Motor Company uses standards to control the labor time and labor cost in the shop. The standard labor cost for a motor tune-up is given below: The record showing the time spent in the shop last week on motor tune-ups has b
> Refer to the data in Exercise 7–14 for Chuck Wagon Grills. Assume in this exercise that the company uses absorption costing. Required: 1. Compute the unit product cost for one barbecue grill. 2. Prepare an income statement for last year
> Kunkel Company makes two products and uses a conventional costing system in which a single plantwide predetermined overhead rate is computed based on direct labor-hours. Data for the two products for the upcoming year follow: These products are customize
> What is a perpetual budget?
> Various activities at Companhia de Textils, S.A., a manufacturing company located in Brazil, are listed below. The company makes a variety of products in its plant outside São Paulo. a. Preventive maintenance is performed on general-purpose production eq
> Larner Corporation is a diversified manufacturer of industrial goods. The company’s activity-based costing system contains the following six activity cost pools and activity rates: Cost and activity data have been supplied for the follo
> Rustafson Corporation is a diversified manufacturer of consumer goods. The company’s activity-based costing system has the following seven activity cost pools: Required: 1. Compute the activity rate for each activity cost pool. 2. Compu
> The following activities occur at Greenwich Corporation, a company that manufactures a variety of products: a. Various individuals manage the parts inventories. b. A clerk in the factory issues purchase orders for a job. c. The personnel department train
> Rusties Company recently implemented an activity-based costing system. At the beginning of the year, management made the following estimates of cost and activity in the company’s five activity cost pools: Required: 1. Compute the activi
> Rocky Mountain Corporation makes two types of hiking boots—Xactive and Pathbreaker. Data concerning these two product lines appear below: The company has a conventional costing system in which manufacturing overhead is applied to units
> Med Max buys surgical supplies from a variety of manufacturers and then resells and delivers these supplies to dozens of hospitals. In the face of declining profits, Med Max decided to implement an activity-based costing system to improve its understandi
> Performance Products Corporation makes two products, titanium Rims and Posts. Data regarding the two products follow: Additional information about the company follows: a. Rims require $17 in direct materials per unit, and Posts require $10. b. The direct
> Kubin Company’s relevant range of production is 18,000 to 22,000 units. When it produces and sells 20,000 units, its average costs per unit are as follows: Required: 1. Assume the cost object is units of production: a. What is the total
> Cherokee Inc. is a merchandiser that provided the following information: Required: 1. Prepare a traditional income statement. 2. Prepare a contribution format income statement.
> What are the four hierarchical levels of activity discussed in the chapter?
> You are auditing a manufacturing company and have drafted a management letter that contains reference to matters to increase the efficiency of company systems and the general profitability of the company. Your audit assistant has asked you if this is app
> You are auditing a company engaged in the development and sale of games software over the internet. You are satisfied that the software is of high quality and are now directing your attention to the controls over the sale of their products. You have conf
> Give some examples of qualitative characteristics an auditor might take into account when deciding if a particular item in the financial statements is materially misstated.
> In this chapter we noted that Roberts and Dwyer (1998) appear to suggest that auditors should disclose the level of materiality they have used when conducting the audit. Given that this is now a requirement for companies that are required to follow the U
> In Appendix 11.2 on the Cengage companion website we suggest steps that could be included in the audit programme for accommodation income of The County Hotel Ltd received in cash. Reread this appendix and now suggest steps that should be included in the
> Two questions are placed within the text (10.5) Case study 10.3 Troston plc; (10.6) Case study 10.4 Burbage Limited: General and application controls in a sales system.
> This question is taken from a past paper of the Final Admitting Examination of CAI. Only the dates have been changed. You are undertaking the fieldwork for the audit of the financial statements of CAREFREE Limited for the year ended 31 December 2020. CA
> Munro Limited is a small company with two divisions. One division trades in specialized equipment for walkers and mountaineers, and the other sells artists’ materials. The company has acquired rights of access to a rocky area near a major city, where it
> In this chapter we referred to the term non-sampling risk. Outline what you believe the term means and give some examples of what you consider to be a non-sampling risk.
> It is early December 2020, and you approach the Chief Financial Officer of Pitscottie Limited, a trading company, to ask him to send the 31 December year-end inventory count instructions for review. He informs you that the directors wish to rely on inven
> You ask your audit assistant to carry out a review of after-date receipts from credit customers. Explain to them the reason for such a review and show how it should be performed. What kind of conclusion might they be able to form after carrying out such
> To what extent are the determinants and characteristics of audit quality similar to those of the audit expectations gap?
> You have completed the audit of Magnolia Ltd for the year ended 31 December 2018. The financial statements show turnover of £10 000 000 – down 10 per cent on the prior year – and losses of £75 000. The company has net assets of £1 000 000 (2017: £1 100 0
> The characteristics of suitable criteria are: relevance, completeness, reliability, neutrality and understandability. Explain what these characteristics mean, illustrating your answer by reference to KPIs in an hotel. You may refer to Case Study 6.4 (Cou
> Your audit assistant on the Greenburn Ltd assignment has asked you where the following working schedules should be filed: a. Summary of the details of a construction contract for the supply of goods to a customer. b. Letter to the company from the compa
> Explain why it is so important for auditors to identify the points at which management is making judgemental decisions about accounting matters. Give examples.
> In previous chapters we discussed the significance of risk facing auditors in the process of forming audit conclusions. Explain how auditors address risk at the prefinal stage of the audit process.
> 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.
> 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 te
