Question: State one test of control and one

> In Part I of the case, you performed preliminary analytical procedures for Pinnacle. The purpose of Part II is to identify factors influencing risks and the relationship of risks to audit evidence. During the planning phase of the audit, you met with Pin

> Explain how prenumbered shipping documents and sales invoices can be useful controls for preventing misstatements in sales.

> The division of the following duties is meant to provide the best possible controls for the Meridian Paint Company, a small wholesale store: †1. Approve credit for customers included in the customer credit master file. †2. Input shipping and billing info

> The following questions deal with audit risk and evidence. Choose the best response. a. As the acceptable level of detection risk decreases, an auditor may (1) Reduce substantive testing by relying on the assessments of inherent risk and control risk. (

> Whitehead, CPA, is planning the audit of a newly obtained client, Henderson Energy Corporation, for the year ended December 31, 2011. Henderson Energy is regulated by the state utility commission and because it is a publicly traded company the audited fi

> Using the audit risk model, state the effect on control risk, inherent risk, acceptable audit risk, and planned evidence for each of the following independent events. In each of the events a to j, circle one letter for each of the three independent varia

> Distinguish the auditor's responsibility for testing controls in an integrated audit of a public company from the responsibility to test controls in an audit of a nonpublic company.

> Below are ten independent risk factors: 1. The client lacks sufficient working capital to continue operations. 2. The client fails to detect employee theft of inventory from the warehouse because there are no restrictions on warehouse access and the clie

> The following are independent internal controls commonly found in the acquisition and payment cycle. Each control is to be considered independently. 1. At the end of each month, an accounting clerk accounts for all prenumbered receiving reports (document

> Explain why auditors usually emphasize the detection of fraud in the audit of cash receipts. Is this consistent or inconsistent with the auditor's responsibility in the audit? Explain.

> What is the purpose of risk assessment procedures and how do they differ from the four other types of audit tests?

> Following are six situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit of inventory. Required a. Explain what low, medium, and high mean for each of the four risks and planned evidence. b. Fill

> Distinguish between a test of control and a substantive test of transactions. Give two examples of each.

> You are evaluating audit results for current assets in the audit of Quicky Plumbing Co. You set the preliminary judgment about materiality for current assets at $15,000 for overstatements and at $22,500 for understatements. The preliminary and actual est

> What is the purpose of using nonstatistical sampling for tests of controls and substantive tests of transactions?

> Although the planning went well, the actual testing yielded some surprises. When conducting tests of controls over acquisitions and additions to the perpetual inventory, the staff person performing the tests found that the exception rates for several key

> The following are the eight balance-related audit objectives, six tests of details of balances for accounts receivable, and seven tests of controls or substantive tests of transactions for the sales and collection cycle: Balance-Related Audit Objective D

> What is the purpose of tests of controls? Identify specific accounts on the financial statements that are affected by performing tests of controls for the acquisition and payment cycle.

> The following are audit procedures in the sales and collection cycle: 1. Add the columns on the aged trial balance and compare the total with the general ledger. 2. Examine a sample of shipping documents to determine whether each has a sales invoice numb

> Evaluate the following statement: "In many audits in which accounts receivable is material, the requirement of confirming customer balances is a waste of time and would not be performed by competent auditors if it were not required by auditing standards.

> The following misstatements are sometimes found in the sales and collection cycle's account balances: 1. The accounts receivable trial balance total does not equal the amount in the general ledger. 2. Several accounts receivable in the accounts receivabl

> Describe what is meant by a sampling unit. Explain why the sampling unit for verifying the occurrence of recorded sales differs from the sampling unit for testing for the possibility of omitted sales.

> The following are audit procedures from different transaction cycles: 1. Use audit software to foot and cross-foot the cash disbursements journal and trace the balance to the general ledger. 2. Select a sample of entries in the acquisitions journal and t

> Distinguish between accuracy tests of gross accounts receivable and tests of the realizable value of receivables.

> State the purpose of footing the total column in the client's accounts receivable trial balance, tracing individual customer names and amounts to the accounts receivable master file, and tracing the total to the general ledger. Is it necessary to trace e

> The following are common audit procedures for tests of sales and cash receipts: 1. Compare the quantity and description of items on duplicate sales invoices with related shipping documents. 2. Trace recorded cash receipts in the accounts receivable maste

> What is meant by using bases for setting a preliminary judgment about materiality? How will those bases differ for the audit of a manufacturing company and a government unit such as a school district?

> The following questions concern audit risk. Choose the best response. a. Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defi

> Explain why inherent risk is set for segments rather than for the overall audit. What is the effect on the amount of evidence the auditor must accumulate when inherent risk is increased from medium to high for a segment?

> Distinguish between a positive and a negative confirmation and state the circumstances in which each should be used. Why do CPA firms sometimes use a combination of positive and negative confirmations on the same audit?

> Explain the causes of an increased or decreased planned detection risk.

> The following sales procedures were encountered during the annual audit of Marvel Wholesale Distributing Company: Customer orders are received by the sales order department. A clerk computes the approximate dollar amount of the order and sends it to the

> Distinguish between substantive tests of transactions and tests of details of balances. Give one example of each for the acquisition and payment cycle.

> What is the relationship of each of the following to the sales and collection cycle: flowcharts, assessing control risk, tests of controls, and tests of details of balances?

> Auditors develop overall audit plans to ensure that they obtain sufficient appropriate audit evidence. The timing and extent of audit procedures auditors use is a matter of professional judgment, which depends upon a number of factors. Decisions about th

> The following are selected transaction-related audit objectives and audit procedures for sales transactions: Transaction-Related Audit Objectives 1. Recorded sales exist. 2. Existing sales are recorded. 3. Sales transactions are correctly included in the

> The following are commonly performed tests of controls and substantive tests of transactions audit procedures in the sales and collection cycle: 1. Account for a sequence of shipping documents and examine each one to make sure that a duplicate sales invo

> The following questions concern audit objectives and management assertions for accounts receivable. Choose the best response. a. When evaluating the adequacy of the allowance for uncollectible accounts, an auditor reviews the entity's aging of receivable

> Items 1 through 9 are selected questions of the type generally found in internal control questionnaires used by auditors to obtain an understanding of internal control in the sales and collection cycle. In using the questionnaire for a client, a "yes" re

> When performing an integrated audit of a public company, what are the auditors responsibilities related to internal control as required by PCAOB standards?

> The following questions deal with audit evidence for the sales and collection cycle. Choose the best response. a. An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts recei

> Management must identify the framework used to evaluate the effectiveness of internal control over financial reporting. What framework is used by most U.S. public companies?

> Describe how the nature of evidence used to evaluate the control environment differs from the nature of evidence used to evaluate control activities.

> The following questions deal with materiality. Choose the best response. a. Which one of the following statements is correct concerning the concept of materiality? (1) Materiality is determined by reference to guidelines established by the AICPA. (2) Ma

> The following are audit procedures from different transaction cycles: 1. Examine duplicate copy of shipping documents for evidence that quantities were verified before shipment. 2. Select a sample of payroll checks and agree hours to employee time record

> In evaluating the audit approach for McClain for the current year's audit, Sessions believed that a substantive approach was really only appropriate for the audits of small nonpublic companies. In his judgment, McClain Plastics, with sales of $200 millio

> For each of the following types of misstatements (parts a through d), select the control that should have prevented the misstatement: a. A manufacturing company received a substantial sales return in the last month of the year, but the credit memorandum

> The following questions deal with internal controls in the sales and collection cycle. Choose the best response. a. The accounting system will not post a sales transaction to the sales journal without a valid bill of lading number. This control is most r

> Diane Smith, CPA, performed tests of controls and substantive tests of transactions for sales for the month of March in an audit of the financial statements for the year ended December 31, 2011. Based on the excellent results of both the tests of control

> Under what circumstances is it acceptable to perform tests of controls and substantive tests of transactions for sales and cash receipts at an interim date?

> Distinguish between a sampling error and a nonsampling error. How can each be reduced?

> Define what is meant by alternative procedures in the confirmation of accounts receivable and explain their purpose. Which alternative procedures are the most reliable? Why?

> What three types of authorizations are commonly used as internal controls for sales? For each authorization, state a substantive test that the auditor could use to verify whether the control was effective in preventing misstatements.

> Define what is meant by inherent risk. Identify four factors that make for high inherent risk in audits.

> How will the conduct of an audit of a medium-sized company be affected by the company's being a small part of a large conglomerate as compared with it being a separate entity?

> What are the five types of tests auditors use to determine whether financial statements are fairly stated? Identify which tests are performed to reduce control risk and which tests are performed to reduce planned detection risk. Also, identify which test

> The following questions deal with confirmation of accounts receivable. Choose the best response. a. The negative form of accounts receivable confirmation request is useful except when (1) Internal control surrounding accounts receivable is considered to

> State the relationship between the confirmation of accounts receivable and the results of the tests of controls and substantive tests of transactions.

> Evaluate the following statement: "Tests of sales and cash receipts transactions are such an essential part of every audit that I like to perform them as near the end of the audit as possible. By that time I have a fairly good understanding of the client

> The following are 11 audit procedures taken from an audit program: 1. Foot the accounts payable trial balance and compare the total with the general ledger. 2. Confirm accounts payable balances directly with vendors. 3. Account for a sequence of checks i

> Explain the circumstances when the auditor should revise the components of the audit risk model and the effect of the revisions on planned detection risk and planned evidence.

> The following questions deal with tests of controls. Choose the best response. a. Which of the following statements about tests of controls is most accurate? (1) Auditing procedures cannot concurrently provide both evidence of the effectiveness of intern

> Explain the importance of proper credit approval for sales. What effect do adequate controls in the credit function have on the auditor's evidence accumulation?

> Define the meaning of the term materiality as it is used in accounting and auditing. What is the relationship between materiality and the phrase obtain reasonable assurance used in the auditor's report?

> The following questions concern types of audit tests. Choose the best response. a. The auditor looks for an indication on duplicate sales invoices to see whether the accuracy of invoices has been verified. This is an example of (1) A test of details of b

> Explain what is meant by block sample selection and describe how an auditor can obtain five blocks of 20 sales invoices from a sales journal.

> Explain how the calculation and comparison to previous years of the gross margin percentage and the ratio of accounts receivable to sales are related to the confirmation of accounts receivable and other tests of the accuracy of accounts receivable.

> Describe the four phases performed by the auditor when obtaining an understanding of internal control and assessing control risk.

> Why do auditors often consider it desirable to perform audit tests throughout the year rather than wait until year-end? List several examples of evidence that can be accumulated before year-end

> List the eight balance-related audit objectives in the verification of the ending balance in inventory and provide one useful audit procedure for each of the objectives.

> Explain the relationship of tolerable misstatement, inherent risk, and control risk to planned tests of details of balances.

> What audit procedures are most likely to be used to verify accounts receivable written off as uncollectible? State the purpose of each of these procedures.

> You have been assigned to the confirmation of aged accounts receivable for the Blank Paper Company audit. You have tested the aged trial balance and selected the accounts for confirming. Before the confirmation requests are mailed, the controller asks to

> State three types of differences that might be observed in the confirmation of accounts receivable that do not constitute misstatements. For each, state an audit procedure that will verify the difference.

> List the most important duties that should be segregated in the sales and collection cycle. Explain why it is desirable that each duty be segregated.

> The auditor's risk assessment procedures identified several risks that the auditor deems to be significant risks. Several internal controls exist that are designed to mitigate the risks identified. Describe the auditor's responsibilities for considering

> Assume a company with the following balance sheet accounts: You are concerned only about overstatements of owner's equity. Set tolerable misstatement for the three relevant accounts such that the preliminary judgment about materiality does not exceed $5,

> Why is it desirable to design tests of details of balances before performing tests of controls and substantive tests of transactions? State the assumptions that the auditor must make in doing so. What does the auditor do if the assumptions are wrong?

> State the three categories of factors that affect acceptable audit risk and list the factors that the auditor can use to indicate the degree to which each category exists.

> State the four-step approach to designing tests of controls and substantive tests of transactions.

> List several audit procedures that the auditor can use to determine whether all cash received was recorded.

> In Part V of the Pinnacle Manufacturing case, you prepared a performance format audit program. In Part VI, sample sizes will be determined by using nonstatistical or attributes sampling, and the results of the tests will be evaluated. You should use nons

> Explain what is meant by lapping and discuss how the auditor can uncover it. Under what circumstances should the auditor make a special effort to uncover lapping?

> Section 404(a) of the Sarbanes-Oxley Act requires management of a public company to issue a report on internal control over financial reporting (ICOFR) as of the end of the company's fiscal year. Many companies have reported that their ICOFR was operatin

> The Albring Company sells electronics equipment, and has grown rapidly in the last year by adding new customers. The audit partner has asked you to evaluate the allowance for doubtful accounts at December 31, 2011. Comparative information on sales and ac

> Lew Pherson and Vera Collier are friends who are employed by different CPA firms. One day during lunch they are discussing the importance of internal control in determining the amount of audit evidence required for an engagement. Pherson expresses the vi

> The following are misstatements that have occurred in Fresh Foods Grocery Store, a retail and wholesale grocery company: 1. The incorrect price was used on sales invoices for billing shipments to customers because the wrong price was entered into the com

> List the transaction-related audit objectives for the audit of sales transactions. For each objective, state one internal control that the client can use to reduce the likelihood of misstatements.

> Rank the following types of tests from most costly to least costly: analytical procedures, tests of details of balances, risk assessment procedures, tests of controls and substantive tests of transactions.

> In Figure13-3, explain the difference among C3, C2, and C1. Explain the circumstances under which it will be a good decision to obtain audit assurance from substantive tests at point C1. Do the same for points C2 and C3. Figure 13-3 Audit Assurance from

> Each of the following internal controls has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in the payroll and personnel cycle. 1. Approval of department head or foreman on time cards is required be

> The following questions deal with assessing control risk in a financial statement audit. Choose the best response. a. The auditor's tests of controls revealed that required approvals of cash disbursements were absent for a large number of sample transact

> The following questions deal with deficiencies in internal control. Choose the best response. a. Which of the following is an example of an operation deficiency in internal control? (1) The company does not have a code of conduct for employees to conside

> What is a walkthrough of internal control? What is its purpose?

> The auditor of Ferguson's Inc. identified two internal controls in the sales and collection cycle for testing. In the first control, the computer verifies that a planned sale on account will not exceed the customer's credit limit entered in the accounts

> List the transaction-related audit objectives for the verification of cash receipts. For each objective, state one internal control that the client can use to reduce the likelihood of misstatements.

> Dodge, CPA, is auditing the financial statements of a manufacturing company with a significant amount of trade accounts receivable. Dodge is satisfied that the accounts are correctly summarized and classified and that allocations, reclassifications, and

> Describe the concept of an integrated audit of the financial statements and internal control required by PCAOB standards.

> Distinguish between the sales journal and the accounts receivable master file. What type of information is recorded in each and how do these accounting records relate?

> Explain the effect of extensive misstatements found in the prior year's audit on inherent risk, planned detection risk, and planned audit evidence.