The Art Appreciation Society operates a museum for the benefit and enjoyment of the community. When the museum is open to the public two clerks who are positioned at the entrance collect a $5.00 admission fee from each nonmember patron. Members of the Art Appreciation Society are permitted to enter free of charge upon presentation of their membership cards. At the end of each day, one of the clerks delivers the proceeds to the treasurer. The treasurer counts the cash in the presence of the clerk and places it in a safe. Each Friday afternoon, the treasurer and one of the clerks deliver all cash held in the safe to the bank and receive an authenticated deposit slip that provides the basis for the weekly entry in the accounting records. The Art Appreciation Society board of directors has identified a need to improve its internal controls over cash admission fees. The board has determined that the cost of installing turnstiles, sales booths, or otherwise altering the physical layout of the museum will greatly exceed any benefits. However, the board has agreed that the sale of admission tickets must be an integral part of its improvement efforts. Smith has been asked by the board of directors of the Art Appreciation Society to review the internal control over cash admission fees and provide suggestions for improvements. Required a. Indicate deficiencies in the existing internal controls over cash admission fees that Smith should identify, and recommend one improvement for each of the deficiencies identified. Organize the answer as indicated in the following illustrative example.* Deficiencies 1. There is no basis for establishingthe number of paying patrons. Recommendation 1. Prenumbered admission tickets should be issued upon payment of the admission fee. b. Indicate which of the deficiencies, if any increase the likelihood of misappropriation of assets. c. Indicate which of the deficiencies, if any increase the likelihood of fraudulent financial reporting.
> What two conditions must be present for the auditor to issue an unqualified opinion on internal control over financial reporting? What type of condition will cause the auditor to issue a qualified or disclaimer of opinion on internal control over financi
> What is the difference between the auditor's approach in verifying sales returns and allowances and that for sales? Explain the reasons for the difference.
> Distinguish between the terms tolerable misstatement and preliminary judgment about materiality. How are they related to each other?
> List the types of specific control activities and provide one specific illustration of a control in the sales area for each control activity.
> The following internal controls for the acquisition and payment cycle were selected from a standard internal control questionnaire. 1. Checks are mailed by the owner or manager or a person under her supervision after signing. 2. All supporting documents
> What is the relationship among the five components of internal control?
> Explain what is meant by making an estimate of the total misstatement in a segment and in the overall financial statements. Why is it important to make these estimates? What is done with them?
> Chapter 8 introduced the eight parts of the planning phase of audits. Which part is understanding internal control and assessing control risk? What parts precede and follow that understanding and assessing control risk?
> Niosoki Auto Parts sells new parts for foreign automobiles to auto dealers. Company policy requires that a prenumbered shipping document be issued for each sale. At the time of pickup or shipment, the shipping clerk writes the date on the shipping docume
> Identify the eight accounts receivable balance-related audit objectives. For each objective, list one audit procedure.
> What two aspects of internal control must management assess when reporting on internal control to comply with Section 404 of the Sarbanes-Oxley Act?
> What is meant by the control environment? What are the factors the auditor must evaluate to understand it?
> Section 404(a) of the Sarbanes-Oxley Act requires management to issue a report on internal control over financial reporting. Identify the specific Section 404(a) reporting requirements for management.
> Describe which of the three categories of broad objectives for internal controls are considered by the auditor in an audit of both the financial statements and internal control over financial reporting.
> The following are various changes in audit circumstances. Audit Circumstance 1. Analytical procedures indicated a significant slowing in accounts receivable turnover. 2. The client entered into sales contracts with new customers that differ from the clie
> State a test of control audit procedure to test the effectiveness of the following control: Approved wage rates are used in calculating employees' earnings. State a substantive test of transactions audit procedure to determine whether approved wage rates
> Gale Brewer, CPA, has been the partner in charge of the audit of Merkle Manufacturing Company, a nonpublic company, for 13 years. Merkle has had excellent growth and profits in the past decade, primarily as a result of the excellent leadership provided b
> Distinguish between the TER and the CUER. How is each determined?
> The following are parts of a typical audit for a company with a fiscal year-end of July 31. 1. Confirm accounts payable. 2. Do tests of controls and substantive tests of transactions for the acquisition and payment and payroll and personnel cycles. 3. Do
> Auditors have not been successful in measuring the components of the audit risk model. How is it possible to use the model in a meaningful way without a precise way of measuring the risk?
> Define the audit risk model and explain each term in the model. Also describe which two factors of the model when combined reflect the risk of material misstatement.
> Kim Bryan, a new staff auditor, is confused by the inconsistency of the three audit partners she has been assigned to on her first three audit engagements. On the first engagement, she spent a considerable amount of time in the audit of cash disbursement
> Describe accounting requirements for proper recording of sales returns and allowances.
> The following are three situations, all involving nonpublic companies, in which the auditor is required to develop an audit strategy: 1. The client has inventory at approximately 50 locations in a three-state region. The inventory is difficult to count a
> Define each of the following terms: a. Acceptable risk of assessing control risk too low (ARACR) b. Computed upper exception rate (CUER) c. Estimated population exception rate (EPER) d. Sample exception rate (SER) e. Tolerable exception rate (TER)
> Following are several decisions that the auditor must make in an audit of a nonpublic company. Letters indicate alternative conclusions that could be made. Required a. Identify the sequence in which the auditor should make decisions 1 to 4. b. For the a
> A considerable portion of the tests of controls and substantive tests of transactions are performed simultaneously as a matter of audit convenience. But the substantive tests of transactions procedures and sample size, in part, depend on the results of t
> Following are evidence decisions for the three audits described in Figure 3-3 Figure 3-3 Audit A Ineffective client internal controls Audit B Very effective client internal controls Audit C Somewhat effective client internal controls Evidence Decisions 1
> Beds and Spreads, Inc. specializes in bed and bath furnishings. Its inventory system is linked through the Internet to key suppliers. The auditor identified the following internal controls in the inventory cycle: 1. The computer initiates an order only w
> Assume that Rosanne Madden, CPA, is using 5% of net income before taxes, current assets, or current liabilities as her major guidelines for evaluating materiality. What qualitative factors should she also consider in deciding whether misstatements may be
> What is meant by planned detection risk? What is the effect on the amount of evidence the auditor must accumulate when planned detection risk is increased from medium to high?
> Distinguish among tests of details of balances, tests of controls, and substantive tests of transactions for the sales and collection cycle. Explain how the tests of controls and substantive tests of transactions affect the tests of details of balances.
> For this problem use the Metaphor-Trans-All file in ACL Demo, which is a file of outstanding sales invoices (each row represents an invoice transaction). The suggested command or other source of information needed to solve the problem requirement is incl
> BestSellers.com sells fiction and nonfiction books to customers through the company's Web site. Customers place orders for books via the Web site by providing their name, address, credit card number, and expiration date. What internal controls could Best
> You are auditing the sales and collection cycle for the Smalltown Regional Hospital, a small not-for-profit hospital. The hospital has a reputation for excellent medical services and deficient record keeping. The medical people have a tradition of doing
> In the confirmation of accounts receivable for the Reliable Service Company, 85 positive and no negative confirmations were mailed to customers. This represents 35% of the dollar balance of the total accounts receivable. Second requests were sent for all
> Frank James, a highly competent employee of Brinkwater Sales Corporation, had been responsible for accounting-related matters for two decades. His devotion to the firm and his duties had always been exceptional, and over the years, he had been given incr
> For each of the following, give an example of a physical control the client can use to protect the asset or record: 1. Petty cash 2. Cash received by retail clerks 3. Accounts receivable records 4. Raw material inventory 5. Perishable tools 6. Manufac
> State what is meant by a representative sample and explain its importance in sampling audit populations.
> Explain why the analysis of differences is important in the confirmation of accounts receivable, even if the misstatements in the sample are not material.
> Explain why you agree or disagree with the following statement: "In most audits, it is more important to test carefully the cutoff for sales than for cash receipts." Describe how you perform each type of test, assuming documents are prenumbered.
> Distinguish a significant deficiency in internal control from a material weakness in internal control. How will the presence of one significant deficiency affect an auditor's report on internal control under PCAOB standards? How will the presence of one
> The separation of operational responsibility from record keeping is meant to prevent different types of misstatements than the separation of the custody of assets from accounting. Explain the difference in the purposes of these two types of separation of
> The Securities and Exchange Commission (SEC) found that Bally Total Fitness Holding Corporation, a nationwide commercial operator of fitness centers, fraudulently accounted for three types of revenues it received from members. The SEC also charged the au
> The engagement partner agreed with Sessions’ recommended approach. In planning the audit evidence for detailed inventory tests, the audit risk model was applied with the following results: TDR = AAR/IR x CR x APR Where: TDR = test of details risk AAR = a
> Establishing materiality and allocation of materiality to individual accounts requires considerable judgment. Access Microsoft’s 2009 financial statements at www.microsoft.com (use the “investor relations” link). Required a. Assume that your firm’s mate
> Give examples of risk factors for misappropriation of assets for each of the three fraud conditions: incentives/pressures, opportunities, and attitudes/rationalization.
> Give examples of risk factors for fraudulent financial reporting for each of the three fraud conditions: incentives/pressures, opportunities, and attitudes/rationalization.
> What are the three conditions of fraud often referred to as "the fraud triangle?"
> Distinguish fraudulent financial reporting from misappropriation of assets.
> SAS No. 99 requires auditors to conduct a brainstorming session to discuss the potential for fraud and how the auditor might respond to the risk of fraud. However, the standard provides limited guidance on how this brainstorming session should take place
> Define fraudulent financial reporting and give two examples that illustrate fraudulent financial reporting.
> Identify risks for accounting systems that rely heavily on IT functions.
> Explain how client internal controls can be improved through the proper installation of IT.
> The information systems (IS) department at Jacobsons Inc. consists of eight employees, including the IS Manager, Melinda Cullen. Melinda is responsible for the day-to-day oversight of the IS function and reports to Jacobsons' chief operating officer (COO
> Each year near the balance sheet date, when the president of Bargon Construction, Inc. takes a 3-week vacation to Hawaii, she signs several checks to pay major bills during the period she is absent. Jack Morgan, head bookkeeper for the company, uses this
> The Kowal Manufacturing Company employs about 50 production workers and has the following payroll procedures. The factory foreman interviews applicants and on the basis of the interview either hires or rejects them. When applicants are hired, they prepar
> Kent, CPA, is the engagement partner on the financial statement audit of Super Computer Services Co. (SCS) for the year ended April 30, 2011. On May 6, 2011, Smith, the senior auditor assigned to the engagement, had the following conversation with Kent c
> Appliances Repair and Service Company bills all customers rather than collecting in cash when services are provided. All mail is opened by Tom Gyders, treasurer. Gyders, a CPA, is the most qualified person in the company who is in the office daily. There
> The following questions concern the auditor's responses to the possibility of fraud. a. When fraud risk factors are identified during an audit the auditor's documentation should include b. If an independent audit leading to an opinion on financial statem
> The following questions address fraud risk factors and the assessment of fraud risk. a. Because of the risk of material misstatements due to fraud (fraud risk), an audit of financial statements in accordance with generally accepted auditing standards sho
> Name the three categories of inquiry and describe the purpose of each when used by an auditor to obtain additional information about a suspected fraud.
> The following misstatements are included in the accounting records of the Joyce Manufacturing Company: 1. A shipment to a customer was not billed because of the loss of the bill of lading. 2. A sales invoice was miscalculated by $1,000 as a result of a k
> You have identified a suspected fraud involving the company's controller. What must you do in response to this discovery? How might this discovery affect your report on internal control when auditing a public company?
> Distinguish management's responsibility from the audit committee's responsibility for designing and implementing antifraud programs and controls within a company.
> The proliferation of information technology (IT) has made governance of IT an important issue for businesses of all sizes and types, as well as their auditors. The IT Governance Institute has developed a wide range of resources for organizations, auditor
> Identify three verbal and three nonverbal cues that may be observed when making inquiries of an individual who is being deceitful.
> Describe the purpose of corporate codes of conduct and identify three examples of items addressed in a typical code of conduct.
> Auditors are required to make inquiries of individuals in the company when gathering information to assess fraud risk. Identify those with whom the auditor must make inquiries.
> The following audit procedures are included in the audit program because of heightened risks of material misstatements due to fraud. 1. Use audit software to search cash disbursement master files for missing check numbers. 2. Search the accounts receivab
> What should the audit team consider in its planning discussion about fraud risks?
> What sources are used by the auditor to gather information to assess fraud risks?
> How does the use of a database management system affect risks?
> Based on a cost-benefit analysis, management at First Community Bank decided to contract with Technology Solutions, a local data center operator, to host all of the bank's financial reporting applications. To avoid the significant costs of developing and
> Parts for Wheels, Inc. has historically sold auto parts directly to consumers through its retail stores. Due to competitive pressure, Parts for Wheels installed an Internet-based sales system that allows customers to place orders through the company's We
> Your new audit client, Hardwood Lumber Company, has a computerized accounting system for all financial statement cycles. During planning, you visited with the information systems vice president and learned that personnel in information systems are assign
> Following are 10 key internal controls in the payroll cycle for Gilman Stores, Inc. Key Controls 1. To input hours worked, payroll accounting personnel input the employee's Social Security number. The system does not allow input of hours worked for inval
> Assessing the risk of fraud in a financial statement audit is a difficult audit judgment. Auditing standards require the auditor to perform several audit procedures to accumulate information to assess the risk of fraud. You are the in-charge auditor resp
> One of the firm's audit partners, Alice Goodwin, just had lunch with a good friend, Sara Hitchcock, who is president of Granger Container Corporation. Granger Container Corp. is a fast-growing company that has been in business for only a few years. Durin
> A CPA’s client, Boos & Baumkirchner, Inc., is a medium-size manufacturer of products for the leisure-time activities market (camping equipment, scuba gear, bows and arrows, and so forth). During the past year, a computer system was installed and inventor
> You are conducting an audit of sales for the James Department Store, a retail chain store with a computer-based sales system in which computer-based cash registers are integrated directly with accounts receivable, sales, perpetual inventory records, and
> During your audit of Wilcoxon Sports, Inc., a retail chain of stores, you learn that a programmer made an unauthorized change to the sales application program even though no work on that application had been approved by IT management. In order for the sa
> The following are various potential frauds in the sales and collection cycle: 1. The company engaged in channel stuffing by shipping goods to customers that had not been ordered. 2. The allowance for doubtful accounts was understated because the company
> The Meyers Pharmaceutical Company has the following system for billing and recording accounts receivable: 1. An incoming customer's purchase order is received in the order department by a clerk who prepares a prenumbered company sales order on which the
> You go through the drive-through window of a fast food restaurant and notice a sign that reads "your meal is free if we fail to give you a receipt." Why would the restaurant post this sign?
> You are doing the audit of Phelps College, a private school with approximately 2,500 students. With your firm's consultation, they have instituted an IT system that separates the responsibilities of the computer operator, systems analyst, librarian, prog
> The following are misstatements that can occur in the sales and collection cycle: 1. A customer number on a sales invoice was transposed and, as a result, charged to the wrong customer. By the time the error was found, the original customer was no longer
> The following questions concern auditing complex IT systems. Choose the best response. a. Which of the following client IT systems generally can be audited without examining or directly testing the computer programs of the system? (1) A system that perf
> The following questions concern the characteristics of IT systems. Choose the best response. a. Effective management of information technologies in an organization embraces the viewpoint that (1) Most technologies reduce existing risk conditions. (2) Te
> During audit planning, an auditor obtained the following information: 1. Management has a strong interest in employing inappropriate means to minimize reported earnings for tax-motivated reasons. 2. The company's board of directors includes a majority of
> Your client has outsourced the majority of the accounting information system to a third-party data center. What impact would that have on your audit of the financial statements?
> Describe risks that are associated with purchasing software to be installed on desktop computer hard drives. What precautions can clients take to reduce those risks?
> Explain what is meant by the test data approach. What are the major difficulties with using this approach? Define parallel simulation with audit software and provide an example of how it can be used to test a client's payroll system.
> The following are activities that occurred at Franklin Manufacturing, a nonpublic company. 1. Franklin's accountant did not record checks written in the last few days of the year until the next accounting period to avoid a negative cash balance in the fi
> Explain what is meant by auditing around the computer and describe what must be present for this approach to be effective when auditing clients who use IT to process accounting information.
> Explain the relationship between application controls and transaction-related audit objectives.
> Explain how the effectiveness of general controls affects the auditor's tests of automated application controls, including the auditor's ability to rely on tests done in prior audits.
> An audit client is in the process of creating an online Web-based sales ordering system for customers to purchase products using personal credit cards for payment. Identify three risks related to an online sales system that management should consider. Fo
> Identify the typical duties within an IT function and describe how those duties should be segregated among IT personnel.
> Distinguish between general controls and application controls and give two examples of each.
