The following questions concern contingencies, subsequent events, and communications with those charged with governance. Choose the best response. a. A client acquired 25 percent of its outstanding capital stock after year end but prior to the date of the auditor’s report. The auditor should (1) disclose the acquisition in the opinion paragraph of the auditor’s report. (2) advise management to adjust the balance sheet to reflect the acquisition. (3) issue pro forma financial statements giving effect to the acquisition as if it had occurred at year end. (4) advise management to disclose the acquisition in the notes to the financial statements. b. Which of the following statements is correct about an auditor’s required communication with those charged with governance? (1) Any matters communicated with those charged with governance are also required to be communicated to the entity’s management. (2) The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management. (3) Disagreements with management about the application of accounting principles must be communicated in writing to those charged with governance. (4) The auditor should not communicate frequently recurring misstatements unless they are material. c. In addition to making management inquiries, an auditor should perform the following procedures to identify client contingencies with the exception of (1) obtaining a client representation letter. (2) reviewing derivative transactions reflected on the quarter-end balance sheet. (3) reviewing the status of long-term leases. (4) discussing sales contracts with the sales manager.
> The following questions concern audit testing of the payroll and personnel cycle. Choose the best response. a. A common audit procedure in the audit of payroll transactions involves tracing selected items from the payroll journal to employee time records
> The following questions concern the audit of income and expense accounts. Choose the best response. a. The auditor may note that annual depreciation expense is too low for a class of assets by noting (1) insured values greatly in excess of carrying amoun
> The following questions concern the audit of asset accounts in the acquisition and payment cycle. Choose the best response. a. In testing for unrecorded disposals of equipment, an auditor most likely will (1) select items of equipment from the accounting
> The following questions concern audit objectives and management assertions for accounts receivable. Choose the best response. a. Which of the following will likely provide the most assurance concerning the accuracy balance-related objective for accounts
> The following items concern determining exception rates using random sampling from large populations using attributes sampling. Select the best response. a. The upper precision limit (CUER) in statistical sampling is (1) the percentage of items in a samp
> The following items apply to determining sample sizes using random sampling from large populations for attributes sampling. Select the most appropriate response for each question. a. If all other factors specified in a sampling plan remain constant, chan
> The following questions concern information accompanying basic financial statements. Choose the best response. a. The Form 10-K filed by management of a public company includes a section on management’s discussion and analysis (MD&A) in addition to the a
> The following questions concern communications between management, those charged with governance, and the auditor. Choose the best response. a. Which of the following is not a required item to be communicated by the auditor to the audit committee or othe
> The following questions concern reports issued by auditors, other than those on historical financial statements. Choose the best response. a. An auditor is reporting on cash basis financial statements. These statements are best referred to in the opinion
> The following questions concern attestation engagements. Choose the best response. a. A Type 1 service auditor’s report on internal controls at a service organization (1) includes an opinion about the suitability of the design of controls at the service
> The auditor will select the MUS sample from the 3,140 inventory items described in Question 17-10 using systematic sampling. Assuming a random starting point of 123,608, identify the cumulative dollar amounts associated with the first five sample items.
> The following are miscellaneous questions about compilation and review services. Choose the best response. a. Which of the following best describes the responsibility of the CPA in performing compilation services for a company? (1) The CPA has to satisfy
> The following questions deal with operational auditing. Choose the best response. a. Which of the following best describes the operational audit? (1) It concentrates on seeking aspects of operations in which waste would be reduced by the introduction of
> The following questions deal with governmental auditing. Choose the best response. a. Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the
> The following questions deal with internal auditing. Choose the best response. a. The independence of the internal audit department will most likely be assured if it reports to the (1) audit committee of the board. (2) president. (3) controller. (4) vice
> The following questions deal with tests of details of balances and substantive analytical procedures for inventory. Choose the best response. a. An auditor selected items for test counts while observing a client’s physical inventory. The auditor traced
> The following questions concern internal controls, and the testing of internal controls, in the inventory and warehousing cycle. Choose the best response. a. For control purposes, the quantities of materials ordered may be omitted from the copy of the pu
> Define the sampling interval when using MUS sampling. How is it calculated?
> What are the most significant balance sheet and income statement accounts related to the acquisition and payment cycle?
> What are the major differences in the 14 steps used in nonstatistical sampling for tests of details of balances versus the steps for tests of controls and substantive tests of transactions?
> Explain the major difference between statistical and nonstatistical sampling. Are both methods acceptable according to auditing standards?
> An auditor is determining the appropriate sample size for testing inventory valuation using MUS. The population has 3,140 inventory items valued at $19,325,000. The tolerable misstatement is $575,000 at a 10 percent ARIA. No misstatements are expected in
> Distinguish between a positive and a negative confirmation and state the circumstances in which each should be used.
> Which of the nine accounts receivable balance-related audit objectives can be partially satisfied by confirmations with customers?
> Describe two types of substantive analytical procedures often performed in the audit of the sales and collection cycle and describe how they might indicate a possible misstatement in the financial statements.
> What are the steps of the audit sampling process that differ across statistical and nonstatistical sampling approaches? In what ways do they differ?
> How does an auditor evaluate the unadjusted misstatement schedule (also called summary of possible misstatements) at the end of the audit engagement to assess whether the financial statements are fairly presented?
> Explain the purpose of a client letter of representation. What types of information are normally included in the letter?
> Distinguish the three types of service organization reports.
> Distinguish among engagements to prepare, compile, and review financial statements. What is the level of assurance for each?
> Lenter Supply Company is a medium-sized distributor of wholesale hardware supplies in the central Ohio area. It has been a client of yours for several years and has instituted excellent internal controls for sales at your recommendation. In providing con
> a. As a staff auditor, you need to develop a sampling plan and select an unbiased random sample for each of the three independent scenarios listed below. The in-charge on the audit engagement has instructed you to use the Excel RANDBETWEEN function to se
> Describe how auditors might use data visualization techniques to perform analytical procedures on disaggregate data for sales or accounts receivable. Provide a specific example.
> Auditing standards provide general guidance to auditors regarding audit sampling but do not require statistical versus nonstatistical sampling or specify which sampling method auditors should use. Search the Internet for “PCAOB Audit Sampling” or go to p
> This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found on the textbook website. You should read all of the ref
> In the confirmation of accounts receivable for the Reliable Service Company, 85 positive and no negative confirmations were mailed to customers. This represents 35 percent of the dollar balance of the total accounts receivable. Second requests were sent
> The following are various changes in audit circumstances. Audit Circumstance 1. The client began experiencing an increase in returns due to product changes that resulted in increased defects. 2. You found several pricing errors in your substantive tests
> You have been assigned to the first audit of the Chicago Company for the year ending March 31, 2019. Accounts receivable were confirmed on December 31, 2018, and at that date the receivables consisted of approximately 200 accounts with balances totaling
> This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found on the textbook website. You should read all of the ref
> Tim Flynn is the engagement manager for the audit of O’Donnell Enterprises. Tim is currently planning tests of details of balances for accounts receivable and is considering the use of electronic confirmation requests to improve response rates. The histo
> The following items were discovered during the December 31, 2019, audit of the financial statements of Westmoreland Corporation: 1. The company’s financial statements did not include an accrual for bonuses earned by senior management in
> Schroeder, CPA, has been engaged by Somerville Company to conduct agreed-upon procedures related to an investment performance schedule of the Red Cedar Investment Fund. Somerville has requested that Schroeder recalculate the rate of return on specific in
> Nilsson, CPA, is conducting the audit of Ellison Waste Management Corporation. In addition, a supplemental negative assurance report is required for a major mortgage holder. The supplemental report concerns indenture agreements to keep the client from de
> Assume that the auditor has selected 100 sales invoices from a population of 100,000 to test for an indication of internal verification of pricing and extensions. Determine the CUER at a 10 percent ARO if four exceptions are found in the sample using sta
> Carl Monson, the owner of Major Products Manufacturing Company, a small, successful, long-time audit client of your firm, has requested you to work with his company in preparing three-year forecasted information for the year ending December 31, 2020, and
> The following questions concern auditor responsibilities related to the audit of the payroll and personnel cycle. Choose the best response. a. In auditing the payroll function of a client, an auditor would least likely (1) verify proper segregation of du
> The following questions concern audit sampling. Choose the best response. a. An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods (1) eliminate the need to apply professional judgment
> The following questions concern auditor responsibilities related to the audit of accounts receivable. Choose the best response. a. The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out t
> The following questions relate to nonstatistical and monetary unit sampling. Choose the best response. a. A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the f
> The following questions concern internal controls and accumulating evidence in the acquisition and payment cycle. Choose the best answer. a. While auditing a client’s purchase transactions, an auditor selects a sample of vouchers and then compares the da
> The following questions concern engagements other than the audit of financial statements performed by accountants. Choose the best response. a. Which of the following is a prospective financial statement for general use upon which an accountant may appro
> The following questions concern internal controls and tests for property, plant, and equipment. Choose the best response. a. An audit firm performs a preliminary review of the client’s internal controls over its property, plant, and equipment cycle. Whic
> The following questions concern the audit of accounts in the capital acquisition and repayment cycle. Choose the best response. a. Which of the following audit procedures would be most relevant when examining the completeness transaction-related audit ob
> Define statistical attributes sampling. For which types of tests do auditors use attributes sampling?
> The following questions deal with operational auditing. Choose the best response. a. Which of the following best describes the operational audit? (1) It concentrates on seeking aspects of operations in which waste would be reduced by the introduction of
> The following questions concern auditing year-end cash and financial instruments. Choose the best response. a. Which of the following controls would most likely detect a kiting scheme? (1) Preparing a bank reconciliation (2) Using a lockbox system for cu
> Describe why transactions in the payroll and personnel cycle are generally more significant than payroll-related balance sheet accounts.
> The following questions deal with internal controls in the inventory and warehousing cycle and tests of details of balances for inventory. Choose the best response. a. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequ
> What is meant by the analysis of expense accounts? List four expense accounts that are commonly analyzed in audits.
> What is the most important balance-related audit objective for depreciation expense? What are the auditor’s primary concerns?
> With the rapid growth of cloud computing, many organizations are contracting with third-party service providers to process and store all kinds of data off site. In doing so, entities are now dependent on the effectiveness of controls provided by external
> With greater frequency, organizations are issuing sustainability reports that describe how they engage in socially responsible activities. Many believe that users will increasingly want assurances from CPAs about the reliability of the information presen
> Jennifer Nantale is a new staff auditor on the audit engagement of Greenville Light & Sound, which is a publicly traded company with a calendar year end. The engagement team has completed its review of the third-quarter financial statements, and the fir
> In an engagement to review the financial statements of a nonpublic company, SSARS require the accountant to obtain review evidence that is primarily based on inquiries and analytical procedures. The nature of the accountant’s inquiries is a matter of jud
> How might the matters communicated to those charged with governance impact the nature of information included in the auditor’s report?
> You are doing the first-year audit of Sherman School District and have been assigned responsibility for doing a four-column proof of cash for the month of October 2019. You obtain the following information: 1. Balance per books September 30 $ 10,725 Octo
> Haskin Company was founded 40 years ago and now has several manufacturing plants in the Northeast and Midwest. The evaluation of proposed capital expenditures became increasingly difficult for management as the company became geographically dispersed and
> The audit firm of Waggoner and Allen, LLP, recently received a request to submit a proposal to audit the financial statements of the Williamson County Public School System. The system is funded mostly through property tax assessments of county residents,
> You are auditing general cash for the Pittsburgh Supply Company for the fiscal year ended July 31, 2019. The client has not prepared the July 31 bank reconciliation. After a brief discussion with the owner, you agree to prepare the reconciliation, with a
> The following audit procedures are concerned with tests of details of general cash and financial instruments balances: 1. Obtain a standard bank confirmation from each bank with which the client does business. 2. Compare the balance on the bank reconcili
> Explain the differences in the primary roles performed by human resources, the employee’s primary supervisor, and those who oversee the creation of a payroll journal or listing and the payroll master file.
> A client applies manufacturing overhead to inventory on the basis of $3.47 per direct labor hour. Explain how the auditor will evaluate the reasonableness of total direct labor hours and manufacturing overhead in the ending inventory of finished goods.
> Assume that the auditor tested an account receivable with a balance of $3,000 and determined that the audited value was $2,700. That is, the auditor determined the receivable was overstated by $300. What is the projected misstatement (excluding the incre
> Describe a contingency. What conditions are required for a contingent liability to exist?
> What procedures do auditors typically follow to address the completeness of disclosures?
> State the relationship between the following: a. ARO and sample size b. Population size and sample size c. TER and sample size d. EPER and sample size
> Distinguish among difference estimation, ratio estimation, mean-per-unit estimation, and stratified mean-per-unit estimation. Give one example in which each can be used.
> Explain the circumstances under which an auditor should perform audit tests primarily designed to uncover fraud in the payroll and personnel cycle.
> Briefly explain why accounting standards related to fair value estimates make the audit of financial instruments more complex.
> Explain why an auditor compares the “date of deposit according to the books” to the “date of disbursement according to the books” on an interbank transfer schedule to detect kiting.
> For the audit of Carbald Supply Company, Carole Wever, CPA, is conducting a test of sales for 9 months of the year ended December 31, 2019. Included among her audit procedures are the following: 1. Electronically re-add the sales journal and trace the ba
> In your audit of Aviary Industries for calendar year 2019, you found number of matters that you believe represent possible adjustments to the company’s books. These matters are described below. Management’s attitude is that “once the books are closed, th
> The following tests of controls and substantive tests of transactions audit procedures for acquisitions and cash disbursements are to be used in the audit of Ward Publishing Company. You concluded that internal control appears effective and a reduced ass
> You are assigned to the December 31, 2019, audit of Sea Gull Airframes, Inc. The company designs and manufactures aircraft superstructures and airframe components. You observed the physical inventory at December 31 and are satisfied that it was properly
> You are the manager in the audit of Vernal Manufacturing Company and are turning your attention to the income statement accounts. The in-charge auditor assessed control risk for all cycles as low, supported by tests of controls. There are no major inhere
> Roost and Briley, CPAs, are doing the audit of Leggert Lumber Co., an international wholesale lumber broker. Because of the nature of their business, payroll is the largest expense. You are the in-charge auditor on the engagement responsible for developi
> Under what circumstances would an auditor choose to confirm information such as the right of return or special sales terms in addition to the customer balance?
> Explain why proper presentation of debt balances and related disclosures is important from a creditor’s perspective.
> Financial statement data for years ending December 31 for Holland Company follows: a. Determine the inventory turnover for 2016 and 2015. b. Determine the number of days’ sales in inventory for 2016 and 2015. Use 365 days and round to
> For the year ending August 31, 2016, Mammalia Medical Co. mistakenly omitted adjusting entries for (1) depreciation of $5,800, (2) fees earned that were not billed of $44,500, and (3) accrued wages of $7,300. Indicate the combined effect of the errors on
> Two income statements for Fuller Company follow: Prepare a horizontal analysis of Fuller Company’s income statements. Fuller Company Income Statements For Years Ended December 31 2016 2015 Fees earned $680,000 $850,000 Operating e
> The following data were taken from Mesa Company’s balance sheet: a. Compute the ratio of liabilities to stockholders’ equity. b. Has the creditor’s risk increased or decreased from December 31, 2015
> Dillin Inc. reported the following on the company’s statement of cash flows in 2016 and 2015: Eighty percent of the net cash flow used for investing activities was used to replace existing capacity. a. Determine Dillinâ€
> McMahon Inc. reported the following on the company’s statement of cash flows in 2016 and 2015: Seventy percent of the net cash flow used for investing activities was used to replace existing capacity. a. Determine McMahonâ€
> Amy Austin established an insurance agency on March 1 of the current year and completed the following transactions during March: a. Opened a business bank account with a deposit of $50,000 in exchange for common stock. b. Purchased supplies on account, $
> A summary of cash flows for Sentinel Travel Service for the year ended August 31, 2016, follows: The cash balance as of September 1, 2015, was $89,000. Prepare a statement of cash flows for Sentinel Travel Service for the year ended August 31, 2016.
> Noric Cruises Inc. reported the following results for the year ended October 31, 2016: Retained earnings, November 1, 2015 $12,400,000 Prepare a retained earnings statement for the fiscal year ended October 31, 2016. Net income 2,350,000 Cash divid
> During the taking of its physical inventory on December 31, 2016, Waterjet Bath Company incorrectly counted its inventory as $728,660 instead of the correct amount of $719,880. Indicate the effect of the misstatement on Waterjet Bath’s December 31, 2016,
> On July 1, 2016, Livingston Corporation, a wholesaler of manufacturing equipment, issued $46,000,000 of 20-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $42,309,236. Interest on the bonds is payable semiannually on Decem
> Financial statement data for years ending December 31 for Edison Company follows: a. Determine the ratio of sales to assets for 2016 and 2015. b. Does the change in the ratio of sales to assets from 2015 to 2016 indicate a favorable or an unfavorable t
