What are the requirements under auditing standards for documenting the assessed level of control risk?
> McMullen and Mulligan, CPAs, were conducting the audit of Cusick Machine Tool Company for the year ended December 31. Jim Sigmund, senior-in-charge of the audit, plans to use MUS to audit Cusick’s inventory account. The balance at Dece
> Doug Iceberge, senior-in-charge of the audit of Fisher Industries, has decided to test the following two controls for Fisher’s revenue process. 1. All sales invoices are supported by proper documentation, that is, a sales order and a sh
> List the various types of auditors and describe their respective roles in a sentence or two each.
> Nathan Matthews conducted a test of controls where the tolerable deviation rate was set at 6 percent and the expected population deviation rate was 3 percent. Using a sample size of 150, Matthews performed the planned test of controls. He found six devia
> Calgari Clothing Company manufactures high-quality silk ties that are marketed under a number of trademarked names. Joe & Vandervelte LLP has been the company’s auditors for five years. Lisa Austen, the senior-in-charge of the audit
> Using the sample sizes determined in Problem 8-27 and the number of deviations shown here, determine the sample deviation rate, computed upper deviation rate, and the auditor’s conclusion (i.e., testing results do or do not support oper
> Determine the sample size for each of the control procedures shown in the following table (assuming a very large population): Control Procedure Parameters 1 2 3 4 5% Risk of incorrect acceptance Tolerable deviation rate 5% 10% 10% 6% 7% 4% 3% Expect
> Using the sample sizes determined in Problem 8-25 and the number of deviations shown here, determine the sample deviation rate, the computed upper deviation rate, and the auditor’s conclusion (i.e., testing results do or do not support
> Determine the sample size for each of the control procedures shown in the following table (assuming a very large population): Control Procedure Parameters 1 2 3 4 Risk of incorrect acceptance 5% 5% 10% 10% Tolerable deviation rate 4% 5% 7% 8% Expect
> Jenny Jacobs, CPA, is planning to use attribute sampling in order to determine the degree of reliance to be placed on an entity’s system of internal control over sales. Jacobs has begun to develop an outline of the main steps in the sampling plan as foll
> Following is a set of situations that may or may not involve sampling. 1. An auditor is examining loan receivables at a local bank. The population of loans contains two strata. One stratum is composed of 25 loans that are each greater than $1 million. Th
> Brown, CPA, is auditing the financial statements of Big Z Wholesaling, Inc., a continuing audit client, for the year ended January 31, 2018. On January 5, 2018, Brown observed the tagging and counting of Big Z’s physical inventory and made appropriate te
> Assume that scenario (b) in Problem 7-36 is a material weakness. Prepare a draft of the auditor’s report for an audit of ICFR. Assume that First Coast’s auditor is issuing a combined report for the financial statement audit and audit of internal control.
> Define audit risk and materiality. How are these concepts reflected in the auditor’s report?
> For each of the following independent situations, indicate the type of report on ICFR you would issue. Justify your report choice. a. The management’s report on ICFR issued by Graham Granary, Inc., includes disclosures about corrective actions taken by t
> For each of the following independent situations relating to the audit of ICFR, indicate the reason for and the type of audit report you would issue. a. During the audit of Wood Pharmaceuticals, you are surprised to find several control deficiencies in t
> For each of the following independent situations, indicate the type of report on ICFR you would issue. Justify your report choice. a. Hansen, Inc., has restated previously issued financial statements to reflect the correction of a misstatement. b. Shu &
> For each of the following cases, indicate why management and the auditors determined that the control deficiency was a material weakness. Case 1: In our assessment of the effectiveness of internal control over financial reporting as of December 31, 2018,
> Entity-level controls can have a pervasive effect on the entity’s ability to meet the control criteria. Which one of the following is not an entity-level control? a. Controls to monitor results of operations. b. Management’s risk assessment process. c. C
> Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance? a. The susceptibility of the related assets or liability to loss or fraud. b. The interaction or relat
> A control deviation caused by an employee performing a control procedure that he or she is not authorized to perform is always considered a a. Deficiency in design. b. Deficiency in operation. c. Significant deficiency. d. Material weakness.
> The Sarbanes-Oxley Act of 2002 requires management to include a report on the effectiveness of ICFR in the entity’s annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requir
> A primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may a. Consider increasing the use of substantive tests of transactions in place of analytical proc
> Which of the following most likely represents a weakness in internal control of an IT system? a. The systems analyst reviews output and controls the distribution of output from the IT department. b. The accounts payable clerk prepares data for computer p
> Why might understanding the characteristics of an entity’s business model be important for a financial statement auditor?
> Significant deficiencies and material weaknesses must be communicated to an entity’s audit committee because they represent a. Material fraud or illegal acts perpetrated by high-level management. b. Disclosures of information that significantly contradic
> Which of the following statements concerning control deficiencies is true? a. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit. b. All significant deficiencies are material
> In auditing ICFR for a public company, Emily finds that the entity has a significant subsidiary located in a foreign country. Emily’s accounting firm has no offices in that country, and the entity has thus engaged another reputable firm to conduct the au
> In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably like
> AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Lileah Company from auditing controls over inventory. Lileah is a public company. Management explains that controls over inventory were recently implemented by a highly r
> When auditors report on the effectiveness of internal control “as of” a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the addition
> Use an Internet browser to search for the following terms: Electronic data interchange (EDI). Image-processing systems. Prepare a memo describing EDI and image-processing systems. Discuss the implications of each for the auditor’s consideration of audit
> Search the SEC’s website (www.sec.gov) or elsewhere on the Internet to identify a company that has been recently cited by the SEC for financial reporting problems related to inventory. Prepare a memo summarizing the inventory issues for the company.
> Auditors are required to obtain and support an understanding of the entity and its environment in order to identify business risks. Much of the information needed to identify the risks can be obtained from the company’s annual report, 10K, and proxy mate
> Earth Wear Clothiers makes high-quality clothing for outdoor sports. It sells most of its products through mail order. Use the Internet to obtain information about the retail mail-order industry.
> Define auditing, attest, and assurance services.
> Visit the Institute of Internal Auditors (IIA) home page (www.theiia.org) and familiarize yourself with the information contained there. Search the site for information about the IIA’s requirements for the objectivity and independence of internal auditor
> While it is a relatively rare event, companies do change auditors. Use the Internet to identify an auditor change? Pick one auditor change and investigate the information provided by management and the auditor for the reasons for the change. Information
> Visit the website of a catalog retailer similar to Earth Wear Clothiers and determine how it processes sales transactions, recognizes revenue, and reserves for returns.
> Search the Internet for information on labor costs in the retail catalog industry (e.g., LO 12-11 labor costs as a percentage of sales). Executive compensation ballooned in the 1990s, and as highlighted in Exhibit 12-1, there were notable com
> Identify five Internet sites that contain accounting or auditing resources. For each site identified, prepare a brief summary of the types of information that are available. For example, the PCAOB’s home page (www.pcaobus.org) contains extensive informat
> What are some possible causes of book-to-physical inventory differences?
> Why is it important for the entity to establish control activities over the classification of payroll transactions?
> What are the key authorization points in a payroll system?
> a. Go to the AICPA’s website (www.aicpa.org). Find the AICPA’s mission statement (currently under the link “About the AICPA” at the bottom of their homepage). Read and briefly summarize the AICPA’s mission as described in its mission statement. b. Go to
> Identify three possible disclosure issues for payroll expense and payroll-related liabilities.
> The auditor should evaluate the qualitative aspects of deviations found in a sampling application. What are the purposes of evaluating the qualitative aspects of deviations?
> Under what circumstances would an auditor give an adverse opinion on the effectiveness of an entity’s ICFR?
> Under what circumstances would an auditor disclaim an opinion on the effectiveness of an entity’s ICFR?
> List the tools that can document the understanding of internal control.
> While net income before taxes is frequently used for calculating overall materiality, discuss circumstances when total assets or revenues might be better bases for calculating overall materiality.
> Why does the “audit testing hierarchy” begin with tests of controls and substantive analytical procedures?
> The AICPA performs a number of functions that directly bear on independent auditors of nonpublic entities, including promulgation of rules and standards. List four types of rules or standards issued by the AICPA.
> Auditors use various audit techniques to gather evidence when an entity’s accounting information is processed using IT. Select the audit procedure from the following list and enter it in the appropriate place on the grid. Audit procedu
> Mead, CPA, was engaged to audit Jiffy Company’s financial statements for the year ended August 31. Mead is applying sampling procedures. During the prior years’ audits Mead used classical variables sampling in performing tests of controls on Jiffy’s acco
> You are an audit manager for Lipske & Griffin, CPAs, who is completing the audit of Gold City Regional Bank’s ICFR for the year ended December 31, 2018. The report will be submitted to the engagement partner who reviews matters thoroughly and agreed with
> Assume that scenario (a) in Problem 7-36 is a material weakness. Prepare a draft of the auditor’s report for an audit of ICFR. Assume that Lorenz’s auditor is issuing a separate report on internal control. Data from Problem 7-36: Following are examples
> In obtaining evidential matter in support of financial statement assertions, the auditor develops specific audit procedures to address those assertions. Required: Hillmart is a retail department store that purchases all goods directly from wholesalers o
> Management makes assertions about components of the financial statements. Match the management assertions shown in the left-hand column with the proper description of the assertion shown in the right-hand column. Management Assertion Description a.
> In obtaining evidence in support of financial statement assertions, the auditor develops specific audit procedures to access those assertions. Required: All’s Fair Appliance Company is an appliance wholesaler. Select the most appropria
> Following are audit procedures that are normally conducted in the purchasing process and related accounts. 1. Test a sample of purchase requisitions for proper authorization. 2. Test transactions around year-end to determine if they are recorded in the p
> Assertions are expressed or implied representations by management that are reflected in the financial statement components. The auditor performs audit procedures to gather evidence to test those assertions. Required: Your client is All’
> Match the term to the definition. a. Attribute sampling b. Desired confidence level 1. The possibility that the sample drawn is not representative of the population and leads to an incorrect conclusion 2. Relies on the auditor's judgment to determin
> Which of the following types of audit evidence is the least reliable? a. Pre numbered purchase order forms prepared by the entity. b. Bank statements obtained from the entity. c. Test counts of inventory performed by the auditor. d. Correspondence from t
> Which of the following presumptions is least likely to relate to the reliability of audit evidence? a. The more effective internal control, the more assurance it provides about the accounting data and financial statements. b. An auditor’s opinion is form
> Bentley Bros. Book Company publishes more than 250 fiction and nonfiction titles. Most of the company’s books are written by southern authors and typically focus on subjects popular in the region. The company sells most of its books to major retail store
> A written understanding between the auditor and the entity concerning the auditor’s responsibility for fraud is usually set forth in a(n) a. Internal control letter. b. Letter of audit inquiry. c. Management letter. d. Engagement letter.
> Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s a. Awareness of the consistency in the application of generally accepted accounting principles between periods
> Which of the following best describes the general character of the section of the “Principles Underlying an Audit of Financial Statements,” titled “Performance”? a. Description of the competence, independence, and professional care of persons performing
> Which of the following statements best describes management’s and the external auditor’s respective levels of responsibility for a public company’s financial statements? a. Management and the external auditor share equal responsibility for the fairness o
> Which of the following audit procedures would probably provide the most reliable evidence concerning the entity’s assertion of rights and obligations related to inventory? a. Tracing of test counts noted during the entity’s physical count to the entity’s
> An auditor would probably be least interested in which of the following fields in an electronic perpetual inventory file? a. Economic reorder quantity. b. Warehouse location. c. Date of last purchase. d. Quantity sold.
> Periodic or cycle counts of selected inventory items are made at various times during the year rather than via a single inventory count at year-end. Which of the following is necessary if the auditor plans to observe inventory at interim dates? a. Comple
> Inquiries of warehouse personnel concerning possibly obsolete or slow-moving inventory items provide assurance about management’s assertion of a. Completeness. b. Existence. c. Presentation. d. Valuation.
> When auditing merchandise inventory at year-end, the auditor performs a purchase cutoff test to obtain evidence that a. All goods purchased before year-end are received before the physical inventory count. b. No goods held on consignment for customers ar
> After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items a. Included in the listing have been counted. b. Represented by inventory tags are included in the l
> The auditors for Weston University are conducting their audit for the fiscal year ended December 31, 2018. Specifically, the audit firm is now focusing on the audit of revenue from this season’s home football games. While planning the audit of sales of f
> An entity maintains perpetual inventory records in both quantities and dollars. If the level of control risk were set at high, an auditor would probably a. Insist that the entity perform physical counts of inventory items several times during the year. b
> Which of the following internal control activities is most likely to address the completeness assertion for inventory? a. The work-in-process account is periodically reconciled with subsidiary records. b. Employees responsible for custody of finished goo
> An auditor’s tests of controls over the issuance of raw materials to production would most likely include a. Reconciliation of raw materials and work-in-process perpetual inventory records to general ledger balances. b. Inquiry of the custodian about the
> Independent internal verification of inventory (i.e., proper segregation of duties) occurs when employees who a. Issue raw materials obtain materials requisitions for each issue and prepare daily totals of materials issued. b. Compare records of goods on
> Which of the following would most likely be an internal control activity designed to detect errors and fraud concerning the custody of inventory? a. Periodic reconciliation of work in process with job cost sheets. b. Segregation of functions between gene
> Which of the following control activities would be most likely to assist in reducing the control risk related to the occurrence of inventory transactions? a. Inventory manager does not have ability to record inventory transactions. b. Summary of the rece
> The objectives of internal control for an inventory management process are to provide assurance that transactions are properly authorized and recorded and that a. Independent internal verification of activity reports is established. b. Transfers to the f
> An auditor is most likely to perform substantive tests of details on payroll transactions and balances when a. Cutoff tests indicate a substantial amount of accrued payroll expense. b. The level of control risk relative to payroll transactions is set at
> Effective control activities over the payroll function may include a. Reconciliation of totals on job time sheets with job reports by employees responsible for those specific jobs. b. Verification of agreement of job time sheets with employee recorded ho
> Which of the following audit tests would most likely be used to test the occurrence assertion for payroll transactions? a. Trace a sample of time sheets to the payroll register. b. Re compute the mathematical accuracy of a sample of payroll checks. c. Tr
> Part I. Lernout & Hauspie (L&H) was the world’s leading provider of speech and language technology products, solutions, and services to businesses and individuals worldwide. Both Microsoft and Intel invested millions in L&H. However, accounting scandals
> Why is independence such an important requirement for auditors? How does independence relate to the agency relationship between owners and managers?
> It would be appropriate for the payroll department to be responsible for which of the following functions? a. Approval of employee time records. b. Preparation of periodic governmental reports as to employees’ earnings and withholding taxes. c. Maintenan
> An auditor who is testing IT controls in a payroll system would most likely use test data (discussed in Advanced Module 2 in Chapter 7) that contain conditions such as a. Deductions not authorized by employees. b. Overtime not approved by supervisors. c.
> The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the a. Human resource function from the controllership function. b. Administrative controls from the internal accounting controls. c. Authorization o
> For an appropriate segregation of duties, journalizing and posting summary payroll transactions should be assigned to a. The treasurer’s department. b. General accounting. c. Payroll accounting. d. The timekeeping department.
> In meeting the control objective of safeguarding of assets, which department should be responsible for the following? Distribution of Paychecks Custody of Unclaimed Paychecks a. Treasurer Treasurer b. Рayroll Treasurer C. Treasurer Payroll d. Payrol
> Which of the following procedures would most likely be considered a weakness in an entity’s internal controls over payroll? a. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department’s payr
> During the year being audited, the Matthews Corporation changed from a system of recording time worked on time sheets to an IT payroll system in which employees record time in and out with magnetic cards. The IT system automatically updates all payroll r
> When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be a. Vendors with whom the entity has previously done business. b. Amounts recorded in the accounts payable
> Which of the following procedures is least likely to be performed before the balance sheet date? a. Test of internal control over cash. b. Confirmation of receivables. c. Search for unrecorded liabilities. d. Observation of inventory.
> Purchase cutoff procedures should be designed to test whether all inventory a. Purchased and received before the end of the year was paid for. b. Ordered before the end of the year was received. c. Purchased and received before the end of the year was re
> Ando Company, a diversified manufacturer, has six divisions that operate throughout the United States and Puerto Rico. Ando has historically allowed its divisions to operate autonomously. Ando does not have an internal audit department and corporate inte
