Question: What consideration, if any, may external auditors

> Auditors should plan and perform their audits to provide reasonable assurance of detecting material misstatements in financial statements, including those resulting from fraud. Required: a. Distinguish between fraudulent financial reporting and misappro

> A CPA has been asked to audit the financial statements of a nonpublic company for the first time. All preliminary discussions have been completed between the CPA, the company, the predecessor auditors, and all other necessary parties. The CPA is now prep

> Criticize the following statement: “Throughout this audit, for all purposes, we will define a ‘material amount’ as $500,000.”

> Assume that you have been assigned to the audit of Lockyer Manufacturing Company. You have completed the procedures for gathering information about the company and its environment, including internal control. a. Describe the next stage of the audit proce

> Explain the meaning of the term documentation as it pertains to computers and an information systems department. How might a client’s documentation be used by the auditors?

> Explain briefly what is meant by an “online real-time system.”

> An information systems department usually performs numerous IT processing functions that would be separated in a manual system. Does this imply that separation of duties is not a practical means of achieving internal control in a computerized system? Exp

> Distinguish general control activities from application control activities and give examples of the types of controls included in each of these broad categories.

> What is cloud computing?

> Distinguish between user control activities and manual application control activities.

> What is meant by a local area network?

> Describe the audit technique known as tagging and tracing. What is the purpose of the technique?

> Do auditors usually begin their consideration of internal control over IT activities with a review of general or application control activities? Explain.

> Discuss what is meant by the phrase “shopping for accounting principles.” What mechanisms have served to prevent this practice by management?

> Discuss the nature of end user computing.

> Is it probable that the use of IT will eventually eliminate the audit trail, making it impossible to trace individual transactions from their origin to the summary totals in the financial statements? Explain.

> Explain briefly what is meant by electronic data interchange (EDI). How does EDI affect a company’s audit trail?

> Explain briefly what is meant by a malware and ransomware.

> What are the advantages of a virtualized client/server infrastructure?

> Describe briefly the controls that should be established over the operation of a workstation to prevent use by unauthorized personnel.

> What is the difference between an Internet-based and an intranet-based information system?

> What is meant by “authentication of the user” and how may authentication be achieved?

> Define and give the purpose of each of the following controls: a. Record counts b. Limit test c. Validity test d. Hash totals e. Missing data test

> What is blockchain technology and how could it eventually change financial reporting and auditing?

> State the purpose and nature of an engagement letter.

> The number of personnel in an information systems department may limit the extent to which segregation of duties is feasible. What is the minimum amount of segregation of duties that will permit satisfactory internal control?

> List and describe the major components of an information system.

> One basic concept of internal control is that no one employee should handle all aspects of a transaction. Assuming that a general category of transactions has been authorized by top management, how many employees (or departments) should participate in ea

> Identify the four types of control activities and describe how each type contributes to effective internal control.

> Describe the two types of monitoring and provide an example of each.

> Describe what is meant by the risk assessment component of internal control and how it contributes to internal control.

> Name three factors you consider of greatest importance in protecting a business against losses through embezzlement.

> How does separation of the record-keeping function from custody of assets contribute to internal control?

> List the principles related to an organization’s control environment.

> List the five stages of the auditors’ overall approach in an audit of internal control performed in accordance with PCAOB requirements.

> In a public company, what requirements must members of the board of directors satisfy in order to serve on the audit committee?

> Distinguish between the two subsections of Section 404 of the Sarbanes-Oxley Act of 2002.

> You have discussed with the president of Vista Corporation several material weaknesses in internal control that have come to your attention during your audit. At the conclusion of this discussion, the president states that he will personally take steps t

> Comment on the following: The Committee of Sponsoring Organizations has issued frameworks on internal control and on enterprise risk management. A starting point for management of a company just beginning operations is to determine which one of the two t

> Identify the five components of an organization’s internal control.

> What is a management letter? What is the letter’s significance?

> How is the auditors’ understanding of the client’s internal control documented in the audit working papers?

> Under what circumstances are tests of controls efficient audit procedures?

> All experienced auditors would design exactly the same audit plan (program) for a particular audit engagement.” Do you agree? Explain.

> Suggest a number of sources from which you might obtain the information needed to prepare a description of internal control in the audit working papers.

> A prospective client informs you that all officers and employees of the company are bonded, and he requests that under these circumstances you forgo a consideration of internal control in order to reduce the cost of an audit. Construct a logical reply to

> What information should a CPA firm seek in its investigation of a prospective client?

> What are the purposes of the consideration of internal control required by generally accepted auditing standards?

> Describe the relationship between corporate governance and internal control.

> Compare the objectives of the internal auditors with those of the independent auditors.

> When planning an audit, the auditors should assess the levels of risk and materiality for the engagement. Explain how the auditors’ judgments about these two factors affect the auditors’ planned audit procedures.

> How can a CPA make use of the preceding year’s audit working papers in a recurring audit?

> Auditing standards require the auditors to have a team meeting regarding the risk of fraud for the engagement. What is the purpose of this meeting?

> The overall audit strategy, the audit plan, and the time budget are three important working papers prepared early in an audit. What functions do these working papers serve in the auditors’ compliance with generally accepted auditing standards? Discuss.

> Define and differentiate between a test of controls and a substantive procedure.

> Charles Halstead, CPA, has a number of clients who desire audits at the end of the calendar year. In an effort to spread his workload more uniformly throughout the year, he is preparing a list of audit procedures that could be performed satisfactorily be

> The overall audit strategy for the audit of Keystone Computers & Networks, Inc., in this appendix includes a section on significant accounting and auditing matters. The second matter described involves capitalizing the costs of developing a software prog

> What are the purposes of the audit procedures of (a) tracing a sample of journal entries forward to the ledgers and (b) vouching a sample of ledger entries back to the journals?

> What is meant by making a proper year-end cutoff? Explain the effects of errors in the cutoff of sales transactions in both the income statement and the balance sheet.

> Identify the general objectives of the auditors’ substantive procedures with respect to any major asset category.

> Why is audit work usually organized around balance sheet accounts rather than income statement accounts?

> What problems are created for a CPA firm when audit staff members underreport the amount of time spent in performing specific audit procedures?

> Suggest some factors that might cause an audit engagement to exceed the original time estimate. Would the extra time be charged to the client?

> Planning information for the audit of Keystone Computers & Networks, Inc., appears in this appendix. Review each major section of the audit plan and briefly describe the purpose and content of the section. Organize your solution in the following mann

> The accompanying flowchart summarizes Corporation’s processing of sales. Some of the flowchart symbols are labeled to indicate controls and records. For each symbol numbered 1 through 13, select one response from either the list of oper

> Certain audit risks are significant in that they require special audit consideration. Describe the typical characteristics of these significant risks.

> Assume that you have been hired by Willington, CPA, as a new staff assistant. He informs you that his approach to audits has always been to assess control risk at the maximum and perform all the substantive procedures he considers necessary. However, he

> Tammy Potter, a new partner with the regional CPA firm of Tower & Tower, was recently appointed to the board of directors of a local civic organization. The chairman of the board of the civic organization is Lewis Edmond, who is also the owner of a real

> You are auditing for the first time the financial statements of Central Savings and Loan Association for the year ending December 31, 20X3. The CPA firm that audited the association’s financial statements for the prior year issued an unqualified audit re

> As you are planning the annual audit of Norton Corporation, you note that the company has a number of user operated computers in use in various locations. One of the machines has been installed in the stores department, which has the responsibility for d

> CPAs may audit around or through computers in the audit of the financial statements of clients who use IT to process accounting data. a. Describe the auditing approach referred to as “auditing around the computer.” b. Under what conditions do CPAs decide

> The Ultimate Life Insurance Company has a database system that stores policy and payment information. The company is now planning to provide its branch offices with terminals that have online access to the central IT facility. a. Define a database. b. Gi

> You have been asked by the board of trustees of a local church to review its accounting procedures. As part of this review, you have prepared the following comments relating to the collections made at weekly services and record keeping for membersâ

> Precision Industries, Inc., is a manufacturer of electronic components. When a purchase order is received from a customer, a sales clerk prepares a serially numbered sales order and sends copies to the shipping and accounting departments. When the mercha

> You are invited by John Bray, the president of Cheviot Corporation, to discuss with him the possibility of your conducting an audit of the company. The corporation is a small, closely held manufacturing organization that appears to be expanding. No previ

> Prospect Corporation, your new audit client, processes its sales and cash receipts in the following manner: (1) Sales. Salesclerks prepare sales invoices in triplicate. The original and second copy are presented to the cashier, and the third copy is reta

> Describe the risk of material misstatement of an assertion. List the two components that make up this risk.

> Island Trading Co., a client of your CPA firm, has requested your advice on the following problem. It has three clerical employees who must perform the following functions: (1) Maintain general ledger. (2) Maintain accounts payable ledger. (3) Maintain a

> Orange Corp., a high-technology company, utilizes the following procedures for recording materials and transferring them to work in process. (1) Upon receipt of raw materials by stores, the storekeeper prepares a stock-in report with part number and quan

> Lee Wong, CPA, is auditing the financial statements of the Alexandria Corporation, which has a batch-processing IT-based system for shipping and invoicing that it purchased from a software vendor. The following comments have been extracted from Wong&acir

> For each definition (or partial definition) in the first column below, identify the most closely related term. Each term may be used once or not at all. Definition (or Partial Definition) Term 1. Batch processing 2. Data warehouse 1. A subject-orle

> For each of the following descriptions, select the computer audit procedure most closely related. Computer audit procedures may be used once, more than once, or not at all. Definition Computer Audit Procedures 1. Auditing by manually testing the In

> Auditors should be familiar with the terminology employed in IT processing. The following statements contain some of the terminology so employed. Indicate whether each statement is true or false. a. A recent improvement in computer hardware is the abilit

> Select the best answer for each of the following questions. Explain the reasons for your selection. a. LAN is the abbreviation for: (1) Large Area Network. (2) Local Area Network. (3) Longitudinal Analogue Network. (4) Low Analytical Nets. b. End user c

> Answer the following questions relating to tests of controls and control risk. a. Tests of controls do not address: (1) How controls were applied. (2) How controls were originated. (3) The consistency with which controls were applied. (4) By what means t

> For each term in the first column, find the closest definition (or portion of a definition) in the second column. Each definition may be used only once or not at all. Term Definition (or Portion) a. Compensating control b. Complementary control c.

> Auditors should have an understanding of the various terms that relate to their consideration of internal control of an organization. For each term presented below, select the category that most clearly defines or includes the term. The categories may be

> An audit plan is desirable when new staff members are assigned to an engagement, but an experienced auditor should be able to conduct an audit without reference to it.” Do you agree? Discuss.

> For each definition (or portion of a definition) in the first column, select the term that most closely applies. Each term may be used only once or not at all. Definition (or Portion) Term a. Representations by management that are communicated, exp

> Assume the following general flow of documents in an accounting system. Reply to the following questions: a. The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure

> You have been hired to perform the audit of Hanmei, Inc.’s financial statements. When planning such an audit, you often may need to access the profession’s auditing standards to perform research. For each of the following circumstances, select the topic

> You are working with William Bond, CPA, and you are considering the risk of material misstatement in planning the audit of Toxic Waste Disposal (TWD) Company’s financial statements for the year ended December 31, 20X0. TWD is a privatel

> Michael Green, CPA, is considering audit risk at the financial statement level in planning the audit of National Federal Bank (NFB) Company’s financial statements for the year ended December 31, 20X1. Audit risk at the financial stateme

> Select the best answer for each of the following. Explain the reasons for your selection. a. In planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriati

> Listed below are controls that have been developed by the management of Cirus Manufacturing Co. 1. Management surveys customers about their satisfaction with the company’s service. 2. The human resources department investigates the educational background

> You are performing an audit of Systex Corporation and evaluating various controls. Classify the following controls as being primarily preventive (P), detective (D), or corrective (C). Explain your answers. a. Annual physical inventory. b. Monthly reconci

> Select the best answer for each of the following questions. Explain the reason for your selection. a. Which of the following would be least likely to be considered an objective of internal control? (1) Checking the accuracy and reliability of accounting

> Mary Deming has been asked to accept an engagement to audit a small financial institution. Deming has not previously audited a financial institution. Required: a. Describe the types of knowledge about the prospective client and its environment that Demi

> Can a standard audit plan be used for most engagements?

> In the overall audit strategy for the audit of Keystone Computers & Networks, Inc., in this appendix, there is a section on significant risks. For each of the risks, identify the implications and potential responses.