Why do you think that the auditors will need a letter from management saying that they have provided them with all the books and records of the company? Try to think of a scenario where management might try to understate cash receipts for their own benefit.
> Kubin Company’s relevant range of production is 18,000 to 22,000 units. When it produces and sells 20,000 units, its average costs per unit are as follows: Required: 1. Assume the cost object is units of production: a. What is the total
> Cherokee Inc. is a merchandiser that provided the following information: Required: 1. Prepare a traditional income statement. 2. Prepare a contribution format income statement.
> What are the four hierarchical levels of activity discussed in the chapter?
> You are auditing a manufacturing company and have drafted a management letter that contains reference to matters to increase the efficiency of company systems and the general profitability of the company. Your audit assistant has asked you if this is app
> You are auditing a company engaged in the development and sale of games software over the internet. You are satisfied that the software is of high quality and are now directing your attention to the controls over the sale of their products. You have conf
> Give some examples of qualitative characteristics an auditor might take into account when deciding if a particular item in the financial statements is materially misstated.
> In this chapter we noted that Roberts and Dwyer (1998) appear to suggest that auditors should disclose the level of materiality they have used when conducting the audit. Given that this is now a requirement for companies that are required to follow the U
> In Appendix 11.2 on the Cengage companion website we suggest steps that could be included in the audit programme for accommodation income of The County Hotel Ltd received in cash. Reread this appendix and now suggest steps that should be included in the
> Two questions are placed within the text (10.5) Case study 10.3 Troston plc; (10.6) Case study 10.4 Burbage Limited: General and application controls in a sales system.
> This question is taken from a past paper of the Final Admitting Examination of CAI. Only the dates have been changed. You are undertaking the fieldwork for the audit of the financial statements of CAREFREE Limited for the year ended 31 December 2020. CA
> Munro Limited is a small company with two divisions. One division trades in specialized equipment for walkers and mountaineers, and the other sells artists’ materials. The company has acquired rights of access to a rocky area near a major city, where it
> In this chapter we referred to the term non-sampling risk. Outline what you believe the term means and give some examples of what you consider to be a non-sampling risk.
> It is early December 2020, and you approach the Chief Financial Officer of Pitscottie Limited, a trading company, to ask him to send the 31 December year-end inventory count instructions for review. He informs you that the directors wish to rely on inven
> You ask your audit assistant to carry out a review of after-date receipts from credit customers. Explain to them the reason for such a review and show how it should be performed. What kind of conclusion might they be able to form after carrying out such
> To what extent are the determinants and characteristics of audit quality similar to those of the audit expectations gap?
> You have completed the audit of Magnolia Ltd for the year ended 31 December 2018. The financial statements show turnover of £10 000 000 – down 10 per cent on the prior year – and losses of £75 000. The company has net assets of £1 000 000 (2017: £1 100 0
> The characteristics of suitable criteria are: relevance, completeness, reliability, neutrality and understandability. Explain what these characteristics mean, illustrating your answer by reference to KPIs in an hotel. You may refer to Case Study 6.4 (Cou
> Your audit assistant on the Greenburn Ltd assignment has asked you where the following working schedules should be filed: a. Summary of the details of a construction contract for the supply of goods to a customer. b. Letter to the company from the compa
> Explain why it is so important for auditors to identify the points at which management is making judgemental decisions about accounting matters. Give examples.
> ‘If management review useful lives annually, impairment reviews will rarely be necessary.’ Give your views on this statement. What audit procedures should you carry out to see if an impairment review is necessary?
> In previous chapters we discussed the significance of risk facing auditors in the process of forming audit conclusions. Explain how auditors address risk at the prefinal stage of the audit process.
> The division of management assertions into genuine, accurate and complete is a useful aid to auditors. Discuss.
> Set out in Figure 9.6 is a systems flowchart for a production payroll system. Explain what is happening in the two routines ‘transaction file update’ and ‘salary run’. In addition, e
> As organizations have become more dependent on the reliability of information systems, they have become more aware of the need to maintain quality of systems and the data/information derived from them. If you were asked to set up a quality standards grou
> An important objective of the business risk approach is to make the audit more profitable by cutting down on the amount of evidence obtained by substantive tests of detail. Discuss.
> Insufficient attention is being paid to the needs, nature and size of the multinational companies the Big Four presently audit when there is discussion of the ways in which competition for such audits can be enhanced. Discuss.
> The audit expectations gap will never be closed. Discuss.
> The willingness of large audit firms to provide forensic audit services indicates that they have the ability and techniques available to detect fraud. It would seem a short step to suggest that auditors should have a greater responsibility for fraud dete
> This question is based on an ACCA question in their Advanced Audit and Assurance Paper P7, June 2012. Snipe Ltd has in place a defined benefit pension plan for its employees. An actuarial valuation on 31 January 2018 indicated that the plan is in deficit
> Consider whether the following statements are true or false: a. The same standards of independence need not be applied in assurance engagements as in the statutory audit of financial statements. b. A review engagement results in a conclusion in the assur
> Lundin plc operates a number of divisions, but the board of directors has been considering closing those that no longer fit into the future plans of the company. On 30 November 2020 (year-end is 31 December 2020), the board decided to close two of the di
> Blackford Ltd is a company engaged in two diverse activities, the manufacture of lawnmowers and trading in the hardware sector, selling its lawnmowers through its own hardware outlets. The company decided to discontinue its loss-making lawnmower operatio
> Consider the following items of income and expense and state: whether they bear a relationship to each other or not; if they are related in any way, in what way they should move in relation to each other; the reasons for your answer in each case. a. New
> Crail Limited analytical review. The profit and loss account for the year ended 31 December 2020 and balance sheet at 31 December 2020 of Crail Limited, a trading company, are set out below. Required: Perform an analytical review of these figures and s
> Refer to questions 9.2 and 9.3 and explain how a data flow diagram would help the auditor to understand how the entity’s order entry system is operating. Why would a data flow diagram be better than a document flowchart for this purpose?
> Figure 8.1 showed that there are two broad levels of regulation and control relating to both external and internal environment. You are the auditor of an entity providing advice to clients on financial matters. You are aware that there have been serious
> Discuss what you understand by the following terms: a. foreseeability b. proximity c. assumption of responsibility
> New rules have been introduced by the European Parliament, and it is anticipated that these new rules will lead to considerable improvements in audit quality. Evaluate the extent to which new legislation can contribute towards improving audit quality.
> The trade payables figure in most companies is normally material in the context of the financial statements taken as a whole. What assertions do you think that management is implicitly making about the trade payables figure? Suggest one audit step for ea
> Explain why the civil society is just as interested in the way that large companies, including banks, behave as are the shareholders of those companies. What do you think is meant by the public interest?
> Why do you think that the collapse of Enron and other scandals affecting large companies may have resulted in a widening of the audit expectations gap? You may want to refer to contemporary reports and media articles emerging relating to the collapse of
> Explain how auditing theory might give useful insights into the practice of auditing. Your answer should make reference to the postulates and concepts of auditing.
> The following question is taken from the June 2011 F8 Paper – Audit and Assurance of the ACCA. We are only asking you to consider requirement (a) of the question. You are an audit manager in NAB & Co., a large audit firm which specializes in the audit of
> Discuss the arguments for and against requiring the mandatory rotation of auditors.
> World Com tried to maintain profit levels by treating revenue costs (over $3.8 billion) as capital expenditure. Explain what the impact would be if revenue costs (such as repairs to plant and machinery) were to be treated as capital assets. What do you t
> Describe the nature of an extranet and explain why it might be a useful means of achieving business objectives. You are auditor of an entity carrying on business using an extranet. Explain what controls you would expect to be in force to protect it.
> Suggest why auditors might be in a good position to provide a service giving assurance on the effectiveness of the company’s information and control system. Take a look at Table 1.1 while you are considering this matter.
> We have not discussed this at length yet, but can you at this stage suggest what benefits society should derive from a competent, independent and effective audit function?
> In Table 3.3 we suggested pressures against independence in respect of small audit firms and small auditees. To what extent do you believe that the IFAC Code and FRC Ethical Standard have been successful in dealing with the special circumstances of small
> Describe the regulatory structure for monitoring audit quality in the UK.
> Discuss the major factors that might influence managers in engaging in earnings management. Consider audit procedures that might be appropriate where earnings management is suspected.
> Explain to your assistant what is meant by audit judgement and give examples of its application. How certain can you be that your judgement has produced the right answer?
> ‘It is very easy to apply the audit risk model. All you have to do is to multiply figures together to determine the amount of testing you have to do’. Discuss this statement.
> What are the main practical differences between the audit risk approach and the business risk approach to auditing?
> Take another look at both The County Hotel and Fine Faces and discuss the proposition that auditors are so willing to help management that they might forget that their primary duty is to form an opinion on the financial statements issued to and used by t
> Segregation of duties is a basic requirement of a good control system. Explain what is meant by this statement and show how segregation of duties in a modern computer system might differ from that in a manual system.
> In January 2018, Carillion, a major UK multinational construction and facilities management company, suddenly collapsed, leaving in its wake almost £7 billion of liabilities and only £29 million in cash. Astonishingly, in 2016, Carillion’s senior executi
> Why do you think it is important to have NEDs on the board?
> Good corporate governance is more likely to exist in companies where there are large institutional shareholders holding a substantial proportion of the shares than in companies where the shares are held by many individual investors. Discuss
> Discuss what are likely to be the main limitations a company faces in establishing an effective audit committee.
> Discuss how corporate governance mechanisms will impact on audit quality and the audit expectations gap.
> Explain why you believe auditors have been reluctant to report on the directors’ reviews of the effectiveness of internal controls.
> In 2014, Lord Myners set out the need to reform the Cooperative Group after near ruinous failure at the bank, describing ‘a dysfunctional board in which some directors did not know the difference between debits and credits’ and [were] ‘clearly out of the
> Audit evidence is required to be both sufficient and appropriate. Explain what is meant by this statement giving appropriate examples.
> The EU Audit Regulation (537/2014) states:’ In order to increase the confidence in … the statutory auditors and the audit firms carrying out the statutory audit of public interest entities, it is important that the transparency reporting by statutory aud
> Your firm has been external auditor of Elgol plc for some years. Elgol has an internal audit department engaged in both compliance and operational auditing. You have a high opinion of the quality of internal audit work and have established a good relatio
> You are the engagement partner of an audit assignment with an entity specializing in the provision of information technology services and software. At the beginning of the financial year the company entered into a contract with the government of China an
> We noted in the chapter that often the directors of a company exerted a considerable influence, more so when there is no audit committee, in determining which firm of auditors should be appointed. Give reasons why this is not an ideal state of affairs an
> A major criticism of the regulatory regime in the past was that it lacked independence from the accounting profession. Discuss the extent to which that criticism is still valid for the new regulatory regime introduced in 2012 as amended by SATCAR.
> Assume you are the senior partner in an audit firm which is considering submitting a tender for the audit of a large company. Outline what information you might want to collect about the company before making a final decision about whether to submit a te
> Explain how a review engagement differs from an audit engagement. Explain why a report on a review engagement might be useful to the person requesting that the engagement be carried out.
> Obtain a recent annual report, such as that of Rolls-Royce plc, which we have cited in the text, and identify what elements in the audit report you believe are likely to be of most interest to investors.
> Discuss the extent to which you believe liability limitation agreements will be helpful in mitigating auditors’ exposure to large claims for negligence.
> The EU Audit Regulations (537/2014) states: ‘The public-interest function of statutory audit means that a broad community of people and institutions rely on the quality of a statutory auditor’s or an audit firm’s work. Good audit quality contributes to t
> You are a member of an internal audit department and have been asked the following questions by an audit assistant: a. Why is it that we check all purchases invoices daily to goods received notes and purchase orders when the definition of internal audit
> Dunino Limited is a company manufacturing, selling and laying carpet tiles, currently preparing financial statements at 31 December 2020. Under the terms of sale, Dunino gives a warranty, whereby it agrees to make good manufacturing or laying defects tha
> Obtain a recent annual report, such as that of Rolls-Royce plc, which we have cited in the text, and identify what elements in the audit report you believe are likely to be of most interest to investors.
> Consider a country operating under fixed exchange rates. The IS curve is given by equation (20.1) a. Explain the term (i* - πe). Why does the foreign nominal interest rate appear in the relation? b. Explain why when πe increases, t
> You are the economic adviser to a newly elected president. In four years he or she will face another election. Voters want a low unemployment rate and a low inflation rate. However, you believe that voting decisions are influenced heavily by the values o
> a. Download the series EXCHUS from the FRED database. This expresses the exchange rate between the yuan (one of the names for the Chinese currency) as the number of yuan per US dollar. Convert that exchange rate to the number of US cents per yuan so that
> Policy choices when the real exchange rate is “too high” and the nominal exchange rate is fixed an overvalued real exchange rate is a rate such that domestic goods are too expensive relative to foreign goods, net expor
> a. Go the Web site of The Economist (www.economist.com) and find data on 10-year interest rates. Look in the section “Markets & Data” and then the subsection “Economic and Financial Indicators.&ac
> a. Explain why, in equation (14.14), it is important that the stock is ex-dividend, that is, it has just paid its dividend and is expected to pay its next dividend in one year. b. Using of equation (14.14), explain the contribution of each component to t
> Suppose that in your country, the saving rate slowly declines from 12% in year t to 11% in year t+1 and 10% in year t+2. Suppose, moreover, that the depreciation rate, a. Using the production function given in the chapter, what happens to the steady-stat
> The Cobb-Douglas production function and the steady state. This problem is based on the material in the chapter appendix. Suppose that the economy’s production function is given by Y = KαN1 - α and assume that a = 1>3 a. Is this production function char
> The appendix to this chapter shows how data on output, capital, and labor can be used to construct estimates of the rate of growth of technological progress. We modify that approach in this problem to examine the growth of capital per worker. Y = K1/3 (A
> Consider the economy described in Problem 3 and assume that there is a fixed exchange rate, Suppose that financial investors worry that the level of debt is too high and that the government may devalue to stimulate output (and therefore tax revenues) to
> Assume that money demand takes the form where Y = 1,000 and r = 0.1. a. Assume that, in the short run, pe is constant and equal to 25%. Calculate the amount of seignorage for each annual rate of money growth, ∆M/M, listed. a. 25% , b.
> Consider a country with two political parties, Party A and Party B. Party A cares more about unemployment than Party B, In 2018 New Zealand rewrote the charter of its central bank to include high employment as well as low inflation as its goals. Why woul
> a. The World Bank reports gross domestic saving rate by country and year. Go to the World Bank website (https://data. worldbank.org/indicator/NY.GNS.ICTR.ZS) and find the most recent saving rates for Indonesia, India, South Korea (the Republic of Korea),
> Go to the World Bank’s website (http://data.worldbank.org/ indicator/NY.GDP.PCAP.KD), find the data on GDP per capita (in constant 2010 US$) for China and the euro area for the years 1960, 1980, 2000, and the latest year available. The euro area includes
> Between 1950 and 1973, France, Germany, and Japan all experienced growth rates that were at least two percentage points higher than those in the United States. Yet the most important technological advances of that period were made in the United States. H
> Consider the production function given in Problem 3. Assume that N is constant and equal to 1. Note that if z = xa , then gz ≈ a gx, where gz and gx are the growth rates of z and x (See Appendix 2 at the end of the book). a. Given the growth approximatio
> Consider the production function: Y = K + 2N a. Compute output when K = 10 and N = 20. b. If both capital and labor triple, what happens to output? c. How would you qualify the returns to scale for this production function? d. Write this production funct
> Assume that every month the average student in Japan and the average student in China buy the quantities and pay the prices indicated in the following table: a. Compute the Japanese consumption per student in yen. b. Compute the Chinese consumption per
> Using the information in this chapter, label each of the following statements true, false, or uncertain. Explain briefly. a. On a logarithmic scale, a variable that increases at 5% per year will move along an upward-sloping line with a slope of 0.05. b.
> Consider the data in the Focus Box, “Deflation in the Great Depression.” a. Calculate real interest rates in each year making the assumption that the expected level of inflation is last year’s rate of inflation. The rate of inflation in 1928 was -1.7%. D
> Consider the data in the Focus Box, “Deflation in the Great Depression.” a. Do you believe that output had returned to its potential level in 1933? b. Which years suggest a deflation spiral as described in Figure 9-3?
> Suppose the economy is operating at the zero lower bound for the nominal policy rate; the initial equilibrium is at the positive target rate of inflation and the economy is resting at potential output but there is a large government deficit in period t.
> Okun’s Law is written as u - u(-1) = -0.4 (gY - 3%) a. What is the sign of u – u (-1) in a recession? What is the sign of u – u (-1) in a recovery? b. Explain where the 3% number comes from? c. Explain why the coefficient on the term (gY - 3%) is -0.4 an
