4-21 When is a duty to disclose fraud to parties other than the entity’s senior management and its audit committee most likely to exist? a. When the amount is material. b. When the fraud results from misappropriation of assets rather than fraudulent financial reporting. c. In response to inquiries from a successor auditor. d. When a line manager rather than a lower-level employee commits the fraudulent act.
> Distinguish among the three categories of expenses. Provide an example of each type of expense.
> List and discuss the three factors mentioned in the chapter that may affect the reliability of confirmations of accounts receivable.
> Describe how the auditor verifies the accuracy of the aged trial balance.
> List four analytical procedures that can be used to test revenue-related accounts. What potential misstatements are indicated by each of these analytical procedures?
> What are the two major controls for sales returns and allowances transactions?
> A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to a. Tour the organization’s facilities and locations before beginning any audit work. b. Trace a transaction from every class of
> In understanding the accounting system in the revenue process, the auditor typically performs a walkthrough to gain knowledge of the system. What knowledge should the auditor try to obtain about the accounting system?
> The auditor needs to understand how selected inherent risk factors affect the transactions processed by the revenue process. Discuss the potential effect that industryrelated factors and misstatements detected in prior periods have on the inherent risk a
> When an entity does not adequately segregate duties, the possibility of cash being stolen before it is recorded is increased. If the auditor suspects that this type of defalcation is possible, what type of audit procedures can he or she use to test this
> Describe the credit function’s duties for monitoring customer payments and handling bad debts.
> Identify three other types of receivables the auditor should examine. What audit procedures would typically be used to audit other receivables?
> Distinguish between positive and negative confirmations. Under what circumstances would positive confirmations be more appropriate than negative confirmations?
> Describe the five-step process that is required for revenue recognition.
> What are the advantages and disadvantages of classical variables sampling?
> Describe the two methods suggested for projecting a non statistical sample result. How does an auditor determine which method should be used?
> How do the desired confidence level, risk of material misstatement, and tolerable and expected misstatements affect the sample size in a non statistical sampling application?
> If the financial reporting risks for a location are low and the entity has good entity level controls, management may rely on which of the following for its assessment? a. Documentation and test controls over specific risks. b. Self-assessment processes
> What is the decision rule for determining the acceptability of sample results when monetary-unit sampling is used?
> How does the use of probability-proportional-to-size selection provide an increased chance of sampling larger items?
> Identify the advantages and disadvantages of monetary-unit sampling.
> How are the desired confidence level, the tolerable misstatement, and the expected misstatement related to sample size?
> What is the decision rule for determining the acceptability of sample results when classical variables sampling is used?
> List the steps in a statistical sampling application for substantive testing.
> In performing certain audit procedures, the auditor may encounter voided documents, inapplicable documents, or missing documents, or the auditor may stop testing before examining all the items selected for the sample. How should each of these situations
> List the four factors that enter into the sample size decision. What is the relationship between sample size and each of these factors?
> How does the timing of controls testing affect the population definition?
> Define attribute sampling. Why is this sampling technique appropriate for tests of controls?
> Which of the following controls would most likely be tested during an interim period? a. Controls over non routine transactions. b. Controls over the period-end financial reporting process. c. Controls that operate on a continuous basis. d. Controls over
> Distinguish between non statistical and statistical sampling. What are the advantages and disadvantages of using statistical sampling?
> List audit evidence types that do not involve sampling and provide an example of a situation where an auditor would not use audit sampling.
> Distinguish between Type I and Type II errors. What terms are used to describe these errors when the auditor is conducting tests of controls and substantive tests? What costs are potentially incurred by auditors when such decision errors occur?
> How should the results of a non statistical test of controls sample be evaluated in terms of considering sampling risk?
> Define audit sampling. Why do auditors sample instead of examining every transaction?
> The period-end financial reporting process controls are always important. What are those controls, why are they important, and what should the auditor’s evaluation of those controls include?
> Describe the steps in obtaining an understanding of ICFR using a top-down, risk based approach.
> How does the auditor evaluate the objectivity and competence of others who perform work for management?
> List the steps in the auditor’s process for an audit of ICFR.
> Management must document its assessment of internal control. What would such documentation include?
> Which of the following is correct concerning required auditor communications about fraud? a. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved. b. Fraud with a materi
> Describe how management and the auditor decide on which locations or business units to test.
> The first element in management’s process for assessing the effectiveness of internal control is determining which controls should be tested. Describe the process management might use to identify the controls to test as part of their assessment of ICFR.
> Describe how the terms likelihood and magnitude play a role in evaluating the significance of a control deficiency.
> Distinguish between generalized and custom audit software. List the functions that can be performed by generalized audit software.
> What should the auditor do when a significant period of time has elapsed between the service organization auditor’s report and the date of management’s assessment?
> What are the types of reports that an auditor can issue for an audit of ICFR? Briefly identify the circumstances justifying each type of report.
> What are the auditor’s documentation requirements for an audit of ICFR?
> Describe what is meant when management remediates a material weakness. If a material weakness is remediated and sufficiently tested before the “as of” date, what can management assert about ICFR? Explain why.
> AS 2201 indicates that certain circumstances are indicators of a material weakness. What are these circumstances, and why do you think the PCAOB assessed them as being of such importance?
> The period-end financial reporting process controls are always important. What are those controls, why are they important, and what should the auditor’s evaluation of those controls include?
> Briefly summarize management’s and the auditor’s basic responsibilities under Section 404 of the Sarbanes-Oxley Act of 2002.
> What is meant by the concept of reasonable assurance in terms of internal control? What are the inherent limitations of internal control?
> Why must the auditor obtain an understanding of internal control?
> What are the major differences between a substantive strategy and a reliance strategy when the auditor considers internal control in planning an audit?
> What are the factors that affect the control environment?
> Describe the five components of internal control.
> What are the potential benefits and risks to an entity’s internal control from information technology?
> What is the auditor’s responsibility for communicating control deficiencies that are severe enough to be considered significant deficiencies or material weaknesses?
> What factors should the auditor consider when substantive procedures are to be completed at an interim date? If the auditor conducts substantive procedures at an interim date, what audit procedures would normally be completed for the remaining period?
> What are management’s incentives for establishing and maintaining strong internal control? What are the auditor’s main concerns with internal control?
> Which of the following is an example of fraudulent financial reporting? a. Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales. b. An employee diverts customer payments to his personal use
> Discuss why there is a demand for auditing services in a free-market economy. What evidence suggests that auditing would be demanded even if it were not required by government regulation?
> Why is it necessary to obtain corroborating evidence for inquiry and for observation?
> In a situation that uses inspection of records and documents as a type of evidence, distinguish between vouching and tracing in terms of the direction of testing and the assertions being tested.
> List and define the audit procedures for obtaining audit evidence.
> Explain why in most instances audit evidence is persuasive rather than convincing.
> Define audit evidence. Provide an example of evidence from accounting records and other information.
> List and define the assertions about account balances, and related disclosures, at the period end.
> List and define the assertions about classes of transactions and events, and related disclosures, for the period under audit.
> How do management assertions relate to the financial statements?
> List and discuss the four categories of financial ratios that are presented in the chapter.
> Significant differences between the auditor’s expectation and the entity’s book value require explanation through quantification, corroboration, and evaluation. Explain each of these terms.
> Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required? a. Whether management has ever intentionally violated the securities laws. b. Whether management has any knowledge
> When discussing the use of analytical procedures, what is meant by the “precision of the expectation”? In applying this notion to an analytical procedure, how might an auditor calculate a tolerable difference?
> Why are indexing and cross-referencing important to the documentation of audit working papers?
> Consider the “assurance bucket” analogy. Why are some of the buckets larger than others for particular assertions or accounts?
> Discuss the relative reliability of the different types of audit procedures.
> Explain why the auditor divides the financial statements into components or segments in order to test management’s assertions.
> Distinguish between errors and fraud. Give three examples of each.
> Distinguish between factual, judgmental, and projected misstatements.
> Many entities are subject to regulations by state and federal regulatory bodies. For example, the Environmental Protection Agency has a mission of protecting human health and the environment. What business risks would an entity face if it operated in the
> Give three examples of conditions and events that may indicate the existence of business risks.
> What are some limitations of the audit risk model?
> Which of the following is a misappropriation of assets? a. Classifying inventory held for resale as supplies. b. Investing cash and earning at a 3 percent rate of return as opposed to paying off a loan with an interest rate of 7 percent. c. An employee o
> Distinguish between sampling risk (i.e., possibility that the sample drawn is not representative of the population) and professional judgment errors (non sampling) risk.
> How do inherent risk and control risk differ from detection risk?
> Marv Jackal, CPA, determines that a number of risks of material misstatement are pervasive to the overall financial statements. How should Jackal respond to such pervasive risks?
> Why would a company institute a control policy that required mandatory vacations?
> What steps should an auditor perform to identify the risk of material misstatement due to fraud?
> Distinguish between audit risk and engagement risk.
> What actions should the engagement team members be informed of by the engagement partner and other engagement team members as part of their supervisory role?
> What are some of the sources of information that may be used to identify transactions with related parties?
> Distinguish between illegal acts that are “direct and material” and those that are “material but indirect.” List five circumstances that may indicate that an illegal act has occurred.
> List the matters an auditor should consider when developing an audit plan.
> Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements? a. Turnover of senior accounting personnel is low. b. Insiders recently purchased additional shares
> What is an audit committee and what are its responsibilities?
> What factors should an external auditor use to assess the objectivity and competence of internal auditors?
> What is the purpose of an engagement letter? List the important information that the engagement letter should contain.
> Who is responsible for initiating the communication between the predecessor and successor auditors? What type of information should be requested from the predecessor auditor?
> List four factors that would cause the auditor to use a lower percentage for establishing tolerable misstatement.
> Give three examples of qualitative factors that might affect the auditor’s choice of the percentage to apply to the benchmark used to establish overall materiality.
