2.99 See Answer

Question: Distinguish between general controls and

Distinguish between general controls and application controls and give two examples of each.

> SAS No. 99 requires auditors to conduct a brainstorming session to discuss the potential for fraud and how the auditor might respond to the risk of fraud. However, the standard provides limited guidance on how this brainstorming session should take place

> Define fraudulent financial reporting and give two examples that illustrate fraudulent financial reporting.

> Identify risks for accounting systems that rely heavily on IT functions.

> Explain how client internal controls can be improved through the proper installation of IT.

> The information systems (IS) department at Jacobsons Inc. consists of eight employees, including the IS Manager, Melinda Cullen. Melinda is responsible for the day-to-day oversight of the IS function and reports to Jacobsons' chief operating officer (COO

> Each year near the balance sheet date, when the president of Bargon Construction, Inc. takes a 3-week vacation to Hawaii, she signs several checks to pay major bills during the period she is absent. Jack Morgan, head bookkeeper for the company, uses this

> The Kowal Manufacturing Company employs about 50 production workers and has the following payroll procedures. The factory foreman interviews applicants and on the basis of the interview either hires or rejects them. When applicants are hired, they prepar

> Kent, CPA, is the engagement partner on the financial statement audit of Super Computer Services Co. (SCS) for the year ended April 30, 2011. On May 6, 2011, Smith, the senior auditor assigned to the engagement, had the following conversation with Kent c

> Appliances Repair and Service Company bills all customers rather than collecting in cash when services are provided. All mail is opened by Tom Gyders, treasurer. Gyders, a CPA, is the most qualified person in the company who is in the office daily. There

> The following questions concern the auditor's responses to the possibility of fraud. a. When fraud risk factors are identified during an audit the auditor's documentation should include b. If an independent audit leading to an opinion on financial statem

> The following questions address fraud risk factors and the assessment of fraud risk. a. Because of the risk of material misstatements due to fraud (fraud risk), an audit of financial statements in accordance with generally accepted auditing standards sho

> Name the three categories of inquiry and describe the purpose of each when used by an auditor to obtain additional information about a suspected fraud.

> The following misstatements are included in the accounting records of the Joyce Manufacturing Company: 1. A shipment to a customer was not billed because of the loss of the bill of lading. 2. A sales invoice was miscalculated by $1,000 as a result of a k

> You have identified a suspected fraud involving the company's controller. What must you do in response to this discovery? How might this discovery affect your report on internal control when auditing a public company?

> Distinguish management's responsibility from the audit committee's responsibility for designing and implementing antifraud programs and controls within a company.

> The proliferation of information technology (IT) has made governance of IT an important issue for businesses of all sizes and types, as well as their auditors. The IT Governance Institute has developed a wide range of resources for organizations, auditor

> Identify three verbal and three nonverbal cues that may be observed when making inquiries of an individual who is being deceitful.

> Describe the purpose of corporate codes of conduct and identify three examples of items addressed in a typical code of conduct.

> Auditors are required to make inquiries of individuals in the company when gathering information to assess fraud risk. Identify those with whom the auditor must make inquiries.

> The following audit procedures are included in the audit program because of heightened risks of material misstatements due to fraud. 1. Use audit software to search cash disbursement master files for missing check numbers. 2. Search the accounts receivab

> What should the audit team consider in its planning discussion about fraud risks?

> What sources are used by the auditor to gather information to assess fraud risks?

> How does the use of a database management system affect risks?

> Based on a cost-benefit analysis, management at First Community Bank decided to contract with Technology Solutions, a local data center operator, to host all of the bank's financial reporting applications. To avoid the significant costs of developing and

> Parts for Wheels, Inc. has historically sold auto parts directly to consumers through its retail stores. Due to competitive pressure, Parts for Wheels installed an Internet-based sales system that allows customers to place orders through the company's We

> Your new audit client, Hardwood Lumber Company, has a computerized accounting system for all financial statement cycles. During planning, you visited with the information systems vice president and learned that personnel in information systems are assign

> Following are 10 key internal controls in the payroll cycle for Gilman Stores, Inc. Key Controls 1. To input hours worked, payroll accounting personnel input the employee's Social Security number. The system does not allow input of hours worked for inval

> Assessing the risk of fraud in a financial statement audit is a difficult audit judgment. Auditing standards require the auditor to perform several audit procedures to accumulate information to assess the risk of fraud. You are the in-charge auditor resp

> One of the firm's audit partners, Alice Goodwin, just had lunch with a good friend, Sara Hitchcock, who is president of Granger Container Corporation. Granger Container Corp. is a fast-growing company that has been in business for only a few years. Durin

> A CPA’s client, Boos & Baumkirchner, Inc., is a medium-size manufacturer of products for the leisure-time activities market (camping equipment, scuba gear, bows and arrows, and so forth). During the past year, a computer system was installed and inventor

> You are conducting an audit of sales for the James Department Store, a retail chain store with a computer-based sales system in which computer-based cash registers are integrated directly with accounts receivable, sales, perpetual inventory records, and

> During your audit of Wilcoxon Sports, Inc., a retail chain of stores, you learn that a programmer made an unauthorized change to the sales application program even though no work on that application had been approved by IT management. In order for the sa

> The following are various potential frauds in the sales and collection cycle: 1. The company engaged in channel stuffing by shipping goods to customers that had not been ordered. 2. The allowance for doubtful accounts was understated because the company

> The Meyers Pharmaceutical Company has the following system for billing and recording accounts receivable: 1. An incoming customer's purchase order is received in the order department by a clerk who prepares a prenumbered company sales order on which the

> You go through the drive-through window of a fast food restaurant and notice a sign that reads "your meal is free if we fail to give you a receipt." Why would the restaurant post this sign?

> You are doing the audit of Phelps College, a private school with approximately 2,500 students. With your firm's consultation, they have instituted an IT system that separates the responsibilities of the computer operator, systems analyst, librarian, prog

> The following are misstatements that can occur in the sales and collection cycle: 1. A customer number on a sales invoice was transposed and, as a result, charged to the wrong customer. By the time the error was found, the original customer was no longer

> The following questions concern auditing complex IT systems. Choose the best response. a. Which of the following client IT systems generally can be audited without examining or directly testing the computer programs of the system? (1) A system that perf

> The following questions concern the characteristics of IT systems. Choose the best response. a. Effective management of information technologies in an organization embraces the viewpoint that (1) Most technologies reduce existing risk conditions. (2) Te

> During audit planning, an auditor obtained the following information: 1. Management has a strong interest in employing inappropriate means to minimize reported earnings for tax-motivated reasons. 2. The company's board of directors includes a majority of

> Your client has outsourced the majority of the accounting information system to a third-party data center. What impact would that have on your audit of the financial statements?

> Describe risks that are associated with purchasing software to be installed on desktop computer hard drives. What precautions can clients take to reduce those risks?

> Explain what is meant by the test data approach. What are the major difficulties with using this approach? Define parallel simulation with audit software and provide an example of how it can be used to test a client's payroll system.

> The following are activities that occurred at Franklin Manufacturing, a nonpublic company. 1. Franklin's accountant did not record checks written in the last few days of the year until the next accounting period to avoid a negative cash balance in the fi

> Explain what is meant by auditing around the computer and describe what must be present for this approach to be effective when auditing clients who use IT to process accounting information.

> Explain the relationship between application controls and transaction-related audit objectives.

> Explain how the effectiveness of general controls affects the auditor's tests of automated application controls, including the auditor's ability to rely on tests done in prior audits.

> An audit client is in the process of creating an online Web-based sales ordering system for customers to purchase products using personal credit cards for payment. Identify three risks related to an online sales system that management should consider. Fo

> Identify the typical duties within an IT function and describe how those duties should be segregated among IT personnel.

> Identify the traditionally segregated duties in noncomplex IT systems and explain how increases in the complexity of the IT function affect that separation.

> The following questions address fraud risks in specific audit areas and accounts. a. Cash receipts from sales on account have been misappropriated. Which of the following acts will conceal this embezzlement and be least likely to be detected by the audit

> Distinguish between random error resulting from manual processing and systematic error resulting from IT processing and give an example of each category of error.

> Define what is meant by an audit trail and explain how it can be affected by the client's integration of IT.

> Compare the risks associated with network systems to those associated with centralized IT functions.

> The sampling data sheet below is missing selected information for six attributes involving tests of transactions for the sales and collection cycle. a. Use Table 15-8and Table 15-9 to complete the missing information for each attribute. Table 15-8 Table

> For the audit of the financial statements of Mercury Fifo Company, Stella Mason, CPA, has decided to apply nonstatistical audit sampling in the tests of controls and substantive tests of transactions for sales transactions. Based on her knowledge of Merc

> Describe systematic sample selection and explain how an auditor will select 40 numbers from a population of 2,800 items using this approach. What are the advantages and disadvantages of systematic sample selection?

> The questions below relate to determining the CUER in audit sampling for tests of controls, using the following table: Required a. Calculate SER for each of columns 1 through 4 and use this to calculate the actual allowance for sampling risk. b. Explai

> The following are auditor judgments and attributes sampling results for six populations. Assume large population sizes. Required a. For each population, did the auditor select a smaller sample size than is indicated by using the attributes sampling table

> The questions below relate to determining the CUER in audit sampling for tests of controls, using the following table: Required a. Using nonstatistical sampling, calculate TER – SER for each of columns 1 through 8 and evaluate whether

> The following questions concern the determination of the proper sample size in audit sampling using the following table: Required a. Assume that the initial sample size for column 1 using nonstatistical sampling is 90 items. For each of columns 2 through

> The following is a partial audit program for the audit of sales transactions. 1. Foot the sales journal for one month and trace the postings to the general ledger. 2. Vouch entries in sales journal to sales invoice and shipping document. 3. Review the sa

> 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. In each of the following independent problems, design an unbiased random sampling plan, using an electronic spreadsheet or a random number generator program. The plan should include defining the sampling unit and establishing a numbering system for th

> The following questions concern sampling for attributes. Choose the best response. a. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor (1) Minimize the failure to detect errors and fraud. (2

> The following items concern determining exception rates using random sampling from large populations using attributes sampling. Select the best response. a. From a random sample of items listed from a client's inventory count, an auditor estimates with a

> 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

> What are the two types of simple random sample selection methods? Which of the two methods is used most often by auditors and why?

> List the major decisions that the auditor must make in using attributes sampling. State the most important considerations involved in making each decision.

> Distinguish between probabilistic selection and statistical measurement. State the circumstances under which one can be used without the other.

> When the CUER exceeds the TER, what courses of action are available to the auditor? Under what circumstances should each of these be followed?

> Explain what is meant by analysis of exceptions and discuss its importance.

> 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% ARACR if four exceptions are found in the sample using attribut

> This problem requires the use of ACL software, which is included in the CD attached to the text. Information about installing and using ACL and solving this problem can be found in Appendix, pages 838-842. You should read all of the reference material, e

> You have just completed the accounts receivable confirmation process in the audit of Danforth Paper Company, a paper supplier to retail shops and commercial users. Following are the data related to this process: Accounts receivable recorded balance $

> You are doing the audit of Peckinpah Tire and Parts, a wholesale auto parts company. You have decided to use monetary unit sampling (MUS) for the audit of accounts receivable and inventory. The following are the recorded balances: Accounts receivable

> Marjorie Jorgenson, CPA, is verifying the accuracy of outstanding accounts payable for Marygold Hardware, a large, single-location retail hardware store. There are 650 vendors listed on the outstanding accounts payable list. She has eliminated from the p

> In auditing the valuation of inventory, the auditor, Claire Butler, decided to use difference estimation. She decided to select an unrestricted random sample of 80 inventory items from a population of 1,840 that had a book value of $175,820. Butler decid

> An audit partner is developing an office training program to familiarize her professional staff with audit sampling decision models applicable to the audit of dollar-value balances. She wishes to demonstrate the relationship of sample sizes to population

> You intend to use MUS as a part of the audit of several accounts for Roynpower Manufacturing Company. You have done the audit for the past several years, and there has rarely been an adjusting entry of any kind. Your audit tests of all tests of controls

> In the audit of Price Seed Company for the year ended September 30, the auditor set a tolerable misstatement of $50,000 at an ARIA of 10%. A PPS sample of 100 was selected from an accounts receivable population that had a recorded balance of $1,975,000.

> State the relationship between the following: a. ARACR and sample size b. Population size and sample size c. TER and sample size d. EPER and sample size

> The accounts receivable population for Jake's Bookbinding Company follows. This table is the same as Table 17-1, except that cumulative amounts are included to assist you in completing the problem. The population is smaller than is ordinarily the case fo

> You are evaluating the results of a nonstatistical sample of 85 accounts receivable confirmations for the Bohrer Company. Information on the sample and population are included below. An overstatement or understatement of more than $100,000 is considered

> You are planning to use nonstatistical sampling to evaluate the results of accounts receivable confirmation for the Meridian Company. You have already performed tests of controls for sales, sales returns and allowances, and cash receipts, and they are co

> The following relate to the use of statistical sampling for tests of details of balances. For each one, select the best response. a. When the auditor uses monetary unit statistical sampling to examine the total dollar value of invoices, each invoice (1)

> The following apply to evaluating results of audit sampling for tests of details of balances. For each one, select the best response. a. While performing a substantive test of details during an audit, the auditor determined that the sample results suppor

> The following questions relate to determining sample size in tests of details of balances. For each one, select the best response. a. Mr. Murray decides to use stratified sampling. The reason for using stratified sampling rather than unrestricted random

> Give an example of the use of attributes sampling, MUS, and variables sampling in the form of an audit conclusion.

> Explain why difference estimation is commonly used by auditors.

> An essential step in difference estimation is the comparison of each computed confidence limit with tolerable misstatement. Why this step so important, and what should the auditor do if one of the confidence limits is larger than the?

> 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. When is MUS preferable to any of these?

> Identify the factors an auditor uses to decide the appropriate ARACR. Compare the sample size for an ARACR of 10% with that of 5%, all other factors being equal.

> In using difference estimation, an auditor took a random sample of 100 inventory items from a large population to test for proper pricing. Several of the inventory items were misstated, but the combined net amount of the sample misstatement was not mater

> Define what is meant by the population standard deviation and explain its importance in variables sampling. What is the relationship between the population standard deviation and the required sample size?

> What alternative courses of action are appropriate when a population is rejected using nonstatistical sampling for tests of details of balances? When should each option be followed?

> What is meant by a decision rule using difference estimation? State the decision rule.

> Why is it difficult to determine the appropriate sample size for MUS? How should the auditor determine the proper sample size?

> Assume that a sample of 100 units was obtained in sampling the inventory in Question 17-4. An auditor is determining the appropriate sample size for testing inventory valuation using MUS. The population has 2,620 inventory items valued at $12,625,000. Th

> What is meant by the "percent of misstatement assumption" for MUS in those population items that are misstated? Why is it common to use a 100% misstatement assumption when it is almost certain to be highly conservative?


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