In Part IV of this case study, you obtained an understanding of internal control and made an initial assessment of control risk for each transaction-related audit objective for acquisition and cash disbursement transactions. The purpose of Part V is to continue the assessment of control risk by determining the appropriate tests of controls and substantive tests of transactions. In order to do this, you must complete the steps needed to prepare a high-quality performance format audit program for tests of controls and substantive tests of transactions for acquisitions and cash disbursements. Assume in Part IV that you identified the following as the key controls you want to rely on (even though your answers were likely different from these): 1. Segregation of the purchasing, receiving, and cash disbursements functions 2. Purchasing can only make acquisitions from a preapproved vendor list 3. Use of prenumbered voucher packages, properly accounted for 4. Use of prenumbered checks, properly accounted for 5. Use of prenumbered receiving reports, properly accounted for 6. Internal verification of document package, including comparison to preapproved vendor list, before check preparation 7. Review of supporting documents and signing of checks by an independent, authorized person 8. Cancellation of documents prior to signing of the check 9. Monthly reconciliation of the accounts payable master file with the general ledger 10. Independent reconciliation of the monthly bank statements 11. Independent review of financial statement disclosures related to acquisitions and cash disbursements a. Access the file listing the 11 controls online at www.pearsonhighered.com/arens. The file, Case 14-37 Key Controls List, is included with the Pinnacle files. b. For each control, identify the transaction-related audit objective(s) that it partially or fully satisfies. c. For each control, list one audit procedure to test the control. Use the most reliable test of control evidence that you can think of. Write the audit procedure in good form. d. For each test of control identified in c., list one substantive test of transactions audit procedure to test whether the control is operating effectively. Use the most reliable substantive tests of transactions evidence that you can think of. e. In the same file, below the list of key controls, locate the table titled “Substantive Tests of Transactions by Audit Objective.” Decide and write one substantive test of transactions audit procedure for each transaction-related audit objective for acquisitions and one substantive test of transactions for each transaction-related audit objective for cash disbursements. At least one of the audit procedures must be different from the ones in requirement d. Prepare a performance audit program for acquisitions and cash disbursements using all audit procedures in requirements c. and d. See Figure 14-6 (p. 477) for a format. To the extent possible, follow the approach in procedure 13 a. through e. in Figure 14-6 of having “one starting point” procedure followed by other related procedures. The audit program should include procedures for both acquisitions and cash disbursements. Be sure to eliminate any duplicate audit procedures.
> The following questions concern unmodified opinion audit reports with an emphasis-of-matter explanatory paragraph or nonstandard wording in report paragraphs. Choose the best response. a. An entity changed from the straight-line method to the declining-b
> The following questions deal with management assertions. Choose the best response. a. An auditor reviews aged accounts receivable to assess likelihood of collection to support management’s assertion about account balances of (1) existence. (2) completene
> The following questions deal with materiality. Choose the best response. a. Which one of the following statements is correct concerning the concept of materiality? (1) Materiality is determined by reference to guidelines established by the AICPA. (2) Mat
> The following questions concern audit documentation. Choose the best response. a. Which of the following is not a primary purpose of audit documentation? (1) To coordinate the audit (2) To assist in preparation of the audit report (3) To support the fina
> The following questions concern the use of analytical procedures during an audit. Select the best response. a. For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent
> Describe management’s responsibility for the financial statements. Do you believe the CEO and CFO of a public company perceive an even greater responsibility as a result of the Sarbanes–Oxley Act requirement to certify the financial statements submitted
> What is the rationale for the PCAOB’s requirement to include a discussion of critical audit matters in the audit report? Provide two examples of areas that might be considered critical audit matters in the audit of a public company in the hotel and lodgi
> The following questions concern persuasiveness of evidence. Choose the best response. a. Which of the following types of documentary evidence should the auditor consider to be the most reliable? (1) Confirmation of an account payable balance mailed by an
> The following questions deal with audits by CPA firms. Choose the best response. a. Which of the following best describes why an independent auditor is asked to express an opinion on the fair presentation of financial statements? (1) The opinion of an in
> The following questions deal with audit risk and evidence. Choose the best response. a. Which of the following does not increase the need for sufficient appropriate audit evidence? (1) A lower acceptable level of detection risk (2) An increase in the ass
> The following questions concern the audit risk model. Choose the best response. a. Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accoun
> The following questions concern the assessment of the risk of material misstatements. Choose the best response. a. Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity’s f
> The following questions pertain to client acceptance. Choose the best response. a. When approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may
> The following questions concern the overall audit strategy and audit program, including selection of the type of test to perform. Choose the best response. a. In the financial statement audit of a nonpublic company, the auditor decides to perform tests o
> The following questions deal with audit evidence for the sales and collection cycle. Choose the best response. a. To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failu
> For each of the following types of misstatements (parts a. through c.), select the control that should have prevented the misstatement: a. Which of the following controls most likely will be effective in offsetting the tendency of sales personnel to maxi
> The following questions deal with internal controls in the sales and collection cycle. Choose the best response. a. Which of the following controls would be most effective in detecting a failure to record cash received from customers paying on their acco
> What types of disciplinary action may be taken if a member has violated the AICPA Code of Professional Conduct?
> The following questions concern the auditor’s responses to the possibility of fraud. When fraud risk factors are identified during an audit, the auditor’s documentation should include b. If an independent audit leadi
> The following questions concern auditing IT systems. Choose the best response. a. As general IT controls weaken, the auditor is most likely to (1) reduce testing of automated application controls done by the computer. (2) increase testing of general IT c
> The following questions deal with assessing control risk in a financial statement audit. Choose the best response. a. On the basis of audit evidence gathered and evaluated, an auditor decides to increase assessed control risk from that originally planned
> The following questions deal with deficiencies in internal control. Choose the best response. a. An internal control deficiency may be defined as a condition in which material misstatements would ordinarily not be timely detected by (1) auditors in assis
> The following questions deal with liability under the 1933 and 1934 securities acts. Choose the best response. a. Major, Major & Sharpe, CPAs, are the auditors of MacLain Technologies. In connection with the public offering of $10 million of MacLain secu
> The following questions concern CPA firms’ liability under common law. Choose the best response. a. In a common law action against an accountant, lack of privity is a viable defense if the plaintiff (1) is the client’s creditor who sues the accountant fo
> The following questions deal with auditing standards. Choose the best response. a. Which of the following best describes what is meant by U.S. auditing standards? (1) Acts to be performed by the auditor (2) Measures of the quality of the auditor’s perfor
> Identify the six organizational structures available to CPA firms. Why are most CPA firms not organized as general partnerships?
> What are the three conditions that require a departure from an unmodified opinion audit report? Give an example of each.
> When should the auditor include an explanatory paragraph in an unmodified opinion audit report?
> Distinguish between a report qualified due to a GAAP departure and one qualified due to a scope limitation.
> What are the most significant differences between the AICPA and the PCAOB standard unmodified opinion audit reports?
> What are the eight parts of a standard unmodified opinion audit report for a nonpublic entity and what is the main content provided in each part?
> Explain the rule on contingent fees. Why is this rule necessary?
> Identify the circumstances under which a CPA can disclose confidential information without client permission.
> Explain the role of the audit committee in enhancing auditor independence.
> How might the write-off of accounts receivable increase the risk of fraud related to cash receipts?
> What are the similarities and differences among the three main types of audits?
> What are the major causes of information risk? How can information risk be reduced?
> The U.S. national stock exchanges require listed companies to have an independent audit committee. Required: a. Describe an audit committee. b. What does it mean for the audit committee members to be “independent”? c. What are the typical functions perf
> The following relate to auditors’ independence: a. Why is independence so essential for auditors? b. Compare the importance of independence of CPAs with that of other professionals, such as attorneys. c. Explain the difference between independence in app
> Identify the two broad categories of management assertions.
> The following are independent situations for which you will recommend an appropriate audit report: 1. Subsequent to the date of the financial statements as part of his post-balance sheet date audit procedures, a CPA learned that a recent fire caused heav
> Review the information in Table 2-1 on page 25 and discuss the following: a. For the largest 10 firms listed in the table, how many firms generate the largest percentage of their revenue from consulting? Discuss why some firms may have larger consulting
> For each engagement described below, indicate whether the engagement is likely to be conducted under international auditing standards, AICPA audit in standards, or PCAOB auditing standards. a. An audit of a public company headquartered in the U.S. listed
> You have been asked to make a presentation in your International Business class about how globalization is impacting the auditing profession. In preparation, you met with your auditing professor and discussed these questions: a. What organization is resp
> The IAASB recently revised its standards related to audit reporting. ISA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, requires the auditor’s report to include the following paragraphs under the headings “Basis for Opinion” and
> The PCAOB’s recently revised auditor reporting standard includes a requirement for the auditor to communicate critical audit matters. Critical audit matters include those matters during the audit that involved difficult, subjective, or complex auditor ju
> PCAOB Rule 3211, Auditor Reporting of Certain Audit Participants, requires that an audit firm file a form, referred to as Form AP, for each initial issuance of an audit report. On Form AP, the audit firm discloses the name of each audit engagement partne
> Regulators are taking advantage of advances in technology to fulfill their oversight responsibilities. Visit the website of the Securities and Exchange Commission (SEC) (www.sec.gov) to locate the speech given at the OpRisk Nort America 2017 Conference b
> This problem is based on the JA Tires data that was first introduced in problem 6-35. If you have not already accessed the data, it can be downloaded from the textbook website. As part of risk assessment procedures, you have been asked to perform some pr
> How did the Sarbanes–Oxley Act of 2002 increase criminal liability for auditors?
> Below are 10 independent risk factors: 1. The client is one of the industry’s largest based on its size and market share. 2. The company is publicly traded. 3. The client fails to reconcile bank accounts to recorded cash balances. 4. The audit program om
> Both transaction-related and balance-related audit objectives include objectives related to presentation and disclosure. Visit the website of the United States Securities and Exchange Commission (SEC) and locate the Accounting and Auditing Enforcement Re
> Section 404(a) of the Sarbanes–Oxley Act requires management of a public company to issue a report on internal control over financial reporting (ICOFR) as of the end of the company’s fiscal year. Visit the website for MetLife (www.metlife.com) and search
> AU-C 265, “Communicating Internal Control Related Matters Identified in an Audit,” provides guidance to auditors on communicating deficiencies in internal control to management and those charged with governance when performing an audit under AICPA auditi
> 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
> Angela Walsh is a new staff auditor. On her first three engagements, she was assigned to perform tests of controls for acquisitions and payments and test of details of balances for accounts payable. The approach taken in each audit is briefly described b
> 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 w
> The PCAOB issues audit practice alerts to highlight new, emerging, or otherwise noteworthy circumstances. Revenue is the largest account in the financial statements for many companies, and many fraudulent financial reporting cases have involved the inten
> The following questions concern auditor responsibilities related to the assessment of risks of material misstatement. Choose the best response. a. Which of the following procedures would a CPA most likely perform during the planning stage of the audit? (
> The following questions concern audit evidence and audit documentation. Choose the best response. a. According to PCAOB audit standards, audit documentation must be retained for b. Which of the following types of audit evidence is generally the most reli
> Describe two of the more common judgment traps and biases.
> The following questions deal with client acceptance, audit planning, and materiality. Choose the best response. a. In which of the following circumstances would an auditor of an issuer be least likely to reevaluate established materiality levels? (1) The
> Auditing standards require the auditor to obtain an understanding of the entity and its environment as a basis for assessing the risks of material misstatements. Business models differ across organizations and industries, leading to unique business proce
> The following questions concern auditor responsibilities in an audit of financial statements. Choose the best response. a. The auditor’s responsibility regarding material misstatements caused by fraud is (1) less than the auditor’s responsibility regardi
> The following questions deal with internal control and audit evidence in the sales and collection cycle. Choose the best response. a. Tracing shipping documents to sales invoices provides evidence that (1) sales billed to customers were actually shipped.
> The following questions concern audit reports other than unmodified opinion audit reports with standard wording. Choose the best response. a. As compared to an unmodified opinion, an opinion qualified due to a material departure from generally accepted a
> The following questions concern auditor responsibilities related to the identification and assessment of fraud risk. Choose the best response. a. While performing a preliminary assessment for a new client audit, the auditor determines that the client has
> The following questions concern auditor professional responsibilities. Choose the best response. a. The concept of materiality would be least important to an auditor when considering the (1) adequacy of disclosure of a client’s illegal act. (2) effects o
> The following are general questions about assessing control risk, testing controls, and reporting on internal controls. Choose the best response. a. During the planning stage of an audit, the auditor initially assessed both inherent risk and control risk
> The following independent scenarios describe auditor behavior on an audit engagement. 1. The audit engagement partner, Marc Johnson, recently received a subpoena for workpapers related to an audit engagement on which his audit firm has been named as a de
> The following questions deal with assurance services and types of audits. Choose the best response. a. Which of the following is considered an assurance engagement? (1) Bookkeeping (2) Preparation (3) Compilation (4) Audit b. Which of the following engag
> Distinguish between an unmodified opinion audit report that contains an emphasis-of-matter explanatory paragraph and a qualified report.
> The following questions concern CPA firms’ liability under common law or statutory law. Choose the best response. a. Which of the following elements is required to be proven by the plaintiff to hold an accountant liable for gross negligence but not for a
> The following questions address CPA firms and entities that regulate them. Choose the best response. a. An auditor of an entity subject to the rules of the SEC must conduct the financial statement audit in accordance with (1) PCAOB standards. (2) Stateme
> Suppose that you share a ride to a client with another audit staff member. Your colleague proposes that you both submit mileage reimbursement requests for each day of the audit even though you share rides. Explain the six-step approach to resolving an et
> Describe the relations among international auditing standards, AICPA auditing standards, and PCAOB auditing standards.
> The following sales procedures were encountered during the annual audit of Griezmann Wholesale Distributing Company: Customer orders are received by the sales order department. A clerk computes the approximate dollar amount of the order and sends it to t
> The following is a list of possible errors or fraud (1 through 8) involving sales and controls (a. through k.) that may prevent or detect the errors or fraud: Possible Errors or Fraud 1. Invoices are sent for shipped goods, and are recorded in the sales
> The following are commonly performed tests of controls and substantive tests of transactions audit procedures in the sales and collection cycle: 1. Review the prelisting of cash receipts to determine whether cash is prelisted daily. 2. Reconcile the reco
> Items 1 through 10 are selected questions of the type generally found in internal control questionnaires used by auditors to obtain an understanding of internal control in the sales and collection cycle. In using the questionnaire for a client, a “yes” r
> The following are partial descriptions of internal controls for companies engaged in the manufacturing business: 1. Every day, hundreds of employees clock in using their employee identification cards at Generous Motors Corporation. The data on these time
> Each of the following internal controls has been taken from a standard internal control questionnaire used by a CPA firm for assessing control risk in the payroll and personnel cycle. 1. Human resource policies require an investigation of an employment a
> Is the auditor’s liability under common law affected if the third party was unknown rather than known? Explain.
> The following internal controls were identified by the auditor while gaining an understanding of internal control for the sales cycle. 1. Access to the customer master file is restricted to authorized personnel. Customers are added to the master file onl
> Siva Kumar and Vera Collier are friends who are employed by different CPA firms. One day during lunch they are discussing the importance of internal control in determining the amount of audit evidence required for an engagement. Kumar expresses the view
> The following are five independent situations. 1. Joanie Brogan is a partner in an audit firm that operates as a limited liability partnership (LLP). The firm has been sued for an alleged audit failure related to an audit engagement handled by a differen
> For each of the following procedures taken from the quality control manual of a CPA firm, identify the applicable element of quality control from Table 2-3 on page 39. a. All potential new clients are reviewed before acceptance. The review includes consu
> Sarah O’Hann enjoyed taking her first auditing course as part of her undergraduate accounting program. While at home during her semester break, she and her father discussed the class, and it was clear that he didn’t really understand the nature of the au
> Why is there a special need for professional conduct by CPAs? How does this differ from the need for special conduct in other professions?
> This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found on the textbook website. You should read all of the ref
> What is meant by determining the degree of correspondence between information and established criteria? What are the criteria for an audit of a company’s financial statements?
> The following are situations that may violate the AICPA Code of Professional Conduct. Assume, in each case, that the CPA is a partner, unless stated otherwise. 1. Elbert is a staff accountant at a CPA firm. Elbert’s wife works in human resources at one o
> Part 1. Whitlow & Company is a brokerage firm registered under the Securities Exchange Act of 1934. The act requires such a brokerage firm to file audited financial statements with the SEC annually. Mitchell & Moss, Whitlow’s CPAs, performed the annual a
> Compare the wording in the standard unmodified opinion audit report for a nonpublic entity under AICPA auditing standards in Figure 3-1 (p. 49) with the wording for a public company audit under PCAOB auditing standards in Figure 3-3 (p. 54). How are the
> Explain the difference in the requirements for reporting on the effectiveness of internal controls over financial reporting for integrated audits versus financial statement–only audits.
> Why are the financial statement audit findings relevant to the auditor’s opinion on the effectiveness of internal controls over financial reporting?
> What four types of procedures are used by auditors to test whether internal controls are operating effectively?
> In Figure 13-4, explain the differences among C3, C2, and C1. Explain the circumstances under which it would be a good decision to obtain audit assurance from substantive tests at point C1. Do the same for points C2 and C3. Figure 13-4: Audit Assur
> What is the purpose of a control risk matrix?
> Explain the conceptual framework for the Rules of Conduct and how it should be applied.
