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Question: The following are parts of a typical

The following are parts of a typical audit for a company with a fiscal year-end of July 31.
1. Confirm accounts payable.
2. Do tests of controls and substantive tests of transactions for the acquisition and payment and payroll and personnel cycles.
3. Do other tests of details of balances for accounts payable.
4. Do tests for review of subsequent events.
5. Accept the client.
6. Issue the audit report.
7. Understand internal control and assess control risk.
8. Do analytical procedures for accounts payable.
9. Set acceptable audit risk and decide preliminary judgment about materiality and tolerable misstatement.

a. Identify the phase of the audit in which each activity occurs.
b. Put parts 1 through 9 of the audit in the sequential order in which you will expect them to be performed in a typical audit.
c. Identify those parts that will frequently be done before July 31.

> Explain the relationship of tolerable misstatement, inherent risk, and control risk to planned tests of details of balances.

> What audit procedures are most likely to be used to verify accounts receivable written off as uncollectible? State the purpose of each of these procedures.

> You have been assigned to the confirmation of aged accounts receivable for the Blank Paper Company audit. You have tested the aged trial balance and selected the accounts for confirming. Before the confirmation requests are mailed, the controller asks to

> State three types of differences that might be observed in the confirmation of accounts receivable that do not constitute misstatements. For each, state an audit procedure that will verify the difference.

> List the most important duties that should be segregated in the sales and collection cycle. Explain why it is desirable that each duty be segregated.

> The auditor's risk assessment procedures identified several risks that the auditor deems to be significant risks. Several internal controls exist that are designed to mitigate the risks identified. Describe the auditor's responsibilities for considering

> Assume a company with the following balance sheet accounts: You are concerned only about overstatements of owner's equity. Set tolerable misstatement for the three relevant accounts such that the preliminary judgment about materiality does not exceed $5,

> Why is it desirable to design tests of details of balances before performing tests of controls and substantive tests of transactions? State the assumptions that the auditor must make in doing so. What does the auditor do if the assumptions are wrong?

> State the three categories of factors that affect acceptable audit risk and list the factors that the auditor can use to indicate the degree to which each category exists.

> State the four-step approach to designing tests of controls and substantive tests of transactions.

> List several audit procedures that the auditor can use to determine whether all cash received was recorded.

> In Part V of the Pinnacle Manufacturing case, you prepared a performance format audit program. In Part VI, sample sizes will be determined by using nonstatistical or attributes sampling, and the results of the tests will be evaluated. You should use nons

> Explain what is meant by lapping and discuss how the auditor can uncover it. Under what circumstances should the auditor make a special effort to uncover lapping?

> 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. Many companies have reported that their ICOFR was operatin

> The Albring Company sells electronics equipment, and has grown rapidly in the last year by adding new customers. The audit partner has asked you to evaluate the allowance for doubtful accounts at December 31, 2011. Comparative information on sales and ac

> Lew Pherson 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. Pherson expresses the vi

> The following are misstatements that have occurred in Fresh Foods Grocery Store, a retail and wholesale grocery company: 1. The incorrect price was used on sales invoices for billing shipments to customers because the wrong price was entered into the com

> List the transaction-related audit objectives for the audit of sales transactions. For each objective, state one internal control that the client can use to reduce the likelihood of misstatements.

> Rank the following types of tests from most costly to least costly: analytical procedures, tests of details of balances, risk assessment procedures, tests of controls and substantive tests of transactions.

> In Figure13-3, explain the difference among C3, C2, and C1. Explain the circumstances under which it will be a good decision to obtain audit assurance from substantive tests at point C1. Do the same for points C2 and C3. Figure 13-3 Audit Assurance from

> 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. Approval of department head or foreman on time cards is required be

> The following questions deal with assessing control risk in a financial statement audit. Choose the best response. a. The auditor's tests of controls revealed that required approvals of cash disbursements were absent for a large number of sample transact

> The following questions deal with deficiencies in internal control. Choose the best response. a. Which of the following is an example of an operation deficiency in internal control? (1) The company does not have a code of conduct for employees to conside

> What is a walkthrough of internal control? What is its purpose?

> The auditor of Ferguson's Inc. identified two internal controls in the sales and collection cycle for testing. In the first control, the computer verifies that a planned sale on account will not exceed the customer's credit limit entered in the accounts

> List the transaction-related audit objectives for the verification of cash receipts. For each objective, state one internal control that the client can use to reduce the likelihood of misstatements.

> Dodge, CPA, is auditing the financial statements of a manufacturing company with a significant amount of trade accounts receivable. Dodge is satisfied that the accounts are correctly summarized and classified and that allocations, reclassifications, and

> Describe the concept of an integrated audit of the financial statements and internal control required by PCAOB standards.

> Distinguish between the sales journal and the accounts receivable master file. What type of information is recorded in each and how do these accounting records relate?

> Explain the effect of extensive misstatements found in the prior year's audit on inherent risk, planned detection risk, and planned audit evidence.

> What two conditions must be present for the auditor to issue an unqualified opinion on internal control over financial reporting? What type of condition will cause the auditor to issue a qualified or disclaimer of opinion on internal control over financi

> What is the difference between the auditor's approach in verifying sales returns and allowances and that for sales? Explain the reasons for the difference.

> Distinguish between the terms tolerable misstatement and preliminary judgment about materiality. How are they related to each other?

> List the types of specific control activities and provide one specific illustration of a control in the sales area for each control activity.

> The following internal controls for the acquisition and payment cycle were selected from a standard internal control questionnaire. 1. Checks are mailed by the owner or manager or a person under her supervision after signing. 2. All supporting documents

> What is the relationship among the five components of internal control?

> Explain what is meant by making an estimate of the total misstatement in a segment and in the overall financial statements. Why is it important to make these estimates? What is done with them?

> Chapter 8 introduced the eight parts of the planning phase of audits. Which part is understanding internal control and assessing control risk? What parts precede and follow that understanding and assessing control risk?

> Niosoki Auto Parts sells new parts for foreign automobiles to auto dealers. Company policy requires that a prenumbered shipping document be issued for each sale. At the time of pickup or shipment, the shipping clerk writes the date on the shipping docume

> Identify the eight accounts receivable balance-related audit objectives. For each objective, list one audit procedure.

> What two aspects of internal control must management assess when reporting on internal control to comply with Section 404 of the Sarbanes-Oxley Act?

> What is meant by the control environment? What are the factors the auditor must evaluate to understand it?

> Section 404(a) of the Sarbanes-Oxley Act requires management to issue a report on internal control over financial reporting. Identify the specific Section 404(a) reporting requirements for management.

> Describe which of the three categories of broad objectives for internal controls are considered by the auditor in an audit of both the financial statements and internal control over financial reporting.

> The following are various changes in audit circumstances. Audit Circumstance 1. Analytical procedures indicated a significant slowing in accounts receivable turnover. 2. The client entered into sales contracts with new customers that differ from the clie

> State a test of control audit procedure to test the effectiveness of the following control: Approved wage rates are used in calculating employees' earnings. State a substantive test of transactions audit procedure to determine whether approved wage rates

> Gale Brewer, CPA, has been the partner in charge of the audit of Merkle Manufacturing Company, a nonpublic company, for 13 years. Merkle has had excellent growth and profits in the past decade, primarily as a result of the excellent leadership provided b

> Distinguish between the TER and the CUER. How is each determined?

> Auditors have not been successful in measuring the components of the audit risk model. How is it possible to use the model in a meaningful way without a precise way of measuring the risk?

> Define the audit risk model and explain each term in the model. Also describe which two factors of the model when combined reflect the risk of material misstatement.

> Kim Bryan, a new staff auditor, is confused by the inconsistency of the three audit partners she has been assigned to on her first three audit engagements. On the first engagement, she spent a considerable amount of time in the audit of cash disbursement

> Describe accounting requirements for proper recording of sales returns and allowances.

> The following are three situations, all involving nonpublic companies, in which the auditor is required to develop an audit strategy: 1. The client has inventory at approximately 50 locations in a three-state region. The inventory is difficult to count a

> Define each of the following terms: a. Acceptable risk of assessing control risk too low (ARACR) b. Computed upper exception rate (CUER) c. Estimated population exception rate (EPER) d. Sample exception rate (SER) e. Tolerable exception rate (TER)

> Following are several decisions that the auditor must make in an audit of a nonpublic company. Letters indicate alternative conclusions that could be made. Required a. Identify the sequence in which the auditor should make decisions 1 to 4. b. For the a

> A considerable portion of the tests of controls and substantive tests of transactions are performed simultaneously as a matter of audit convenience. But the substantive tests of transactions procedures and sample size, in part, depend on the results of t

> Following are evidence decisions for the three audits described in Figure 3-3 Figure 3-3 Audit A Ineffective client internal controls Audit B Very effective client internal controls Audit C Somewhat effective client internal controls Evidence Decisions 1

> Beds and Spreads, Inc. specializes in bed and bath furnishings. Its inventory system is linked through the Internet to key suppliers. The auditor identified the following internal controls in the inventory cycle: 1. The computer initiates an order only w

> Assume that Rosanne Madden, CPA, is using 5% of net income before taxes, current assets, or current liabilities as her major guidelines for evaluating materiality. What qualitative factors should she also consider in deciding whether misstatements may be

> What is meant by planned detection risk? What is the effect on the amount of evidence the auditor must accumulate when planned detection risk is increased from medium to high?

> Distinguish among tests of details of balances, tests of controls, and substantive tests of transactions for the sales and collection cycle. Explain how the tests of controls and substantive tests of transactions affect the tests of details of balances.

> For this problem use the Metaphor-Trans-All file in ACL Demo, which is a file of outstanding sales invoices (each row represents an invoice transaction). The suggested command or other source of information needed to solve the problem requirement is incl

> BestSellers.com sells fiction and nonfiction books to customers through the company's Web site. Customers place orders for books via the Web site by providing their name, address, credit card number, and expiration date. What internal controls could Best

> You are auditing the sales and collection cycle for the Smalltown Regional Hospital, a small not-for-profit hospital. The hospital has a reputation for excellent medical services and deficient record keeping. The medical people have a tradition of doing

> In the confirmation of accounts receivable for the Reliable Service Company, 85 positive and no negative confirmations were mailed to customers. This represents 35% of the dollar balance of the total accounts receivable. Second requests were sent for all

> Frank James, a highly competent employee of Brinkwater Sales Corporation, had been responsible for accounting-related matters for two decades. His devotion to the firm and his duties had always been exceptional, and over the years, he had been given incr

> For each of the following, give an example of a physical control the client can use to protect the asset or record: 1. Petty cash 2. Cash received by retail clerks 3. Accounts receivable records 4. Raw material inventory 5. Perishable tools 6. Manufac

> State what is meant by a representative sample and explain its importance in sampling audit populations.

> Explain why the analysis of differences is important in the confirmation of accounts receivable, even if the misstatements in the sample are not material.

> Explain why you agree or disagree with the following statement: "In most audits, it is more important to test carefully the cutoff for sales than for cash receipts." Describe how you perform each type of test, assuming documents are prenumbered.

> Distinguish a significant deficiency in internal control from a material weakness in internal control. How will the presence of one significant deficiency affect an auditor's report on internal control under PCAOB standards? How will the presence of one

> The separation of operational responsibility from record keeping is meant to prevent different types of misstatements than the separation of the custody of assets from accounting. Explain the difference in the purposes of these two types of separation of

> The Securities and Exchange Commission (SEC) found that Bally Total Fitness Holding Corporation, a nationwide commercial operator of fitness centers, fraudulently accounted for three types of revenues it received from members. The SEC also charged the au

> The engagement partner agreed with Sessions’ recommended approach. In planning the audit evidence for detailed inventory tests, the audit risk model was applied with the following results: TDR = AAR/IR x CR x APR Where: TDR = test of details risk AAR = a

> Establishing materiality and allocation of materiality to individual accounts requires considerable judgment. Access Microsoft’s 2009 financial statements at www.microsoft.com (use the “investor relations” link). Required a. Assume that your firm’s mate

> Give examples of risk factors for misappropriation of assets for each of the three fraud conditions: incentives/pressures, opportunities, and attitudes/rationalization.

> Give examples of risk factors for fraudulent financial reporting for each of the three fraud conditions: incentives/pressures, opportunities, and attitudes/rationalization.

> The Art Appreciation Society operates a museum for the benefit and enjoyment of the community. When the museum is open to the public two clerks who are positioned at the entrance collect a $5.00 admission fee from each nonmember patron. Members of the Ar

> What are the three conditions of fraud often referred to as "the fraud triangle?"

> Distinguish fraudulent financial reporting from misappropriation of assets.

> 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


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