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 defendant. Marc asked the staff auditor to remove and discard two memos from the workpaper files documenting communication between the engagement partner and the CFO regarding the goodwill impairment analysis. 2. Chad Lewis is the lead audit partner on the audit engagement of a publicly traded company. Chad followed auditing standards on the audit engagement and issued an unqualified opinion. It was subsequently discovered that the financial statements contained a material misstatement that had been undetected by the management of the company and by the audit team. 3. Maria Marquez, CPA, is a sole proprietor. She recently accepted a new audit client who was applying for a bank loan and needed to present audited financial statements to the bank. Maria was not able to complete the audit engagement by herself, so she hired several college students to assist her. The students completed the audit procedures without much guidance, and Maria issued an unmodified opinion on the client’s financial statements. 4. On a recent audit engagement, the client firm neglected to inform the audit firm that a significant percentage of inventory was stored at an outside warehouse. As a result, the auditors did not observe the physical inventory count for that inventory, which represented 20 percent of the client’s inventory balance. The auditors were able to satisfy themselves that the inventory existed through alternative procedures, and issued an unmodified opinion on the financial statements as a whole. 5. Melissa Louis is the lead engagement partner on a publicly traded company. The company’s CEO recently approached Melissa and informed her that they had identified a material misstatement in the prior year’s financial statements, which had been audited by Melissa’s firm and submitted to the SEC. The CEO suggested they correct the misstatement by recording a journal entry in the current year for half of the amount of the misstatement, and in the following year for the remaining half. Melissa agreed to this plan to avoid a public announcement of a restatement and a potential lawsuit, since the amount of the journal entries recorded in the current and subsequent years would be considered immaterial to the financial statements. Required: For each of the scenarios listed above, discuss whether the auditor’s behavior would be considered non-negligence, ordinary negligence, gross negligence, constructive fraud, fraud, or criminal behavior.
> 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
> 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 c
> 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 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.
> Define the audit risk model and explain each term in the model
> Describe the three main techniques used to manipulate revenue.
> How do the COSO principles help an organization assess whether internal controls are designed and operating effectively?
> What are the three ways auditors respond to fraud risks?
> Why is an auditor’s independence so essential?
> Describe the types of procedures that constitute risk assessment procedures.
> At what two levels does the auditor assess the risk of material misstatement?
> What is the purpose of the Principles of Professional Conduct? Identify the six principles.
> Explain the difference between known and likely misstatements. Assume the auditor tests a sample of $100,000 of inventory and finds misstatements totaling $5,000. What is the likely misstatement if the account balance is $500,000?
> Explain the five elements that are part of a strategic understanding of the client’s business.
> What are the auditor’s possible defenses against lawsuits filed under the Securities Exchange Act of 1934?
> Explain the concept of professional skepticism and identify its two elements.
> What are the four major sources of auditors’ legal liability?
> Describe whether the auditor is more concerned about the occurrence or completeness objective related to cash receipts.
> What three types of authorizations are commonly used as internal controls for sales? Explain the importance of each.
> What are the purposes of the opinion section in the auditor’s report? Identify the most important information included in the opinion section.
> As part of the engagement team for the audit of JA Tire Manufacturing for the year ended December 31, 2019, you are responsible for auditing the sales and collection cycle. If you have not done so already, visit the textbook website to download the data
> A study was made to determine whether more Italians than Americans prefer white champagne to pink champagne at weddings. Of the 300 Italians selected at random, 72 preferred white champagne, and of the 400 Americans selected, 70 preferred white champagne
> A geneticist is interested in the proportions of males and females in a population who have a certain minor blood disorder. In a random sample of 100 males, 31 are found to be afflicted, whereas only 24 of 100 females tested have the disorder. Can we con
> State the null and alternative hypotheses to be used in testing the following claims and determine generally where the critical region is located: (a) The mean snowfall at Lake George during the month of February is 21.8 centimeters. (b) No more than 20%
> In a study to estimate the proportion of wives who regularly watch soap operas, it is found that 52 of 200 wives in Denver, 31 of 150 wives in Phoenix, and 37 of 150 wives in Rochester watch at least one soap opera. Use a 0.05 level of significance to te
