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Question: The following independent scenarios describe


The following independent scenarios describe auditor decisions made during an audit engagement.
1. Chen Li worked on the audit of American Healthcare Associations (AHA), which operates hospitals and outpatient centers in Texas and Oklahoma. Chen was assigned responsibility to audit the allowance for patient receivables. For the past several years, AHA’s accounting policy required that the recorded allowance for patient receivables be set to equal the total amount of receivables over 180 days past due. Prior audit testing of the allowance in previous years has found that the subsequent write-offs of patient receivables has closely approximated the amount included in the allowance. During the current-year audit, Chen examined the amount recorded in the general ledger allowance account and reconciled that amount to the amount shown in AHA’s consolidated aged trial balance in the 180-days-past-due amount. Given that the dollar amounts agreed, Chen concluded that the allowance was in accordance with AHA accounting policy and fairly stated. While media reports and other industry publications suggested that recent regulatory changes in healthcare insurance were affecting patients’ ability to pay, Chen concluded that AHA’s allowance was fairly stated given the amounts complied with AHA’s policy.
2. Stephan Tjugum was assigned responsibility for evaluating the goodwill impairment testing process at Georgia Metals, Inc. Because Georgia Metals’ growth strategy was based mostly on acquisitions, the company had experience in performing annual impairment tests of goodwill. The client provided Stephan extensive information along with detailed schedules that documented management’s testing approaches, and it provided him support for key assumptions made by management. Stephan reviewed the schedules in detail and tested the key calculations. While Stephan’s firm has a number of valuation specialists as part of its staff, Stephan decided not to request their assistance in making an independent assessment of goodwill impairment given that the client’s documentation was extensive and it would take too much time to have the firm’s valuation specialists complete an independent assessment.
3. Carlos Mena was responsible for auditing the occurrence of sales transactions in the audit of Robertsville Manufacturing. As part of his testing, he reviewed the contracts signed between Robertsville Manufacturing and its customers to determine that the transaction terms justified the recording of sales for the year under audit. In addition, he examined documentation related to the sales transactions, including the customers’ purchase orders, shipping documents, and invoices generated by Robertsville. That evidence examined supported the correct recording of sales in the current year. However, Carlos also noticed in the customer files copies of email exchanges between Robertsville Manufacturing sales agents and the customers suggesting that some of the terms of the sales agreements could be waived at the customers’ discretion. Carlos decided to rely on the contracts and sales transactions documentation to conclude that the sales were properly stated, given that the other information was only included in emails.
4. Allison Garrett works on a number of audits of technology equipment manufacturers and has developed extensive knowledge and experience in the industry. On the recent audit engagement of financial statements for Zurich Technologies, Allison was responsible for auditing the valuation of inventories, including the reserve for obsolescence. Given her familiarity with the industry, Allison decided to conduct a quick ratio analysis of the days in inventory and determined that the reserve was fairly stated, given it was in line with reserves established by some of her other clients. She determined that additional evidence was not necessary to obtain because of her experience with other clients.
For each of the scenarios listed above, describe the most likely judgment trap that ultimately biased the auditor’s decision making in the audit.



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> The following audit procedures are included in the audit program of Holland Equipment, Inc. 1. Use audit software to examine journal entries in the sales, cash receipts, purchases, cash disbursements, payroll, and general journals for any amounts exceedi

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> The following misstatements are included in the accounting records of the Dillon Manufacturing Company: 1. Cash paid on accounts receivable was stolen by the mail clerk when the mail was opened. 2. A sales invoice was miscalculated by $1,000 as a result

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> Each of the following situations involves possible violations of the AICPA Code of Professional Conduct. For each situation, state whether it is a violation of the Code. In those cases in which it is a violation, explain the nature of the violation and t

> Each of the following situations involves a possible violation of the AICPA Code of Professional Conduct. For each situation, state the applicable rule of conduct and whether it is a violation. a. Stefan, CPA, provides tax services, management advisory s

> Following are six situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit of inventory. Required: a. Explain what low, medium, and high mean for each of the four risks and planned evidence. b. Fi

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> Target and Kohl’s are chains of stores that cater to customers who desire name-brand goods at lower prices. The Securities and Exchange Commission (SEC) Form 10-K filing rules require management of U.S. public companies to include background information

> Listed below are various risks identified during audit planning that you have been asked to evaluate to assess whether they are significant risks. 1. Fernandez Wholesalers sells energy drinks to various distributors. As they have expanded sales to additi

> Moranda and Sills, LLP, has served for over 10 years as the auditor of the financial statements of Highland Bank and Trust. The firm is conducting its audit planning for the current fiscal year and is in the process of performing risk assessment procedur

> This problem requires you to access PCAOB Auditing Standard AS 2110, Identifying and Assessing Risks of Material Misstatements (pcaobus.org). Use this standard to answer each of the questions below. For each answer, document the paragraph(s) in AS 2110 s

> The following are concepts discussed in Chapter 8 and this chapter: 1. Preliminary judgment about materiality 7. Estimated total misstatement in a segment 2. Control risk 8. Planned detection risk 3. Risk of fraud 9. Estimate of the combined misstatement

> The following are various activities an auditor does during audit planning. 1. Review accounting principles unique to the client’s industry 2. Determine the likely users of the financial statements 3. Evaluate the appropriate financial statement measures

> Gordon & Groton, CPAs, were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange. Gordon & Groton audited and reported on the financial statements of Bank, which were filed with the Securities and Exchange Commission.

> Taylor Bean & Whitaker Mortgage Corp. (Taylor Bean) was a Florida mortgage lender. Once one of the nation’s largest privately held mortgage companies, the company collapsed in 2009 after a multibillion dollar mortgage fraud unraveled. The downfall of Tay

> Doyle and Jensen, CPAs, audited the accounts of Regal Jewelry, Inc., a corporation that imports and deals in fine jewelry. Upon completion of the audit, the auditors supplied Regal Jewelry with 20 copies of the audited financial statements. The firm knew

> As the in-charge senior auditor on the audit engagement for JA Tire Manufacturing for the year ended December 31, 2019, you are responsible for performing risk assessment procedures related to the sales cycle. JA Tire has four sales divisions within the

> Identify the management assertion and general balance-related audit objective for the specific balance-related audit objective: All recorded fixed assets exist at the balance sheet date.

> Following are statements of earnings and financial position for Wexler Industries. // Required: a. Use professional judgment in deciding on the preliminary judgment about materiality for earnings, current assets, current liabilities, and total asset

> Ling, an audit manager, is planning the audit of Modern Technologies, Inc. (MT, Inc.), a manufacturer of electronic components. This is the first year that Ling’s audit firm has performed the audit for MT, Inc. Ling set the preliminary

> Analytical procedures are an important part of the audit process and consist of the evaluation of financial information by the study of plausible relationships among financial and nonfinancial data. Analytical procedures may be done during planning, as a

> The following are specific balance-related audit objectives applied to the audit of accounts receivable (a. through i.) and management assertions about account balances (1 through 6). The list referred to in the specific balance-related audit objectives

> Your comparison of the gross margin percent for Jones Drugs for the years 2016 through 2019 indicates a significant decline. This is shown by the following information: A discussion with Tanvi Anand, the controller, brings to light two possible explana

> The minutes of the board of directors of the Tetonic Metals Company for the year ended December 31, 2019, were provided to you. Meeting of March 5, 2019 The meeting of the board of directors of Tetonic Metals was called to order by James Cook, the chairm

> Your audit firm was recently engaged to conduct the financial statement audit for BBH Automotive, an original equipment manufacturer (OEM) in the automotive industry. As the senior manager on the engagement, you are performing initial audit planning and

> You are auditing payroll for the Morehead Technologies company for the year ended October 31, 2019. Included next are amounts from the client’s trial balance, along with comparative audited information for the prior year. You have obt

> Following are the auditor’s calculations of several key ratios for Cragston Star Products. The primary purpose of this information is to understand the client’s business and assess the risk of financial failure, but an

> This problem requires the use of ACL software, which can be accessed by following the instructions available on the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found on the textbook webs

> What are the information and established criteria for the audit of Jones Company’s tax return by an internal revenue agent? What are they for the audit of Jones Company’s financial statements by a CPA firm?

> The following are specific transaction-related audit objectives applied to the audit of cash disbursement transactions (a. through f.), management assertions about classes of transactions and events and related disclosures (1 through 6), and general tran

> The following audit procedures were performed in the audit of inventor to satisfy specific balance-related audit objectives as discussed in Chapter 6. The audit procedures assume that the auditor has obtained the inventory count sheets that list the clie

> The following are various audit procedures performed to satisfy specific transaction-related audit objectives as discussed in Chapter 6. The general transaction-related audit objectives from Chapter 6 are also included. Audit Procedures 1. Trace from re

> As auditor of the Star Manufacturing Company, you have obtained a trial balance taken from the books of Star one month before year end: There are no inventories consigned either in or out. All notes receivable are due from outsiders and held by Star.

> The following are examples of documentation typically obtained by auditors: 1. Duplicate sales invoices 2. Receiving reports 3. Minutes of the board of directors 4. Signed W-4s 5. Subsidiary accounts receivable records 6. Vendors’ invoices 7. General led

> For the following independent situations, assume that you are the audit partner on the engagement: 1. A number of frozen yogurt stores have opened in the last few years and your client, YogurtLand, has experienced a noticeable decline in customer traffic

> Patel, CPA, has completed the audit of the financial statements of Bellamy Corporation as of and for the year ended December 31, 2019. Patel also audited and reported on the Bellamy financial statements for the prior year. Patel drafted the following rep

> A careful reading of an unmodified opinion audit report indicates several important phrases. Explain why each of the following phrases or clauses is used rather than the alternative provided: a. “The accompanying financial statements present fairly, in a

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> In the normal course of performing their responsibilities, auditors often conduct audits or reviews of the following: 1. The computer operations of a large corporation to evaluate whether the internal controls are likely to prevent misstatements in accou

> Identify some of the most important ways that the profession and society encourage CPAs to conduct themselves at a high level.

> The following (1 through 16) are the balance-related and transaction related audit objectives. Identify the specific audit objective (1 through 16) that each of the following specific audit procedures (a. through l.) satisfies in the audit of sales, ac

> There are many types of information that require assurance. Individually or in groups, identify the following types of assurance services. a. Identify three or more assurance services that are likely to be provided only by public accounting firms. b. Ide

> Publicly traded companies must electronically file a variety of forms or reports with the SEC, including the Form 10-K, which includes the audited annual financial statements. The SEC makes most of these electronic documents available on the Internet via

> The following information was obtained from several accounting and auditing enforcement releases issued by the SEC after its investigation of fraudulent financial reporting involving Just for Feet, Inc.: Just for Feet, Inc., was a national retailer of at

> The SEC Enforcement Division investigates possible violations of securities laws; recommends SEC action when appropriate, either in a federal court or before an administrative law judge; and negotiates settlements. Litigation Releases, which are descript

> James Burrow is the loan officer for the National Bank of Dallas. National has a loan of $325,000 outstanding to Regional Delivery Service, a company specializing in delivering products of all types on behalf of smaller companies. National’s collateral o

> Monterrey Corporation has an existing loan in the amount of $7 million with an annual interest rate of 6.5%. The company provides an internal company-prepared financial statement to the bank under the loan agreement. Two competing banks have offered to r

> As discussed in the chapter opening vignette and on page 9, companies are increasingly issuing reports on corporate social responsibility. Visit the Global Reporting Initiative website (www.globalreporting.org) and answer the following questions. a. What

> Visit the PCAOB’s website (www.pcaobus.org) and locate the PCAOB’s Settled Disciplinary Order against David M. Burns issued on December 19, 2017, to answer the following questions: a. What position did Burns hold within the audit firm and how long had he

> Explain how the increased use of fair value accounting might increase information risk.

> The following questions relate to the AICPA Code of Professional Conduct, which can be viewed online or downloaded in pdf format at www.aicpa.org: a. When should a member apply the conceptual framework for members in public practice? Which rule or rules

> The following questions deal with tests of controls. Choose the best response. a. To support the auditor’s initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Wh

> The following questions concern types of audit tests. Choose the best response. a. An auditor’s deci0sion either to apply analytical procedures as substantive tests or to perform substantive tests of transactions and account balances usually is determine

> The following are general questions about internal control. Choose the best response. a. Which of the following would not be considered an inherent limitation of the potential effectiveness of an entity’s internal control structure? (1) Mistakes in judgm

> The following questions concern the planning of the engagement. Select the best response. a. Analytical procedures used in planning an audit should focus on identifying (1) material weaknesses in internal control. (2) the predictability of financial dat

> The following are general questions about internal control. Choose the best response. a. Which of the following situations is not an example of an inherent limitation of internal control? (1) A programming error in the design of an automated control allo

> The following questions concern the characteristics of IT systems and their impact on internal controls. Choose the best response. a. Which of the following is an advantage of a computer-based system for transaction processing over a manual system? A com

> The following questions address fraud risk factors and the assessment of fraud risk. a. Which action regarding fraud is an activity related to performance of risk assessment procedures? (1) Document the results of procedures used to address the risk of f

> The following questions concern quality control standards. Choose the best response. a. The nature and extent of a CPA firm’s quality control policies and procedures depend on b. Which of the following is an element of a CPA firm&acir

> The following questions deal with types of audits and auditors. Choose the best response. a. Operational audits generally have been conducted by internal auditors and governmental audit agencies but may be performed by certified public accountants. A pri

> Identify the three main ways information risk can be reduced. What arethe advantages and disadvantages of each?

> The following questions deal with errors and fraud. Choose the best response. a. An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the fina

> The following questions concern the reasons auditors do audits. Choose the best response. a. The major reason an independent auditor gathers audit evidence is to (1) form an opinion on the financial statements. (2) detect fraud. (3) evaluate management.

> The following questions concern unmodified opinion audit reports. Choose the best response. a. Which of the following is not a required element of a standard unmodified opinion audit report issued in accordance with AICPA auditing standards? (1) A title

> The following questions concern possible violations of the AICPA Code of Professional Conduct. Choose the best response. a. In which one of the following situations would a CPA be in violation of the AICPA Code of Professional Conduct in determining the

> The following questions concern auditor independence. Choose the best response. a. What is the meaning of the rule that requires the auditor be independent? (1) The auditor must adopt a critical attitude during the audit. (2) The auditor’s sole obligatio

> 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?

3.99

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