Why do predecessor auditors need to obtain the client’s consent to give information to prospective auditors? What information should prospective auditors try to obtain from predecessor auditors?
> Ordinarily, what source of evidence should least affect audit conclusions? a. External documentary evidence. b. Inquiry of management. c. Documentation prepared by the audit team. d. Inquiry of entity legal counsel.
> What is the primary objective of the fraud brainstorming session? a. Determine audit risk and materiality. b. Identify whether analytical procedures should be applied to the revenue accounts. c. Assess the potential for material misstatement due to fraud
> Which of the following matters relating to an entity’s operations would an auditor most likely consider as an inherent risk factor in planning an audit? a. The entity’s fiscal year ends on June 30. b. The entity enters into significant derivative transac
> Which of the following risk types increase when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date? a. Inherent. b. Control. c. Detection. d. Sampling.
> An auditor’s analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by a. An error in recording amortization of the excess of the investor’s cost over the investment’s
> What are the primary reasons for conducting an evaluation of an audit client’s internal control?
> A primary objective of analytical procedures used in the final review stage of an audit is to a. Identify account balances that represent specific risks relevant to the audit. b. Gather evidence from tests of details to corroborate financial statement as
> Auditors perform analytical procedures in the planning stage of an audit for the purpose of a. Deciding the matters to cover in an engagement letter. b. Identifying unusual conditions that deserve more auditing effort. c. Determining which of the financi
> Which of the following statements best describes auditors’ responsibility for detecting a client’s noncompliance with a law or regulation? a. The responsibility for detecting noncompliance exactly parallels the responsibility for errors and fraud. b. Aud
> When auditors become aware of noncompliance with a law or regulation committed by client personnel, the primary reason that the auditors should obtain a better understanding of the nature of the act is to a. Recommend remedial actions to the audit commit
> An audit committee is a. Composed of internal auditors. b. Composed of members of the audit team. c. Composed of members of a company’s board of directors who are not involved in the day-to-day operations of the company. d. A committee composed of person
> Martin is considering submitting a proposal to conduct the audit examination of Phillip Inc., a manufacturer and distributor of automotive parts to the large automobile manufacturers. Martin learned of this client opportunity through one of its staff acc
> When evaluating whether accounting estimates made by management are reasonable, auditors would be most interested in which of the following? a. Key factors that are consistent with prior periods. b. Assumptions that are similar to industry guidelines. c.
> Under the Private Securities Litigation Reform Act (the Act), independent auditors are required to first a. Report in writing all instances of noncompliance with the Act to the client’s board of directors. b. Report to the SEC all instances of noncomplia
> An audit strategy memorandum contains a. Specifications of auditing standards relevant to the financial statements being audited. b. Specifications of procedures the auditors believe appropriate for the financial statements under audit. c. Documentation
> Auditors are not responsible for accounting estimates with respect to a. Making the estimates. b. Determining the reasonableness of estimates. c. Determining that estimates are presented in conformity with GAAP. d. Determining that estimates are adequate
> Analytical procedures used when planning an audit should concentrate on a. Weaknesses in the company’s internal control activities. b. Predictability of account balances based on individual significant transactions. c. Management assertions in financial
> Define control risk and explain the role of control risk assessment in audit planning.
> Analytical procedures can be used in which of the following ways? a. As a means of overall review near the end of the audit. b. As “attention-directing” methods when planning an audit at the beginning. c. As substantive audit procedures to obtain evidenc
> Which of the following relationships between types of analytical procedures and sources of information are most logical? Type of Analytical Procedure Source of Information a. Comparison of current account balances with prior periods b. Comparison of
> Which of the following is a specific audit procedure that would be completed in response to a particular fraud risk in an account balance or class of transactions? a. Exercising more professional skepticism. b. Carefully avoiding conducting interviews wi
> Horizontal analysis refers to changes of financial statement numbers and ratios across two or more years. Vertical analysis refers to financial statement amounts expressed each year as proportions of a base such as sales for the income statement accounts
> An important principle for auditors is the need to maintain an appropriate level of professional skepticism. Required: a. Define professional skepticism. b. During which stages of the audit are auditors required to exhibit professional skepticism? c. Ho
> Oak Industries, a manufacturer of radio and cable TV equipment and an operator of subscription TV systems, had a multitude of problems. Subscription services in a market area, or which $12 million of cost had been deferred, were being terminated, and the
> An auditor must identify the relevant assertions about each significant financial statement account and disclosure and then gather evidence to conclude whether a material misstatement exists for each assertion. The nature of each financial statement acco
> Johnson & Company, CPAs, audited Guaranteed Savings & Loan Company. M. Johnson had the assignment of evaluating the collectability of real estate loans. Johnson was working on two particular loans: (1) a $4 million loan secured by Smith Street Apartments
> Weyman Z. Wannamaker is the chief financial officer of Cogburn Company. He prides himself on being able to manage the company’s cash resources to minimize the interest expense. Consequently, on the second business day of each month, Wey
> Audit standards distinguish auditors’ responsibility for planning procedures for detecting noncompliance with laws and regulations having a direct effect on financial statements versus planning procedures for detecting noncompliance with laws and regulat
> Give an example of an error or fraud that would misstate financial statements to affect the accounts as follows, taking each case independently. (Note: “Overstate” means the account has a higher value than would be appropriate under GAAP and “understate”
> What are management’s and auditors’ respective responsibilities regarding internal control?
> The auditor should establish an overall audit strategy that sets the scope, timing, and direction of the audit and guides the development of the audit plan. In establishing the overall audit strategy, the auditor should develop and document an audit plan
> The following situations represent errors and frauds that could occur in financial statements. Required: State how the ratio in question would compare (higher, equal, or lower) to what the ratio should have been had the error or fraud not occurred. a. T
> Management fraud (fraudulent financial reporting) is not the expected norm, but it happens from time to time. In the United States, several cases have been widely publicized. They happen when motives and opportunities overwhelm managerial integrity. a. W
> What is management’s responsibility for reporting on internal control over financial reporting?
> This question consists of a number of items pertaining to an auditor’s risk analysis for a company. Your task is to tell how each item affects overall audit risk—that is, the probability of issuing an unmodified audit report on materially misleading fina
> Suppose management estimated the market valuation of some obsolete inventory at $99,000; this inventory was recorded at $120,000, which resulted in recognizing a loss of $21,000. The auditors obtained the following information: The inventory in question
> Audit risks for particular accounts and disclosures can be conceptualized in the model: Audit risk (AR) = Inherent risk (IR) × Control risk (CR) × Detection risk (DR). Use this model as a framework for considering the following situations and deciding wh
> Dunder-Mifflin Inc. wanted to expand its manufacturing and sales facilities. The company applied for a loan from First Bank, presenting the prior-year audited financial statements and the forecast for the current year shown in Exhibit 4.56.1. (Dunder-Mif
> Kelly Griffin, an audit manager, had begun preliminary analytical procedures of selected statistics related to the Majestic Hotel. Her objective was to obtain an understanding of the hotel’s business in order to draft a preliminary audi
> As part of your regular year-end audit of a public client, you must estimate the probability of success of its proposed new product line. The client has experienced financial difficulty during the last few years and, in your judgment, a successful introd
> For a typical audit engagement, describe the people and skills that are normally assigned to a full service audit team.
> What are the three goals of an internal control system according to the COSO report? Which of the three is most important to auditors?
> What is meant by the information and communications component of an effective internal control system? How can an auditor evaluate whether a client’s internal control system is functioning properly for this component?
> What must external auditors do to use the work of audit specialists in the audit of an entity’s financial statements?
> Generally accepted auditing standards require auditors to be independent. Included within this standard are the concepts of independence in fact and independence in appearance. Required: a. Define independence in fact and independence in appearance. b.
> What must external auditors do to use the work of internal auditors in the audit of an entity’s financial statements?
> List some items normally documented in a planning memorandum.
> What is the purpose of a planning memorandum?
> What benefits are obtained by having an engagement letter? What is a termination letter?
> What sources of information can auditors use in connection with deciding whether to accept a new client?
> What are the documentation retention requirements of AS 1215?
> What is considered the most important content of the auditor’s current audit documentation files?
> What information would you expect to find in a current audit file?
> What is the Committee of Sponsoring Organizations (COSO)? Briefly describe the original COSO framework from 1992 and the improvements made in the updated COSO framework from 2013.
> You are meeting with executives of Cooper Cosmetics Corporation to arrange your firm’s engagement to audit the corporation’s financial statements for the year ending December 31. One executive suggests the audit work be divided among three staff members.
> What purposes are served by a dual-purpose test?
> What is the difference between preventive controls and detective controls? Give an example of each.
> Boulder Mines paid $425,000 for the right to extract ore from a 250,000-ton mineral deposit. In addition to the purchase price, Boulder Mines also paid a $110 fi ling fee, a $2,000 license fee to the state of West Virginia, and $55,390 for a geologic sur
> National Truck Company is a large trucking company that operates throughout the United States. National Truck Company uses the units-of-production (UOP) method to depreciate its trucks. National Truck Company trades in trucks often to keep driver morale
> Assume that on January 2, 2012, Vincent of Vermont purchased fixtures for $8,700 cash, expecting the fixtures to remain in service for five years. Vincent has depreciated the fixtures on a double-declining-balance basis, with $1,800 estimated residual va
> Assume Z-1 Software Consultants purchased a building for $445,000 and depreciated it on a straight-line basis over 40 years. The estimated residual value was $90,000. After using the building for 20 years, Z-1 realized that the building will remain usefu
> Assume that in early January 2012, a Sunshine Bakery restaurant purchased a building, paying $53,000 cash and signing a $103,000 note payable. The restaurant paid another $66,000 to remodel the building. Furniture and fixtures cost $59,000, and dishes an
> During fiscal year 2012, Capitol Cupcakes reported a net income of $132.4 million. Capitol received $1.4 million from the sale of other businesses. Capitol made capital expenditures of $10.5 million and sold property, plant, and equipment for $6.8 millio
> Wilcox Financial paid $530,000 for a 45% investment in the common stock of Hornet, Inc. For the first year, Hornet reported net income of $240,000 and at year-end declared and paid cash dividends of $125,000. On the balance-sheet date, the fair value of
> Refer to the RadioShack Corporation Consolidated Financial Statements in Appendix B at the end of this book. This case leads you through an analysis of the activity in Radioshack’s long-term assets, as well as the calculation of its rate of return on tot
> Refer to Amazon.com, Inc.’s Consolidated Financial Statements in Appendix A at the end of the book, and answer the following questions: 1. Refer to Note 1 and Note 3 of the Notes to Consolidated Financial Statements. What kinds of assets are included in
> Ralph’s Pizza bought a used Toyota delivery van on January 2, 2012, for $18,600. The van was expected to remain in service for four years (35,000 miles). At the end of its useful life, Ralph’s officials estimated that the van’s residual value would be $2
> North Mark (NM) owns vast amounts of corporate bonds. Suppose that on June 30, 2012, NM buys $800,000 of CitiSide bonds at a price of 102. The CitiSide bonds pay cash interest at the annual rate of 7% and mature at the end of five years. 1. How much did
> United Jersey Bank of Princeton purchased land and a building for the lump sum of $6 million. To get the maximum tax deduction, the bank’s managers allocated 80% of the purchase price to the building and only 20% to the land. A more realistic allocation
> Assume Shoe Mania Corporation completed the following transactions: a. Sold a store building for $620,000. The building had cost Shoe Mania $1,400,000, and at the time of the sale, its accumulated depreciation totaled $780,000. b. Lost a store building i
> The European Press (TEP) is a major telecommunication conglomerate. Assume that early in year 1, TEP purchased equipment at a cost of 20 million euros (€20 million). Management expects the equipment to remain in service for four years and estimated resid
> Lowe’s Companies, Inc., the second-largest home improvement retailer, reported the following information (adapted) for its fiscal year ended January 31, 2011: Requirements 1. Compute profit margin for the year ended January 31, 2011.
> Assume Doltron paid $19 million to purchase Northeast.com. Assume further that Northeast had the following summarized data at the time of the Doltron acquisition (amounts in millions): Northeast’s long-term assets had a current market
> At the end of 2011, Solar Power Associates (SPA) had total assets of $17.6 billion and total liabilities of $9 billion. Included among the assets were property, plant, and equipment with a cost of $4.9 billion and accumulated depreciation of $2.6 billion
> 1. Mayflower Printers incurred costs of $1,200,000 for a patent for a new laser printer. Although the patent gives legal protection for 20 years, it is expected to provide Mayflower Printers with a competitive advantage for only 12 years. Assuming the st
> Valley Mines paid $428,000 for the right to extract ore from a 325,000-ton mineral deposit. In addition to the purchase price, Valley Mines also paid a $130 fi ling fee, a $2,300 license fee to the state of West Virginia, and $66,820 for a geologic surve
> United Truck Company is a large trucking company that operates throughout the United States. United Truck Company uses the units-of-production (UOP) method to depreciate its trucks. United Truck Company trades in trucks often to keep driver morale high a
> During 2012, Cheng Book Store paid $483,000 for land and built a store in Georgetown. Prior to construction, the city of Georgetown charged Cheng $1,300 for a building permit, which Cheng paid. Cheng also paid $15,300 for architect’s fees. The constructi
> Assume that on January 2, 2012, Barrett of Nebraska purchased fixtures for $8,200 cash, expecting the fixtures to remain in service for five years. Barrett has depreciated the fixtures on a double-declining-balance basis, with $1,100 estimated residual v
> Without making journal entries, record the transactions of Exercise 8-26B directly in the Potter account, Long-Term Investment in Faulk Software. Assume that after all the noted transactions took place, Potter sold its entire investment in Faulk Software
> Assume S-1 Security Consultants purchased a building for $450,000 and depreciated it on a straight-line basis over 40 years. The estimated residual value was $93,000. After using the building for 20 years, S-1 realized that the building will remain usefu
> Two accounts that arise from consolidation accounting are goodwill and noncontrolling interest. 1. What is goodwill, and how does it arise? Which company reports goodwill, the parent or the subsidiary? Where is goodwill reported? 2. What is noncontrollin
> Assume that in early January 2012, an Early Bird Café purchased a building, paying $54,000 cash and signing a $104,000 note payable. The restaurant paid another $65,000 to remodel the building. Furniture and fixtures cost $51,000, and dishes and supplies
> Translate into dollars the balance sheet of Washington Leather Goods’ Spanish subsidiary. When Washington Leather Goods acquired the foreign subsidiary, a euro was worth $1.02. The current exchange rate is $1.34. During the period when retained earnings
> Deluxe Pizza bought a used Honda delivery van on January 2, 2012, for $22,000. The van was expected to remain in service for four years (113,125 miles). At the end of its useful life, Deluxe officials estimated that the van’s residual value would be $3,9
> Mid Atlantic Energy Company’s balance sheet includes the asset Iron Ore. Mid Atlantic Energy paid $2.4 million cash for the right to work a mine that contained an estimated 195,000 tons of ore. The company paid $63,000 to remove unwanted buildings from t
> During 2012, Ming Book Store paid $485,000 for land and built a store in Baltimore. Prior to construction, the city of Baltimore charged Ming $1,700 for a building permit, which Ming paid. Ming also paid $15,700 for architect’s fees. The construction cos
> Assume Decadent Delights, Inc., purchased conveyor-belt machinery. Classify each of the following expenditures as a capital expenditure or an immediate expense related to machinery: a. Sales tax paid on the purchase price b. Transportation and insurance
> Assume Plastic Products, Inc., purchased conveyor-belt machinery. Classify each of the following expenditures as a capital expenditure or an immediate expense related to machinery: a. Sales tax paid on the purchase price b. Transportation and insurance w
> Southwood Manufacturing bought three used machines in a $192,000 lump-sum purchase. An independent appraiser valued the machines as shown: Machine No. ___________Appraised Value 1 …………………………………………………………$50,000 2 ……………………………………………………….. $96,000 3 ……………………
> Pierce Self Storage purchased land, paying $160,000 cash as a down payment and signing a $150,000 note payable for the balance. Pierce also had to pay delinquent property tax of $5,000, title insurance costing $2,000, and $3,000 to level the land and rem
> Assume Happy Feet Corporation completed the following transactions: a. Sold a store building for $680,000. The building cost Happy Feet $1,600,000, and at the time of the sale, its accumulated depreciation totaled $920,000. b. Lost a store building in a
> Kroger, Inc., one of the nation’s largest grocery retailers, reported the following information (adapted) for its fiscal year ended January 31, 2011: Requirements 1. Compute profit margin for the year ended January 31, 2011. 2. Comput
> Assume Caltron paid $20 million to purchase HarborSide.com. Assume further that HarborSide had the following summarized data at the time of the Caltron acquisition (amounts in millions): HarborSide’s long-term assets had a current mar
> Potter Corporation owns equity-method investments in several companies. Suppose Potter paid $1,100,000 to acquire a 30% investment in Faulk Software Company. Faulk Software reported net income of $660,000 for the first year and declared and paid cash div
> Answer these questions about consolidation accounting: 1. Define “parent company.” Define “subsidiary company.” 2. How do consolidated financial statements differ from the financial statements of a single company? 3. Which company’s name appears on the c
> Kerusi, Inc., has a popular line of boogie boards. Kerusi reported net income of $64 million for 2012. Depreciation expense for the year totaled $30 million. Kerusi, Inc., depreciates plant assets over eight years using the straight-line method and no re
> Avril, Inc., sells electronics and appliances. The excerpts that follow are adapted from Avril’s financial statements for 2012 and 2011. Requirements 1. How much was Avril’s cost of plant assets at February 28, 2012?
> 1. Makon Printers incurred costs of $1,500,000 for a patent for a new laser printer. Although the patent gives legal protection for 20 years, it is expected to provide Makon Printers with a competitive advantage for only 15 years. Assuming the straight-l
> Maplewood Manufacturing bought three used machines in a $204,000 lump-sum purchase. An independent appraiser valued the machines as shown in the table. Machine No. ___________Appraised Value 1 ………………………………………………………… $ 63,000 2 …………………………………………………………. 107
