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ACCT 444 Week 1 Quiz
1. (TCO 3) Prior to the passage of the Sarbanes-Oxley Act,
which of the following was responsible for establishing auditing standards?
(Points: 3)
Public Company Accounting Oversight
Board
Securities and Exchange Commission
National Association of Accounting
Auditing Standards Board
Chapter 2
2. (TCO 1) Which one of the following is not one of the three general
standards? (Points: 3)
Proper planning and supervision
Due professional care
Adequate training and proficiency
Independence of mental attitude
Chapter 2
3. (TCO 1) An independent auditor must have which of the
following? (Points: 3)
A pre-existing and well-informed
point of view with respect to the audit
Technical training that is adequate
to meet the requirements of a professional
Experience in taxation that is
sufficient to comply with generally accepted auditing standards
A background in many different
disciplines
4. (TCO 1) Any service that requires a CPA firm to issue a
report about the reliability of an assertion that is made by another party is
a(n) _____ (Points: 3)
assurance service.
attestation service.
tax service.
accounting and bookkeeping service.
Chapter 1
5. (TCO 1) Which of the following statements is incorrect
regarding the SEC’s partner rotation rules? (Points: 3)
The lead and concurring partners are
subject to a 5-year time out period.
All audit partners must rotate off
the audit engagement after 5 years.
Other audit partners are subject to
a 2-year time out period.
Small firms may be exempted from the
partner rotation requirement.
6. (TCO 3) Burrow & Co., CPAs, have provided annual audit
and tax compliance services to Mare Corp. for several years. Mare has been
unable to pay Burrow in full for services Burrow rendered 19 months ago. Burrow
is ready to begin fieldwork for the current year’s audit. Under the ethical
standards of the profession, which of the following arrangements will permit
Burrow to begin the fieldwork on Mare’s audit? (Points: 3)
Mare engages another firm to perform
the fieldwork, and Burrow is limited to reviewing the workpapers and issuing
the audit report.
Mare sets up a 2-year payment plan
with Burrow to settle the unpaid fee balance.
Mare gives Burrow an 18-month note
payable for the full amount of the past due fees before Burrow begins the
audit.
Mare commits to pay the past due fee
in full before the audit report is issued.
Chapter 2
7. (TCO 3) Independence in auditing means (Points: 3)
remaining aloof from a client.
taking an unbaised and objective
viewpoint.
not being financially dependent on a
client.
being an advocate for a client.
Chapter 4
8. (TCO 3) The financial interests of which of the following
parties would not be included as a direct financial interest of the CPA?
(Points: 3)
Dependent child
Relative supported by the CPA
Spouse
Sibling living in the same city as
the CPA
Chapter 4
9. (TCO 1) The phrase U.S. generally accepted accounting principles
is an accounting term that (Points: 3)
encompasses the conventions, rules,
and procedures necessary to define U.S. accepted accounting practice at a
particular time.
provides a measure of conventions,
rules, and procedures governed by the AICPA.
is included in the audit report to
indicate that the audit has been conducted in accordance with generally
accepted auditing standards (GAAS).
includes broad guidelines of general
application but not detailed practices and procedures.
Chapter 1
10. (TCO 1) Which of the following statements best describes the
ethical standard of the profession pertaining to advertising and solicitation?
(Points: 3)
A CPA may advertise in any manner
that is not false, misleading, or deceptive.
There are no prohibitions regarding
the manner in which CPAs may solicit new business.
All forms of advertising and
solicitation are prohibited.
A CPA may only solicit new clients
through mass mailings.
1. (TCO 3) The Sarbanes-Oxley Act applies to which of the
following companies? (Points : 3)
Privately held companies
All companies
All public companies and privately
held companies with assets greater than $500 million
Public companies
Chapter 1
Question 4. 4. (TCO 1) An
operational audit has as one of its objectives to (Points : 3)
make recommendations for improving
performance.
determine whether the financial
statements fairly present the entity’s operations.
evaluate the feasibility of
attaining the entity’s operational objectives.
report on the entity’s relative
success in attaining profit maximization.
Chapter 1
Question 5. 5. (TCO 1) Which of the
following services do not need to be preapproved by the audit committee of an
issuer? (Points : 3)
Nonaudit services related to
internal control over financial reporting
Tax services
Nonaudit services that are less than
5 % of total revenues from the audit client
Services provided by the auditor on
a recurring basis
Question 8. 8. (TCO 3) Several
months after an unqualified audit report was issued, the auditor discovered the
financial statements were materially misstated. The client’s CEO agrees that
there are misstatements, but refuses to correct them. She claims that
confidentiality prevents the CPA from informing anyone. (Points : 3)
The CEO is incorrect, but because
the audit report has been issued, it is too late.
The CEO is correct and the auditor
must maintain confidentiality.
The CEO is correct, but to be
ethically correct the auditor should violate the confidentiality rule and disclose
the error.
The CEO is incorrect, and the
auditor has an obligation to issue a revised audit report, even if the CEO will
not correct the financial statements.
Chapter 4
Question 9. 9. (TCO 1) Which of the
following terms identifies a requirement for audit evidence? (Points : 3)
Adequate
Disconfirming
Reasonable
Appropriate
Chapter 1
Question 10. 10. (TCO 1) The auditor
of an issuer may provide which of the following tax services? (Points : 3)
Tax services for immediate family
members of corporate officers
Tax planning services
Tax services for officers of the
issuer
Services related to confidential tax
transactions
5. (TCO 1) Jackson & Company, CPAs, plan to audit the
financial statements of Perigee Technologies, an issuer as defined under the Sarbanes-Oxley
Act of 2002. Which of the following situations would impair Jackson’s
independence? (Points : 3)
Discovering that Lowe, the chief
financial officer of Perigee, started his accounting career 10 years earlier as
a staff accountant for Jackson & Company and continues to maintain ties
with current partners at the firm
Provision of personal tax services
to Johnson, the accounts payable manager of Perigee
Audit of Perigee’s internal control
is performed contemporaneously with the annual financial statement audit
Preparation of Perigee’s routine
annual tax return, where Jackson’s fee will be calculated as a percentage of
the tax refund obtained
ACCT
444 Week 2 Quiz
Week
2 : Auditor Legal Liability, Fraud, & Audit Objectives – Quiz
Question 1. 1. (TCO 4) To succeed in
an action against the auditor, the client must be able to show that (Points :
3)
the auditor was fraudulent.
the auditor was grossly negligent.
there was a written contract.
there is a close causal connection
between the auditor’s behavior and the damages suffered by the client.
Chapter 5, 6 & 7
1. (TCO 4) In connection with the audit of financial
statements, an independent auditor could be responsible for failure to detect a
material fraud if (Points : 3)
statistical sampling techniques were
not used on the audit engagement.
the auditor planned the audit in a
negligent manner.
accountants performing important
parts of the work failed to discover a close relationship between the treasurer
and the cashier.
the fraud was perpetrated by one
employee who circumvented the existing internal controls.
Question 2. 2. (TCO 4) The principal
issue to be resolved in cases involving alleged negligence is usually (Points :
3)
the amount of the damages suffered
by plaintiff.
whether to impose punitive damages
on the defendant.
the level of care exercised by the
CPA.
whether defendant was involved in
fraud.
Chapter 5, 6 & 7
2. (TCO 4) The principal issue to be resolved in cases
involving alleged negligence is usually (Points : 3)
the amount of the damages suffered
by plaintiff.
whether to impose punitive damages
on the defendant.
the level of care exercised by the
CPA.
whether defendant was involved in
fraud.
Question 3. 3. (TCO 4) While
performing services for their clients, professionals have a duty to provide a
level of care that is (Points : 3)
free from judgment errors.
superior.
greater than average.
reasonable.
Chapter 5
3. (TCO 4) A third-party beneficiary is one that (Points : 3)
has failed to establish legal
standing before the court.
does not have privity of contract
and is unknown to the contracting parties.
does not have privity of contract,
but is known to the contracting parties and intended to benefit under the
contract.
may establish legal standing before
the court after a contract has been consummated.
Chapter 5
Question 4. 4. (TCO 4) Tort actions
against CPAs are more common than breach of contract actions because (Points :
3)
there are more torts than contracts.
the burden of proof is on the
auditor rather than on the person suing.
the person suing need prove only
negligence.
the amounts recoverable are normally
larger.
Chapter 5
Question 5. 5. (TCO 4) The
responsibility for adopting sound accounting policies and maintaining adequate
internal control rests with the (Points : 3)
board of directors.
company management.
financial statement auditor.
company’s internal audit department.
Chapter 6
Question 6. 6. (TCO 3) Which of the
following is not one of the reasons that auditors provide only reasonable
assurance on the financial statements? (Points : 3)
The auditor commonly examines a
sample, rather than the entire population of transactions.
Accounting presentations contain
complex estimates, which involve uncertainty.
Fraudulently prepared financial
statements are often difficult to detect.
Auditors believe that reasonable
assurance is sufficient in the vast majority of cases.
Chapter 6
6. (TCO 3) Which of the following statements is most correct
regarding errors and fraud? (Points : 3)
An error is unintentional, whereas
fraud is intentional.
Frauds occur more often than errors
in financial statements.
Errors are always fraud and frauds
are always errors.
Auditors have more responsibility
for finding fraud than errors.
Question 7. 7. (TCO 3) Which of the
following is not one of the factors of the fraud triangle? (Points : 3)
Incentives/pressures
Attitudes/rationalization
Opportunities
Psychological make-up
Chapter 5 or 11
7. (TCO 3) In the fraud triangle, fraudulent financial
reporting and misappropriation of assets (Points : 3)
share little in common.
share most of the same risk factors.
share the same three conditions.
share most of the same conditions.
Chapter 11
Question 8. 8. (TCO 3) Fraudulent
financial reporting may be accomplished through the manipulation of (Points :
3)
assets.
liabilities.
revenues.
all of the above.
Chapter 11
8. (TCO 3) Because of the risk of material misstatements due to
fraud, an audit of financial statements in accordance with generally accepted
auditing standards should be performed with an attitude of (Points : 3)
objective judgment.
impartial conservatism.
independent integrity.
professional skepticism.
Chapter 11
Question 9. 9. (TCO 3) Which of the
following is a factor that relates to attitudes or rationalization to commit
fraudulent financial reporting? (Points : 3)
Significant accounting estimates
involving subjective judgments
Excessive pressure for management to
meet debt repayment requirements
Management’s practice of making
overly aggressive forecasts
High turnover of accounting,
internal audit and information technology staff
Chapter 11
Question 10. 10. (TCO 3) Auditor
responses to fraud risks include which of the following? (Points : 3)
Change the overall conduct of the
audit to respond to identified fraud risks.
Design and perform audit procedures
to address identified risks.
Perform procedures to address the
risk of management override of controls.
All of the above.
Chapter 11
10. (TCO 3) Which of the following characteristics is most
likely to heighten an auditor’s concern about the risk of material
misstatements, due to fraud in an entity’s financial statements? (Points : 3)
Employees who handle cash receipts
are not bonded.
The entity’s industry is
experiencing declining customer demand.
Internal auditors have direct access
to the board of directors and the entity’s management.
The board of directors is active in
overseeing the entity’s financial reporting policies.
Chapter 11
ACCT
444 Week 3 Quiz
Week 3 : Audit Evidence, Planning,
Risk, & Materiality – Quiz
1. (TCO 6) Physical examination is the inspection or count by
the auditor of items such as (Points : 3)
cash or inventory only.
cash, inventory, canceled checks, and
sales documents.
cash, inventory, canceled checks,
and tangible fixed assets.
cash, inventory, securities, notes
receivable, and tangible fixed assets.
Chapter 7
1. (TCO 6) The distinction between physical examination of
assets and examination of documents is dependent on the item being examined. If
the object being examined has no inherent value, the evidence is called (Points
: 3)
documentation.
physical examination.
confirmation.
none of the above.
Chapter 7
1. (TCO 6) Which of the following statements regarding
documentation is not correct? (Points : 3)
Documentation includes examining
client records, such as general ledgers and supporting journals.
Internal documents are documents
that are generated within the company and used to communicate with external
parties.
External documents are documents
that are generated outside of the company and are used to communicate the
results of a transaction.
All of the above are correct
statements
Chapter 7
2. (TCO 6) Which of the following is not a purpose of analytical
procedures? (Points : 3)
Understand the client’s industry
Assess the client’s ability to
continue as a going concern
Identify misstatements
Reduce detailed audit tests
Chapter 7
2. (TCO 6) Analytical procedures are (Points : 3)
diagnostic tests of financial
information that may not be classified as evidential matter.
calculations of financial
information made by a computer.
substantive tests of financial
information made by a study and comparison of relationships among data.
statistical tests of financial
information designed to identify areas requiring intensive investigation.
Chapter 7
2. (TCO 6) When analytical procedures reveal no unusual
fluctuations, the implication is that (Points : 3)
there are no material errors or
irregularities.
there are no material errors.
there are no material
irregularities.
the possibility of a material error
or irregularity is lessened.
Chapter 7
3. (TCO 6) The Auditing Standards Board has concluded that
analytical procedures are so important that they are required during (Points :
3)
planning and testing phases.
planning and completion phases.
testing and completion phases.
planning, testing, and completion
phases.
Chapter 7
3. (TCO 6) The primary purpose of performing analytical
procedures in the testing phase of an audit is to (Points : 3)
help the auditor obtain an
understanding of the client’s industry and business.
assess the going concern assumption.
indicate possible misstatements.
reduce detailed tests.
Chapter 7
3. (TCO 6) Which of the following statements regarding
analytical procedures is not correct? (Points : 3)
The definition of analytical tests
emphasizes a comparison of client’s data to GAAP.
Analytical procedures are required
on all audits.
Analytical procedures can be used as
substantive tests.
For certain accounts with small
balances, analytical procedures alone may be sufficient evidence.
Chapter 7
4. (TCO 6) Which of the following statements about confirmation
is true? (Points : 3)
Confirmations are expensive and so
are often not used.
Confirmations may inconvenience
those asked to supply them, but they are widely used.
Confirmations are sometimes not
reliable and so auditors use them only as necessary.
None of the above statements are
true.
Chapter 7
4. (TCO 6) Three common types of confirmations used by auditors
are (1) negative confirmations where only a response is requested if the debtor
disagrees with the amount, (2) positive confirmations with a request for
information where the debtor is requested to respond and to include their believed
balance, and (3) positive confirmations with the information included where the
debtor is requested to respond and to confirm the balance we give them. If they
were placed in the order of their competence, from highest to lowest, the
sequence would be (Points : 3)
3, 1, 2.
1, 2, 3.
3, 2, 1.
2, 3, 1.
Chapter 7
4. (TCO 6) Traditionally, confirmations are used to verify
(Points : 3)
individual transactions between
organizations, such as sales transactions.
bank balances and accounts
receivables.
fixed asset additions.
All of the above
Chapter 7
5. (TCO 7) The major concern when using nonfinancial data in
analytical procedures is the (Points : 3)
accuracy of the nonfinancial data.
source of the nonfinancial data.
type of nonfinancial data.
presence of multiple sources of
nonfinancial data.
Chapter 8
5. (TCO 7) Analytical procedures used in planning an audit
should focus on identifying (Points : 3)
material weaknesses of internal
control.
the predictability of financial data
from individual transactions.
the various assertions that are
embodied in the financial statements.
areas that may represent specific
risks relevant to the audit.
Chapter 8
5. (TCO 7) Which of the following is correct with respect to
the use of analytical procedures? (Points : 3)
Analytical procedures may be used in
evaluating balances in the testing phase as long as the auditor also uses them
in assessing the going concern assumption.
Analytical procedures must be used
throughout the audit.
Analytical procedures used in the
testing phase of the audit are primarily used to direct an auditor’s attention
so that the auditor’s understanding of the business is improved.
None of the above
Chapter 8
6. (TCO 7) A measure of how willing the auditor is to accept
that the financial statements may be materially misstated after the audit is
completed and an unqualified opinion has been issued is the (Points : 3)
inherent risk.
acceptable audit risk.
statistical risk.
financial risk.
Chapter 8
6. (TCO 7) When inherent risk is high, there will need to be (Points
: 3)
more evidence accumulated.
more experienced staff assigned to
the work.
either a or b, but not both.
both a and b.
Chapter 8
6. (TCO 7) A measure of the auditor’s assessment of the
likelihood that there are material misstatements in an account before
considering the effectiveness of the client’s internal control is (Points : 3)
acceptable audit risk.
control risk.
inherent risk.
statistical risk.
Chapter 8
7. (TCO 7) What is the responsibility of a successor auditor
with respect to communicating with the predecessor auditor in connection with a
prospective new audit client? (Points : 3)
The successor auditor has no
responsibility to contact the predecessor auditor.
The successor auditor should obtain
permission from the prospective client to contact the predecessor auditor.
The successor auditor should contact
the predecessor regardless of whether the prospective client authorizes
contact.
The successor auditor need not
contact the predecessor if the successor is aware of all available relevant
facts.
Chapter 8
7. (TCO 7) A successor auditor may perform which of the
following for a new audit client? (Points : 3)
Speak to local attorneys, banks, and
other businesses regarding the company’s reputation
Speak to the predecessor auditor
about disagreements they had with management
Interview client personnel to better
understand the business and associated risks
All of the above
Chapter 8
7. (TCO 7) Which of the following is not correct regarding the
communications between successor and predecessor auditors? (Points : 3)
The burden of initiating the
communication rests with the predecessor auditor.
The burden of initiating the
communication rests with the successor auditor.
The predecessor auditor must receive
their former client’s permission prior to divulging information to the
successor auditor.
The predecessor auditor may choose
to provide a limited response to a successor auditor.
Chapter 8
8. (TCO 8) The FASB definition of materiality emphasizes what
class of financial statement users? (Points : 3)
Regulators
Informed investors
Reasonable persons
Potential investors
Chapter 9
8. (TCO 8) Auditors are responsible for determining whether
financial statements are materially misstated, so upon discovering a material
misstatement, they must bring it to the attention of (Points : 3)
regulators.
the audit firm’s managing partner.
no one in particular.
the client’s management.
Chapter 9
8. (TCO 8) The preliminary judgment about materiality is the
_____ amount by which the auditor believes the statements could be misstated
and still not affect the decisions of reasonable users. (Points : 3)
minimum
maximum
mean average
median average
Chapter 9
9. (TCO 8) In setting materiality guidelines for current
assets, the two standard setters, FASB and the AICPA, provide the following
guidelines to practitioners (Points : 3)
Both agree that materiality should
be set at an amount greater than 10% of current assets.
FASB’s guideline is greater than
10%, but the AICPA’s is greater than 5%.
Both agree that it should be greater
than 5%.
No specific materiality guidelines
are provided by either of them.
Chapter 9
9. (TCO 8) Auditors are _____ to decide on the combined amount
of misstatements in the financial statements that they would consider material
early in the audit. (Points : 3)
permitted
required
not allowed
strongly encouraged
Chapter 9
9. (TCO 8) When auditors allocate the preliminary judgment
about materiality to account balances, the materiality allocated to any given
account balance is referred to as (Points : 3)
the materiality range.
the error range.
tolerable materiality.
tolerable misstatement.
Chapter 9
10. (TCO 8) Which of the following is not a correct statement
regarding the allocation of the preliminary judgment about materiality to
balance sheet accounts? (Points : 3)
Auditors expect certain accounts to
have more misstatements than others.
The allocation has virtually no
effect on audit costs because the auditor must collect sufficient appropriate
audit evidence.
Auditors expect to identify
overstatements as well as understatements in the accounts.
Relative audit costs affect the
allocation.
Chapter 9
10. (TCO 8) Which of the following elements ultimately
determines the specific auditing procedures that are necessary in the
circumstances to afford a reasonable basis for an opinion? (Points : 3)
Inherent risk
Materiality
Auditor judgment
Reasonable assurance
Chapter 9
10. (TCO 8) Why do auditors establish a preliminary judgment
about materiality? (Points : 3)
To determine the appropriate level
of audit experience required for the work
So that the client can know what
records to make available to the auditor
To plan the appropriate audit
evidence to accumulate and develop an overall audit strategy
None of the above
Chapter 9
ACCT
444 Week 4 Quiz
1. (TCO 5) Which of the following is responsible for
establishing internal controls for a public company? (Points : 3)
Management
Financial statement auditors
Management and auditors
Committee of Sponsoring
Organizations
1. (TCO 5) Which of the following parties provides an
assessment of the effectiveness of internal control over financial reporting
for public companies? (Points : 3)
Management
Financial statement auditors
Management and the financial
statement auditors
Committee of Sponsoring
Organizations
1. (TCO 5) Which of the following is responsible for
establishing a private company’s internal control? (Points : 3)
Management
Auditors
Management and auditors
Committee of Sponsoring
Organizations
2. (TCO 5) Which section of the Sarbanes-Oxley Act requires
management to issue an internal control report? (Points : 3)
202
203
404
408
2. (TCO 5) Sarbanes-Oxley requires management to issue an
internal control report that includes two specific items. Which of the
following is one of these two requirements? (Points : 3)
A statement that management is
responsible for establishing and maintaining an adequate internal control
structure and procedures for financial reporting
A statement that management and the
board of directors are jointly responsible for establishing and maintaining an
adequate internal control structure and procedures for financial reporting
A statement that management, the
board of directors, and the external auditors are jointly responsible for
establishing and maintaining an adequate internal control structure and
procedures for financial reporting
None of the above
2. (TCO 5) Internal control reports issued by public companies
must identify the framework used to evaluate the effectiveness of internal
control. Which of the following is the most common framework in the U.S.?
(Points : 3)
Effective Internal Control
Framework-AICPA
Internal Control-Integrated
Framework-COSO
Enterprise Internal Control-COSO
There is no common framework used in
the U.S.
3. (TCO 5) Which of the following activities would be least
likely to strengthen a company’s internal control? (Points : 3)
Separating accounting from other
financial operations
Maintaining insurance for fire and
theft
Fixing responsibility for the
performance of employee duties
Carefully selecting and training
employees
3. (TCO 5) Management’s tests of operating effectiveness might
include which of the following types of procedures? (Points : 3)
Inspection of relevant documentation
Inquiries of personnel
Reperformance of the application of
controls
All of the above
3. (TCO 5) Which of management’s concerns with respect to
implementing internal controls is the auditor primarily concerned? (Points : 3)
Efficiency of operations
Reliability of financial reporting
Effectiveness of operations
Compliance with applicable laws and
regulations
4. (TCO 5) Internal controls can never be regarded as
completely effective. Even if company personnel could design an ideal system,
its effectiveness depends on the (Points : 3)
adequacy of the computer system.
proper implementation by management.
ability of the internal audit staff
to maintain it.
competency and dependability of the
people using it.
4. (TCO 5) Even with the most effectively designed internal
control, the auditor must obtain audit evidence, beyond testing the controls,
for every (Points : 3)
transaction.
financial statement account.
material financial statement
account.
financial statement account that
will be relied upon by third parties.
4. (TCO 5) The essence of an effectively controlled organization
lies in the (Points : 3)
effectiveness of its independent
auditor.
effectiveness of its internal
auditor.
attitude of its employers.
attitudes of its management.
5. (TCO 5) Which of the following is not one of the levels of
an absence of internal controls? (Points : 3)
Major deficiency
Material weakness
Significant deficiency
Control deficiency
5. (TCO 5) To determine if a significant internal control
deficiency or deficiencies are a material weakness, they must be evaluated on
their (Points : 3)
likelihood.
materiality or significance.
both A and B are correct.
neither A nor B is correct.
6. (TCO 10) Which of the following is not a benefit of using
IT-based controls? (Points : 3)
Ability to process large volumes of
transactions
Ability to replace manual controls
with computer-based controls
Reduction in misstatements due to
consistent processing of transactions
Over-reliance on computer-generated
reports
6. (TCO 10) Which of the following is not a risk to IT systems?
(Points : 3)
Need for IT experience
Separation of IT duties
Improved audit trail
Hardware and data vulnerability
6. (TCO 10) Which of the following is not a risk specific to IT
environments? (Points : 3)
Reliance on the functioning
capabilities of hardware and software
Increased human involvement
Loss of data due to insufficient
backup
Reduced segregation of duties
7. (TCO 10) Which of the following IT duties should be
separated from the others? (Points:3)
Systems development
Operations
Data control
All of the above
7. (TCO 10) The extent to which IT duties are separated in an
organization depends on (Points : 3)
the organization’s size.
the organization’s complexity.
both A and B.
neither A nor B.
7. (TCO 10) Programmers should do all but which of the
following? (Points : 3)
Test programs for proper performance
Evaluate legitimacy of transaction
data input
Develop flowcharts for new
applications
Programmers should perform each of
the above
8. (TCO 10) Which of the following is a category of general
controls? (Points : 3)
Processing controls
Output controls
Physical and online security
Input controls
8. (TCO 10) General controls include all of the following
except (Points : 3)
systems development.
online security.
processing controls.
hardware controls.
8. (TCO 10) Which of the following is least likely to be used
in obtaining an understanding of client general controls? (Points : 3)
Examination of system documentation
Inquiry of client personnel (e.g.
key users)
Observation of transaction
processing
Reviews of questionnaires completed
by client IT personnel
9. (TCO 10) Controls that apply to a specific element of the
system are called (Points : 3)
user controls.
general controls.
systems controls.
application controls.
9. (TCO 10) A control that relates to all parts of the IT
system is called a(n) (Points : 3)
general control.
systems control.
universal control.
applications control.
9. (TCO 10) Auditors should evaluate the _____ before
evaluating application controls because of the potential for pervasive effects.
(Points : 3)
input controls
control environment
processing controls
general controls
10. (TCO 10) Which of the following is not an example of an
application control? (Points: 3)
An equipment failure causes system
downtime.
There is a preprocessing authorization
of the sales transactions.
There are reasonableness tests for
the unit selling price of a sale.
After processing, all sales
transactions are reviewed by the sales department.
10. (TCO 10) Which of the following is not a category of an
application control? (Points : 3)
Processing controls
Output controls
Hardware controls
Input controls
10. (TCO 10) Which of the following statements related to
application controls is correct? (Points : 3)
Application controls relate to
various aspects of the IT function, including software acquisition and the
processing of transactions.
Application controls relate to
various aspects of the IT function, including physical security and the
processing of transactions in various cycles.
Application controls relate to all
aspects of the IT function.
Application controls relate to the
processing of individual transactions.
ACCT
444 Week 5 Quiz
1. (TCO 6) The auditor looks for an indication on duplicate
sales invoices to see whether the invoices have been verified. This is an
example of (Points : 3)
a test of details of balances.
a test of control.
a substantive test of transactions.
both a test of control and a
substantive test of transactions.
1. (TCO 6) Tests of controls may include which of the following
types of evidence? (Points : 3)
Observation
Reperformance
Inquiries
All of the above
1. (TCO 6) For efficiency, tests of controls are frequently
done at the same time as (Points : 3)
analytical procedures.
compliance tests.
tests of transactions.
tests of details of balances.
2. (TCO 6) Analytical procedures are defined in the auditing
standards as (Points : 3)
compliance tests.
substantive tests.
tests of controls.
helpful procedures not possessing
the validity of other tests available to the auditor.
2. (TCO 6) Which of the following is not a direct result of
performing analytical procedures? (Points : 3)
Identify areas of potential
misstatements.
Reduce detailed audit risk.
Understand the client’s business.
Identify specific errors in the
accounts.
2. (TCO 6) Analytical procedures may be classified as being
primarily (Points : 3)
tests of controls.
substantive tests.
tests of ratios.
tests of details of balances.
3. (TCO 6) Which of the following audit tests is usually the
least costly to perform? (Points : 3)
Analytical procedures
Tests of controls
Tests of balances
Substantive tests of transactions
3. (TCO 6) Which of the following audit tests is usually the
most costly to perform? (Points : 3)
Analytical procedures
Tests of controls
Tests of balances
Substantive tests of transactions
4. (TCO 6) Which of the following tests commonly occur
together? (Points : 3)
Substantive tests of transactions
and tests of controls
Substantive tests of transactions
and obtaining an understanding of internal controls
Analytical procedures and tests of
controls
All of the above
4. (TCO 6) Which of the following relationships between types
of tests and audit evidence is not correct? (Points : 3)
Tests of details and documentation
Tests of controls and observation
Tests of details and observation
Substantive tests of transactions
and reperformance
5. (TCO 6) The sequence of steps in gathering evidence as the
basis of the auditor’s opinion are (Points : 3)
substantive tests, initial
assessment of control risk, and tests of controls.
initial assessment of control risk,
substantive tests, and tests of controls.
initial assessment of control risk,
tests of controls, and substantive tests.
tests of controls, initial
assessment of control risk, and substantive tests.
5. (TCO 6) The purpose of tests of controls is to provide
reasonable assurance that the (Points : 3)
accounting treatment of transactions
and balances is valid and proper.
internal control procedures are
functioning as intended.
entity has complied with GAAP
disclosure requirements.
entity has complied with
requirements of quality control.
6. (TCO 9) It is important that sales be billed and recorded in
the journal as soon as possible after (Points : 3)
the order is received.
the order is received and credit is
approved.
credit is approved and it is
verified that there is enough inventory to fill the order.
the shipment takes place.
6. (TCO 9) The use of prenumbered sales invoices is meant to
prevent (Points : 3)
the failure to bill or record sales.
duplicate billings and recording of
sales.
both A and B are correct.
neither A nor B is correct.
6. (TCO 9) Prenumbered documents will only be useful for
control purposes if (Points : 3)
a different numerical sequence is
used for each company.
the sequence is accounted for
periodically.
employees do not have access to the
complete sequence.
All of the above
7. (TCO 9) Which one of the following is not an auditor’s
concern about a key authorization point in the sales or collection cycle?
(Points : 3)
The receiving room must have
authorization before releasing items to inventory control.
Credit must be authorized before the
sale.
Goods must be shipped after the
authorization.
Prices must be authorized.
7. (TCO 9) At which point in an ordinary sales transaction
would a lack of specific authorization be of least concern to the auditor?
(Points : 3)
Granting of credit
Shipment of goods
Determination of discounts
Selling of goods for cash
8. (TCO 9) The credit-granting functions should be separated
from which of the following? (Points : 3)
Purchasing functions
Manufacturing function
Sales function
None of the above
9. (TCO 9) When designing substantive tests of transactions for
sales, the auditor is concerned with the possibility of several types of
misstatements. Which of the following is not one of the types of these
misstatements? (Points : 3)
Sales being included in the journal
for which no shipment was made
Sales to related parties, such as
officers and subsidiaries
Sales recorded more than once
Shipments being made to nonexistent
customers and recorded as sales
10. (TCO 9) A key internal control in the sales and collection
cycle is the separation of duties between cash handling and record keeping. The
objective most directly associated with this control is to verify that (Points
: 3)
cash receipts recorded in the cash
receipts journal are reasonable.
cash receipts are properly
classified.
recorded cash receipts result from
legitimate transactions.
existing cash receipts are recorded.
10. (TCO 9) Which one of the following would the auditor
consider to be an incompatible operation if the cashier receives remittances
from the mailroom? (Points : 3)
The cashier prepares the daily
deposit.
The cashier makes the deaily deposit
at a local bank.
The cashier posts the receipts to
the accounts receivable subsidiary ledger cards.
The cashier endorses the checks.
ACCT
444 Week 1 Homework
Chapter
1
1-18
(Objectives 1-3, 1-4, 1-5) Consumers Union is a nonprofit organization that provides
information and counsel on consumer goods and services. A major part of its
function is the testing of different brands of consumer products that are
purchased on the open market and then the reporting of the results of the tests
in Consumer
Reports, a monthly publication. Examples of
the types of products it tests are middle-sized automobiles, residential
dehumidifiers, flat-screen TVs, and boys’ jeans.
Required
1. In what ways are the services
provided by Consumers Union similar to assurance services provided by CPA
firms?
2. Compare the concept of information
risk introduced in this chapter with the information risk problem faced by a
buyer of an automobile.
3. Compare the four causes of
information risk faced by users of financial statements as discussed in this
chapter with those faced by a buyer of an automobile.
4. Compare the three ways users of
financial statements can reduce information risk with those available to a
buyer of an automobile.
Chapter
2
2-19
(Objective 2-7) 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 2-4 on page 38.
1. Appropriate accounting and auditing
research requires adequate technical reference materials. Each firm
professional has online password access through the firm’s Internet Web site to
electronic reference materials on accounting, auditing, tax, SEC, and other
technical information, including industry data.
2. Each office of the firm shall be
visited at least annually by review persons selected by the director of
accounting and auditing. Procedures to be undertaken by the reviewers are
illustrated by the office review program.
3. All potential new clients are
reviewed before acceptance. The review includes consultation with predecessor
auditors, and background checks. All new clients are approved by the firm
management committee, including assessing whether the firm has the technical
competence to complete the engagement.
4. Each audit engagement must include a
concurring partner review of critical audit decisions.
5. Audit engagement team members enter
their electronic signatures in the firm’s engagement management software to
indicate the completion of specific audit program steps. At the end of the
audit engagement, the engagement management software will not allow archiving
of the engagement file until all audit program steps have been electronically
signed.
6. At all stages of any engagement, an
effort is made to involve professional staff at appropriate levels in the
accounting and auditing decisions. Various approvals of the manager or senior
accountant are obtained throughout the audit.
7. No employee will have any direct or
indirect financial interest, association, or relationship (for example, a close
relative serving a client in a decision-making capacity) not otherwise
disclosed that might be adverse to the firm’s best interest.
8. Individual partners submit the nominations
of those persons whom they wish to be considered for partner. To become a
partner, an individual must have exhibited a high degree of technical
competence; must possess integrity, motivation, and judgment; and must have a
desire to help the firm progress through the efficient dispatch of the job
responsibilities to which he or she is assigned.
9. Through our continuing employee
evaluation and counseling program and through the quality control review
procedures as established by the firm, educational needs are reviewed and
formal staff training programs modified to accommodate changing needs. At the
conclusion of practice office reviews, apparent accounting and auditing
deficiencies are summarized and reported to the firm’s director of personnel.
10. The firm’s mission statement
indicates its commitment to quality, and this commitment is emphasized in all
staff training programs
Chapter
4
4-22
(Objectives 4-6, 4-7) Each of the following situations involves possible
violations of the AICPA’s 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 the rationale for the existing rule.
1. The audit firm of Miller and Yancy,
CPAs has joined an association of other CPA firms across the country to enhance
the types of professional services the firm can provide. Miller and Yancy share
resources with other firms in the association, including audit methodologies
and audit manuals, and common IT systems for billing and time reporting. One of
the partners in Miller and Yancy has a direct financial interest in the audit
client of another firm in the association.
.
1. Bruce Sullivan, CPA, is the audit
partner on the engagement of Xylium Corporation, which is a public company. In
structuring the agreement with the audit committee for the audit of Xylium’s
financial statements, Sullivan included a clause that limits the liability of
Sullivan’s firm so that shareholders of Xylium are prohibited from suing Sullivan
and the firm for performance issues related to the audit.
1. Jennifer Crowe’s audit client has a
material investment in Polex, Inc. Jennifer’s nondependent parents also own
shares in Polex and Polex is not an attest client of Jennifer’s firm. The
amount of her parent’s ownership in Polex is not significant to Jennifer’s net
worth.
.
1. Joe Stokely is a former partner in
Bass and Sims, CPAs. Recently, Joe left the firm to become the chief operating
officer of Lacy Foods, Inc., which is an audit client of Bass and Sims. In his
new role, Joe has no responsibilities for financial reporting. Bass and Sims
made significant changes to the audit plan for the upcoming audit.
.
1. Odonnel Incorporated has struggled
financially and has been unable to pay the audit fee to its auditor, Seale and
Seale, CPAs, for the 2009 and 2010 audits. Seale and Seale is currently
planning the 2011 audit.
1. Connor Bradley is the partner in
charge of the audit of Southern Pinnacle Bank. Bradley is in the process of
purchasing a beach condo and has obtained mortgage financing from Southern
Pinnacle.
.
1. Jessica Alma has been serving as the
senior auditor on the audit of Carolina BioHealth, Inc. Because of her
outstanding work, the head of internal audit at Carolina BioHealth extended her
an offer of employment to join the internal audit department as an audit
manager. When the discussions with Carolina BioHealth began, Jessica informed her
office’s managing partner and was removed from the audit engagement.
.
1. Lorraine Wilcox is a CPA and
professor of accounting at a major state university. One of her former students
recently sat for the Audit section of the CPA exam. One day, the student dropped
by Lorraine’s office and told her about many of the questions and simulation
content on the exam. Lorraine was grateful for the information, which will be
helpful as she prepares the course syllabus for the next semester.
1. Audrey Glover is a financial analyst
in the financial reporting department of Technologies International, a
privately held corporation. Audrey was asked to prepare several journal entries
for Technologies International related to transactions that have not yet
occurred. The entries are reflected in financial statements that the company
recently provided to the bank in connection with a loan outstanding due to the
bank.
1. Austin and Houston, CPAs, is
performing consulting services to help management of McAlister Global Services
streamline it production operations. Austin and Houston structured the fee for
this engagement to be a fixed percentage of costs savings that result once the
new processes are implemented. Austin and Houston perform no other services for
McAlister Global.
.
Chapter
26
26-25
(Objectives 26-25, 26-1, 26-4) Weston Corporation has an internal
audit department operating out of the corporate headquarters. Various types of
audit assignments are performed by the department for the eight divisions of
the company. The following findings resulted from recent audits of Weston
Corporation’s White Division:
1. One of the departments in the division appeared to have an
excessive turnover rate. Upon investigation, the personnel department seemed to
be unable to find enough workers with the specified skills for this department.
Some workers are trained on the job. The departmental supervisor is held
accountable for labor efficiency variances but does not have qualified staff or
sufficient time to train the workers properly. The supervisor holds individual
workers responsible for meeting predetermined standards from the day they
report to work. This has resulted in a rapid turnover of workers who are
trainable but not yet able to meet standards.
2. The internal audit department recently participated in a
computer feasibility study for this division. It advised and concurred on the
purchase and installation of a specific computer system. Although the system is
up and operating, the results are less than desirable. The software and hardware
meet the specifications of the feasibility study, but there are several
functions unique to this division that the system has been unable to
accomplish. Linking of files has been a problem. For example, several vendors
have been paid for materials not meeting company specifications. A revision of
the existing software is probably not possible, and a permanent solution
probably requires replacing the existing computer system with a new one.
3. One of the products manufactured by this division was recently
redesigned to eliminate a potential safety defect. This defect was discovered
after several users were injured. At present, there are no pending lawsuits
because none of the injured parties has identified a defect in the product as a
cause of the injury. There is insufficient information to determine whether the
defect was a contributing factor.
The director of internal auditing
and assistant controller is in charge of the internal audit department and
reports to the controller in corporate headquarters. Copies of internal audit
reports are sent routinely to Weston’s board of directors.
Required
1. Explain the additional steps in
terms of field work, preparation of recommendations, and operating management
review that ordinarily should be taken by Weston Corporation’s internal
auditors as a consequence of the audit findings in the first situation
(excessive turnover).
.
1. Discuss whether there are any
objectivity problems with Weston Corporation’s internal audit department as
revealed by the audit findings. Include in your discussion any recommendations
to eliminate or reduce an objectivity problem, if one exists.
.
1. The internal audit department is
part of the corporate controllership function, and copies of the internal audit
reports are sent to the board of directors.
·
Evaluate
the appropriateness of the location of the internal audit department within
Weston’s organizational structure.
.
·
Discuss
who within Weston should receive the reports of the internal audit department.
ACCT
444 Week 2 Homework
Chapter
5
5-23
(Objectives 5-4, 5-5, 5-7) Chen, CPA, is the auditor for Greenleaf Manufacturing
Corporation, a privately owned company that has a June 30 fiscal year.
Greenleaf arranged for a substantial bank loan that was dependent on the bank’s
receiving, by September 30, audited financial statements that showed a current
ratio of at least 2 to 1. On September 25, just before the audit report was to
be issued, Chen received an anonymous letter on Greenleaf’s stationery
indicating that a 5-year lease by Greenleaf, as lessee, of a factory building
accounted for in the financial statements as an operating lease was, in fact, a
capital lease. The letter stated that there was a secret written agreement with
the lessor modifying the lease and creating a capital lease.
Chen confronted the president of
Greenleaf, who admitted that a secret agreement existed but said it was
necessary to treat the lease as an operating lease to meet the current ratio
requirement of the pending loan and that nobody would ever discover the secret
agreement with the lessor. The president said that if Chen did not issue his
report by September 30, Greenleaf would sue Chen for substantial damages that
would result from not getting the loan. Under this pressure and because the audit
files contained a copy of the 5-year lease agreement that supported the
operating lease treatment, Chen issued his report with an unqualified opinion
on September 29.
Despite the fact that the loan was
received, Greenleaf went bankrupt within 2 years. The bank is suing Chen to
recover its losses on the loan, and the lessor is suing Chen to recover
uncollected rents.
Required
Answer the following questions,
setting forth reasons for any conclusions stated:
1. Is Chen liable to the bank?
1. Is Chen liable to the lessor?
1. Is there potential for criminal
action against Chen?
5-24
(Objective 5-6) Under Section 11 of the Securities Act of 1933 and Section
10(b), Rule 10b-5, of the Securities Exchange Act of 1934, a CPA may be sued by
a purchaser of registered securities. The following items relate to what a
plaintiff who purchased securities must prove in a civil liability suit against
a CPA.
The plaintiff security purchaser
must allege or prove:
1. Material misstatements were included in a filed document.
2. A monetary loss occurred.
3. Lack of due diligence by the CPA.
4. Privity with the CPA.
5. Reliance on the financial statements.
6. The CPA had scienter (knowledge and intent to deceive).
Required
For each of the items 1 through 6
listed above, indicate whether the statement must be proven under
1. Section 11 of the Securities Act of
1933 only.
1. Section 10(b) of the Securities
Exchange Act of 1934 only.
1934.
Both
Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934.
1934.
Neither
Section 11 of the Securities Act of 1933 nor Section 10(b) of the Securities
Exchange Act of 1934.*
Chapter
6
6-23
(Objectives 6-1, 6-3) Auditors provide “reasonable assurance” that the financial
statements are “fairly stated, in all material respects.” Questions are often
raised as to the responsibility of the auditor to detect material
misstatements, including misappropriation of assets and fraudulent financial
reporting.
Required
1. Discuss the concept of “reasonable
assurance” and the degree of confidence that financial statement users should
have in the financial statements.
1. What are the responsibilities of the
independent auditor in the audit of financial statements? Discuss fully, but in
this part do not include fraud in the discussion.
.
1. What are the responsibilities of the
independent auditor for the detection of fraud involving misappropriation of
assets and fraudulent financial reporting? Discuss fully, including your
assessment of whether the auditor’s responsibility for the detection of fraud
is appropriate.
.
6-27
(Objectives 6-6, 6-7) 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 (1 through 5), and
general transaction-related audit objectives (6 through 11).
Specific
Transaction-Related Audit Objective
1. Recorded cash disbursement transactions are for the amount
of goods or services received and are correctly recorded.
2. Cash disbursement transactions are properly included in the
accounts payable master file and are correctly summarized.
3. Recorded cash disbursements are for goods and services
actually received.
4. Cash disbursement transactions are properly classified.
5. Existing cash disbursement transactions are recorded.
6. Cash disbursement transactions are recorded on the correct
dates.
Required
1. Explain the differences among
management assertions about classes of transactions and events, general
transaction-related audit objectives, and specific transaction-related audit
objectives and their relationships to each other.
1. For each specific
transaction-related audit objective, identify the appropriate management assertion.
2. For each specific
transaction-related audit objective, identify the appropriate general
transaction-related audit objective.
Chapter
11
11-30
(Objective 11-1) The following are activities that occurred at Franklin
Manufacturing, a nonpublic company.
1. Franklin’s accountant did not record checks written in the
last few days of the year until the next accounting period to avoid a negative
cash balance in the financial statements.
2. Franklin’s controller prepared and mailed a check to a
vendor for a carload of material that was not received. The vendor’s chief
accountant, who is a friend of Franklin’s controller, mailed a vendor’s invoice
to Franklin, and the controller prepared a receiving report. The vendor’s chief
accountant deposited the check in an account he had set up with a name almost
identical to the vendor’s.
3. The accountant recorded cash received in the first few days
of the next accounting period in the current accounting period to avoid a
negative cash balance.
4. Discounts on checks to Franklin’s largest vendor are never
taken, even though the bills are paid before the discount period expires. The
president of the vendor’s company provides free use of his ski lodge to the
accountant who processes the checks in exchange for the lost discounts.
5. Franklin shipped and billed goods to a customer in New York
on December 23, and the sale was recorded on December 24, with the
understanding that the goods will be returned on January 31 for a full refund
plus a 5 percent handling fee.
6. Franklin’s factory superintendent routinely takes scrap
metal home in his pickup and sells it to a scrap dealer to make a few extra
dollars.
7. Franklin’s management decided not to include a footnote
about a material uninsured lawsuit against the company on the grounds that the
primary user of the statements, a small local bank, will probably not
understand the footnote anyway.
Required
1. Identify which of these activities
are frauds.
1. For each fraud, state whether it is
a misappropriation of assets or fraudulent financial reporting.
ACCT
444 Week 3 Homework
Chapter
7
7-27
(Objective 7-4) The following are examples of documentation typically
obtained by auditors:
1. Vendors’ invoices
2. General ledger files
3. Bank statements
4. Cancelled payroll checks
5. Payroll time records
6. Purchase requisitions
7. Receiving reports (documents prepared when merchandise is
received)
8. Minutes of the board of directors
9. Remittance advices
10. Signed W-4s (Employee’s Withholding Exemption Certificates)
11. Signed lease agreements
12. Duplicate copies of bills of lading
13. Subsidiary accounts receivable records
14. Cancelled notes payable
15. Duplicate sales invoices
16. Articles of incorporation
17. Title insurance policies for real estate
18. Notes receivable
Required
1. Classify each of the preceding items
according to type of documentation: (1) internal or (2) external.
1. Explain why external evidence is
more reliable than internal evidence.
.
7-30
(Objective 7-4) Eight different types of evidence were discussed. The
following questions concern the reliability of that evidence:
Required
1. Explain why confirmations are
normally more reliable evidence than inquiries of the client.
.
1. Describe a situation in which
confirmation will be considered highly reliable and another in which it will
not be reliable.
.
1. Under what circumstances is the
physical observation of inventory considered relatively unreliable evidence?
.
1. Explain why recalculation tests are
highly reliable but of relatively limited use.
.
1. Give three examples of relatively
reliable documentation and three examples of less reliable documentation. What
characteristics distinguish the two?
1. Give several examples in which the
qualifications of the respondent or the qualifications of the auditor affect
the reliability of the evidence.
1. Explain why analytical procedures
are important evidence even though they are relatively unreliable by
themselves.
.
7-31
(Objective 7-4) As auditor of the Star Manufacturing Company, you have
obtained
1. A trial balance taken from the books of Star one month
before year-end:
2. There are no inventories consigned either in or out.
3. All notes receivable are due from outsiders and held by
Star.
Required
Which accounts should be confirmed
with outside sources? Briefly describe from whom they should be confirmed and
the information that should be confirmed. Organize your answer in the following
format:*
Chapter
8
8-22 (Objective 8-7) Gale Gordon,
CPA, has found ratio and trend analysis relatively useless as a tool in
conducting audits. For several engagements, he computed the industry ratios
included in publications by Standard and Poor’s and compared them with industry
standards. For most engagements, the client’s business was significantly
different from the industry data in the publication and the client
automatically explained away any discrepancies by attributing them to the
unique nature of its operations. In cases in which the client had more than one
branch in different industries, Gordon found the ratio analysis no help at all.
How can Gordon improve the quality of his analytical procedures?
8-33
(Objectives 8-3, 8-7, 8-8) Your comparison of the gross margin percent for Jones Drugs
for the years 2008 through 2011 indicates a significant decline. This is shown
by the following information:
A discussion with Marilyn Adams, the
controller, brings to light two possible explanations. She informs you that the
industry gross profit percent in the retail drug industry declined fairly
steadily for 3 years, which accounts for part of the decline. A second factor
was the declining percent of the total volume resulting from the pharmacy part
of the business. The pharmacy sales represent the most profitable portion of
the business, yet the competition from discount drugstores prevents it from
expanding as fast as the nondrug items such as magazines, candy, and many other
items sold. Adams feels strongly that these two factors are the cause of the
decline.
The following additional information
is obtained from independent sources and the client’s records as a means of
investigating the controller’s explanations:
Required
1. Evaluate the explanation provided by
Adams. Show calculations to support your conclusions.
.
1. Which specific aspects of the
client’s financial statements require intensive investigation in this audit?
.
Chapter
9
9-33
(Objectives 9-6) Below are ten independent risk factors:
1. The client lacks sufficient working capital to continue
operations.
2. The client fails to detect employee theft of inventory from
the warehouse because there are no restrictions on warehouse access and the
client does not reconcile inventory on hand to recorded amounts on a timely
basis.
3. The company is publicly traded.
4. The auditor has identified numerous material misstatements
during prior year audit engagements.
5. The assigned staff on the audit engagement lack the
necessary skills to identify actual errors in an account balance when examining
audit evidence accumulated.
6. The client is one of the industry’s largest based on its
size and market share.
7. The client engages in several material transactions with
entities owned by family members of several of the client’s senior executives.
8. The allowance for doubtful accounts is based on significant
assumptions made by management.
9. The audit plan omits several necessary audit procedures.
10. The client fails to reconcile bank accounts to recorded cash
balances.
Required
Identify
which of the following audit risk model components relates most directly to
each of the ten risk factors:
·
Acceptable
audit risk
·
Inherent
risk
·
Control
risk
·
Planned
detection risk
ACCT
444 Week 4 Homework
Chapter
10
10-33
(Objective 10-3) Following are descriptions of ten internal controls.
1. The company’s computer systems track individual transactions
and automatically accumulate transactions to create a trial balance.
2. The company must receive university transcripts documenting
all college degrees earned before an individual can begin their first day of
employment with the company.
3. Senior management obtains data about external events that
might affect the entity and evaluates the impact of that information on its
existing accounting processes.
4. Each quarter, department managers are required to perform a
self-assessment of the department’s compliance with company policies. Reports
summarizing the results are to be submitted to the senior executive overseeing
that department.
5. Before a cash disbursement can be processed, all payee
information must be verified by matching the payee to the company’s approved
vendor listing.
6. The system automatically reconciles the detailed accounts
receivable subsidiary ledger to the accounts receivable general ledger account
on daily basis.
7. The company has developed a detailed series of accounting
policy and procedures manuals to help provide detailed instructions to
employees about how controls are to be performed.
8. The company has an organizational chart that establishes the
formal lines of reporting and authorization protocols.
9. The compensation committee reviews compensation plans for
senior executives to determine if those plans create unintended pressures that
might lead to distorted financial statements.
10. On a monthly basis, department heads review a budget to
actual performance report and investigate unusual differences.
Required
Indicate
which of the five COSO internal control components is best represented by each
internal control.
1. Control environment
2. Risk assessment
3. Control activities
4. Information and communication
5. Monitoring
10-41
(Objective 10-7) The following are independent situations for which you will
recommend an appropriate audit report on internal control over financial
reporting as required by PCAOB auditing standards:
1. The auditor identified a material misstatement in the
financial statements that was not detected by management of the company.
2. The auditor was unable to obtain any evidence about the
operating effectiveness of internal control over financial reporting.
3. The auditor determined that a deficiency in internal control
exists that will not prevent or detect a material misstatement in the financial
statements.
4. During interim testing, the auditor identified and
communicated to management a significant control deficiency. Management
immediately corrected the deficiency and the auditor was able to sufficiently
test the newly-instituted internal control before the end of the fiscal period.
5. As a result of performing tests of controls, the auditor
identified a significant deficiency in internal control over financial
reporting; however, the auditor does not believe that it represents a material
weakness in internal control.
Required
For
each situation, state the appropriate audit report from the following
alternatives:
·
Unqualified
opinion on internal control over financial reporting
·
Qualified
or disclaimer of opinion on internal control over financial reporting
·
Adverse
opinion on internal control over financial reporting
Chapter
12
12-19
(Objectives 12-2, 12-3) The following are misstatements that can occur in the sales
and collection cycle:
1. A customer number on a sales invoice was transposed and, as
a result, charged to the wrong customer. By the time the error was found, the
original customer was no longer in business.
2. A former computer operator, who is now a programmer, entered
information for a fictitious sales return and ran it through the computer
system at night. When the money came in, he took it and deposited it in his own
account.
3. A nonexistent part number was included in the description of
goods on a shipping document. Therefore, no charge was made for those goods.
4. A customer order was filled and shipped to a former customer
that had already filed for bankruptcy.
5. The sales manager approved the price of goods ordered by a
customer, but he wrote down the wrong price.
6. A computer operator picked up a computer-based data file for
sales of the wrong week and processed them through the system a second time.
7. For a sale, a data entry operator erroneously failed to enter
the information for the salesman’s department. As a result, the salesman
received no commission for that sale.
8. Several remittance advices were batched together for
inputting. The cash receipts clerk stopped for coffee, set them on a box, and
failed to deliver them to the data input personnel.
Required
1. Identify the transaction-related
audit objective(s) to which the misstatement pertains.
2. Identify one automated control that
would have likely prevented each misstatement.
12-26
(Objective 12-4) Following are 10 key internal controls in the payroll cycle
for Gilman Stores, Inc.
Key
Controls
1. To input hours worked, payroll accounting personnel input
the employee’s Social Security number. The system does not allow input of hours
worked for invalid employee numbers.
2. The payroll application is programmed so that only human
resource personnel are able to add employee names to the employee master files.
3. Input menus distinguish executive payroll, administrative
payroll, and factory payroll.
4. The system automatically computes pay at time and a half
once hours worked exceed 80 in a 2-week pay period.
5. The system accumulates totals each pay period of employee
checks processed and debits the payroll expense general ledger account for the
total amount.
6. Each pay period, payroll accounting clerks count the number
of time cards submitted by department heads for processing and compare that
total with the number of checks printed by the system to ensure that each time
card has a check.
7. For factory personnel, the payroll system matches employee
ID numbers with ID numbers listed on job costing tickets as direct labor per
the cost accounting system. The purpose of the reconciliation is to verify that
the amount paid to each employee matches the amount charged to production
during the time period.
8. The system generates a listing by employee name of checks
processed. Department heads review these listings to ensure that each employee
actually worked during the pay period.
9. On a test basis, payroll accounting personnel obtain a
listing of pay rates and withholding information for a sample of employees from
human resources to recalculate gross and net pay.
10. The system automatically rejects processing an employee’s
pay if inputted hours exceed 160 hours for a 2-week pay period.
Required
For
each control:
1. Identify whether the control is an
automated application control (AC) or a manual control done by Gilman employees
(MC).
2. Identify the transaction-related
audit objective that is affected by the control.
3. Identify which controls, if tested
within the last two prior year audits, would not have to be retested in the
current year, assuming there are effective IT general controls and no changes
to the noted control have been made since auditor testing was completed.
ACCT
444 Week 5 Homework
Chapter
13
13-26
(Objectives 13-1, 13-2, 13-3, 13-6) The following are audit procedures
from different transaction cycles:
1. Use audit software to foot and cross-foot the cash
disbursements journal and trace the balance to the general ledger.
2. Select a sample of entries in the acquisitions journal and
trace each one to a related vendor’s invoice to determine whether one exists.
3. Examine documentation for acquisition transactions before
and after the balance sheet date to determine whether they are recorded in the
proper period.
4. Inquire of the credit manager whether each account
receivable on the aged trial balance is collectible.
5. Compute inventory turnover for each major product and
compare with previous years.
6. Confirm a sample of notes payable balances, interest rates,
and collateral with lenders.
7. Use audit software to foot the accounts receivable trial
balance and compare the balance with the general ledger.
Required
1. For each audit procedure, identify
the transaction cycle being audited.
2. For each audit procedure, identify
the type of evidence.
3. For each audit procedure, identify
whether it is a test of control or a substantive test.
4. For each substantive audit
procedure, identify whether it is a substantive test of transactions, a test of
details of balances, or an analytical procedure.
5. For each test of control or
substantive test of transactions procedure, identify the transaction-related
audit objective or objectives being satisfied.
6. For each analytical procedure or
test of details of balances procedure, identify the balance-related audit
objective or objectives being satisfied.
13-30
(Objectives 13-5, 13-7) Following are evidence decisions for the three audits
described in Figure 13-3 on page 411:
Evidence
Decisions
1. The auditor performed extensive positive confirmations at
the balance sheet date.
2. The auditor performed extensive tests of controls and
minimal substantive tests.
3. The auditor decided it was possible to assess control risk
below the maximum.
4. The auditor performed substantive tests.
5. This audit was likely the least expensive to conduct.
6. The auditor confirmed receivables at an interim date.
7. The auditor identified effective controls and also
identified some deficiencies in controls.
8. The auditor performed tests of controls.
Required
1. Explain why Audit B represents the
maximum amount of reliance that can be placed on internal control. Why can’t
all the audit assurance be obtained by tests of controls?
.
1. Explain why the auditor may not
place the maximum extent of reliance on controls in Audit B and Audit C.
1. For each of the eight evidence
decisions, indicate whether the evidence decision relates to each of the audits
described above. Every evidence decision relates to at least one of the audits,
and some may relate to two or all three audits.
13-33
(Objective 13-4) 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 disbursements by examining cancelled
checks, electronic payments, and supporting documentation, but almost no
testing was spent in the verification of fixed assets. On the second
engagement, a different partner had her do less intensive tests in the cash
disbursements area and take smaller sample sizes than in the first audit, even
though the company was much larger. On her most recent engagement under a third
audit partner, there was a 435436thorough test of cash disbursement transactions,
far beyond that of the other two audits, and an extensive verification of fixed
assets. In fact, this partner insisted on a complete physical examination of
all fixed assets recorded on the books. The total audit time on the most recent
audit was longer than that of either of the first two audits despite the
smaller size of the company. Bryan’s conclusion is that the amount of evidence
to accumulate depends on the audit partner in charge of the engagement.
Required
1. State several factors that can
explain the difference in the amount of evidence accumulated in each of the
three audit engagements as well as the total time spent.
1. What could the audit partners have
done to help Bryan understand the difference in the audit emphasis on the three
audits?
1. Explain how these three audits are
useful in developing Bryan’s professional judgment. How could the quality of
her judgment have been improved on the audits?
1. Which audit most likely represents
an integrated audit of a public company’s financial statements and internal
control over financial reporting?
Chapter
14
14-25
(Objectives 14-3, 14-4, 14-5) The following are commonly performed
tests of controls and substantive tests of transactions audit procedures in the
sales and collection cycle:
1. Account for a sequence of shipping documents and examine
each one to make sure that a duplicate sales invoice is attached.
2. Account for a sequence of sales invoices and examine each
one to make sure that a duplicate copy of the shipping document is attached.
3. Compare the quantity and description of items on shipping
documents with the related duplicate sales invoices.
4. Trace recorded sales in the sales journal to the related
accounts receivable master file and compare the customer name, date, and amount
for each one.
5. Examine sales returns for approval by an authorized
official.
6. Review the prelisting of cash receipts to determine whether
cash is prelisted daily.
7. Reconcile the recorded cash receipts on the prelisting with
the cash receipts journal and the bank statement for a 1-month period.
Required
1. Identify whether each audit
procedure is a test of control or a substantive test of transactions.
2. State which of the six
transaction-related audit objectives each of the audit procedures fulfills.
3. Identify the type of evidence used
for each audit procedure, such as documentation and observation.
14-26
(Objective 14-3) The following are selected transaction-related audit
objectives and audit procedures for sales transactions:
Transaction-Related
Audit Objectives
1. Recorded sales exist.
2. Existing sales are recorded.
3. Sales transactions are correctly included in the accounts
receivable master file and are correctly summarized.
Procedures
1. Trace a sample of shipping documents to related duplicate
sales invoices and the sales journal to make sure that the shipment was billed.
2. Examine a sample of duplicate sales invoices to determine
whether each one has a shipping document attached.
3. Examine the sales journal for a sample of sales transactions
to determine whether each one has a posting reference in the margin indicating
that it has been automatically compared by the computer with the accounts
receivable master file for customer name, date, and amount.
4. Examine a sample of shipping documents to determine whether
each one has a duplicate sales invoice number printed on the bottom left
corner.
5. Trace a sample of debit entries in the accounts receivable
master file to the sales journal to determine whether the date, customer name,
and amount are the same.
6. Vouch a sample of duplicate sales invoices to related
shipping documents filed in the shipping department to make sure that a
shipment was made.
Required
1. For each objective, identify at
least one specific misstatement that could occur.
1. Describe the differences between the
purposes of the first and second objectives.
.
1. For each audit procedure, identify
it as a test of control or substantive test of transactions. (There are three
of each.)
1. For each objective, identify one
test of control and one substantive test of transactions.
2. For each test of control, state the
internal control that is being tested. Also, identify or describe a
misstatement that the client is trying to prevent by use of the control.
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