ACCT 444 Full Course All Quizzes and Homework Assignments
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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
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
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)
accounting and bookkeeping service.
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.
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.
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)
Relative supported by the CPA
Sibling living in the same city as the CPA
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.
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 public companies and privately held companies with assets greater than $500 million
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.
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
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.
Question 9. 9. (TCO 1) Which of the following terms identifies a requirement for audit evidence? (Points : 3)
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.
greater than average.
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.
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.
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.
financial statement auditor.
company’s internal audit department.
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.
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)
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.
Question 8. 8. (TCO 3) Fraudulent financial reporting may be accomplished through the manipulation of (Points : 3)
all of the above.
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)
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
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.
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.
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.
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)
none of the above.
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
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
Reduce detailed audit tests
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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
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)
acceptable audit risk.
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.
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.
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.
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
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.
8. (TCO 8) The FASB definition of materiality emphasizes what class of financial statement users? (Points : 3)
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)
the audit firm’s managing partner.
no one in particular.
the client’s management.
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)
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.
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)
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.
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.
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)
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
ACCT 444 Week 4 Quiz
1. (TCO 5) Which of the following is responsible for establishing internal controls for a public company? (Points : 3)
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)
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 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)
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)
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)
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)
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)
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)
Physical and online security
8. (TCO 10) General controls include all of the following except (Points : 3)
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)
9. (TCO 10) A control that relates to all parts of the IT system is called a(n) (Points : 3)
9. (TCO 10) Auditors should evaluate the _____ before evaluating application controls because of the potential for pervasive effects. (Points : 3)
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)
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)
All of the above
1. (TCO 6) For efficiency, tests of controls are frequently done at the same time as (Points : 3)
tests of transactions.
tests of details of balances.
2. (TCO 6) Analytical procedures are defined in the auditing standards as (Points : 3)
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.
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)
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)
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)
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
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.
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.
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
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.
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.
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
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.
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).
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.*
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.
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.
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.
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.
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
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
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:
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.
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:*
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:
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?
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.
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
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.
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
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.
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
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.
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.
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.
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
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.
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:
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.
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.
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?
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.
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.
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.
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.