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Audit Reports MSA Question Answers Masters of Science in Accounting

John Marsh
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Prairie View A&M University Audit Reports MSA 103 

Audit Reports MSA Question Answers PVAMU

Audit Reports

1) Explain why auditors’ reports are important to users of financial statements and why it is desirable to have standard wording.

2) List the seven parts of a standard unqualified audit report and explain the meaning of each part. How do the parts compare with
those found in qualified report?

3) What are the purposes of the scope paragraph in the auditor’s report? Identify the most important information included in the scope paragraph.

4) What are the purposes of the opinion paragraph in the auditor’s report? Identify the most important information included in the opinion paragraph.

5) On February 17, 2006, a CPA completed the field work on the financial statements for the Buckheizer Technology Corporation for the year ended December 31, 2005. The audit in satisfactory in all respects except for the existence of a change in accounting principle from FIFO to LIFO inventory valuation., which results in an explanatory paragraph to consistency. On February 26, the auditor completed the tax return and the draft of the financial statements. The final audit report was completed, attached to the financial statements, and delivered to the client on March 7. What is the appropriate date on the auditor’s report?

6) What five circumstances are required for a standard unqualified report to be issued?

7) Describe the additional information included in the introductory, scope, and opinion paragraphs in a combined audit report on
financial statements and the effectiveness of internal control over financial reporting. What is the nature of the additional paragraphs
in the audit report?

8) What type of opinion should an auditor issue when the financial statements are not in accordance with GAAP because such
adherence would result in misleading statements?

9) Distinguish between an unqualified report with explanatory paragraph or modified wording and a qualified report. Give examples when an explanatory paragraph or modified wording should be used in an unqualified opinion.

10)Describe what is meant by a reports involving the use of other auditors. What are the three options available to the principal auditor and when should each be used?

11)The client has restated the prior-year statements because of a change from LIFO to FIFO. How should be this reflected in the auditor’s report?

12)Distinguish between changes that affect consistency and those that may affect comparability but not consistency. Give an example of each.

13)List the three conditions that require a departure from unqualified opinion and give one specific example of each those conditions.

14)Distinguish between a qualified opinion, adverse opinion, and a disclaimer of opinion, and explain the circumstances under which each is appropriate.

15)Define materiality as it is used in audit reporting. What conditions will affect the auditor’s determination of materiality?

16)Explain how materiality differs for failure to follow GAAP and for lack of independence.

17)How does the auditor’s opinion differ between scope limitations caused by client restrictions and limitations resulting from conditions beyond the client’s control? Under which of these two would the auditor be most likely to issue a disclaimer of opinion?

18)Distinguish between a report qualified as to opinion only and one with both a scope and opinion qualification.

19)Identify the three alternative opinion that may be appropriate when the client’s financial statements are not accordance with GAAP. Under what circumstances is each appropriate.

20)Discuss why the AICPA has such strict requirements on audit opinions when the auditor is not independent.

21)When an auditor discovers more than one condition that requires departure from or modification of standard unqualified report, what should the auditor’s report include?

22)What responsibility does the auditor have for information on the company’s web site that may be inked to electronic versions of the company’s annual financial statements and auditor’s report? How does this differ from the auditor’s responsibility for other information in the company’s annual report that includes the financial statements and auditor’s report?

The Audit Process-Audit Responsibilities and objectives

1) State the objective of the audit of financial statements. In general terms, how do auditors meet that objective?

2) Distinguish between management’s and auditor’s responsibility for the financial statements being audited.

3) Distinguish between the terms errors and fraud. What is the auditor’s responsibility for finding each?

4) Distinguish between fraudulent financial reporting and misappropriation of assets. Discuss the likely difference between those two types of fraud on the fair presentation of financial statements.

5) “It is well accepted in auditing that throughout the conduct of the ordinary audit, it is essential to obtain large amounts of information from management and to rely heavily on management’s judgments. After all, the financial statements are management’s representations, and simple, it is extremely difficult, if not impossible, for the auditor to evaluate the obsolescence inventory as well as management can in a highly complex business. Similarly, the collectability of accounts receivable and the continued usefulness of machinery and equipment are heavily dependent on management’s willingness to provide truthful responses to questions.” Reconcile the auditor’s responsibility for discovering material misrepresentations by management with these comments.

6) List two major characteristics that are useful in predicting the likelihood of fraudulent financial reporting in an audit. For each of the characteristics, state two things that the auditor can do to evaluate its significance in the engagement.

7) Describe what is meant by the cycle approach to auditing. What are the advantages of dividing the audit into different cycles?

8) Identify the cycle to which each of the following ledger accounts would ordinarily be assigned: sales, account payable, retained earnings, account receivable, inventory and repairs and maintenance.

9) Why are sales, sales R&A, bad debts, cash discounts, AR, and allowance for uncollectible accounts all included in the same cycle?

10)Define what is meant by a management assertion about financial statements. Identify the five board categories of management assertions.

11)Distinguish between the general audit objectives and management assertions. Why are the general audit objectives more useful to auditors?

12)An acquisition of fixed-asset repair by a construction company is recorded on the wrong date. Which transaction-related audit objective has been violated? Which transaction-related audit objective has been violated if the acquisition had been capitalized as a fixed asset rather than expensed?

13)Distinguish between the existence and completeness balancerelated audit objectives. State the effect on financial statements
(overstatement or understatement) of a violation of each in the audit of accounts receivable.

14)What are specific audit objectives? Explain their relationship to the general audit objectives.

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

16)Explain how management assertions, general balance-related audit objectives, and specific balance-related audit objectives are developed for an account balance such as accounts receivable.

17)Identify the four phases of the audit. What is the relationship of the four phases to the objective of the audit of financial statements?

The Audit Process-Audit Evidence

1) Discuss the similarities and differences between evidence in a legal case and evidence in an audit of financial statements.

2) List the four major evidence decisions that must be made on every audit

3) Describe what is meant by an audit procedure. Why is it important for audit procedures to be carefully worded?

4) Describe what is meant by an audit program for accounts receivable. What four things should be included in an audit program?

5) State the third standard of field work. Explain the meaning of each of the major phrases of the standard.

6) Explain why the auditor can be persuaded only with a reasonable level of assurance, rather than convinced, that the financial statements are correct.

7) Identify the two factors, that determine the persuasiveness of evidence. How are these two factors related to audit procedures, sample size, items to select, and timing?

8) Identify the seven characteristics that determine the competence of evidence. For each characteristics, provide one example of a type of evidence that is likely to be competent.

9) List the seven types of audit evidence included in this chapter and give two examples of each.

10)What are the four characteristics of the definition of a confirmation? Distinguish between a confirmation and external documentation.

11)Distinguish between internal documentation and external documentation as audit evidence and give three examples of each.

12)Explain the importance of analytical procedures as evidence in determining the fair presentation of the financial statements.

13)Identify the most important reasons for performing analytical procedures.

14)Your client, Harper Company, has a contractual commitment as a part of a bond indenture to maintain a current ratio of 2.0. if the ratio falls below that level on the balance sheet date, the entire bond becomes payable immediately. In the current year, the client’s financial statements show that the ratio has dropped from 2.6 to 2.05 over the past year. How should this situation affect your audit plan?

15)Distinguish between attention-directing analytical procedures and those intended to eliminate or reduce detailed substantive procedures.

16)Explain why the statement “Analytical procedures are essential in every part of an audit, but these tests are rarely sufficient by themselves for any audit area” is correct or incorrect.

17)List the purposes of audit documentation and explain why each purpose is important.

18)What are the two criteria that auditors of public companies consider when determining whether memos, correspondence, and other documents must be maintained in the audit files?

19)For how long does the Sarbanes-Oxley Act require auditors of public companies to retain audit documentation?

20)Explain why it is important for audit documentation to include each of the following: identification of the name of the client, period covered, description of the contents, initial of the preparer, date of the preparation, and an index code.

21)Define what is meant by a permanent file, and list several types of information typically included. Why does the auditor not include the contents of the permanent file with the current year’s audit file?

22)Distinguish between the following types of current period supporting schedules and state the purpose of each: analysis, trial balance, and tests of reasonableness.

23)Why is it essential that the auditor not leave questions or exceptions in the audit documentation without an adequate explanation?

24)Define what is meant by a tick mark. What is its purpose?

25)Who owns the audit files? Under what circumstances can they be used by other people?

26)A CPA sells his auditing practice to another CPA firm and includes all audit files as part of the purchase price. Under what circumstances is this a violation of the code of professional conduct?

27)How does the auditor read and evaluate information that is available only in machine-readable form?

28)Explain the purposes and benefits of audit documentation software.

The Audit Process-Audit Planning and Analytical Procedures

1) what benefits does the auditor derive from planning audits?

2) Identify the eight major steps in planning audits.

3) What are the responsibilities of the successor and predecessor auditors when a company is changing auditors?

4) What factors should an auditor consider prior to accepting an engagement? Explain

5) What is the purpose of an engagement letter? What subjects should be covered in such a letter?

6) Who is considered “the client” when auditing public companies?

7) Which services must be preapproved by the audit committee a public company?

8) Explain why auditors need an understanding of the client’s industry. What sources are commonly

9) When a CPA has accepted an engagement from a new client who is manufacturer, it is customary for the CPA to tour the client’s plant facilities. Discuss the ways in which the CPA’s observations made during the course of the plant tour will be of help in planning and conducting the audit.

10)An auditor often tries to acquire background knowledge of the client’s industry as an aid to audit work. How does the acquisition of this knowledge aid the auditor in distinguishing between obsolete and current inventory?

11)Define what is meant by a related party. What are the auditor’s responsibilities for related parties and related party transactions?

12)Which types of loans to executives are permitted by the SarbanesOxley Act?

13)Your firm has performed the audit of Rogers Company for several years and you have been assigned the audit responsibility for the current audit. How would you review of the corporate charter and bylaws for this audit differ from that of the audit of a client who was audited by a different CPA firm in the preceding year?

14)For the audit of Radline Manufacturing Company, the audit partner asks you to carefully read the new mortgage contract with the First National Bank and abstract all pertinent information. List the information in a mortgage that is likely to be relevant to the auditor.

15)Identify two types of information in the client’s minutes of the board of directors meetings that are likely to be relevant to the auditor. Explain why it is important to read the minutes early in the engagement.

16)Identify the three categories of client objectives. Indicate how each objective may affect the auditor’s assessment of inherent risk and evidence accumulation.

17)What is the purpose of the client’s performance measurement system? Give examples of key performance indicators for the following business: (1) a chain of retail clothing stores; (2) an internet portal; (3) a hotel chain.

18)Define client business risk and describe several sources of client business risk. What is the auditor’s primary concern when evaluating client business risk?

19)Describe top management controls and their relation to client business risk. Give examples of effective management and governance controls.

20)What are the purposes of preliminary analytical procedures? What types of comparisons are useful when performing preliminary analytical procedures?

21)When are analytical procedures required to be performed during the audit? What is the primary purpose of analytical procedures performed during the completion phase of the audit?

22)Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a tool in conducting audits. For several engagement, he computed the industry ratios included in publications by Robert Morris Associates 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 would automatically explain 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 could Gordon improve the quality of his analytical procedures?

23)At the completion of every audit, Roger Morris, CPA, calculates a large number of ratios and trends for comparison with industry averages and prior-year calculations. He believes the calculations are worth the relatively small cost of doing them because they provide him with an excellent overview of the client’s operations. If the ratios are out of line, Morris discusses the reasons with the client and often make suggestions on how to bring the ratio back in line in the future. In some cases, these discussions with management have been the basis for management consulting engagements. Discuss the major strengths and shortcomings in Morris’s use of ratio and trend analysis.

24)Name the four categories of financial ratios and give an example of a ratio in each category. What is the primary information provided by each financial ratio category?

The Audit Process-Materiality and Risk

1) Chapter 8 introduced the eight parts of the planning phase of an audit. Which part is the evaluation of materiality and risk?

2) Define the meaning of the term materiality as it is used in accounting and auditing. What is the relationship between materiality and the phrase obtain reasonable assurance used in the auditor’s report?

3) Explain why materiality is important but difficult to apply in practice.

4) What is meant by setting a preliminary judgment about materiality? Identify the most important factors affecting the preliminary judgment.

5) What is meant by using bases for setting a preliminary judgment about materiality? How would those bases differ for the audit of a manufacturing company and a government unit such as school district?

6) Assume that Rosanne Madden, CPA, is using 5% of net income before tax, current assets, or current liabilities as her major guidelines for evaluating materiality. What qualitative factors should she also consider in deciding whether misstatements maybe material?

7) Distinguish between the terms tolerable misstatement and preliminary judgment about materiality. How are they related to each other?

8) Assume a company with the following balance sheet accounts:
Fixed Assets
Long-Term loans
M. Johnson Proprietor

You are concerned only about overstatement of owner’s equity. Set tolerable misstatement for the three relevant accounts such that the preliminary judgment about materiality does not exceed $5,000. Justify your answer.

9) Explain what is meant by making an estimate of the total misstatement in a segment and in the overall financial statements. Why is it important to make these estimates? What is done with them?

10)How would the conduct of an audit of a medium-sized company be affected by the company’s being a small part of a large conglomerate as compared with it being a separate entity?

11)Define the audit risk model and explain each term in the model.

12)What is meant by planned detection risk? What is the effect on the amount of evidence the auditor must accumulate when planned detection risk is increased from medium to high?

13)Explain the causes of an increased or decreased planned detection risk.

14)Define what is meant by inherent risk. Identify four factors that make for high inherent risk in audits.

15)Explain why inherent risk is set for segments rather than for overall audit. What is the effect on the amount of evidence the auditor must accumulate when inherent risk is increased from medium to high for a segment? Compare your answer with the one for question 12.

16)Explain the effect of extensive misstatements found in the prior year’s audit on inherent risk, planned detection risk, and planned audit evidence.

17)Explain what is meant by term acceptable audit risk. What is its relevance to evidence accumulation?

18)Explain the relationship between acceptable audit risk and the legal liability of auditors.

19)State the three categories of factors that affect acceptable audit risk and list the factors that auditor can use to indicate the degree to which each category exists.

20)Auditors have not been successful in measuring the components of the audit risk model. How is it possible to use the model in a meaningful way without a precise way of measuring risk?

21)Explain the circumstances when the auditor should revise the components of the audit risk model and the effect of the revisions on planned detection risk and planned evidence.

The Audit Process-Audits of Internal Control and Control Risk

1) Describe the three broad objectives management has when designing effective internal control.

2) Describe which of the three categories of broad objectives for internal controls would be considered by the auditor in an audit of both financial statements and internal control over financial reporting.

3) Section 404 of the Sarbanes-Oxley Act requires management to issue a report on internal control over financial reporting. Identify the specific section 404 reporting requirements for management.

4) What two components of internal control must management assess when reporting on internal control to comply with section 404 of the Sarbanes-Oxley Act?

5) Chapter eight introduced the eight parts of the planning phase of audits. Which part is understanding internal control and assessing control risk? What parts precede and follow that understanding and assessing?

6) What is the auditor’s responsibility for obtaining an understanding of internal control? How does the responsibility differ for audits of public and nonpublic companies?

7) When auditing a public company, what are the auditor’s responsibilities related to internal control as required by PCAOB standard 2?

8) State the six transaction-related audit objectives.

9) Management must identify the framework used to evaluate the effectiveness of internal control over financial reporting. What framework is used by most U.S. public companies?

10)What are the five components of internal control in the COSO internal control framework?

11)What is meant by the control environment? What are the factors the auditor must evaluate to understand it?

12)What is the relationship among the five components of internal control?

13)List the types of specific control activities and provide one specific illustration of a control in sales area for each control activity.

14)The separation of operational responsibility from record keeping is meant to prevent different types of misstatements than the separation of the custody of assets from accounting. Explain the difference in the purposes of these two types of separation of duties

15)For each of the following, give an example of a physical control the client can use to protect the asset or record:
1. Petty cash
2. Cash received by retail clerks
3. Accounts receivable records
4. Raw material inventory
5. Perishable tools
6. Manufacturing equipment
7. Marketable securities

16)Explain what is meant by independent checks on performance and give five specific examples.

17)Describe the four phases performed by the auditor when obtaining an understanding of internal control and assessing control risk.

18)What are management’s responsibilities for documenting internal control over financial reporting in a public company? How would the lack of documentation affect an auditor’s report on internal control over financial reporting by PCAOB standard 2?

19)What two aspects of internal control must the auditor assess when performing procedures to obtain an understanding of internal control?

20)What is a walkthrough of internal control? What is the PCAOB standard 2 requirement related to auditor walkthroughs of internal control in an integrated audit?

21)Describe what is meant by a key control and a control deficiency.

22)Distinguish a significant deficiency in internal control form a material weakness in internal control. How would the presence of one significant deficiency affect the auditor’s report on internal control required by PCAOB standard 2? How would the presence of one material weakness affect an auditor’s report on internal control required by PCAOB standard 2?

23)Frank James, a highly competent employee of Brinkwater Sales Corporation, had been responsible for accounting-related matters for two decades. His devotion to the firm and his duties always been exceptional, and over the years, he had been given increased responsibility. Both president of Brinkwater and the partner of an independent CPA firm in charge of the audit were shocked and dismayed to discover that James had embezzled more than $500,000 over a 10-year period by not recording billings in the sales journal and subsequently diverting the cash receipts. What major factors permitted the defalcation to take place?

24)Jeanne Maier, CPA, believes that it is appropriate to obtain an understanding of intaernal control about halfway through the audit, after she is familiar with the client’s operations and the way the system actually works. Sha has found through experience taht filling out internal control questionnaires and flowcharts early in the engagement is not beneficial because the system rarely functions the way it is supposed to. Later in engagement, the auditor can prepare flowcharts and questionnaires with relative ease because of the knowledge already obtained on the audit. Evaluate her approach.

25)Distinguish the auditor’s responsibility for testing control in an audit of a public company from the responsibility to test controls in an audit of a nonpublic company.

26)How does the sufficiency of evidence differ between procedures to obtain an understanding of internal control and tests of controls?

27)During the prior-year audits of McKimmon Inc., a public company, the auditor did tests of controls for all relevant financial statement assertions. Some of the related controls are manual while others are automated. Describe the extent the auditor can rely on tests of controls performed in prior years.

28)What are two opinions that must be included in the auditor’s report on internal control over financial reporting required by PCAOB standard 2?

29)What two conditions must be present for the auditor to issue an unqualified opinion on internal control over financial reporting? What type of condition will cause the auditor to issue a qualified or disclaimer of opinion on internal control over financial reporting?

30)Describe the concept of an integrated audit of the financial statements and internal control required by PCAOB standard 2.

The Audit Process-Fraud Auditing

1) Define fraudulent financial reporting and give two examples that illustrate fraudulent financial reporting.

2) Define misappropriation of assets and give two examples of misappropriation of assets.

3) Distinguish fraudulent financial reporting from misappropriation of assets.

4) What are the three conditions of fraud often referred to as “the fraud triangle?”

5) Give examples of risk factors for fraudulent financial reporting for each of the three fraud conditions: incentives/pressures, opportunities, and attitudes/rationalization.

6) Give examples of risk factors for misappropriation of assets for each of the three fraud conditions: incentives/pressures, opportunities, and attitudes/rationalization.

7) What sources are used by the auditor to gather information to assess fraud risks?

8) What should the audit team consider in its planning discussion about fraud risks?

9) Auditors are required to make inquiries of individuals in the company when gathering information to asses fraud risk. Identify those with whom the auditor must make inquiries.

10)Describe the purpose of corporate codes of conduct and identify three examples of items addressed in a typical code of conduct.

11)Discuss the importance of the control environment, or “setting the tone at the top,” in establishing a culture of honesty and integrity in a company

12)Distinguish management’s responsibility from the audit committee’s responsibility for designing and implementing antifraud programs and controls within a company

13)What are the three categories of auditor responses to fraud risks?

14)What three auditor actions are required to

15)Describe the three main techniques used to manipulate revenue.

16)You go through the drive-through window of a fast food restaurant and notice a sign that reads “your meal is free if we fail to give you a receipt.” Why would the restaurant post this sign?

17)Name the three categories of inquiry and describe the purpose of each when used by an auditor to obtain additional information about a suspected fraud.

18)Identify three verbal and three nonverbal cues that may be observed when making inquiries of an individual who is being deceitful.

19)You have identified a suspected fraud involving the company’s controller. What must you do in response to this discovery? How might this discovery affect your report on internal control when auditing a public company?

The Audit Process-The Impact of Information Technology

1) Explain how client internal controls can be improved through the proper installation of IT.

2) Identify risks for accounting systems that rely heavily on IT functions.

3) Define what is meant by an audit trail and explain how it can be affected by client’s integration of IT.

4) Distinguish between random error resulting from manual processing and systematic error resulting from IT processing and give an example of each category of error.

5) Identify the traditionally segregated duties in noncomplex IT systems and explain how increases in the complexity of the IT function affect that separation.

6) Distinguish between general controls and application controls and give two examples of each.

7) Identify the typical duties within an IT function and describe how those duties should be segregated among IT personnel.

8) Explain how the effectiveness of general controls affects the auditor’s tests of automated application controls, including the auditor’s ability to rely on tests done in prior audits.

9) Explain the relationship between application controls and transaction-related audit objectives.

10)Explain what is meant by auditing around the computer and describe what must be present for this approach to be effective when auditing clients who use IT to process accounting information.

11)Explain what is meant by the test data approach. What are the major difficulties with using this approach? Define parallel simulation with audit software and provide an example of how it can be used to test a client’s payroll system.

12)Describe risks that are associated with purchasing software to be installed on microcomputer hard drives. What precautions can clients take to reduce those risks?

13)Compare the risks associated with network systems to those associated with centralized IT functions.

14)How does the use of a database management system affect risks?

15)An audit client is in the process of creating an online web-based sales ordering system for customers to purchase products using personal credit cards for payment. Identify three risks related to an online sales system that management should consider. For each risk, identify an internal control that could be implemented to reduce that risk.

16)Explain why it is unacceptable for an auditor to assume that an independent computer service center is providing reliable accounting information to an audit client. What can auditor do to test the service center’s internal controls?

The Audit Process-Overall Audit Plan and Audit Program

1) What are the five types of tests auditors use to determine whether financial statements are fairly stated? Identify which tests are performed to reduce control risk and which tests are performed to reduce planned detection risk. Also, identify which tests will be used by a public company auditor when internal control over financial reporting.

2) What is the purpose of tests of controls? Identify specific accounts on the financial statements that are affected by performing tests of controls for the acquisition and payment cycle.

3) Distinguish between a test of control and a substantive test of transactions. Give two examples of each.

4) State a test of control audit procedure to test the effectiveness of the following control: approved wage rates are used in calculating employees’ earnings. State a substantive test of transactions audit procedure to determine whether approved wage rates are actually used in calculating employees’ earnings.

5) A considerable portion of the tests of controls and substantive tests of transactions are performed simultaneously as a matter of audit convenience. But the substantive tests of transactions procedures and sample size, in part, depend on the results of the tests of controls. How can the auditor resolve this apparent inconsistency?

6) Evaluate the following statement: “tests of sales and cash receipts transactions are such an essential part of every audit that i like to perform them as near the end of the audits as possible. By that time i have a fairly good understanding of the client’s business and its internal controls because confirmations, cutoff tests, and other procedures have already been completed.”

7) Explain how the calculation and comparison to previous years of the gross margin percentage and the ratio of accounts receivable to sales are related to the confirmation of accounts receivable and other tests of the accuracy of accounts receivable.

8) Distinguish between substantive tests of transactions and tests of details of balances. Give one example of each for the acquisition and payment cycle.

9) The auditor Ferguson’s Inc. identified two internal controls in the sales and collection receipts cycle for testing. In the first control, the computer verifies that a planned sale on account will not exceed the customer’s credit limit entered in the accounts receivable master file. In the second control, the accounts receivable clerk matches bills of ladding, sales invoices, and customer orders before recording in the sales journal. Describe how the presence of general controls over software programs and master file changes affects the extent of audit testing of each of these two internal controls.

10)Assume that the client’s internal controls over the recording and classifying of fixed asset additions are considered deficient because the individual responsible for recording new aquisitions has inadequate technical training and limited experience in accounting. How will this situation affect the evidence you should accumulate in auditing fixed assets as compared with another audit in which the controls are excellent? Be as specific as possible.

11)For each of the eight types of evidence discussed in chapter 7, identify whether it is applicable for risk assessment procedures, tests of controls, substantive tests of transactions, analytical procedures, adn tests of details of balances.

12)Rank the following types of tests from moct costly to least costly: analytical procedures, tests of details of balances, risk assessment
procedures, tests of controls, and substantive tests of transactions.

13)In figure 13-3, explain the difference among C3, C2, and C1. Explain the circumstances under which it will be a good decision to obtain audit assurance from substantive tests at point C1. Do the same for points C2, and C3.

14)Table 13-3 illustrates variations in the emphasis on different types of audit tests. What are the benefits to the auditor of identifying the best mix of tests?

15)State the four-step approach to designing tests of controls and substantive tests of transactions.

16)Expalin the relationship between the methodology for designing tests of controls and substantive tests of transactions in figure 13-4 to the methodology for designing tests of details of balances in figure 13-6.

17)Why is it desirable to design tests of details of balances before performing tests of controls and substantive tests of transactions? State the assumptions that the auditor must make in doing that. What does the auditor do if the assumptions are wrong?

18)Explain the relationship of tolerable misstatement, inherent risk, and control risk to planned tests of details of balances.

19)List the nine balance-related audit objectives in the verification of the ending balance in inventory and provide one useful audit procedure for each of the objectives.

20)Why do auditors often consider it desirable to perform audit tests throughout the year rather than wait until year-end? List several examples of evidence that can be accumulated before year-end.

Completing The Audit

1) Distinguish between a contingent liability and an actual liability and give three examples of each.

2) In the audit of the James Mobley Company, you are concerned about the possibility of contingent liabilities resulting from income tax disputes. Discuss the procedures you could use for an extensive investigation in this area.

3) Explain why an auditor is interested in a client’s future commitments to purchase raw materials at affixed price.

4) Explain why the analysis of legal expense is an essential part of every audit.

5) During the audit of the Merrill Manufacturing Company, Ralph Pyson, CPA, has become aware of four lawsuits against the client though discussions with the client, reading corporate minutes, and reviewing correspondence files. How should Pyson determine the materiality of the lawsuits and the proper disclosure in the financial statements?

6) Distinguish between an asserted and unasserted claim. Explain why a client’s attorney may not reveal an unasserted claim.

7) Describe the action that an auditor should take if an attorney refuses to provide information that is within the attorney’s jurisdiction and may directly affect the fair presentation of the financial statements.

8) Distinguish between the two general types of subsequent events and explain how they differ. Give two examples of each type.

9) In obtaining letters from attorneys, Bill Malano’s aim is to receive the letters as early as possible after the balance sheet date. This provides him with a signed letter from every attorney in time to properly investigate any exceptions. It also eliminates the problem of a lot unresolved loose ends near the end of the audit. Evaluate Malano’s approach.

10)What major considerations should the auditor take into account in determining how extensive the review of subsequent events should be?

11)Identify five audit procedures normally done as a part of the review for subsequent events

12)Distinguish between subsequent events occurring between the balance sheet date and the date of the auditor’s report, and subsequent discovery of facts existing at the date of the auditor’s report. Give two examples of each and explain the appropriate action by the auditor in each instance.

13)Miles Lawson, CPA, believes that the final summarization is the easiest part of the audit if careful planning is follow throughout the audit. He makes sure that each segment of the audit is completed, he is finished with the audit. He believes this may cause each part of the audit to take a little longer, but he makes up for it by not having to do the final summarization. Evaluate Lawson’s approach.

14)Compare and contrast the accumulation of audit evidence and the evaluation of the adequacy of the disclosures in the financial statements. Give two examples in which adequate disclosure could depend heavily on the accumulation of evidence and two others in which audit evidence does not normally significantly affect the adequacy of the disclosure.

15)Distinguish between a client letter of representation and a management letter and state the primary purpose of each. List some items that might be included in each letter.

16)Explain what is meant by information accompanying basic financial statements. Provide two examples of such information. What levels of assurance may the CPA offer for this information?

17)What is meant by reading other financial information in annual reports? Give an example of the type of information the auditor is examining.

18)Distinguish between regular audit documentation review and independent review and state the purpose of each. Give two examples of potential findings in each of these two types of review.

19)Describe matters that the auditor must communicate to audit committees of public companies.




Audit Reports MSA Question Answers Masters of Science in Accounting

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