Auditing midterm review
Explain briefly the auditors' responsibility for detecting noncompliance with laws by clients
Depends on their nature. The professional standards identify two types of laws. Those with a direct effect on the financial statement amounts and others.
Under common law, the CPA who were negligent may mitigate some Damages to a client by proving 1) contributory negligence 2) the CPA fee was not material 3) the CPA were. Or competent to accept the engagement 4) the CPA negligence was caused by the fact they had too much work
1) contributory negligence
Which of the following cases reaffirmed the principles in the ultramares case 1) credit alliance corp v Arthur Andersen 2) rosenblum v Adler 3) Ernst v hochfelder 4) escott v barchris construction
1) credit alliance corp v Arthur Andersen
The most significant result of the continental vending case was that it: 1) created a more general awareness of the possibility of auditor criminal prosecution 2) extended the auditors responsibility to all information included in Registration statements 3) defined the CPA responsibilities for unaudited FS 4) established a precedent for auditors being held liable to third parties under common law for ordinary negligence
1) cretes a more general awareness of the possibility of auditor criminal prosecution
describe the two types of misstatements due to fraud. which one generally is of more concern to the auditors?
1) misstatements arising from fraudulent financial reporting 2) misstatements arising from misappropriation of assets management fraud is of the most concern to the auditors
In cases of breach of contracts, plaintiffs, generally have to prove all of the following, except: 1) cpa had a duty 2) CPA made false statement 3) the client incurred losses related to CPA performance 4) CPA breached their duty
2) CPA made a false statement
Which of the following approaches to auditors liability is least desirable from the CPAs perspective 1) ultramares approach 2) rosenblum approach 3) restatement of torts approach 4) foreseen user approach
2) rosenblum approach
The 1136 tenants case was important because of its emphasis upon the legal liability of the CPA when associated with: 1) a review of annual statements 2) unaudited FS 3) an audit resulting in a disclaimer of opinion 4) letters for underwriters
2) unaudited FS
which of the following best describes what is meant by the term "fraud risk factor"? 1. factors that, when present, indicate that risk exists 2. factors often observed in circumstances where frauds have occurred 3. factors that, when present, require modification of planned audit procedures 4. weaknesses in internal control identified during an audit
2. factors often observed in circumstances where frauds have occurred
If a cpa performs and audit. Recklessly, the cpa will be liable to third parties who were unknown and not foreseeable to the cpa for: 1) strict liability for all damages 2) gross negligence 3) either ordinary or gross negligence 4) breach of contract
2. gross negligence
which of the following is most likely to be an overall response to fraud risks identified in an audit? 1. supervise members of the audit team less closely and rely more upon judgement 2. use less predictable audit procedures 3. use only certified public accountants on the engagement 4. place increased emphasis on the audit of objective transactions rather than subjective transactions
2. use less predictable audit procedures
If the CPA provides negligent tax advice to a public company, the client would bring the suit under 1) securities act of 1934 2) securities exchange act of 1934 3) federal income tax law 4) common law
4) common law
Which of the following elements is most frequently necessary to hold a CPA liable to a client 1) acted with scienter or guilty knowledge 2) was not independent of the client 3) failed to exercise due care 4) did not use an engagement letter
3) failed to exercise due care
Under the securities and exchange act of 1934, auditors and other defendants are faced with 1) joint liability 2) joint and several liability 3) proportionate liability 4) limited liability
3) proportionate liability
Which statement best expresses the factors that purchasers of securities registered under the securities act of 1933 need to prove to recover losses from the auditors 1) the purchasers of the securities must prove ordinary negligence by the auditors and reliance on the audited FS 2) the purchasers of the securities must prove that FS were misleading and that they relied on them to purchase the securities 3) the purchasers of securities must prove that the financial statements were misleading then the burden of proof is shifted to the auditors to show that the audit was performed with due diligence 4) the purchasers of the securities must prove that the FS were misleading and the auditors were negligent
3) the purchasers of securities must prove that the financial statements were misleading then the burden of proof is shifted to the auditors to show that the audit was performed with due diligence
in planning and performing an audit, auditors are concerned about risk factors for two distinct types of fraud: fraudulent financial reporting and misappropriation of assets. which of the following is a risk factor for misappropriation of assets? 1. generous performance-based compensation system 2. management preoccupation with increased financial performance 3. an unreliable accounting system 4. strained relationships between management and the auditors
3. an unreliable accounting system
the primary objective of tests of details of transactions performed as substantive procedures is to 1. comply with generally accepted auditing standards 2. attain assurance about the reliability of the accounting system 3. detect material misstatements in the financial systems 4. evaluate whether managements policies and procedures are operating effectively
3. detect material misstatements in the financial systems
which of the following elements underlies the application of GAAS, particularly the standards of fieldwork and reporting? 1. adequate disclosure 2. quality control 3. materiality and audit risk 4. client acceptance
3. materiality and audit risk
which portion of an audit is least likely to be completed before the balance sheet date? 1. test of controls 2. issuance of an engagement letter 3. substantive procedures 4. assessment of control risk
3. substantive procedures
three conditions generally are present when fraud occurs. select the one below that is not one of those conditions 1. incentive or pressure 2. opportunity 3. supervisory position 4. attitude
3. supervisory position
A CPA issued unqualified opinion on the FS of a company that sold common stock in a PO subject to the securities act of 1933. Based on a misstatement in the financial statements, the CPA is being sued by an investor who purchased shares of this PO. Which of the following represents a viable defense? 1) investor has not proved negligence of CPA 2) investor did not actually rely on the false statement 3) the CPA detected the false statement after the audit date 4) the false statement is immaterial in the overall context of the FS
4) the false statement is immaterial in the overall context of the financial statements
which of the following should not normally be included in the engagement letter for an audit? 1. a description of the responsibilities of client personnel to proived assistance 2. an indication of the amount of audit fee 3. a description of the limitations of an audit 4. a listing of the client's branch offices selected for testing
4. a listing of the client's branch offices selected for testing
the risk that the auditors will conclude; based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as 1. business risk 2. engagement risk 3. control risk 4. detection risk
4. detection risk
which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? 1. analysis of balance sheet accounts 2. analysis of income statement accounts 3. all matter of continuing accounting significance 4. facts that might bear on the integrity of management
4. facts that might bear on the integrity of management
the audit committee of a company must be made up of: 1. representatives from the client's management, investors, suppliers, and customers 2. the audit partner, the chief financial-officer, the legal counsel, and atleast one outsider 3. representatives of the major equity interests, such as preferred and common stockholders 4. members of the board of directors who are not officers or employees
4. members of the board of directors who are not officers or employees
as one step in testing sales transactions, a CPA traces a random sample of sales journal entries to debits in the accounts receivable subsidiary ledger. this test provides evidence as to whether 1. each recorded sale represents a bona fide transactions 2. all sales have been recorded in the sales journals 3. all debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries 4. recorded sales have been properly posted to customer accounts
4. recorded sales have been properly posted to customer accounts
United States v Simon (continental vending)
A case in which auditors were held liable for criminal negligence
Rusch factors v levin
A case in which the court uses the guidance of the second restatement of the law of Torts to decide the auditors liability to third parties under common law
Hochfelder v Ernst
A case that established that auditors should not be held liable under the securities exchange act of 1934 , unless there was intent to deceive
Rosenblum v adler
A case that established the precedent that auditors should be held liable under common law for ordinary negligence to all foreseeable third parties
Credit alliance v Arthur andersen
A common law case in which the court held that auditors should be held liable for ordinary negligence only to third parties they know will use financial statements for a particular purpose
Ultramares v touché
A landmark case establishing that auditors should be held liable to third parties not in privity of contract for gross negligence, but not for ordinary negligence
Escott v barchris
A landmark case in which the auditors were held liable under section 11 of the securities act of 1933
The international cpa firm of Arthur Andersen faced significant liability in conjunction with Enron corp. a) from legal liability perspective, describe unique features from this audit case B) describe the important implications of this audit case for a firm of public accounting
A) Andersen was proven guilty of destroying legal documents which is a felony this lead to the company being dissolved, no specific personnel were mentioned B) it shows the importance of ethics and how unethical decisions of one person can ruin the whole company
The firm of harwood & toole CPAs has been the auditor and tax return preparer for tucker inc a non public company, in the current year management harwood and tucker inc part ways. Tucker hasn't paid harwood for any current year audit and tax fees, which information will harwood have to hand over A) accounting records of tucker inc in the possession of harwood B). Copies of adjusting entries prepared by the staff of harwood and tools C) a copy of Tucker's partially completed tax return prepared by the staff of harwood D) copies of harwood audit working papers E) several consolidating entries prepared by tucker reviewed by harwood
A) harwood must return accounting info B) no they do not need to return adjusting entries but may be negotiated for C) no they do not have to return the tax return D) work papers belong to the audit firm E) no they do not need to return consolidating entries by they may be negotiated for
Jenko corp is an audit client of Williams and co. CPAs. Determine if each member is a covered member A) bill jones a partner in Tucson , he does not work on jenko audit B) Mary Adams first year staff assistant who works on the audit C) Mary Anderson is a partner in Phoenix she does not work on the audit D) bill keeps on, a staff auditor who does not work on the audit, but owns stock in jenko E) ken sanders , a tombstone office partner provides no services for jenko audit other than serving as a consultant for the attest team regarding industry related issues specific to jenko
A) no, as a partner in another office with no ties to the audit he is not covered B) yes, as an individual on the attest engagement team she is a covered member C) yes as a partner in the engagement office she is a covered member D) no Joe son isn't working on the audit therefore is not covered E) yes, sanders is a consultant so he is able to influence he audit
Sawyer and Sawyer cpas audited the FS of rattler corp. rattler went bankrupt, stockholders brought a case against management assume $5 million in losses and allocation of losses as follows Management 70% Board of directors 20% Auditors 5% Attorneys 5% A) under what securities act would the stockholders initiate the lawsuit B) assuming that all defendants in the case are financially able to pay their share of the losses, calculate the amount of losses that would allocated to Sawyer C) assuming he attorneys had no financial resources, describe Sawyer share of losses might increase
A) stockholders would bring the lawsuit through the securities and exchange act of 1934 B) the private litigation reform act of 1995 establishes proportionate liability, Sawyer must pay 250,000(5%*5,000,000) C) if management cannot pay its share other defense are must pay 50%, Sawyer would be liable for 375,000 (250,000+ 125,000)
While the AICPA administers a peer review program for CPA firms, the PCAOB staff performs practice inspections A) identify the two types of peer review B) on what part of a firms practice does the PCAOB staff focus its inspections C) describe a PCAOB inspection D) describe how the pcaob staff selects an audit engagement for inspection
A) system review (study and appraisal of a CPA firms system of quality control to perform accounting and auditing work), engagement review(take actual accounting work from the CPA firm they take samples of their work to see if it's adequate) B) selected quality control issues only and may also consider other aspects of practice management, such as the determination of partner compensation C) inspection and review of selected audit and review engagements, evaluation of the quality control system and the communication within the system, tests of audit and supervisory controls D) uses risk assessment to indentify engagements that have higher risk of lack of professional standards
Dandy container corporation engaged the accounting firm of Adams and Adams to audit FS to be used in connection with an interstate PO of securities. The audit was completed, and an unqualified opinion was expressed on the financial statements that were submitted to the securities and exchange commission along with the registration statement. 200,000 shares of dandy container common stock were offered at $11 a share. 8 months later the stock fell to $2 a share when several large loans were disclosed, state whether it's true or false A) the securities act of 1933 applies to the above described PO of securities B) the accounting firm has potential liability to any person who acquired the stock C) an insider who had knowledge of all the facts regarding the loans could recover from the accounting firm D) in court, investors who bought shares in dandy only Have to show a loss and that failure to disclose the loans led to misleading FS E) the accountant could avoid liability if they show they are not negligent F) accountants can avoid or reduce damages if they prove the stock drop happened for other reasons G) the sec would defend any actions brought against the accountants
A) true B) true C) false D) true E) true F) true G) false
After commuter airlines was forced into bankruptcy m, the company's stockholders brought suit against Thomas & Ross, the company's independent auditors m. 3 independent assumptions concerning this litigation are listed below. A) commuter airlines is not under sec jurisdiction. Plaintiffs suit is brought under common law in a state court that adheres to ultramares B) commuter airlines had recently issued its publicly held securities stockholders suit is brought to federal court under securities act of 1933 C) commuter airlines is under sec jurisdiction. Suit is brought to fed court alleging violations of sections 18(a) and 10(b) of the securities exchange act of 1934
A) under common law, stockholders must show incurred losses, that CPA were negligent and that gross negligence was the cause of the stockholders loss, auditors will introduce evidence to refute plaintiffs allegations B) initial purchasers must show that FS are misleading, auditors must Prove the audit was performed with due diligence and they were not Negligent, if they were negligent it was the not the cause of the lost money C) must prove the statements are misleading and caused the loss, and to avoid liability the auditors must prove they weee not negligent or negligence wasn't the cause of the loss
Contrast the roles of the AICPA and the PCAOB in the development of auditing standards
AICPA has no standard-setting or regulatory responsibilities regarding public company audits; the PCAOB has no standard-setting or regulatory responsibilities regarding CPA services for non-public companies but they have to offer an opinion on internal controls
List the broad categories of threats to independence included in the AICPA conceptual framework for independence standards
Adverse interest, advocacy, familiarity, management participation, self interest, self review, undue influence
Describe what is meant by the term covered member
An individual firm or entity that is capable of influencing on attest engagement
Explain why potential liability of auditors for professional malpractice exceeds that of physicians
Because the sheer number of litigants, auditors can effect millions of people with a negligent action, while doctors will realistically only affect a handful of patients
In what forms may CPAs practice public accounting
CPAs can practice in any form...corporations, LLPs, partnerships, or sole practice
Indentify the circumstances under which a CPA may not perform professional services on a contingent fee basis
If they perform public audits or services for the client or themselves
Briefly describe the differences in liability to third parties under the known user , foreseen user, and foreseeable user approaches to CPA liability
In ultramares v touché , ny court of appeals ruled auditors can be held liable to third parties for gross negligence or fraud but not ordinary negligence, In rosenblum v Adler nj Supreme Court ruled that auditors could be held liable for ordinary negligence for foreseeable third parties who utilize FS
In the context of an audit of financial statements, explain what is meant by professional skepticism
Includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and critical assessment of audit evidence. Guilty of a bad audit because you were not skeptical enough and you were too easily satisfied
What are the two major types of constraints on decisions that involve ethical issues
Internal and external; an individual self-interest may be inconsistent with acting in accordance with ethical beliefs as a whole
When a CPA firm completes an audit of a non public business and issues a report, does it express an opinion on the client's accounting records, financial statements, or both? Give reasons
It is appropriate that the auditors state in their reports that they have audited the financial statements rather than accounting records. The auditors report covers the years for which financial statements were presented by the company.
Contrast joint and several liability and proportionate liability
Joint and several: holds defendants jointly responsible for losses attributed to the class as well as being liable for any share of the liabilities not collected Proportional liability is a method of allocating damages to each group that is liable based on involvement
What is a material amount from the perspective of auditors?
Material is defined as sufficiently important to influence decisions made by reasonable users of the FS m. Materiality is influenced by the size of the organization that is being audited
Jian zhang is a CPA who often serves as an expert witness in court. Is it proper for zhang to receive compensation in a damage suit based on the amount awarded to the plaintiff
No, because the amount of his fee is dependent on the finding or result of the service, if it was a fixed fee it would be allowable
Do AICPA attestation standards supersede any of the AICPA generally accepted accounting standarss
No, however the ASB does provide guidance for attesting to specific types of information, such as prospective financial statements and internal control over financial reporting
Laura Clark, wife of Jon Clark CPA is a life insurance agent. Can Jon Clark refer audit clients to his wife Laura for life insurance ?
No, this impairs his independence regarding audits. The threat is financial self interest since he would share commission with his wife
Pike company has had an annual audit performed by the same firm of certified public accountants for many years the financial statements and copies of the audit report are distributed to stockholders each year shortly after completion of the audit. Who is primarily responsible for the fairness of these financial statements?
Primary responsibility is managements, even though the auditor can give their opinion they can not change the information they can only request that information is changed to created fairness of the financial statements
In 1136 tenants corporation case, what was the essential difference in the way the client and CPAs viewed the work to be done in the engagement
The client said the auditors had been hired to perform all necessary accounting work and auditing services while the CPAs argues they had been retained to do accounting record work only, the client contended that the CPAs did not discover defalcation. This case illustrated the importance of a cover letter
Why was Ernst v hochfelder considered a win for the accounting profession
The court rules that ordinary negligence was not sufficient misconduct for auditors to be liable to third parties under rule 10b-5 of securities exchange act of 1934
marion watson & co. CPAs is planning its audit procedures for its tests of the valuation of inventories of east coast manufacturing co. the auditors on the engagement have assessed inherent risk for valuation of inventories at 100 percent and 50 percent respectively. a. calculate the appropriate level of detection risk for the audit of this assertion, given the auditors wish to restrict the audit risk to 3 percent b. calculate the appropriate level of detection risk for the audit of this assertion, given that the auditors wish to restrict audit risk for the assertion to 5 percent
a. Audit risk = inherent risk*control risk*detection risk detection risk = audit risk/ (inherent risk*control risk) detection risk = 3%/(100%*50%) detection risk = 6% b. detection risk = audit risk / (inherent risk*control risk) detection risk = 5%/(100%*50%) detection risk = 10%
Davis & co. Certified public accountants, after completing an audit of Samson company, decided that it would be unable to issue an unmodified opinion. What circumstances might explain this decision?
There is either a problem with GAAP or GAAS so much that you could not issue a standard unmodified or unqualified opinion
Why did congress enact racketeer inflicted and corrupt orginizatuins act? Why has is been of concern to auditors? What subsequent developments have reduced this concern
This was used in cases against CPAs because is loosely defined the definition of racketeering activities. Concern about rico act has been reduced since they ruled accountants cannot be held liable for fraud unless they took part in it or were in management of the organization
What is the basic purpose of a code of ethics for a profession
To provide guidance on appropriate ethical conduct for a profession. Aids in creating integrity of the profession
Sandy Schultz CPA performed consulting services which resulted in her client purchasing a computer manufactured by AMZ computer corp. shortly after Schultz was surprised by the $1000 commission she received from AMZ, would acceptance of this commission violate AICPA code of professional conduct?
Yes, this type of commission is prohibited by rule 503...a member of a public practice shall not refer a client to any service or product for a commission
criticize the following statement : "throughout this audit, for all purposes, we will define a 'material amount' a $500,000"
a defined amount may be applied to a portion of the FS account balances but they may determine a smaller amount for individual account balances because of the nature of the account
explain the meaning of permanent file as sued in connection with audit working papers. what kinds of information are usually included in the permanent file
a permanent file consists of working papers stretching back several years, such papers are reviewed and brought up to date with each succeeding audit and therefore may be contrasted with a current years working papers which relate to a single years audit. typical papers to be placed in these files, articles of incorporation or partnership agreement, long-term construction contracts, description of the history and policies of the company, and schedules or analyses of such accounts as capital stock, land, and buildings which often show little or no change over a period of years.
state the purpose and nature of an engagement letter
the engagement letter is a formal letter sent to the clients by the auditors at the beginning of the process to scope the work that is expected to be done.
audit risk should be considered when planning and performing an audit of financial statements in accordance with GAAS a. define audit risk b. describe components of inherent risk, control risk, and detection risk c. explain the interrelationship among these components d. which (if any) of these components is completely a function of the sufficiency of the evidence gathered by the auditors procedures e. comment on the following: "since cash is often less than 1 percent of total assets, inherent and control risk for that account must be low, accordingly, detection risk should be established at a high level."
a. audit risk is the possibility that auditors may unknowingly fail to modify their opinion on financial statements that are materially misstated. b. inherent risk refers to the possibility of material misstatement occurring before internal control, control risk is the risk that a material misstatement will not be prevented or detected on a timely basis by the company's internal control. detection risk is the risk that auditors will fail to detect the misstatement with their audit procedures. c. the risks vary inversely from one another. the less inherent risk or control risk the greater the acceptable detection risk, on the flip side the greater the inherent or control risk the less the acceptable detection risk. d. detection risks is the only risk that is completely a function of sufficiency of the evidence gathered by the auditors' procedures. Inherent risk and control risk are a function of the client and its operating environment. regardless of how much information they gather they cannot change the levels of the risk. e. the statement is incorrect, it overlooks the liquid nature of cash as well as its high rate of turnover. throughout a year a large amount of cash is generated and spent, allowing for material misstatements, embezzlement, and other improper use.
analytical procedures are extremely useful throughout the audit a. explain how the procedures are useful in: 1) the risk assessment stage of the audit 2) the substantive procedures of the audit 3) near the end of the audit b. list five sources of information that are available to auditors in developing expectations for analytical procedures c. list and describe four techniques that may be used by the auditors in developing expectations for analytical procedures
a. planning stage: helps the auditors understand the business and directs the auditors attention to potential problems substantive procedures: provide auditors evidence that specific account balances or financial statements amounts end of audit: ensures the audit results make sense b. comparable financial data from prior periods, industry averages, relationships among elements of financial information within a period, budgets or forecasts, relevant nonfinancial information c. trend analysis(review of changes in account balances over time), ratio analysis(comparison of relationships between two or more Financial statement accounts),Regression analysis(use of statistical models to quantify auditors = expectation about a financial statement amount), reasonableness tests (expectation is developed but different approaches to the estimate are used)
included in the financial statements are a variety of accounting estimates. audit procedures should be designed to obtain evidence about the assertions of management related to all accounts, including those based on accounting estimates. a. list three approaches to auditing estimates. provide an example of how an auditor might apply each of the three approaches in auditing the allowance for doubtful accounts, which management has established at 1 percent of credit sales b. discuss the meaning of the valuation or allocation assertion as it relates to the allowance for doubtful accounts. c. discuss factors that bear on whether the allowance for doubtful accounts is likely to be an account with high inherent risk.
a. three approaches for auditing estimates are: 1) review and test management's process of developing the estimate. using this approach an auditor will recalculate the amount included in the allowance and consider the reasonableness of the method and result 2) independently develop an estimate of the amount to compare to managements estimate. 3) review subsequent events or transactions bearing on the estimate. collection of receivables after year-end will provide evidence relevant to the valuation of the account at year-end. overdue accounts will then be analyzed to determine collectibility. b. the valuation assertion for the allowance for uncollectible accounts addresses whether the amount in the account is determined in accordance with GAAP. since accounts receivable should be valued at their net realizable value, the receivable balance less the allowance for uncollectible accounts should equal this amount. c. the following are indicative of an account with high inherent risk 1) difficult to audit transactions or balances 2) complex calculations 3) difficult account issues 4) significant judgment 5) valuation that varies significantly based on economic factors
give at least four examples of specialists whose findings might provide appropriate evidence for the independent auditors
among specialists whose findings might provide competent evidence for the independent auditors are (only four required): actuaries, appraisers, attorneys, engineers, environmental consultants, and geoligists
when in the course of an audit might the auditor find it useful to apply analytical procedures
auditors use analytical procedures at different times, sometimes in the early planning stages and other times during the field work... to provide more evidence, they also use analytical procedures at the end of the process to complete the final overview of the audit
distinguish between the component of audit risk that the auditors gather evidence to assess versus the component of audit risk that they collect evidence to restrict
because inherent risk and control risk are a result of characteristics of the client and its internal controls, auditors assess them. because detection risk is a function of the effectiveness of the audit procedures used to gather evidence, it is restricted to the appropriate level based on the scope of procedures performed
Morgan, CPA is approached by a prospective audit client who wants to engage morgan to perform an audit for the current year. in prior years, this prospective client was audited by another CPA. identify the specific procedures that morgan should follow in deciding to accept this client.
evaluate the CPA firms independence with respect to the prospective audit client, explain to the client the need to make inquiries of the previous auditor, make inquiries with previous auditor to review their working papers, obtain a knowledge of the clients business activities and sources revolving around their aspect of business, consider any special problems or unique risks, hold preliminary meetings with management and the audit committee top discuss the services to be performed and the timing, issue an engagement letter
richard foster, an assistant auditor, was assigned to the year-end audit work of sipher corporation. sipher is a small manufacturer of language translation equipment. as his first assignment, foster was instructed to test the cutoff of year-end sales transactions. since sipher uses a calendar year-end for its financial statements. foster began by obtaining the computer-generated sales ledgers and journals, nothing the dates of the journal entries. foster noted no journal entries that were posted to the ledger in the wrong accounting period. thus, he concluded that the client's cutoff sales transactions was effective. comment on the validity of foster's conclusion.
fosters procedure is completely ineffective for testing sales cutoff. in computerized accounting system, the journal entries and ledgers generally are prepared simultaneously by the computer. the entry date and the posting date are determined by the date indicated by the employee entering the transaction. to test the cutoff of transactions in accounting systems auditors must trace entries before and after the balance sheet date to supporting documentation, to find the date of actual occurrence. for sales transactions auditors are interested in examining shipping documents, which indicates the date the sales took place.
what problems are created for a CPA firm when audit staff members underreport the amount of time spent in performing specific audit procedures?
informal policy is violated, possible under billing of the client, may encourage unrealistic budgets in the future, under reporting of time on a large scale may affect the firms ability to retain and attract employees
describe the risk of material misstatement of an assertion. list the two components that make up this risk.
inherent and control risk, the risk of material misstatement of an assertion exists in the FS and the auditors do not detect it with their audit procedures
what are related party transactions
related party transactions are when one party is related and has the ability to influence another party. an example of parties related to the client entity include officers to directors.
distinguish among routine, nonroutine, and estimation transactions. include an example of each.
routine transactions involve recurring financial activities, examples include sales transactions, purchase transactions, cash disbursements, cash receipts, and payroll transactions nonroutine transactions involve activities that occur only periodically. examples include taking inventories, calculating depreciation, and consolidating financial results estimation transactions are financial reporting activities that involve creating an accounting estimate. examples include estimating the allowance for uncollectible accounts, estimating warranty reserves, and assessing assets for impairment
define and differentiate between a test of controls and a substantive procedure
test of controls and substantive procedures are included in stage 4 of the audit process, perform further audit procedures, test of controls are performed to determine whether key controls are properly designed and operating effectively. substantive procedures are performed to restrict detection risk, the risk that auditors will not detect a material misstatement
when auditing a client's asset that is valued at fair value, would the auditors expect that asset to be valued at the price to purchase the asset as of the measurement date, or the price that would be received to sell it?
the approach is basically an "exit value", a sales value approach. Fair value is defined to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
in a conversation with you, mark rogers, CPA, claims that both the sufficiency and the appropriateness of audit evidence are a matter of judgement in every audit. do you agree?
the sufficiency of the audit is a matter of judgement on every audit, there are no firm guidelines on the amount of information needed for a specific audit varies with the auditors opinion. the appropriateness is the measure of quality of audit evidence-both its relevance and reliability the reliability of the audit depends on the source, someone outside of the organization is a higher quality than someone who is within the organization
what are the purposes of the audit procedures of a tracing sample of journal entries forward to the ledgers and vouching a sample of ledger entries back to the journals
tracing tests for completeness. this procedures traces from source documents to the ledger to ensure that all transactions have been recorded. vouching tests for existence or occurrence. this procedure follows an assertion of the FS back to its source document
