Ch 6 HW
Assume the following general flow of documents in an accounting system. Reply to the following question: Source documents --> Journals --> Ledgers The auditors are concerned about source documents that reflect valid transactions that have not been recorded in the journals. Which procedure would be most effective? -(1) Trace from source documents to journals. -(2) Vouch from journals to source documents. -Either (1) or (2).
(1) Trace from source documents to journals.
Assume the following general flow of documents in an accounting system. Reply to the following question: Source documents --> Journals --> Ledgers The auditors are concerned about transactions that have been recorded in the journals (and subsequently in the ledgers) that are not valid—that is, a transaction is recorded, but it did not actually occur (e.g., a fraudulent overstatement of sales). Which procedure would be most effective? -(1) Trace from source documents to journals. -Either (1) or (2). -(2) Vouch from journals to source documents.
(2) Vouch from journals to source documents.
Which of the following should not normally be included in the engagement letter for an audit? -An indication of the amount of the audit fee. -A listing of the client's branch offices selected for testing. -A description of the limitations of an audit.. -A description of the responsibilities of client personnel to provide assistance.
A listing of the client's branch offices selected for testing.
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? -Strained relationships between management and the auditors. -An unreliable accounting system. -Management preoccupation with increased financial performance. -Generous performance-based compensation systems.
An unreliable accounting system.
Comparing a client's unaudited results for the year with last year's audited results
Analytical procedures
Representations by management that are communicated, explicitly or implicitly, in the financial statements.
Assertions
Assume the following general flow of documents in an accounting system. Reply to the following question: Source documents --> Journals --> Ledgers Tracing from source documents to journals most directly tests: -Completeness (understatements) -Existence (overstatements)
Completeness (understatements)
The importance of considering the possibility of overstated revenues (e.g., through premature revenue recognition)
Consideration of fraud in a financial statement audit
The need to "brainstorm" among audit team members about how accounts could be intentionally misstated
Consideration of fraud in a financial statement audit
You have been hired to perform the audit of Hanmei, Inc.'s financial statements. When planning such an audit, you often may need to access the profession's auditing standards to perform research. For each of the following circumstances, select the topic most closely related in the Professional Standards Topics below. A topic may be selected once, more than once, or not at all. Possible risk factors related to misappropriation of assets
Consideration of fraud in a financial statement audit
Requirements relating to identifying violations of occupational safety and health regulations
Consideration of laws and regulations
During 20X1, litigation filed against TWD from an action 10 years ago that alleged that TWD discharged pollutants into state waterways was dropped by the state. Loss contingency disclosures that TWD included in prior years' financial statements are being removed from the 20X1 financial statements.
Decrease
TWD's bank has a loan officer who meets regularly with TWD's CEO and controller to monitor TWD's financial performance.
Decrease
You are working with William Bond, CPA, and you are considering the risk of material misstatement in planning the audit of Toxic Waste Disposal (TWD) Company's financial statements for the year ended December 31, 20X0. TWD is a privately owned entity that contracts with municipal governments to remove environmental waste. TWD's Board of Directors is controlled by Janice Mead, the majority stockholder, who also acts as the chief executive officer. Based only on the information below, indicate whether each of the following factors would most likely increase, decrease, or have no effect on the risk of material misstatement. Because municipalities have received increased federal and state funding for environmental purposes, TWD returned to profitability for the first year following three years with losses.
Decrease
The primary objective of tests of details of transactions performed as substantive procedures is to: -Attain assurance about the reliability of the accounting system. -Evaluate whether management's policies and procedures are operating effectively. -Comply with generally accepted auditing standards. -Detect material misstatements in the financial statements.
Detect material misstatements in the financial statements.
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 -Control risk -Detection risk -Business risk -Engagement risk
Detection risk
Assume the following general flow of documents in an accounting system. Reply to the following question: Source documents --> Journals --> Ledgers The auditors are concerned about transactions that have been recorded for improper amounts. Which procedure would be most effective? -(2) Vouch from journals to source documents. -Either (1) or (2). -(1) Trace from source documents to journals.
Either (1) or (2).
Assume the following general flow of documents in an accounting system Source Documents --> Journals --> Ledgers Vouching from journals (or ledgers) to source documents most directly tests: -Existence (overstatements) -Completeness (understatements)
Existence (overstatements)
Which of the following best describes what is meant by the term "fraud risk factor"? -Weaknesses in internal control identified during an audit. -Factors that, when present, indicate that risk exists. -Factors often observed in circumstances where frauds have occurred. -Factors that, when present, require modification of planned audit procedures.
Factors often observed in circumstances where frauds have occurred.
Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement? -Analysis of balance sheet accounts. -Facts that might bear on the integrity of management. -Analysis of income statement accounts. -All matters of continuing accounting significance.
Facts that might bear on the integrity of management.
An initial public offering of TWD's stock is planned for late 20X2.
Increase
During 20X1, TWD changed its method of preparing its financial statements from the cash basis to generally accepted accounting principles.
Increase
During 20X1, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant influence over UEL.
Increase
During December 20X1, TWD completed a barter transaction with a municipality. TWD removed waste from the municipally owned site and acquired title to another contaminated site at below market price. TWD intends to service this new site in 20X2.
Increase
During December 20X1, TWD signed a contract to lease disposal equipment from an entity owned by Janice Mead's parents. This related party transaction is not disclosed in TWD's notes to the 20X1 financial statements.
Increase
Inquiries about the substantial increase in revenue TWD recorded in the fourth quarter of 20X1 disclosed a new operating policy. TWD guaranteed to several municipalities that it would refund the federal and state funding paid to TWD if any municipality fails a federal or state site clean-up inspection in 20X2.
Increase
TWD has such a strong financial presence in its industry to allow it often to dictate the terms or conditions of transactions with its suppliers.
Increase
TWD's Board of Directors is controlled by Janice Mead, the majority stockholder, who also acts as the chief executive officer.
Increase
The accounting department has experienced a high rate of turnover of key personnel.
Increase
The internal auditor reports to the controller and the controller reports to Janice Mead.
Increase
The relationship between materiality used for planning versus evaluation purposes
Materiality in planning and performing an audit.
The audit committee of a company must be made up of: -Representatives from the client's management, investors, suppliers, and customers. -The audit partner, the chief financial officer, the legal counsel, and at least one outsider. -Members of the board of directors who are not officers or employees. -Representatives of the major equity interests, such as preferred and common stockholders.
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: -All debit entries in the accounts receivable subsidiary ledger are properly supported by sales journal entries. -Each recorded sale represents a bona fide transaction. -All sales have been recorded in the sales journal. -Recorded sales have been properly posted to customer accounts.
Recorded sales have been properly posted to customer accounts.
Hanmei, Inc., has transactions with the corporation president's brother
Related parties
Which portion of an audit is least likely to be completed before the balance sheet date? -Assessment of control risk. -Issuance of an engagement letter. -Substantive procedures. -Tests of controls.
Substantive procedures.
Three conditions generally are present when fraud occurs. Select the one below that is not one of those conditions. -Incentive or pressure. -Opportunity. -Attitude. -Supervisory position.
Supervisory position.
Details on considering design effectiveness of controls
Understanding the entity and its environment and assessing the risks of material misstatement
Which of the following is most likely to be an overall response to fraud risks identified in an audit? -Use only certified public accountants on the engagement. -Place increased emphasis on the audit of objective transactions rather than subjective transactions. -Supervise members of the audit team less closely and rely more upon judgment. -Use less predictable audit procedures.
Use less predictable audit procedures.
A description of the nature, timing, and extent of the audit procedures to be performed.
audit plan
At the overall engagement level, this is the risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated.
audit risk
A risk that threatens management's ability to achieve the organization's objectives.
business risk
The purpose of this document is to avoid misunderstandings between the auditors and the client.
engagement letter
The risk of material misstatement of an assertion about an account without considering internal control.
inherent risk
Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? -Quality control. -Client acceptance. -Adequate disclosure. -Materiality and audit risk.
materiality and audit risk
During December 20X1, TWD increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost.
no effect
TWD's employees are paid biweekly.
no effect
An identified risk that requires special audit consideration.
significant risk
An estimate of the time required to perform each step in the audit.
time budget
