Exam 1: Task-based simulations

An auditor's working papers include the narrative description of the cash receipts and billing portions of Southwest Medical Center's internal control. Evaluate the information in the situation as being either (1) a strength, (2) a weakness, (3) not a strength or a weakness. Southwest is a health-care provider that is owned by a partnership of five physicians. It employs eleven physicians, including the five owners, twenty nurses, five laboratory and X-ray technicians, and four clerical workers. The clerical workers perform such tasks as reception, correspondence, cash receipts, billing, accounts receivable, bank deposits, and appointment scheduling. These clerical workers are referred to in the situation as office manager, clerk #1, clerk #2, and clerk #3. Assume that the narrative is a complete description of the system. About two-thirds of Southwest's patients receive medical services only after insurance coverage is verified by the office manager and communicated to the clerks. Most of the other patients pay for services by cash or check when services are rendered, although the office manager extends credit on a case-by-case basis to about 5% of the patients. When services are rendered, the attending physician prepares a prenumbered service slip for each patient and gives the slip to clerk #1 for pricing. Clerk #1 completes the slip and gives the completed slip to clerk #2 and a copy to the patient. Using the information on the completed slip, clerk #2 performs one of the following three procedures for each patient: - Clerk #2 files an insurance claim and records a receivable from the insurance company if the office manager has verified the patient's coverage, or - Clerk #2 posts a receivable from the patient on clerk #2's PC if the office manager has approved the patient's credit, or - Clerk #2 receives cash or a check from the patient as the patient leaves the medical center, and clerk #2 records the cash receipt. At the end of each day, clerk #2 prepares a revenue summary. - Clerk #1 performs correspondence functions and opens the incoming mail. Clerk #1 gives checks from insurance companies and patients to clerk #2 for deposit. - Clerk #2 posts the receipt of patients' checks on clerk #2's PC patient receivable records and insurance companies' checks to the receivables from the applicable insurance companies. Clerk #1 gives mail requiring correspondence to clerk #3. - Clerk #2 stamps all checks "for deposit only" and each day prepares a list of checks and cash to be deposited in the bank. (This list also includes the cash and checks personally given to clerk #2 by patients.) Clerk #2 keeps a copy of the deposit list and gives the original to clerk #3. - Clerk #3 personally makes the daily bank deposit and maintains a file of the daily bank deposits. Clerk #3 also performs appointment scheduling for all of the doctors and various correspondence functions. Clerk #3 also maintains a list of patients whose insurance coverage the office manager has verified. When insurance claims or patient receivables are not settled within sixty days, clerk #2 notifies the office manager. The office manager personally inspects the details of each instance of nonpayment. The office manager converts insurance claims that have been rejected by insurance companies into patient receivables. Clerk #2 records these patient receivables on clerk #2's PC and deletes these receivables from the applicable insurance companies. Clerk #2 deletes the patient receivables that appear to be uncollectible from clerk #2's PC when authorized by the office manager. Clerk #2 prepares a list of patients with uncollectible balances and gives a copy of the list to clerk #3, who will not allow these patients to make appointments for future services. Once a month an outside accountant posts clerk #2's daily revenue summaries to the general ledger, prepares a monthly trial balance and monthly financial statements, accounts for prenumbered service slips, files payroll forms and tax returns, and reconciles the monthly bank statements to the general ledger. This accountant reports directly to the physician who is the managing partner. All four clerical employees perform their tasks on PCs that are connected through a local area network. Each PC is accessible with a password that is known only to the individual employee and the managing partner. Southwest uses a standard software package that was acquired from a software company and that cannot be modified by Southwest's employees. None of the clerical employees have access to Southwest's check writing abilities. For each of the following conditions indicate whether it is a strength, weakness, or neither. 1. Southwest is involved only in medical services and has not diversified its operations. 2. Insurance coverage for patients is verified and communicated to the clerks by the office manager before medical services are rendered. 3. The physician who renders the medical services documents the services on a prenumbered slip that is used for recording revenue and as a receipt for the patient. 4. Cash collection is centralized in that Clerk #2 receives the cash (checks) from patients and records the cash receipt. 5. Southwest extends credit rather than requiring cash or insurance in all cases. 6. The office manager extends credit on a case-by-case basis rather than using a formal credit search and established credit limits. 7. The office manager approves the extension of credit to patients and also approves the write-offs of uncollectible patient receivables. 8. Clerk #2 receives cash and checks and prepares the daily bank deposit. 9. Clerk #2 maintains the accounts receivable records and can add or delete information on the PC. 10. Prenumbered service slips are accounted for on a monthly basis by the outside accountant who is independent of the revenue generating and revenue recording functions. 11. The bank reconciliation is prepared monthly by the outside accountant who is independent of the revenue generating and revenue recording functions. 12. Computer passwords are only known to the individual employees and the managing partner who has no duties in the revenue recording functions. 13. Computer software cannot be modified by Southwest's employees. 14. None of the employees who perform duties in the revenue generating and revenue recording are able to write checks.

1. Neither 2. Strength 3. Strength 4. Weakness. This combines custody of asset with record keeping. 5. Neither 6. Weakness. If there is not an approved procedure for credit authorization that a manager is following, the company is exposed to inconsistencies in extending credit. For example, without procedures including appropriate investigation, a manager could extend too much credit to a customer who has a consistent pattern of not paying. 7. Weakness. In this setting, the manager could approve credit for an individual and then write off the amount so that individual does not have to pay. 8. Weakness. Clerk #2 handles receipt of the cash, prepare the deposit, and records the cash receipt. There should be separation of custody of the asset from recording. 9. Weakness. Clerk #2 should not be able to maintain the accounts receivable records and also add or delete information on the PC. 10. Strength 11. Strength 12. Strength 13. Strength 14. Strength

You are preparing to select a sample of accounts receivable for confirmation. Before doing so, you want to refresh your understanding of the risks related to sampling. In particular, you would like to know what nonsampling risk is. Which section of the AICPA Professional Standards addresses this issue and will answer your question? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.

AU-C-530-05

Issuer or non-issuer: Auditors of such companies must use professional judgment and exercise due care

Both

Issuer or non-issuer: Audit work guided by PCAOB

Issuers

Issuer or non-issuer: Required compliance with Sarbanes-Oxley Act of 2002

Issuers

Issuer or non-issuer: Required opinion on internal controls

Issuers

Issuer or non-issuer: Required compliance with International Standards on Auditing

Neither

To ensure that it is not violating any independence rules in its audit of ABC Co., the Stallion Accounting Firm (SAF) is reviewing all its relationships with ABC. Answer the following questions selecting "yes" or "no" as appropriate. 5. Tal is a covered member for purposes of the ABC audit, for he provides more than 10 hours of tax advisory services to ABC every year. Tal just learned that when his Aunt Peggy dies, he will inherit 50 shares of ABC stock. He has arranged with his stock broker to sell the shares immediately after they come into his legal possession following probate of Aunt Peggy's will after she dies. Does this impair independence?

No So long as Tal does not participate on the engagement team and disposes of the shares as soon as practicable (but no later than 30 days) after receiving the right to do so, there is no independence problem.

To ensure that it is not violating any independence rules in its audit of ABC Co., the Stallion Accounting Firm (SAF) is reviewing all its relationships with ABC. Answer the following questions selecting "yes" or "no" as appropriate. 3. A covered member of SAF is the beneficiary of a family trust. The member does not participate in the trust's investment decisions. The trust has purchased 10 shares of ABC stock. Does this impair independence?

No This appears to be an interest that is both indirect (because the covered member does not influence investment decisions) and immaterial (only 10 shares).

Issuer or non-issuer: Audits must comply with Clarified Statements on Auditing Standards

Non-issuers

Issuer or non-issuer: Optional opinion on internal controls

Non-issuers

To ensure that it is not violating any independence rules in its audit of ABC Co., the Stallion Accounting Firm (SAF) is reviewing all its relationships with ABC. Answer the following questions selecting "yes" or "no" as appropriate. 4. Cameron, a partner of SAF who is not a covered member, owns 11% of ABC stock. Does this impair independence?

Yes Even though Cameron is not a covered member, if any partner or professional member of SAF owns more than 5% of a client's stock, there is an independence problem.

To ensure that it is not violating any independence rules in its audit of ABC Co., the Stallion Accounting Firm (SAF) is reviewing all its relationships with ABC. Answer the following questions selecting "yes" or "no" as appropriate. 2. A covered member of SAF is both the beneficiary and one of the trustees of a family trust. The member participates in the trust's investment decisions, and the trust has purchased 100 shares of ABC stock. Does this impair independence?

Yes This is a direct (because the covered member participates in the investment decisions) financial interest in an audit client and impairs independence.

To ensure that it is not violating any independence rules in its audit of ABC Co., the Stallion Accounting Firm (SAF) is reviewing all its relationships with ABC. Answer the following questions selecting "yes" or "no" as appropriate. 1. A covered member of SAF has committed to buy 100 shares of ABC stock. Does this impair independence?

Yes This is a direct financial interest in an audit client and definitely impairs independence.

The audit team for Pine Co. is compiling a listing of journal entries for audit testwork in conjunction with the December 31, year 1, audit. The senior auditor obtained an electronic copy of Pine's journal entries, which appears in the exhibit provided. - The audit team determined that materiality for journal entry testing is $200,000. - For each of the criteria below, select the journal entry number that corresponds to the appropriate criterion. An option may be used once, more than once, or not at all. 1. Select journal entry for testing based on personnel preparing and approving a. 1881610 b. 1880960 c. 1880989 d. 1881635 e. 1881302

a. 1881610 (This journal entry is to adjust the allowance for uncollectibles. It is curious that the journal entry was, first, prepared by administrative staff and, second, reviewed by the sales manager, who may be somewhat biased in evaluating the creditworthiness of customers.)

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Each type of audit procedure is used, one of them twice. 2. Calculate the ratio of bad debt expense to credit sales. a. Analytical procedures b. Tests of controls c. Risk assessment procedures (other than analytical procedures) d. Test of details of account balances, transactions, or disclosures

a. Analytical procedures

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Each type of audit procedure is used, one of them twice. 5. Compare current financial information with comparable prior periods. a. Analytical procedures b. Tests of controls c. Risk assessment procedures (other than analytical procedures) d. Test of details of account balances, transactions, or disclosures

a. Analytical procedures

You have been assigned to the audit of Huskie Company. The company was previously audited by another CPA firm. The audit team is currently focused on pre-engagement acceptance and other planning issues. Match the phrases below with the most closely corresponding terms associated with planning activities by selecting from the associated cell. Each source may be used once, more than once, or not at all. 2. The nature, timing, and extent of planned substantive audit procedures for each audit area. a. Audit program b. Inherent risk c. Misappropriation of assets d. Planning-stage materiality e. Detection risk

a. Audit program Auditors are required to develop an audit plan which includes the "nature, timing, and extent of audit procedures to be performed." The list of audit procedures for a given area, e.g., Cash, is known as an audit program.

The auditors of Green Pen, Inc. obtained the journal entries below as part of the Year 2 audit. For each of the journal entries, click the associated cell and select from the list provided the most appropriate audit procedure to perform or action to take regarding the transaction represented by the journal entry. A procedure or action may be selected once, more than once, or not at all. A journal entry was made by the fixed asset manager on December 31, Year 2: Dr: Accumulated depreciation Cr. Depreciation expense Explanation: To adjust machine's depreciation expense. a. Confirm with the controller any changes in estimates b. Obtain management's bonus plan and eligible employee list and recalculate expense c. Review board minutes for change in classification of long-lived assets d. Propose adjusting entry to debit prior-year retained earnings e. Obtain financial statement of subsidiary

a. Confirm with the controller any changes in estimates This journal entry represents a reversal of part of the recorded depreciation expense during the period. This would be appropriate, for example, if the entity increased the estimated useful lives of certain depreciable assets. Of the various answer choices, the one that fits best with the need to decrease the recorded depreciation expense is the following: "Confirm with the controller any changes in estimates." [Note that this is not an appropriate use of the audit word "confirm," which normally involves a written communication from an independent outside party; the word "verify" or "inquire" would be more appropriately used in this context.]

You are performing an audit of the financial statements of the Josh Music Co. as of December 31, year 1. Given your experience auditing this company in previous years, you have developed an expectation relative to each financial statement account for current-year activity. Based upon your review of preliminary financial statements, the actual results differ from your expectation for certain accounts and the CFO has provided an explanation for the difference. For the expectations, results, and subsequent client explanations in the table below, click on the cell in column D and select from the option list provided the appropriate audit response for each situation. An option may be used once, more than once, or not at all. Audit Expectation: Increase in interest expense due to increase in debt. Audit Result: Interest expense stayed the same. Client Explanation: Debt was refinanced during the year. Audit response: a. Examine new data agreement b. Review Depreciation policies c. Review sales returns subsequent to year end d. Review sales and related product cost data e. Review repairs and maintenance accounts for proper classifications

a. Examine new data agreement

You have been assigned to the audit of Golden Bear Company. The company is a continuing audit client of your firm. The audit team is currently focused on evidence-gathering issues. Match the most applicable financial statement assertion for each of the situations below. Each assertion may be used once, more than once, or not at all. 1. In performing the year-end "sales cutoff" procedures, the auditor identified several sales transactions recorded in December 20X1, which were not actually shipped to customers until January 20X2 a. Existence b. Completeness c. Rights and obligations d. Valuation and allocation

a. Existence Cutoff is often confusing as it addresses two assertions, Existence and Completeness. Determining which of the two requires figuring out which transactions are being examined. In this item, the auditor is looking at transactions recorded in December which were not shipped until January. As a result, these transactions are really January sales, NOT December sales. The assertion being addressed is Existence as the auditor is verifying that December sales actually exist, i.e., they are valid sales. By proving that the supposed December sales were not shipped until January, the auditor has verified that the December sales do not exist.

You have been assigned to the audit of Badger Company. The company was previously audited by another CPA firm. The audit team is considering the audit implications of basic internal control considerations. For each item below, click the associated cell and select from the list provided the most closely corresponding term. A selection may be used once, more than once, or not at all. 2. Audit procedures that must be performed when evaluating the operating effectiveness of internal control. a. Test controls b. Inherent limitations c. Flowcharts d. Deficiency in operations e. Significant deficiencies

a. Test controls Tests of control are tests that verify whether or not a control is operating effectively. When an auditor plans to rely on a given control to reduce substantive testing, the auditor must perform a test of control to ensure that the control is being performed properly.

You are a staff auditor with Williams and Co. CPAs. Bill Jones, a new hire, has come to you with questions concerning "assertions" and "audit procedures." For 1 through 6, select from the list provided the statement that most closely approximates its meaning. 3. Existence and occurrence a. There is such an asset b. Transactions are recorded in the correct accounting period c. Assets are properly classified d. The company legally owns the assets e. All assets have been recorded f. Assets are recorded at proper amounts

a. There is such an asset

The audit team for Pine Co. is compiling a listing of journal entries for audit testwork in conjunction with the December 31, year 1, audit. The senior auditor obtained an electronic copy of Pine's journal entries, which appears in the exhibit provided. - The audit team determined that materiality for journal entry testing is $200,000. - For each of the criteria below, select the journal entry number that corresponds to the appropriate criterion. An option may be used once, more than once, or not at all. 5. Select journal entry for testing because entry is missing information a. 1881610 b. 1880960 c. 1880989 d. 1881635 e. 1881302

b. 1880960 (This journal entry is the only one that omits an explanation regarding the purpose of the journal entry. The entry debits "Travel expense" and credits "Cash" without further description.)

You have been assigned to the audit of Golden Bear Company. The company is a continuing audit client of your firm. The audit team is currently focused on evidence-gathering issues. Match the most applicable financial statement assertion for each of the situations below. Each assertion may be used once, more than once, or not at all. 5. In performing the year-end "search for unrecorded liabilities", the auditor identified several instances where merchandise that had been ordered was received before year-end without recognition of the payable until the month following year-end. a. Existence b. Completeness c. Rights and obligations d. Valuation and allocation

b. Completeness The auditor's performance of the search for unrecorded liabilities addresses Completeness, the completeness of Accounts Payable. The auditor is looking for (and has found) transactions with related payables that were not recorded as of year end even though they were owed as of year end.

You have been assigned to the audit of Badger Company. The company was previously audited by another CPA firm. The audit team is considering the audit implications of basic internal control considerations. For each item below, click the associated cell and select from the list provided the most closely corresponding term. A selection may be used once, more than once, or not at all. 3. Errors may occur due to misunderstandings, carelessness, or fatigue. a. Test controls b. Inherent limitations c. Flowcharts d. Deficiency in operations e. Significant deficiencies

b. Inherent limitations Internal control systems will never be perfect. Every internal control system is subject to inherent limitations which prevent the system from providing absolute assurance. Inherent limitations include errors in judgment, internal control breakdowns, and human failures. Inherent limitations include the occurrence of errors due to misunderstandings, carelessness, or fatigue.

You have been assigned to the audit of Huskie Company. The company was previously audited by another CPA firm. The audit team is currently focused on pre-engagement acceptance and other planning issues. Match the phrases below with the most closely corresponding terms associated with planning activities by selecting from the associated cell. Each source may be used once, more than once, or not at all. 4. The susceptibility of an assertion to a material misstatement, assuming that there are no related controls. a. Audit program b. Inherent risk c. Misappropriation of assets d. Planning-stage materiality e. Detection risk

b. Inherent risk Inherent risk is "the susceptibility of a relevant assertion to a misstatement that could be material, either individually or in the aggregate" (AU 312). It is the risk that a material misstatement could occur without taking into account any related internal controls.

The auditors of Green Pen, Inc. obtained the journal entries below as part of the Year 2 audit. For each of the journal entries, click the associated cell and select from the list provided the most appropriate audit procedure to perform or action to take regarding the transaction represented by the journal entry. A procedure or action may be selected once, more than once, or not at all. A journal entry was made by the controller on December 31, Year 2: Dr: Salaries and wages expense Cr: Accrued liabilities Explanation: To account for compensation for Year 2 to be paid in Year 3. a. Confirm with the controller any changes in estimates b. Obtain management's bonus plan and eligible employee list and recalculate expense c. Review board minutes for change in classification of long-lived assets d. Propose adjusting entry to debit prior-year retained earnings e. Obtain financial statement of subsidiary

b. Obtain management's bonus plan and eligible employee list and recalculate expense This journal entry represents the accrual of compensation earned in Year 2 that will be paid in Year 3. Of the various answer choices, the one that fits best with the need to accrue additional compensation is the following: "Obtain management's bonus plan and eligible employee list and recalculate expense."

You are performing an audit of the financial statements of the Josh Music Co. as of December 31, year 1. Given your experience auditing this company in previous years, you have developed an expectation relative to each financial statement account for current-year activity. Based upon your review of preliminary financial statements, the actual results differ from your expectation for certain accounts and the CFO has provided an explanation for the difference. For the expectations, results, and subsequent client explanations in the table below, click on the cell in column D and select from the option list provided the appropriate audit response for each situation. An option may be used once, more than once, or not at all. Audit Expectation: The industry historically has few losses on retired assets. Audit Result: There have been excessive recurring losses on assets retired. Client Explanation: Losses were due to increased asset usage. Audit response: a. Examine new data agreement b. Review Depreciation policies c. Review sales returns subsequent to year end d. Review sales and related product cost data e. Review repairs and maintenance accounts for proper classifications

b. Review Depreciation policies

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Each type of audit procedure is used, one of them twice. 3. Determine whether disbursements are properly approved. a. Analytical procedures b. Tests of controls c. Risk assessment procedures (other than analytical procedures) d. Test of details of account balances, transactions, or disclosures

b. Tests of controls

You are a staff auditor with Williams and Co. CPAs. Bill Jones, a new hire, has come to you with questions concerning "assertions" and "audit procedures." For 1 through 6, select from the list provided the statement that most closely approximates its meaning. 2. cutoff a. There is such an asset b. Transactions are recorded in the correct accounting period c. Assets are properly classified d. The company legally owns the assets e. All assets have been recorded f. Assets are recorded at proper amounts

b. Transactions are recorded in the correct accounting period

The audit team for Pine Co. is compiling a listing of journal entries for audit testwork in conjunction with the December 31, year 1, audit. The senior auditor obtained an electronic copy of Pine's journal entries, which appears in the exhibit provided. - The audit team determined that materiality for journal entry testing is $200,000. - For each of the criteria below, select the journal entry number that corresponds to the appropriate criterion. An option may be used once, more than once, or not at all. 4. Select journal entry for testing based on complexity a. 1881610 b. 1880960 c. 1880989 d. 1881635 e. 1881302

c. 1880989 (This journal entry is to record an impairment loss on factory equipment, which is inherently a rather complex and subjective accounting estimate relative to the other journal entries presented. Such entries may be susceptible to management bias.)

You are a staff auditor with Williams and Co. CPAs. Bill Jones, a new hire, has come to you with questions concerning "assertions" and "audit procedures." For 1 through 6, select from the list provided the statement that most closely approximates its meaning. 4. Presentation and disclosure a. There is such an asset b. Transactions are recorded in the correct accounting period c. Assets are properly classified d. The company legally owns the assets e. All assets have been recorded f. Assets are recorded at proper amounts

c. Assets are properly classified

You have been assigned to the audit of Badger Company. The company was previously audited by another CPA firm. The audit team is considering the audit implications of basic internal control considerations. For each item below, click the associated cell and select from the list provided the most closely corresponding term. A selection may be used once, more than once, or not at all. 5. Documentation of the auditor's understanding of an entity's internal controls for major transaction cycles by a symbolic representation of the systems. a. Test controls b. Inherent limitations c. Flowcharts d. Deficiency in operations e. Significant deficiencies

c. Flowcharts The auditor is required to obtain and document his/her understanding of internal controls. The means of documentation is not specified in the standards. Commonly used methods include written narrative, internal control questionnaires, and flowcharts. Flowcharts are symbolic representations of transaction processing and related internal controls.

You have been assigned to the audit of Huskie Company. The company was previously audited by another CPA firm. The audit team is currently focused on pre-engagement acceptance and other planning issues. Match the phrases below with the most closely corresponding terms associated with planning activities by selecting from the associated cell. Each source may be used once, more than once, or not at all. 5. A material misstatement of the financial statements caused by the theft of cash receipts concealed by false entries in the accounting records. a. Audit program b. Inherent risk c. Misappropriation of assets d. Planning-stage materiality e. Detection risk

c. Misappropriation of assets Auditors consider two types of fraud in planning an audit - misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets. The latter type, misstatements arising from misappropriation of assets, involves material thefts of company assets. The theft of cash receipts resulting in a material misstatement of the financial statements is a misstatement arising from the misappropriation of assets.

The auditors of Green Pen, Inc. obtained the journal entries below as part of the Year 2 audit. For each of the journal entries, click the associated cell and select from the list provided the most appropriate audit procedure to perform or action to take regarding the transaction represented by the journal entry. A procedure or action may be selected once, more than once, or not at all. A journal entry was made by the controller on December 30, Year 2: Dr: Investments in debt securities available-for-sale Cr. Investments in debt securities held-to-maturity Explanation: Change in asset classification. a. Confirm with the controller any changes in estimates b. Obtain management's bonus plan and eligible employee list and recalculate expense c. Review board minutes for change in classification of long-lived assets d. Propose adjusting entry to debit prior-year retained earnings e. Obtain financial statement of subsidiary

c. Review board minutes for change in classification of long-lived assets This journal entry reclassifies certain investments in debt securities, removing them from "held-to-maturity" and placing them in "available-for-sale." Authorization of that change in the intended purpose becomes a relevant issue to the auditor. Of the various answer choices, the one that fits best with the reclassification of certain investments is the following: "Review board minutes for change in classification of long-lived assets."

You are performing an audit of the financial statements of the Josh Music Co. as of December 31, year 1. Given your experience auditing this company in previous years, you have developed an expectation relative to each financial statement account for current-year activity. Based upon your review of preliminary financial statements, the actual results differ from your expectation for certain accounts and the CFO has provided an explanation for the difference. For the expectations, results, and subsequent client explanations in the table below, click on the cell in column D and select from the option list provided the appropriate audit response for each situation. An option may be used once, more than once, or not at all. Audit Expectation: Shipping January orders in December is a common industry practice. Audit Result: Sales have grown in each of the last three years. Client Explanation: Increased marketing efforts have positively influenced sales. Audit response: a. Examine new data agreement b. Review Depreciation policies c. Review sales returns subsequent to year end d. Review sales and related product cost data e. Review repairs and maintenance accounts for proper classifications

c. Review sales returns subsequent to year end

You have been assigned to the audit of Golden Bear Company. The company is a continuing audit client of your firm. The audit team is currently focused on evidence-gathering issues. Match the most applicable financial statement assertion for each of the situations below. Each assertion may be used once, more than once, or not at all. 2. While auditing inventory, the auditor discovered that half of the auditee's inventory was pledged as collateral for a loan obtained from a commercial lender. a. Existence b. Completeness c. Rights and obligations d. Valuation and allocation

c. Rights and obligations In this case, the auditor has discovered a lien against inventory, i.e., half of the inventory was pledged as collateral for a loan. The assertion being addressed is Rights and Obligations. The company does not have full rights to the inventory.

You have been assigned to the audit of Golden Bear Company. The company is a continuing audit client of your firm. The audit team is currently focused on evidence-gathering issues. Match the most applicable financial statement assertion for each of the situations below. Each assertion may be used once, more than once, or not at all. 4. A portion of the company's long-term liabilities is guaranteed by an affiliated corporation, which becomes liable for the debts if the company defaults on that debt. a. Existence b. Completeness c. Rights and obligations d. Valuation and allocation

c. Rights and obligations The guarantee of debt by an affiliate addresses the Rights and Obligations assertion. The company's obligation for a portion of its long-term debt has been guaranteed by an affiliate. As a result, the company's obligation for the debt is reduced - it has a backup payer.

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Each type of audit procedure is used, one of them twice. 1.Prepare a flowchart of internal control over sales. a. Analytical procedures b. Tests of controls c. Risk assessment procedures (other than analytical procedures) d. Test of details of account balances, transactions, or disclosures

c. Risk assessment procedures (other than analytical procedures)

The audit team for Pine Co. is compiling a listing of journal entries for audit testwork in conjunction with the December 31, year 1, audit. The senior auditor obtained an electronic copy of Pine's journal entries, which appears in the exhibit provided. - The audit team determined that materiality for journal entry testing is $200,000. - For each of the criteria below, select the journal entry number that corresponds to the appropriate criterion. An option may be used once, more than once, or not at all. 2. Select journal entry for testing based on date/time of adjustment a. 1881610 b. 1880960 c. 1880989 d. 1881635 e. 1881302

d. 1881635 (This journal entry is to adjust warranty expense. It is curious that the entry was posted minutes before midnight as the fiscal year was ending. This raises the possibility of income smoothing considerations)

You have been assigned to the audit of Badger Company. The company was previously audited by another CPA firm. The audit team is considering the audit implications of basic internal control considerations. For each item below, click the associated cell and select from the list provided the most closely corresponding term. A selection may be used once, more than once, or not at all. 4. Control performed by person who lacks the necessary authority or competence to perform the control effectively. a. Test controls b. Inherent limitations c. Flowcharts d. Deficiency in operations e. Significant deficiencies

d. Deficiency in operations An internal control may be properly designed but if performed by a person with insufficient authority or knowledge to perform the control properly, a deficiency in operation exists

You have been assigned to the audit of Huskie Company. The company was previously audited by another CPA firm. The audit team is currently focused on pre-engagement acceptance and other planning issues. Match the phrases below with the most closely corresponding terms associated with planning activities by selecting from the associated cell. Each source may be used once, more than once, or not at all. 3. The relative size of financial statement misstatements that the auditor's planned substantive audit procedures is designed to detect. a. Audit program b. Inherent risk c. Misappropriation of assets d. Planning-stage materiality e. Detection risk

d. Planning-stage materiality While establishing the overall audit strategy, auditors are required to determine a materiality level for the financial statements as a whole. This is known as "planning stage materiality" or the "preliminary judgment about materiality." Planning stage materiality is an amount which will be considered material and will therefore be used to determine the evidence to be collected. For example, if $100,000 is considered to be material, the auditor must plan the audit to detect all misstatements of $100,000 or more.

The auditors of Green Pen, Inc. obtained the journal entries below as part of the Year 2 audit. For each of the journal entries, click the associated cell and select from the list provided the most appropriate audit procedure to perform or action to take regarding the transaction represented by the journal entry. A procedure or action may be selected once, more than once, or not at all. A journal entry was made by the controller on January 1, Year 2: Dr. Repairs and maintenance Cr. Accounts payable Explanation: To record the proposed audit adjustments from Year 1. a. Confirm with the controller any changes in estimates b. Obtain management's bonus plan and eligible employee list and recalculate expense c. Review board minutes for change in classification of long-lived assets d. Propose adjusting entry to debit prior-year retained earnings e. Obtain financial statement of subsidiary

d. Propose adjusting entry to debit prior-year retained earnings This journal entry supposedly records an audit adjusting journal entry associated with Year 1. However, the entry was dated January 1, Year 2. Since the journal entry records an increase in an expense (repairs and maintenance), the date of the entry is important. The effect was to record the Year 1 expense inappropriately in Year 2. A correction is necessary. Of the various answer choices, the one that best fits with correcting an entry which records an expense in the wrong period is the following: "Propose adjusting entry to debit prior-year retained earnings."

You are performing an audit of the financial statements of the Josh Music Co. as of December 31, year 1. Given your experience auditing this company in previous years, you have developed an expectation relative to each financial statement account for current-year activity. Based upon your review of preliminary financial statements, the actual results differ from your expectation for certain accounts and the CFO has provided an explanation for the difference. For the expectations, results, and subsequent client explanations in the table below, click on the cell in column D and select from the option list provided the appropriate audit response for each situation. An option may be used once, more than once, or not at all. Audit Expectation: Gross profit was 2% in the prior year; similar profit expected in year 1. Audit Result: Gross profit was 12% in year 1. Client Explanation: Sold more expensive products with a higher gross margin during the year. Audit response: a. Examine new data agreement b. Review Depreciation policies c. Review sales returns subsequent to year end d. Review sales and related product cost data e. Review repairs and maintenance accounts for proper classifications

d. Review sales and related product cost data

Auditors perform audit procedures to obtain audit evidence that will allow them to draw reasonable conclusions as to whether the client's financial statements follow generally accepted accounting principles. Match each audit procedure with its type. Each type of audit procedure is used, one of them twice. 4. Confirm accounts receivable. a. Analytical procedures b. Tests of controls c. Risk assessment procedures (other than analytical procedures) d. Test of details of account balances, transactions, or disclosures

d. Test of details of account balances, transactions, or disclosures

You are a staff auditor with Williams and Co. CPAs. Bill Jones, a new hire, has come to you with questions concerning "assertions" and "audit procedures." For 1 through 6, select from the list provided the statement that most closely approximates its meaning. 5. Rights and obligations a. There is such an asset b. Transactions are recorded in the correct accounting period c. Assets are properly classified d. The company legally owns the assets e. All assets have been recorded f. Assets are recorded at proper amounts

d. The company legally owns the assets

You have been assigned to the audit of Golden Bear Company. The company is a continuing audit client of your firm. The audit team is currently focused on evidence-gathering issues. Match the most applicable financial statement assertion for each of the situations below. Each assertion may be used once, more than once, or not at all. 3. In reviewing a client's aging of accounts receivable, the auditor determined that the entity's Allowance for Uncollectibles required a material adjusting journal entry to increase the allowance. a. Existence b. Completeness c. Rights and obligations d. Valuation and allocation

d. Valuation and allocation The auditor's examination of the accounts receiving aging and the related allowance for uncollectibles addresses the Valuation and Allocation assertion. The auditor is ensuring that accounts receivable are properly stated at net realizable value.

The audit team for Pine Co. is compiling a listing of journal entries for audit testwork in conjunction with the December 31, year 1, audit. The senior auditor obtained an electronic copy of Pine's journal entries, which appears in the exhibit provided. - The audit team determined that materiality for journal entry testing is $200,000. - For each of the criteria below, select the journal entry number that corresponds to the appropriate criterion. An option may be used once, more than once, or not at all. 3. Select journal entry for testing based on materiality a. 1881610 b. 1880960 c. 1880989 d. 1881635 e. 1881302

e. 1881302 (The materiality threshold for testing was stated to be $200,000. The only journal entry that exceeds that dollar amount is #1881302, for which the dollar amount was $225,000. The entry was intended to correct a sale to Behn Co.)

You are a staff auditor with Williams and Co. CPAs. Bill Jones, a new hire, has come to you with questions concerning "assertions" and "audit procedures." For 1 through 6, select from the list provided the statement that most closely approximates its meaning. 1. Completeness a. There is such an asset b. Transactions are recorded in the correct accounting period c. Assets are properly classified d. The company legally owns the assets e. All assets have been recorded f. Assets are recorded at proper amounts

e. All assets have been recorded

You have been assigned to the audit of Huskie Company. The company was previously audited by another CPA firm. The audit team is currently focused on pre-engagement acceptance and other planning issues. Match the phrases below with the most closely corresponding terms associated with planning activities by selecting from the associated cell. Each source may be used once, more than once, or not at all. 1. The auditor does not identify a material misstatement that exists in an assertion. a. Audit program b. Inherent risk c. Misappropriation of assets d. Planning-stage materiality e. Detection risk

e. Detection risk The "official" definition of detection risk is "the risk that the auditor will not detect a misstatement that exists in a relevant assertion that could be material, either individually or when aggregated with other misstatements" (AU 312). The auditor's failure to identify a material misstatement in an assertion is detection risk.

The auditors of Green Pen, Inc. obtained the journal entries below as part of the Year 2 audit. For each of the journal entries, click the associated cell and select from the list provided the most appropriate audit procedure to perform or action to take regarding the transaction represented by the journal entry. A procedure or action may be selected once, more than once, or not at all. A journal entry was made by the controller on December 31, Year 2: Dr. Investment in stock Cr. Investment income a. Confirm with the controller any changes in estimates b. Obtain management's bonus plan and eligible employee list and recalculate expense c. Review board minutes for change in classification of long-lived assets d. Propose adjusting entry to debit prior-year retained earnings e. Obtain financial statement of subsidiary

e. Obtain financial statement of subsidiary This journal entry records the investment income (the "equity pick up") under the equity method. To verify the appropriateness of the journal entry, the auditor would need to verify the subsidiary's net income. Of the various answer choices, the one that best fits with verifying the investment income recorded under the equity method is the following: "Obtain financial statement of subsidiary."

You are performing an audit of the financial statements of the Josh Music Co. as of December 31, year 1. Given your experience auditing this company in previous years, you have developed an expectation relative to each financial statement account for current-year activity. Based upon your review of preliminary financial statements, the actual results differ from your expectation for certain accounts and the CFO has provided an explanation for the difference. For the expectations, results, and subsequent client explanations in the table below, click on the cell in column D and select from the option list provided the appropriate audit response for each situation. An option may be used once, more than once, or not at all. Audit Expectation: Property, plant, and equipment acquisitions generally do not fluctuate from year to year. Audit Result: Property, plant, and equipment acquisitions decreased significantly from the previous year Client Explanation: No changes were made to property, plant, and equipment acquisition practices. Audit response: a. Examine new data agreement b. Review Depreciation policies c. Review sales returns subsequent to year end d. Review sales and related product cost data e. Review repairs and maintenance accounts for proper classifications

e. Review repairs and maintenance accounts for proper classifications

You have been assigned to the audit of Badger Company. The company was previously audited by another CPA firm. The audit team is considering the audit implications of basic internal control considerations. For each item below, click the associated cell and select from the list provided the most closely corresponding term. A selection may be used once, more than once, or not at all. 1. A deficiency (or combination of deficiencies) in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. a. Test controls b. Inherent limitations c. Flowcharts d. Deficiency in operations e. Significant deficiencies

e. Significant deficiencies A significant deficiency is a serious internal control problem that must be reported to management and those charged with governance if discovered during the audit. It could result from a failure in the design of an internal control as well as a failure in the operation of an internal control. The definition provided is the "official" definition of a significant deficiency.

You are a staff auditor with Williams and Co. CPAs. Bill Jones, a new hire, has come to you with questions concerning "assertions" and "audit procedures." For 1 through 6, select from the list provided the statement that most closely approximates its meaning. 6. Valuation a. There is such an asset b. Transactions are recorded in the correct accounting period c. Assets are properly classified d. The company legally owns the assets e. All assets have been recorded f. Assets are recorded at proper amounts

f. Assets are recorded at proper amounts

Issuer or non-issuer: Standard-setting body for audit work is guided by AICPA

non-issuer