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Chapter: 8 -Problem: 23 >> Assume the auditors of a company with an IT system have determined that general controls are effective. They are currently auditing the application controls over sales and wish to test the following controls: ? Authorization of sales transactions by sales personnel. ? Authorization and enforcement of credit limits by credit personnel. ? Describe how the auditors could test these controls in an eff
Answer Preview: Since the auditors have tested the general controls and found them to …

, Chapter: 8 -Problem: 2 >> Discuss the nature of end user computing.
Answer Preview: End user computing makes the user responsible for the development and execution of the …

, Chapter: 16 -Problem: 16 >> What are loss contingencies? How are such items presented in the financial statements? Explain.
Answer Preview: Loss contingencies are possible losses, stemming from past events, wh…

, Chapter: 17 -Problem: 16 >> Because of a very significant scope limitation, the auditors are uncertain about the propriety of the client’s accounting for deferred income taxes. The possible amounts involved are so significant that the auditors have not been able to form an opinion on the financial statements taken as a whole. What type of report should they issue?
Answer Preview: Since the auditors have not …

, Chapter: 5 -Problem: 20 >> What are related party transactions?
Answer Preview: Related party transactions, as the term would suggest, are …

, Chapter: 5 -Problem: 47 >> Auditors consider financial statement assertions to identify appropriate audit procedures. For items a through f, match each assertion with the statement that most closely approximates its meaning. Each statement may be used only once.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
Answer Preview: Adapted AICPA Task-Based Simulation 3All assets have been recorded. 4Transactions are …

, Chapter: 20 -Problem: 19 >> An auditor’s client uses the services of a payroll service provider. Which type of service auditor’s report is most likely to be helpful to that auditor: SOC 1, SOC 2, or SOC 3? Explain why.
Answer Preview: SOC 2 auditors report is most likely to be helpful to that auditor because SOC 1 and …

, Chapter: 8 -Problem: 14 >> What is the difference between an Internet-based and an intranet-based information system?
Answer Preview: Internet-based systems allow users to communicate with servers ov…

, Chapter: 20 -Problem: 4 >> A CPA’s report includes the following: “We are not aware of any material modifications that should be made in order for the information to be in conformity with accounting principles generally accepted in the United States of America, and accordingly, in our opinion, the financial statements follow those principles.”* Discuss the propriety of this portion of the report.
Answer Preview: This statement qualifies and qualifies the consequences of adopting accounting principles generally …

, Chapter: 17 -Problem: 6 >> What information is provided in a public company audit report relating to critical audit matters?
Answer Preview: For each CAM, the auditors must include: Identification of the C…

, Chapter: 20 -Problem: 34 >> Trust services were developed by the AICPA and the CICA. a. Present and describe the criteria related to trust services. b. Must a trust services engagement include reporting on all the categories of criteria?
Answer Preview: (a) The Trust Service categories of criteria include: Security. The information and systems are prot…

, Chapter: 10 -Problem: 28 >> Assume that you are auditing the financial statements of Young Manufacturing Co. Management of Young has designed a review control for cash disbursements using data analytics. The company's software examines all disbursements for duplicate payments, unusual payees, large amounts, material variances from expected amounts, and unusual relationships between amounts and expense category. The company's
Answer Preview: (a) To test the design effectiveness of the review control, you would evaluate the follo…

, Chapter: 7 -Problem: 26 >> Many companies have implemented COSO’s enterprise risk management framework to assist them in managing risks. a. Are public companies required by the SEC to implement COSO’s enterprise risk management framework? Explain. b. Describe two of the components of COSO’s enterprise risk management framework. c. Comment on the accuracy of the following statement: “If management implements COSO’s enterpris
Answer Preview: (a) Public companies are required to maintain effective internal control, and management of large public companies are required to evaluate the compan…

, Chapter: 2 -Problem: 24 >> Comment on the following: The SEC’s acceptance of the use of International Financial Reporting Standards in filings replaces use of PCAOB Auditing Standards for audits of international companies.
Answer Preview: The statement is incorrect as acceptance of international accounting standards repla…

, Chapter: 9 -Problem: 13 >> What is a dual-purpose test?
Answer Preview: A dual-purpose test is on…

, Chapter: 2 -Problem: 11 >> State the principal assertions made by the auditors in the “Opinion on the Financial Statements” section of the PCAOB auditors’ report with an unqualified opinion. Assume that the auditors issued a separate report on internal control.
Answer Preview: In the opinion on the financial statements section o…

, Chapter: 8 -Problem: 17 >> Explain briefly what is meant by a malware and ransomware.
Answer Preview: Malware is software that is designed t…

, Chapter: 7 -Problem: 11 >> What consideration, if any, may external auditors give to the work of a client’s internal audit staff?
Answer Preview: The external auditors should consider the work of the internal auditors as a p…

, Chapter: 8 -Problem: 16 >> What are the advantages of a virtualized client/server infrastructure?
Answer Preview: A virtualized client/server configuration requires the system software …

, Chapter: 21 -Problem: 32 >> Distinguish between a subrecipient and a primary recipient. Provide an example of each.
Answer Preview: A recipient is one that receives federal financial assi…

, Chapter: 12 -Problem: 15 >> “A well-prepared balance sheet usually includes a statement that the inventories are valued at cost.” Evaluate this quotation.
Answer Preview: The statement is misleading. Inventories a…

, Chapter: 16 -Problem: 42 >> This simulation integrates concepts first presented in Chapter 5 (see Figure 5.1 for Assertions about Account Balances) and information from throughout the procedural chapters (Chapters 10 through 16) rather than only Chapter 16 coverage. This problem uses only the four account balances assertions from Figure 5.1; it does not include the cutoff assertion. Accordingly, procedures that might be cons
Answer Preview: Adapted AICPA Task-Based Simulation Account Balances 1. Accounts receivable 2. Inventory 3. Fixed as…

, Chapter: 1 -Problem: 33 >> Each auditing term (or organizational name) in Column 1 below bears a close relationship to  a term in Column 2.Identify the most closely related terms in Columns 1 and 2. Organize your answer in a two column format by copying the numbers and terms in Column 1 as given. Then, rearrange the sequence of terms in Column 2 so that each line of your schedule will contain two closely related terms.
Answer Preview: 1. Quality control 2. Operational audit Column One 3. Internal cont…

, Chapter: 3 -Problem: 34 >> Bill Jones is a partner with Adelson & Co., a one office CPA firm located in Tucson, Arizona. He is the engagement partner on the audit team of NRG, LTD, a public company and he has just discovered that his wife Sophia owns 100 shares of NRG, shares worth $10 each. a. What effect, if any, does Sophia’s investment have on the independence of Bill and Adelson & Co.? b. Briefly describe the SEC’s req
Answer Preview: (a) Because Jones wife is an immediate family relative, she is under the same rules as is he. Accord…

, Chapter: 10 -Problem: 38 >> Assume that you are performing the audit of Cameron Mfg. Co. Cameron has an IT system and you have evaluated and tested the general controls and found them to be effective. Also assume that the company has the typical control procedures for controlling cash disbursements. Assume that you are currently designing tests of the application controls over cash disbursements and have been provided with t
Answer Preview: (a) The following tests could be performed: (1) Test for approval of payments by determ…

, Chapter: 11 -Problem: 36 >> Assume you are testing the internal controls over sales transactions for the Tidwell Co. audit. You have tested the general controls and found them to be operating effectively. You are now testing the application controls over sales transactions and have been provided with the following two data files.a. Describe three tests of controls that you might perform using data analytics. b. Assume that y
Answer Preview: (a) The following tests could be performed: (1) Test for authorization of s…

, Chapter: 4 -Problem: 4 >> Define the term third-party beneficiary.
Answer Preview: A third-party beneficiary is a person other than the contracting parties who is …

, Chapter: 21 -Problem: 38 >> CPAs may become involved in examinations of broker-dealers. a. Describe the information a broker-dealer who maintains custody of customer funds or securities is required to file in an annual compliance report. b. Which of the required information in part (a) will ordinarily be examined and reported upon by a CPA?
Answer Preview: a. A broker-dealer who maintains custody of customer funds or securities is required to fil…

, Chapter: 20 -Problem: 13 >> Comment on the following statement: A financial projection presents an organization’s expected results, given a hypothetical assumption.
Answer Preview: The statement is correct. …

, Chapter: 11 -Problem: 12 >> Assume you are auditing the financial statements of an information technology company that provides hardware and software to clients with complex sales contracts. Since the contracts are virtually identical, the company wants to use a portfolio approach to revenue recognition.Describe how the auditors might audit the consistency of contract terms (a) Manually and (b) Using artificial intelligence.
Answer Preview: (a) If the auditors decide to manually test the contrac…

, Chapter: 3 -Problem: 26 >> The Institute of Internal Auditors’ Code of Ethics has a number of “Principles.” What are the titles of those principles?
Answer Preview: The four IIA Princ…

, Chapter: 7 -Problem: 32 >> Assume that you are auditing the financial statements of Wexler Inc. Wexler’s financial statements include a number of significant estimates. a. Describe the desired internal controls over the processes for developing accounting estimates.b. Describe how the auditors would test the controls over the processes for developing accounting estimates.
Answer Preview: (a) The controls over the development of significant accounting estimates include: (1) Control envir…

, Chapter: 7 -Problem: 29 >> Robert Tailor, CPA, is planning the audit of The Neighborhood Store, a local grocery cooperative. Because The Neighborhood Store is a small business operated entirely by part-time volunteer personnel, internal control is weak. Tailor has decided that he will assess control risk at the highest level for all assertions and not restrict audit procedures in any area. Under these circumstances, may Tai
Answer Preview: Since Tailor's consideration of internal control sho…

, Chapter: 6 -Problem: 34 >> Auditors identify “significant risks” when performing their audits. a. Explain what is meant by a significant risk. b. What factors do auditors consider in assessing whether a risk is a significant risk? c. Describe how a significant risk should be treated in an audit.
Answer Preview: (a) A significant risk is a risk that requires special audit c…

, Chapter: 3 -Problem: 8 >> Jim Willingham works as a manager in the Phoenix office of an international public accounting firm. His younger brother has just taken a position as a purchasing agent for one of the public accounting firm’s Phoenix clients. Has Jim’s independence been impaired with respect to this audit client? Has the public accounting firm’s independence been impaired if Jim does not work on the audit?
Answer Preview: Jim Willinghams brother is considered a close relati…

, Chapter: 20 -Problem: 22 >> What types of elder care services do CPAs typically perform?
Answer Preview: Elder care services include financial services include goal s…

, Chapter: 18 -Problem: 32 >> The CPA firm Hank and Henry LLP is performing its first integrated audit of their recently acquired public client Wigly Corporation. Wigly has been in existence for 10 years. Wigly Corporation has two branch locations and has a monthly performed management review control of having the controller at each location test the existence, completeness and valuation for various general and administrative
Answer Preview: The procedures are not adequate to conclude that controls are operating effectively. Among questions …

, Chapter: 2 -Problem: 31 >> Casa Royale Inc., a public company, retains Ying and Company CPA to audit its financial statements and internal control. Howard Smythe, the partner in charge of the audit, drafted the following unqualified report:Report of Independent Registered Public Accounting Firm (Comment a) To the shareholders and the board of directors (Comment b) of Casa Royale, Inc. Opinion on the Financial Statements We
Answer Preview: Adapted AICPA Task-Based Simulation a. The report should not include the word "Registered." b. The r…

, Chapter: 3 -Problem: 6 >> How does the AICPA Code of Professional Conduct relate, if at all, to Statements on Auditing Standards?
Answer Preview: The Compliance with Standards Rule of the AICPA Code of Profession…

, Chapter: 11 -Problem: 5 >> Criticize the following statement: “Because the sales department maintains relationships with customers, personnel from that department should grant credit and decide when accounts should be written off as uncollectible.”
Answer Preview: The statement is incorrect. Personnel in the credit de…

, Chapter: 7 -Problem: 46 >> Assume that you have been hired by Ming Lin, CPA, as a new staff assistant. He informs you that his approach to audits has always been to assess control risk at the maximum and perform all the substantive procedures he considers necessary. However, he has recently read an article in The Journal of Accountancy that indicates that a more efficient audit may sometimes be achieved by performing some t
Answer Preview: *Inherent risk is assessed at the maximum level; evaluation of controls is based on management's des…

, Chapter: 5 -Problem: 17 >> In their audit of accounting estimates, auditors emphasize significant assumptions. Provide characteristics of such assumptions.
Answer Preview: Examples of significant assumptions include those that are: Sensiti…

, Chapter: 11 -Problem: 27 >> Hayden Corp. uses an enterprise resource planning (ERP) system. In their audit of receivables and revenues, the auditors have identified the following data elements in the corporation’s database that may be used for data analytics applications: Customer balance Customer credit limit and credit rating Customer total annual sales Customer purchases by date Customer returns by date Customer name Cust
Answer Preview: (a) A number of data analytic applications might be used to audit the existence …

, Chapter: 19 -Problem: 25 >> Occasionally, public accounting firms are engaged to report on specified elements, accounts, and items of financial statements. Discuss types of reports that may be provided for a nonpublic company for specified elements, accounts, and items of financial statements.
Answer Preview: CPAs may report on specified elements, accounts, or items of a financial statement in the followin…

, Chapter: 2 -Problem: 12 >> What does a nonpublic company audit report say concerning the risk of not detecting a material misstatement resulting from fraud versus one resulting from error?
Answer Preview: The nonpublic company audit report indicates that the ris…

, Chapter: 20 -Problem: 18 >> What two types of cybersecurity examinations are available?
Answer Preview: The two types of examinations generally available are those using (1) The SOC for Cybersecurity criteria (2) The SOC 2 examination …

, Chapter: 17 -Problem: 30 >> Public company audit reports generally include a section on critical audit matters. For each of the following statements indicate whether you believe the statement is correct or incorrect. For those you consider incorrect indicate why. 1. All significant risks identified in an audit constitute critical audit matters. 2. A Critical Audit Matters section follows at an appropriate point after the Bas
Answer Preview: 1. Incorrect. Some significant risks will not meet the definition of a critical …

, Chapter: 16 -Problem: 31 >> a. Calculate the gross margin percentage for each of State University’s product lines. b. Compare State University’s gross margins to industry averages. Indicate any margins that appear out of line, in relation to the industry. Transcribed Image Text: New Course Books Used Course Books Custom Publis
Answer Preview: (a) (b) The following percentages appear unexpected as we publish: New Cou…

, Chapter: 12 -Problem: 26 >> Assume that you are auditing the financial statements of Wagner Pharma Co. for the year ending June 30, 20X1. Wagner has very large warehouses where it stores its numerous prescription drug products. The company tracks inventory with a radio frequency identification (RFID) system, which it uses to take inventory and control the movement of inventory items. It also uses drones to perform cycle test
Answer Preview: When the client employs this type of IT enabled inventory system, the auditor…

, Chapter: 3 -Problem: 48 >> Use the Code of Professional Conduct (available at pub.aicpa.org/codeofconduct) to research each of the circumstances presented in Problem 3-40 and address whether Daleiden would violate the Code. Provide the Rule of the Code of Professional Conduct involved as well as section numbers of the Code that address the issue and your resolution of the issue—you need not consider the conceptual framework
Answer Preview: (a) No violation. There is no apparent violation of the Code of Professional Conduct in this circumstance because the Form of Organization and Name Rule allows a CPA to use a fictitious firm name. Not…

, Chapter: 21 -Problem: 24 >> Describe the additional reporting requirements of Government Auditing Standards.
Answer Preview: The additional reporting requirements of Government Auditing Standards include (1) …

, Chapter: 16 -Problem: 41 >> Match the following terms to the appropriate definition (or partial definition). Each definition is used once. Transcribed Image Text: Term a. Commitment b. Contingent liability c. General risk contingency d. Iron curtain approach e. Factual misstatements f. Projected misstatements g. Loss contingen
Answer Preview: Answer:- match A. Commitment 1) A contractual obligation to carry out a transaction at specified ter…

, Chapter: 15 -Problem: 17 >> Describe the ordinary role of paper stock certificates when a direct registration system (DRS) is utilized.
Answer Preview: Ordinarily, when a direct registration system (DRS) is utilized, it replaces …

, Chapter: 12 -Problem: 27 >> Assume that you are auditing Hobart Wholesale Supply Co. and that you have decided to use data analytics to test the inventory. Specifically, you would like to identify (1) Excess and overvalued items in inventory (e.g., possibly obsolete, quantities well over needed) and (2) Unusual transactions. From your discussions with management and your review of overall balances, you have determined that t
Answer Preview: (a) One can perform tests of inventory using files 1-3 by joining them using the item part no. The f…

, Chapter: 6 -Problem: 33 >> Auditors assess the risks of material misstatement and then design further audit procedures. a. Describe the auditors’ approach to identifying and assessing the risks of material misstatement. b. Describe likely responses when an audit is considered to be particularly high risk in terms of material misstatements, including complex transactions.
Answer Preview: (a) In identifying and assessing the risks of material misstatement, the auditors' approach should b…

, Chapter: 10 -Problem: 31 >> Metropolitan Corporation has a significant investment in a closely-held corporation, Wake Forest Company. Metropolitan’s investment does not enable the company to exercise significant influence over the operating and financial operations of Wake Forest. To evaluate whether the investment is impaired, Management of Metropolitan has engaged a securities valuation firm to value the investment. In you
Answer Preview: (a) As discussed in Chapter 5, the securities valuation firm would be considered to be a specialist. …

, Chapter: 21 -Problem: 17 >> Describe the role of a broker-dealer.
Answer Preview: A broker-dealer is a person or firm in the …

, Chapter: 2 -Problem: 9 >> What are the titles of the sections of the public and nonpublic company audit reports presented in the chapter?
Answer Preview: Public company audit report section titles: Opinion on the Financ…

, Chapter: 20 -Problem: 37 >> Assume that you are a CPA interested in expanding your services to provide System and Organization Controls (SOC) reports. Access the AICPA store website (aicpastore.com) and find guidance that will help you achieve your goal. Skim through the available items, some of which are relevant and some not. For three items, provide both the document (or other item) name and a brief summary of the guidanc
Answer Preview: As we go to press the following represent some of the guidan…

, Chapter: 1 -Problem: 9 >> Comment on whether you agree with the following: Today’s sophisticated information systems make auditing of samples necessary, and auditing of an entire population impossible.
Answer Preview: The statement is incorrect. The inc…

, Chapter: 16 -Problem: 24 >> Describe a disclosure checklist. What is its purpose
Answer Preview: A disclosure checklist is a list of specific disc…

, Chapter: 5 -Problem: 45 >> At 12 o’clock, when the plant whistle sounded, George Jones, an assistant auditor, had been working on his laptop computer. Jones stopped work immediately, but not wanting to waste a lot of time, he simply closed his laptop. He then departed for lunch. The auditor-in-charge, who had been observing what was going on, was critical of the assistant’s actions. What do you think was the basis for criti
Answer Preview: The criticism by the auditor-in-charge was properly based on the …

, Chapter: 7 -Problem: 1 >> What is internal control?
Answer Preview: Internal control is a process, effected by the entit…

, Chapter: 17 -Problem: 39 >> Assume that during the audit of the public Chandler Corporation the following critical audit matter was identified and summarized for purposes of inclusion in the audit report. Critique presentation and details of the matter.Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or requi
Answer Preview: Improper statements in the two paragraphs presented include: First paragraph In the first sentence o…

, Chapter: 8 -Problem: 13 >> What is meant by “authentication of the user,” and how may authentication be achieved?
Answer Preview: Authentication refers to the techniques used to assure …

, Chapter: 14 -Problem: 40 >> Clark, CPA, is engaged in the audit of Tower Wholesaling for the year ended December 31. Clark obtained an understanding of internal control relating to the purchasing, receiving, trade accounts payable, and cash disbursement cycles and has decided not to proceed with tests of controls. Based upon analytical procedures, Clark believes that the trade accounts payable on the balance sheet as of Dece
Answer Preview: Clark should perform, the following additional substantive audit procedures: (1) Foot the client-pre…

, Chapter: 7 -Problem: 20 >> Comment on the following: The Committee of Sponsoring Organizations has issued frameworks on internal control and on enterprise risk management. A starting point for management of a company just beginning operations is to determine which one of the two to select for use.
Answer Preview: While it is true that Committee of Sponsoring Organizations has issued frame…

, Chapter: 21 -Problem: 1 >> Define internal auditing.
Answer Preview: Internal auditing may be defined as an independent, obje…

, Chapter: 5 -Problem: 11 >> Provide an example in which a data analytics technique applied in financial statement auditing could serve as both a test of a control and a substantive procedure.
Answer Preview: Any solution addressing both effectiveness of operation o…

, Chapter: 16 -Problem: 43 >> Rita King, your staff assistant on the April 30, 20X2, audit of Maxwell Company, was transferred to another assignment before she could prepare a proposed adjusting journal entry for Maxwell’s Miscellaneous Revenue account, which she had analyzed per the working paper given below. You have reviewed the working paper and are satisfied with King’s procedures. You are convinced that all the miscellan
Answer Preview: MAXWELL COMPANY Proposed Adjusting Journal Entry April 30, 20X2 Accumula…

, Chapter: 10 -Problem: 6 >> In a well-controlled IT computer system, the auditors wish to test the control of authorization of cash disbursements. What is the most efficient way that the auditors could test this control?
Answer Preview: In a well-controlled IT system the auditors would …

, Chapter: 8 -Problem: 11 >> What is blockchain technology and how could it eventually change financial reporting and auditing?
Answer Preview: Blockchain technology involves a decentralized database …

, Chapter: 17 -Problem: 18 >> Comment on whether you agree with the following: In a nonpublic company audit report, the second section is always titled “Basis for Opinion.”
Answer Preview: The statement is not correct. While the term basis for …

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7 Reviews for Principles Of Auditing And Other Assurance Services Textbook Questions And Answers