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1. 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?
2. Which portion of an audit is least likely to be completed before the balance sheet date?
3. Which of the following should the auditors obtain from the predecessor auditors before accepting an audit engagement?
4. 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:
5. The primary objective of tests of details of transactions performed as substantive procedures is to
6. 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
7. Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?
8. Which of the following best describes what is meant by the term “fraud risk factor”?
9. 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.
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10. 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.
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Professional Standards Topics: |
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Analytical procedures |
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Materiality in planning and performing an audit |
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Consideration of fraud in a financial statement audit |
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Understanding the entity and its environment and assessing the risks of material misstatement |
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Consideration of laws and regulations |
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Management representations |
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7. |
Related parties |
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11. Assume the following general flow of documents in an accounting system. Reply to the following question:
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?
12. 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?
13. The auditors are concerned about transactions that have been recorded for improper amounts. Which procedure would be most effective?
14. Tracing from source documents to journals most directly tests:
15. Vouching from journals (or ledgers) to source documents most directly tests:
16.
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The Stages of an Audit |
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Read the overview below and complete the activities that follow. |
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Every audit is unique, and specific procedures performed will vary based on the client, industry, and people involved; however, every audit that is performed in accordance with Generally Accepted Auditing Standards follows the same six steps. |
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CONCEPT REVIEW: |
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Although specific elements are required along each step of an audit and will be varying and modified specific to each engagement, every audit goes through the same six phases: 1) Planning the audit; 2) Obtaining an understanding of the client and its environment, including internal control; 3) Assessing the risks of misstatement and designing further audit procedures; 4) Performing further audit procedures; 5) Completing the auditing; and 6) Forming an opinion and issuing the audit report. |
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The Stages of an Audit |
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Read the overview below and complete the activities that follow. |
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Every audit is unique, and specific procedures performed will vary based on the client, industry, and people involved; however, every audit that is performed in accordance with Generally Accepted Auditing Standards follows the same six steps. |
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CONCEPT REVIEW: |
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Although specific elements are required along each step of an audit and will be varying and modified specific to each engagement, every audit goes through the same six phases: 1) Planning the audit; 2) Obtaining an understanding of the client and its environment, including internal control; 3) Assessing the risks of misstatement and designing further audit procedures; 4) Performing further audit procedures; 5) Completing the auditing; and 6) Forming an opinion and issuing the audit report. |
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18.
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Predecessor-Successor Auditor Communications |
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Read the case, then answer the questions that follow. |
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Audit standards require successor auditors to attempt to communicate with the predecessor before accepting an audit engagement. |
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CONCEPT REVIEW: |
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Audit standards require successor auditors to attempt communication with the predecessor auditors. The predecessors must have permission from the previous client before sharing information with the successor auditors. Predecessor auditors will help successor auditors to determine whether or not to accept an engagement. |
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BACKGROUND: |
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Audit standards require that successor auditors communicate with predecessor auditors prior to accepting an engagement. Predecessor auditors, however, cannot share confidential client information without the permission of the client. Once permission is granted, communication can begin and includes conversations about the client to help the successor auditor determine if client acceptance appears appropriate. For example, conversations will include discussion about management integrity, any disagreements with management, communication with those charged with governance, and the reason for the auditor change. |
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Smith Jones CPA was the predecessor auditor for Awesome Adventures, Inc. Jones was told that the firm was terminated and Awesome Adventures was to retain Rich Fortune CPA. Rich Fortune contacted Smith Jones in order to have a predecessor-successor conversation. Smith Jones indicated that Awesome Adventures was a long time client of the firm and that the dispute which led to the termination of its services significantly revolved around audit fees. Jones indicated that management put unusual time deadlines on the CPAs, and they sometimes felt rushed to complete the audit. |
a. What step did Rich Fortune fail to perform?
b. Rich Fortune appears to have asked Smith Jones about management integrity, disagreements with management, and the reason for the auditor change. What did Rich Fortune fail to ask Smith Jones?
c. What should Rich Fortune do with the information about the unnecessary time pressure?
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Predecessor-Successor Auditor Communications |
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Read the case, then answer the questions that follow. |
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Audit standards require successor auditors to attempt to communicate with the predecessor before accepting an audit engagement. |
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CONCEPT REVIEW: |
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Audit standards require successor auditors to attempt communication with the predecessor auditors. The predecessors must have permission from the previous client before sharing information with the successor auditors. Predecessor auditors will help successor auditors to determine whether or not to accept an engagement. |
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General Objectives for Asset Accounts |
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Read the overview below and complete the activities that follow. |
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The audit procedures for each financial statement account must be tailored to uncover potential misstatements in each account. |
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CONCEPT REVIEW: |
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While specific audit procedures must be tailored to each type of account, it is important to ensure that the auditors are meeting general objectives based on assertions. |
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Read the overview below and complete the activities that follow. |
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The audit procedures for each financial statement account must be tailored to uncover potential misstatements in each account. |
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CONCEPT REVIEW: |
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While specific audit procedures must be tailored to each type of account, it is imp |
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