Homework answers / question archive / Chapter 6 Problems: 6-21, 6-22, 6-23, 6-24, 6-26, 6-27, 6-34   6-21 (OBJECTIVE 6-1)   A

Chapter 6 Problems: 6-21, 6-22, 6-23, 6-24, 6-26, 6-27, 6-34   6-21 (OBJECTIVE 6-1)   A

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Chapter 6 Problems: 6-21, 6-22, 6-23, 6-24, 6-26, 6-27, 6-34

 

6-21 (OBJECTIVE 6-1)

 

A.  The major reason an independent auditor gathers audit evidence is to

(1) form an opinion on the financial statements.

(2) detect fraud.

(3) evaluate management.

(4) assess control risk.

 

B. Which of the following best describes the reason why an independent auditor reports on financial statements?

(1) A misappropriation of assets may exist, and it is more likely to be detected by independent auditors.

(2) Different interests may exist between the company preparing the statements and the persons using the statements.

(3) A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work.

(4) Poorly designed internal controls may be in existence.

 

C. Because of the risk of material misstatement, an audit should be planned and performed with an attitude of

(1) professional skepticism.

(2) independent integrity

(3) objective judgment.

(4) impartial conservatism.

 

 

6-22 (OBJECTIVE 6-3)

 

A. An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in auditing standards? (1) Misappropriation of an asset or groups of assets

(2) Clerical mistakes in the accounting data underlying the financial statements

(3) Mistakes in the application of accounting principles

(4) Misinterpretation of facts that existed when the financial statements were prepared

 

B. What assurance does the auditor provide that errors and fraud that are material to the financial statements will be detected?

Errors                          Fraud

(1) Limited                  Negative

(2) Reasonable            Reasonable

(3) Limited                  Limited

(4) Reasonable            Limited

 

C. Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?

(1) The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.

(2) Audit procedures that are effective for detecting unintentional misstatements may be ineffective for an intentional misstatement that is concealed through collusion.

(3) An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning fraud.

(4) The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional misstatements.

 

 

6-23 (OBJECTIVE 6-8)

 

A. An auditor reviews aged accounts receivable to assess likelihood of collection to support management’s assertion about account balances of

(1) existence.

(2) completeness.

(3) accuracy, valuation, and allocation.

(4) rights and obligations.

 

B. An auditor will most likely review an entity’s periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support management’s assertion about classes of transactions of

(1) occurrence.

(2) classification.

(3) accuracy.

(4) completeness.

 

C. In the audit of accounts payable, an auditor’s procedures will most likely focus primarily on management’s assertion about account balances of

(1) existence.

(2) completeness.

(3) accuracy, valuation, and allocation.

(4) classification

 

 

6-24 (OBJECTIVES 6-3, 6-11)

 

A. The auditor’s responsibility regarding material misstatements caused by fraud is

(1) less than the auditor’s responsibility regarding material misstatements caused by error.

(2) greater than the auditor’s responsibility regarding material misstatements caused by error.

(3) the same as the auditor’s responsibility regarding material misstatements caused by error.

(4) either less than or greater than the auditor’s responsibility regarding material misstatements caused by error, depending on the circumstances.

B. Which of the following would not have a direct impact in determining the sufficiency of evidence gathered during an audit?

(1) The cost benefit relationship of obtaining the audit evidence

(2) The quality of audit evidence obtained

(3) The auditor’s professional judgment

(4) The risk of material misstatement

 

C. When determining the auditor’s or management’s responsibility for compliance with laws and regulations during an audit, which of the following statements below would be incorrect?

(1) The auditor is not responsible for preventing noncompliance with laws and regulations.

(2) Management and those charged with governance are responsible for ensuring that the company’s operations are conducted in accordance with all applicable laws and regulations.

(3) The auditor provides reasonable assurance that the financial statements are free of material misstatement due to noncompliance with laws and regulations.

(4) The auditor is expected to detect the client’s noncompliance with all laws and regulations affecting transaction cycles under review during the audit itself.

 

6-26 (OBJECTIVES 6-2, 6-3)

 

The following are selected portions of the report of management from a published annual report. Report of Management Management’s Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting in accordance with accounting principles generally accepted in the United States of America. Management evaluates the effectiveness of the Company’s internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control–Integrated Framework (2013). Management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019, and concluded it is effective.

 

Management’s Responsibility for Consolidated Financial Statements

Management is also responsible for the preparation and content of the accompanying consolidated financial statements as well as all other related information contained in this annual report. These financial statements have been prepared in conformity with accounting principles generally accepted in the United States, and necessarily include amounts, which are based on management’s best estimates and judgments.

 

a. What are the purposes of the two parts of the report of management?

 

b. What is the auditor’s responsibility related to the report of management?

 

 

6-27 (OBJECTIVES 6-1, 6-3) Auditors provide “reasonable assurance” that the financial statements are “fairly stated, in all material respects.” Questions are often raised as to the responsibility of the auditor to detect material misstatements, including misappropriation of assets and fraudulent financial reporting.

a. Discuss the concept of “reasonable assurance” and the degree of confidence that financial statement users should have in the financial statements.

 

b. What are the responsibilities of the independent auditor in the audit of financial statements? Discuss fully, but in this part do not include fraud in the discussion.

 

c. What are the responsibilities of the independent auditor for the detection of fraud involving misappropriation of assets and fraudulent financial reporting? Discuss fully, including your assessment of whether the auditor’s responsibility for the detection of fraud is appropriate.

 

6-34 (OBJECTIVE 6-10)

 

 The following (1 through 16) are the balance-related and transaction-related audit objectives.

 

Balance-Related Audit Objectives

1. Existence

2. Completeness

3. Accuracy                                                                            

4. Cutoff

5. Detail tie-in

6. Realizable value

7. Classification

8. Rights and obligations

9. Presentation

 

Transaction-Related Audit Objectives

10. Occurrence

11. Completeness

12. Accuracy

13. Classification

14. Timing

15. Posting and summarization

16. Presentation

 

Identify the specific audit objective (1 through 16) that each of the following specific audit procedures (a. through l.) satisfies in the audit of sales, accounts receivable, and cash receipts for fiscal year ended December 31, 2019.

a. Examine a sample of electronic sales invoices to determine whether each order has been shipped, as evidenced by a shipping document number.

 

b. Add all customer balances in the accounts receivable trial balance and agree the amount to the general ledger.

 

c. For a sample of sales transactions selected from the sales journal, verify that the amount of the transaction has been recorded in the correct customer account in the accounts receivable subledger.

 

d. Inquire of the client whether any accounts receivable balances have been pledged as collateral on long-term debt and determine whether all required information is included in the footnote description for long-term debt.

 

e. For a sample of shipping documents selected from shipping records, trace each shipping document to a transaction recorded in the sales journal.

 

f. Discuss with credit department personnel the likelihood of collection of all accounts as of December 31, 2019, with a balance greater than $100,000 and greater than 90 days old as of yearend.

 

g. Examine sales invoices for the last five sales transactions recorded in the sales journal in 2019 and examine shipping documents to determine they are recorded in the correct period.

 

h. For a sample of customer accounts receivable balances at December 31, 2019, examine subsequent cash receipts in January 2020 to determine whether the customer paid the balance due.

 

i. Determine whether risks related to accounts receivable are clearly and adequately disclosed.

j. Use audit software to total sales in the sales journal for the month of July and trace postings to the general ledger.

 

k. Send letters to a sample of accounts receivable customers to verify whether they have an outstanding balance at December 31, 2019.

 

l. Determine whether long-term receivables and related party receivables are reported separately in the financial statements.