...serious. There may be chances of fraud. * Goods were received and sat on the dock for up to seven day before the receipt was recorded: This will show understatement in the inventory. And it shows overstatement of net income b. Substantive test is the test of account balances to verify the correctness of the amounts they are design to identify errors and irregularities. In this case misstatement of inventory identified would be considered significantly enough to require substantive testing of inventory. In this case inventory is not entering proper time and missing the records. So auditor has to do substantive test of inventory. c. Substantive testing procedures that evaluate the accuracy, completeness and existence of amounts stated in general ledger accounts and financial statements. In this case substantive testing should performed by physical inspection of inventory, verification of vendors invoice, verification of delivery documentation, tracing of related disbursement records, and ascertaining that the inventory is recorded in appropriated general ledger account, and timing of the transaction record. d. If there is no deficiencies were found in the auditor’s tests of control, auditor doesn’t have to do all substantive tests. They can reduce their work load. They can take continuous inventory. A daily record is maintained for the physical quantity of the inventory, and this should reconciled to actual physical counts at short intervals. 7-39 a. Confirmation...
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...Assignment #2 Cash The information that follows is grouped into two categories: 1) Internal Control and 2) Substantive Audit Procedures. This information is to be used to complete the exercises for this assignment. Relevant Information Internal Control Peach Blossom Cologne Company’s general disbursement checking account (account number 101) is with the Big City National Bank, Main at Michigan Avenue, Chicago, Illinois. It is used for all cash receipts and disbursements transactions. The following internal control questionnaire pertaining to cash receipts, cash disbursements, and cash balances was completed by Jasper Parsons on December 15, 2009. Review this questionnaire carefully along with the Permanent File material describing the control environment, as well as the accounting and control procedures related to the various cash subsystems. Your firm has found that personnel involved in this area are generally competent. As you read this material and analyze the internal control questionnaire, keep in mind the six control procedure categories: (1) segregation of duties, (2) access, (3) authorization, (4) input controls, (5) processing controls, and (6) output controls. Then consider possible errors or irregularities that could occur in the accounting system related to cash transactions and balances. Typical errors or irregularities involving cash receipts, disbursements, and balances include: Cash Receipts 1. Cash receipts may have been deposited...
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...Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when [pic][pic] A. The audit committee is active in overseeing the entity’s financial reporting policies. Answer A is incorrect. An active audit committee tends to temper management's aggressive stance. [pic] B. External policies established by parties outside the entity affect its accounting practices. Answer B is incorrect. External policies tend to moderate such management tendencies. [pic] C. Management is dominated by one individual who is also a shareholder. Answer C is correct because these noted factors tend to have an especially significant influence on the control environment when management is dominated by one or a few individuals. Such a circumstance allows management to effectively implement aggressive financial reporting and emphasize meeting profit goals. [pic] D. Internal auditors have direct access to the board of directors and entity management. Answer D is incorrect. Internal auditors tend to mitigate management's aggressive attitude. close Control environment. The control environment factors set the tone of an organization, influencing the control consciousness of its people. The seven control environment factors, which you may remember using the mnemonic IC HAMBO, are |I |- |Integrity and ethical values ...
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...AUDITING THEORY TESTBANKS / REVIEWERS 1. When an auditor believes that an understanding with the client has not been established, he or she should ordinarily a. Perform the audit with increase professional skepticism. b. Decline to accept or perform the audit. c. Assess control risk at the maximum level and perform a primarily substantive audit. d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud. 2. An auditor should design the written audit program so that a. All material transactions will be selected for substantive testing. b. Substantive tests prior to the balance sheet date will be minimized. c. The audit procedures selected will achieve specific audit objectives. d. Each account balance will be tested under either tests of controls or tests of transactions. 3. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? a. Fictitious transactions may be recorded that cause an understatement of revenues and overstatement of receivables. b. Claim received from customers for goods returned may be intentionally recorded in other customer’s accounts. c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. d. The failure to prepare shipping documents may cause an overstatement of inventory balances. 4. Accepting an engagement to examine...
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...AUDITING THEORY TESTBANKS / REVIEWERS 1. When an auditor believes that an understanding with the client has not been established, he or she should ordinarily a. Perform the audit with increase professional skepticism. b. Decline to accept or perform the audit. c. Assess control risk at the maximum level and perform a primarily substantive audit. d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud. 2. An auditor should design the written audit program so that a. All material transactions will be selected for substantive testing. b. Substantive tests prior to the balance sheet date will be minimized. c. The audit procedures selected will achieve specific audit objectives. d. Each account balance will be tested under either tests of controls or tests of transactions. 3. Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? a. Fictitious transactions may be recorded that cause an understatement of revenues and overstatement of receivables. b. Claim received from customers for goods returned may be intentionally recorded in other customer’s accounts. c. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. d. The failure to prepare shipping documents may cause an overstatement of inventory balances. 4. Accepting an engagement to examine an entity’s financial...
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... Both the SEC and the PCAOB require management to use the COBIT framework for assessing internal control adequacy. ANS: F PTS: 1 3. Both the SEC and the PCAOB require management to use the COSO framework for assessing internal control adequacy. ANS: F PTS: 1 4. A qualified opinion on management’s assessment of internal controls over the financial reporting system necessitates a qualified opinion on the financial statements? ANS: F PTS: 1 5. The same internal control objectives apply to manual and computer-based information systems. ANS: T PTS: 1 6. The external auditor is responsible for establishing and maintaining the internal control system. ANS: F PTS: 1 7. Segregation of duties is an example of an internal control procedure. ANS: T PTS: 1 8. Preventive controls are passive techniques designed to reduce fraud. ANS: T PTS: 1 9. The Sarbanes-Oxley Act requires only that a firm keep good records. ANS: F PTS: 1 10. A key modifying assumption in internal control is that the internal control system is the responsibility of management. ANS: T PTS: 1 11. While the Sarbanes-Oxley Act prohibits auditors from providing non-accounting services to their audit clients, they are not prohibited from performing such services for non-audit clients or privately held companies. ANS: T PTS: 1 12. The Sarbanes-Oxley Act requires the audit committee to hire and oversee the external auditors. ANS: T PTS: 1 13. Section 404 requires that corporate management...
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...and Code of Ethics _____ ____ 2. Determine appropriate laws/regulations that govern this area: a. state law b. federal law c. guidelines d. Other - wage/hour, etc. _____ ____ 3. Maintain an awareness of the potential for fraud, and when appropriate: a. Design audit steps to address significant risk of fraud b. Employ audit tests to detect fraud c. Determine if suspected fraud merits investigation _____ ____ 4. Determine if the audit should be conducted under the attorney client privilege _____ ____ 5. Establish the audit engagement's objective and scope _____ ____ 6. Collect data a. Policies and procedures b. Preliminary surveys c. Meeting summaries d. Other relevant and useful information _____ ____ 7. Evaluate the relevance, sufficiency and competence of data collected _____ ____ 8. Analyze and interpret data collected _____ ____ 9. Develop work papers _____ ____ 10. Review of work papers _____ ____ 11. Communicate interim progress with auditee _____ ____ 12. Draw conclusions _____ ____ 13. Report audit engagement results: a. Conduct exit conference b. Prepare draft report or other communication c. Approve draft report d. Obtain management's response to report e. Include management's response in final report _____ ____ 14. Determine next steps: a. Monitoring ...
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...perpetrated in lower levels of the organization. Upper management improperly booked $3.8 billion as capital expenditures, boosting cash flow and profit over 5 quarters, disguising an actual net loss for 2001 and the first quarter of 2002. WorldCom’s management did not account for expenses when it incurred them, instead hiding expenses by pushing them into the future. This made it seem as if they were spending less and making more money. This caused investor confidence to rise, and the stock price to increase at a time when other telecommunications companies were struggling. By reclassifying operating expenses as capital expenditures, WorldCom was secretly hiding a large amount of expenses. Operational expenses are decreases in the company’s assets from its profit-directed activities, and result in negative cash flows (Williams). Examples of operational expenses are office...
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...ATTACHMENT A: GENERIC TRAINING PLAN EY Zimbabwe – 2013 Instructions for completion · This is a generic training plan for ONE hypothetical trainee · All applicants must complete all the sections TRAINING PLAN Elective: Auditing & Assurance Residuals: Taxation Management Decision-Making & Control Financial Management Internal Audit, Risk Management and Governance COMPULSORY SKILLS BUSINESS ETHICS Mode through which competence will be achieved (i.e. practical experience/ simulation Competency to be achieved BE(C) Acts ethically and in accordance with the rules of professional conduct Tasks to be performed BE(C)1 Displays honesty and integrity BE(C)2 BE(C)3 BE(C)4 BE(C)5 BE(C)6 BE(C)7 BE(C)8 Carries out work with a desire to exercise due care Maintains objectivity and independence Avoids conflict of interest Protects the confidentiality of information Maintains and enhances the profession’s reputation Adheres to the rules of professional conduct, including the ICAZ Code of Professional Conduct Identifies and adequately responds to potential ethical dilemmas Examples of activities to be performed by trainees to gain exposure to this competence E&Y Firm values – Our shared values inspire our people worldwide and guide them to do the right thing, and our commitment to quality is embedded in who we are and in everything we do. Our values define who we are · · · People who demonstrate integrity, respect and teaming People with energy, enthusiasm and the courage to lead People who...
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... Response: The auditor cannot be an advocate of the client, but must independently attest to whether GAAP and other appropriate guidelines have been adequately met. Independence for internal auditors is different because they are employed by the organization, and cannot be as independent as the external auditor. Thus internal auditors must use professional judgment and independent minds in performing IA activities. 3. What are the conceptual phases of an audit? How do they differ between general auditing and IT auditing? Response: The three conceptual phases of auditing are: i. Audit planning, ii. Tests of internal controls, and iii. Substantive tests. Conceptually, no difference exists between IT auditing and general auditing. IT auditing is typically a subset of the overall audit; the portion that involves computer technology is the subset. 4. Distinguish between the internal and external auditors. Response: External auditors represent the interests of third-party...
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...Worksheet for You Decide Name Cathie Reid Course Code ACC555 Grade ___/ Date_12_/12_/12_ Questions: Q1: Discuss how the SEC has influence (if any) over the audit of Smackey Dog Foods, Inc. Solution: The SEC does not have direct influence over the audit of Smackey Company because, Smackey is not a public held organization, they do not have assets in excess of $10 million, and they do not have over 500 stockholders; which are the requirements for public and privately held companies. The SEC does have indirect influence over the audit because all companies, whether public or private are required to comply with General Accepted Accounting Principles (GAAP) and the SEC plays a significant role in influencing these standards. The auditors, while not bound by SEC rules they are required to obey specific audit rules and guidelines as outlined under the the American Institute of Certified Public Accountants (AICPA). The AICPA is responsible for establishing auditing and attestation standards for private companies in the United States and for enforcing a code of professional conduct for its members. The code is comprised of six principles that the auditors must adhere to. The principles are: responsibilities, the public interest, integrity, independence and objectivity, due care, and the scope and nature of services. Q2: Discuss the essential activities involved in the initial planning of an audit. How do these all specifically to the Smackey Dog Food...
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...ACCTG 312 2013 FC Example mid term test This test consists of40 multiple choice questions . Choose the best answer. 5. Independent auditors are referred to as 'independent' because: A. their offices are not at the entity's place of business. B. they are not employees of the entity being audited. C. they are paid by parties outside of the audited entity. D. they report to users outside of the audited entity 5:B 12.Independent auditors perform audits on the financial reports of public companies. This type of auditing can best be described as: A.a discipline that assures financial information presented by management. B.an activity whose purpose is to search for irregularities. C.a regulatory function that prevents the issuance of improper financial information. D.a professional activity that measures and communicates financial and business data. 12: A 17. Which of the following statements is not true concerning assurance services? A. Assurance services focus on improving the quality of information, or its context, for decision makers. B. The growth in assurance services has been driven in part by users' demands for more relevant and reliable information. C. Auditing services can be viewed as a subset of assurance services. D. Unlike audit engagements, an engagement to perform assurance services does not require the auditor to consider information reliability. 17: D 23.The primary responsibility for the adequacy of disclosures in the financial report...
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...These funds are considered both budgeted and unbudgeted funds under the control and supervision of the School Board with the principal having responsibility as prescribed by the School Board. School Activity Accounts that received and expended monies during the year for various student activities (i.e., National Honor Society, Student Government, and Athletics) are required to have a budget on file. Trust Accounts (i.e., General Fund, Field Trips, and Foundation Grants) which received and expended funds for a specified purpose are unbudgeted funds. OVERSIGHT/GOVERNANCE/ENABLING LEGISLATION: This engagement will be performed in accordance with; the board approved internal audit plan, XYZ policy xx, State Statutes, various XYZ policy and procedures (i.e., which refer to all relevant State Statues and State Board of Education rules), State Administrative Code rule 1234, and the Financial and Program Cost Accounting and Reporting for the State Schools manual Chapter x published by the State Department of Education. Sound business practices shall be observed in all transactions. KEY CLIENT PERSONNEL AND CONTACT INFORMATION: The bookkeeper and the principal at each school, the XYZ Chief of Administration, and the Superintendent are responsible for the management of School Activity Accounts, AUDITOR PERSONNEL: The School Accounting Specialist will perform the audit field work under the supervision...
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...Auditing Theory 1. A control which relates to all parts of the EDP system is called a(n) a. Systems control c. Applications control b. General control d. Universal control 2. Which of the following is not an output control? a. Proper authorization of transaction b. Control totals c. Check digits d. Adequate documents 3. Should the auditor feel, after obtaining an understanding of the EDP internal control structure, that control risk cannot be reduced, he or she will a. Issue a disclaimer b. Issue an adverse opinion c. Increase the sample size for tests of controls d. Expand the substantive testing portion of the audit 4. The real-time feature normally would be least useful when applied to accounting for a firm’s a. Bank-account balances b. Property and depreciation c. Customer accounts receivable d. Merchandise inventory 5. A sample in which the characteristics in the sample are the same as those of the population is a a. Random sample c. Attributes sample b. Variables sample d. Representative sample 6. Establishing a route through the random number table a. Is an arbitrary decision b. Needs to be done in advance of choosing the numbers c. Is essential and the route must be followed consistently d. Requires that all three of the above is true 7. When...
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...………9 Issues 1. Compute key ratios and other financial measures for Crazy Eddie during the period 1984-1987. Identify and briefly explain the red flags in Crazy Eddie’s financial statements that suggested the firm possess a higher-than-normal level of audit risk. 2. Identify specific audit procedures that might have led to the detection of the following accounting irregularities perpetrated by Crazy Eddie personnel: (a) the falsification of inventory count sheets, (b) the bogus debit memos for accounts payable, (c) the recording of transshipping transactions as retail sales, and (d) the inclusion of consigned merchandise in year-end inventory. 3. The retail consumer electronics industry was undergoing rapid and dramatic changes during 1980s. Discuss how changes in an audit client’s industry should affect audit planning decisions. Relate this discussion to Crazy Eddie. 4. Explain what is implied by the term lowballing in an audit context. How can this practice potentially affect the quality of independent audit services? 5. Assume that you were a member of Crazy Eddie audit team in 1986. You were assigned to test the client’s year year-end inventory cutoff procedures. You selected 30 invoices entered in the accounting records near year-end: 15 in the few days prior to the client’s fiscal year-end and 15 in the first few days of the New Year. (A.) What if the that client personnel were unable to locate 10 of these invoices. (B.) How should you and your...
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