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Auditing liability terms analytical procedures: quiz

1. Which of the following statements is most correct regarding errors and fraud?
An error is unintentional, whereas fraud is intentional.
Fraud occurs more often than errors in financial statements.
Errors are always fraud and fraud is always errors.
Auditors have more responsibility for finding fraud than errors.

2. If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can:
Issue an adverse audit report; Issue a qualified audit report
Yes; Yes
No; No
Yes; No
No; Yes

3. If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can do all but which of the following?
issue an adverse audit report
issue a disclaimer of opinion
withdraw from the engagement
issue a qualified audit report

4. The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the:
board of directors
company management
financial statement auditor
company's internal audit department
5. The Auditing Standards Board has concluded that analytical procedures are so important that they are required during:
planning and test of control phases
planning and completion phases
test of control and completion phases
planning, test of control, and completion phases

6. An example of an external document is:
employee time reports
bank statements
purchase order for company purchases
carbon copies of checks

7. When auditors use documents to support recorded transactions, the process is often called:
inquiry
confirmation
vouching
physical examination

8. Analytical procedures must be used during which phase(s) of the audit?
Test of Controls; Planning; Completion
Yes; Yes; Yes
No; Yes; Yes
Yes; No; No
No; No; No

9. When the auditor has reason to believe an illegal act has occurred without any corrective action being taken, the auditor should:
inquire of management only at one level below those likely to be involved with the illegality
begin communication with the FASB in accordance with PCAOB regulations
consider accumulating additional evidence to determine if there is actually an illegal act
consider accumulating additional evidence to determine if there is actually an illegal act

10. The most widely used profitability ratio is:
quick ratio
profit margin
return on assets
earnings per share

11. Which is a liquidity activity ratio?
Profit margin
Inventory turnover
Return on assets
Times interest earned

1. Match the following definitions to the terms.
____ Standards of Fieldwork
____ General Standards
____ Standards of Reporting

a. Due Professional Care
b. Adequacy of informative disclosures
c. Sufficient understanding of internal control

2. The following is a portion of a qualified scope and opinion report due to a scope restriction. (Note: A separate report was issued on the effectiveness of internal control over financial reporting.)
Independent Auditor's Report
To the shareholders of Fast Times Corporation,
We have audited the accompanying balance sheet of Fast Times Corporation as of September 30, 2009, and the related statements of income, retained earnings, and cash flows for the past year. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
We were unable to obtain audited financial statements supporting the company's investment in a foreign affiliate stated at $1,040,000, or its equity in earnings of that affiliate of $501,000, which is included in net income, as described in Note 14 to the financial statements. Because of the nature of the company's records, we were unable to satisfy ourselves as to the carrying value of the investment or the equity in its earnings by means of other auditing procedures.
Required: Complete the above report by preparing the opinion paragraph.

3. The following situation involves a possible violation of the AICPA's Code of Professional Conduct. For each situation, (1) determine the applicable rule number from the Code, (2) decide whether or not the Code has been violated, and (3) briefly explain how the situation violates (or does not violate) the Code.
Your answer should be set up something like this:
Rule # __________ Violation? Yes or No
1 or 2 line explanation:
Auditor Tex Gato of the CPA firm Smackey and Smackey, CPAs, enjoyed auditing his favorite client, Super Pup Dog Food because the client would allow him to take home to his dog a variety of dog food samples that amounted to a year's worth of dog food.

4. The following situation involves a possible violation of the AICPA's Code of Professional Conduct. For each situation, (1) determine the applicable rule number from the Code, (2) decide whether or not the Code has been violated, and (3) briefly explain how the situation violates (or does not violate) the Code.
Your answer should be set up something like this:
Rule # __________ Violation? Yes or No
1 or 2 line explanation:
Howard Cunningham & Co., CPAs, designates its firm as Members of the American Institute of Certified Public Accountants. All of the partners of the firm are CPAs. However, one of the partners has recently chosen to allow her membership to lapse because of personal reasons.

5. Brandt, CPAs has obtained Big-Bucks, a new publicly-held client. Big-Bucks has various accounting-related needs that Brandt, CPAs would like to fulfill. Partner-in-charge D. Brandt has discussed with Big-Bucks the possibility of performing the annual audit of Big-Bucks as well as preparing the tax returns, business plan, quarterly write-up services, and providing consultation on the viability and valuation of mining gas reserves in Tennessee. An outside expert would be hired by Brandt CPAs to provide expert advice to the CPA firm on mining gas reserves. Additionally, Brandt, CPA's audit manager who will be assigned to this audit has previously been approached by Big-Bucks to come work for the company as Chief Financial Officer. The audit manager has refused the offer, since his cousin's sister-in-law is a 10 percent shareholder in Big-Bucks and does not want her to have any say in his employment.
Under the Sarbanes-Oxley Act of 2002, what issues do you see and how would you advise Brandt, CPAs? Is there ever a time when Brandt, CPAs could perform any of these services for Big-Bucks?

6. There are four major sources of an auditor's legal liability. One source is liability to the audit client under common law. Briefly summarize the other three sources.

7. Match nine of the terms (a-k) with the definitions provided below (1-9):
a. Foot
b. Compute
c. Scan
d. Inquire
e. Count
f. Trace
g. Recompute
h. Read
i. Examine
j. Observe
k. Compare
____ 1. A calculation done by the auditor independent of the client.
____ 2. Addition of a column of numbers to determine if the total is the same as the client's.
____ 3. A comparison of information in two different locations.
____ 4. A use of the senses to assess certain activities.
____ 5. Following details of transactions from original documents to journals.
____ 6. A less detailed examination of a document or record to determine if there is something unusual warranting further investigation.
____ 7. Obtaining information from the client in response to specific questions.
____ 8. A determination of assets on hand at a given time.
____ 9. An examination of written information to determine facts pertinent to the audit.

8. Auditors routinely conduct analytical procedures in the planning, testing, and completion phases of the audit. Identify the primary and secondary purposes of performing analytical procedures in each phase of the audit.

Solution Preview

1. Which of the following statements is most correct regarding errors and fraud?
** An error is unintentional, whereas fraud is intentional.
Fraud occurs more often than errors in financial statements.
Errors are always fraud and fraud is always errors.
Auditors have more responsibility for finding fraud than errors.

Coaching tip: Fraud is "on purpose." Accidents are "errors."

2. If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can:
Issue an adverse audit report; Issue a qualified audit report
**Yes; Yes
No; No
Yes; No
No; Yes

Coaching tip: He can also withdraw from the audit.

3. If management insists on financial statement disclosures that the auditor finds unacceptable, the auditor can do all but which of the following?
issue an adverse audit report
** issue a disclaimer of opinion
withdraw from the engagement
issue a qualified audit report

4. The responsibility for adopting sound accounting policies and maintaining adequate internal control rests with the:
board of directors
** company management
financial statement auditor
company's internal audit department

Coaching tip: Auditors reviews and test controls but management designs them.

5. The Auditing Standards Board has concluded that analytical procedures are so important that they are required during:
planning and test of control phases
**planning and completion phases
test of control and completion phases
planning, test of control, and completion phases

Coaching tip: The Auditing Standards Board issued of Statement on Auditing Standards (SAS) No. 56 in 1988, which requires that analytical procedures be used by auditors as they plan the audit and also in the final review of the financial statements.

6. An example of an external document is:
employee time reports
** bank statements
purchase order for company purchases
carbon copies of checks

Coaching tip: External means someone outside the firm created it....in this case the bank.

7. When auditors use documents to support recorded transactions, the process is often called:
inquiry
confirmation
**vouching
physical examination

Coaching tip: vouching means checking the underlying document to verify a transaction.

8. Analytical procedures must be used during which phase(s) of the audit?
Test of Controls; Planning; Completion
Yes; Yes; Yes
** No; Yes; Yes
Yes; No; No
No; No; No

Coaching tip: The Auditing Standards Board issued of Statement on Auditing Standards (SAS) No. 56 in 1988, which requires that analytical procedures be used by auditors as they plan the audit and also in the final review of the financial statements.

9. When the auditor has reason to believe an illegal act has occurred without any corrective action being taken, the auditor should:
inquire of management only at one level below those likely to be involved with the illegality
begin communication with the FASB in accordance with PCAOB regulations
**consider accumulating additional evidence to determine if there is ...

Solution Summary

Your study guide is attached with instructional comments to help you, including an opinion paragraph, discussion of two AICPA rule of conduct violations and reasons for conducting analytical review (with reference to PCAOB).

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