...Phar-Mor Case 4.6 Questions 1. a) By hiring a member of its external audit team a company could gain insight into the auditor’s process and better devise methods of hiding fraud. b) Hiring a former auditor would greatly compromise and possibly impair the existing external auditor’s ability to remain independent. On top of having knowledge about the auditor’s practice, preexisting relationships could cause bias in the audit outcome. c) Sarbanes-Oxley Act 2002 limits the ability of corporations to hire employees of their external audit firms. Sox requires a “cooling-off” period of one year, after the audit commencement date, before a member of the auditing team can begin work in a key position with the client. d) It is not appropriate for auditors to trust executives of a client. AU section 230, auditors should exercise “due professional care in the performance of work”, hence apply professional skepticism. The auditor should be impartial to the level of management’s honesty and pursue factual evidence to support findings and conclusions. 2. a) The client can be in a more powerful position than the auditor in the auditor-client relationship if the auditor is trying to sell the client additional services. b) SOX prohibits external auditors from providing certain services to clients including: • bookkeeping or other services relating to the accounting records or financial statements of the audit client; • financial information systems design and implementation;...
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...for auditing the finance and investment cycle? a. Perform extensive tests of controls and limit substantive procedures to analytical procedures. b. Ignore internal controls and perform extensive substantive procedures. c. Review internal controls, and perform extensive substantive procedures. d. Ignore internal controls and limit substantive procedures to analytical procedures. 2. Loan covenants are used for which of the following reasons? a. To protect the lender from the borrower substantially weakening the borrower’s financial position. b. To protect the borrower from the lender calling the loan early. c. To protect the auditor from false information by the borrower. d. To protect shareholders from management taking on too much debt. 3. A related-party is a person or entity that a. Has a family tie to a management member. b. Does business with the company. c. Can exert significant influence over or be influenced by the company. d. Is a member of the company’s management. 4. Jones was engaged to examine the financial statements of Gamma Corporation for the year ended June 30. Having completed an examination of the investment securities, which of the following is the best method of verifying the accuracy of recorded dividend income? a. Tracing recorded dividend income to cash receipts records and validated deposit slips. b. Utilizing analytical procedures and statistical sampling. c. Comparing recorded dividends with amounts appearing on federal information Form...
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...provides less assurance than an audit as to whether the financial statements are in material conformity with accounting standards. Auditing standards: Establish mandatory (强制) requirements and provide explanatory (解释) guidance to auditors in fulfilling their professional responsibilities in the audit of financial reports. Auditing: Is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria. Auditing should be performed by a competent, independent person. Compliance audit: 合规性审计 One of three primary types of audits, a review of an organization’s financial records performed to determine whether the organization is following specific procedure, rules or regulations set by some higher authority. An audit performed to determine whether an entity that receives financial assistance from the Federal Government has complied with specific laws and regulations. E.g.: determine whether bank requirements for loan continuation have been met. Financial statement...
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...Lecture 1 Chapter 1- Demand for audit and assurance services. Assurance services * Independent professional services that improve the quality of information for decision makers. 1. Attestation services * A type of assurance services in which the public accounting firm issues a written communication that express a conclusion about the liability of a written assertion of another party. * Three categories of Attestation services: a. Audit historical financial statements A form of attestation services in which the auditor issues a written report expressing an opinion about whether the financial statement are in material conformity which accounting standard. b. Review of financial statement: A type of attestation service performed by public accountants. Many entities want to provide assurance on their financial statement, without incurring the cost of an audit. c. Other attestation services Such as a natural extension of audit of historical financial statement, as users seek independent assurance about other types of information. For example: banks often require debtors to engage public accountants to provide assurance about the debtor’s compliance with certain financial covenant provision stated in the loan agreement. 2. Other assurance services, They are similar to attestation services in that public accountant must be independent and must provide assurance about information used by decision maker, but differ in that the public...
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...Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (October 2010) Accountancy Key concepts Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Constant Item Purchasing Power Accounting · Cost of goods sold · Debits and credits · Double-entry system · Fair value accounting · FIFO & LIFO · GAAP / International Financial Reporting Standards · General ledger · Historical cost · Matching principle · Revenue recognition · Trial balance Fields of accounting Cost · Financial · Forensic · Fund · Management · Tax Financial statements Statement of Financial Position · Statement of cash flows · Statement of changes in equity · Statement of comprehensive income · Notes · MD&A · XBRL Auditing Auditor's report · Financial audit · GAAS / ISA · Internal audit · Sarbanes–Oxley Act Accounting qualifications CA · CCA · CGA · CMA · CPA · CGFM · APA This box: view · talk · edit The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation. Contents [hide] 1 Audits in accounting 1.1 Integrated audits 1.2 Assessments 1.3 Types of auditors 2 Quality audits 3 In Project Management 4 Energy audits 5 See also 6 References [edit]Audits in accounting Audits are performed to ascertain...
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...you may see on any upcoming exams. 2006 AICPA Newly-Released Auditing Questions An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of: Presentation and disclosure Yes Yes No No Existence or occurrence Yes No Yes No a. b. c. d. ANSWER: Choice "c" is correct. In testing the existence or occurrence assertion, the auditor is concerned that fictitious or overstated receivables may have been recorded. Observing the mailing of monthly statements and reviewing evidence of follow-up on errors reported by customers provides evidence that procedures are in place to identify and correct such errors. Choice "a" is incorrect. Observing the mailing of monthly statements and reviewing evidence of follow-up on errors reported by customers does not provide any assurance regarding how receivables are presented and disclosed in the financial statements. Choice "b" is incorrect. Observing the mailing of monthly statements and reviewing evidence of follow-up on errors reported by customers provides support for the existence or occurrence assertion, but does not provide evidence of proper financial statement presentation and disclosure, as discussed in the explanations for items "c" and "a" above. Choice "d" is incorrect. Observing the mailing of monthly statements and reviewing evidence of follow-up...
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...Auditing and Assurance Services 14th Edition By Arens, Beasley and Elder– Test Bank Score A Grade In your Quizzes (Exams) Click Here to Purchase the Test Bank All 26 Chapters Quiz Answers Email me if there is any problem or if you need help with your other classes assignments, problems or quizzes. ewood6449@gmail.com Auditing and Assurance Services, 14e (Arens) Chapter 1 The Demand for Audit and Other Assurance Services Learning Objective 1-1 1) The Sarbanes-Oxley Act applies to which of the following companies? A) All companies. B) Privately held companies. C) Public companies. D) All public companies and privately held companies with assets greater than $500 million. Answer Terms: Sarbanes-Oxley Act Diff: Easy Objective: LO 1-1 AACSB: Reflective thinking skills Topic: SOX 2) Which of the following is considered audit evidence? A) Oral statements Written Auditor made by management Communications Observation Y N N B) Oral statements made by management N C) Oral statements made by management Y Written Communications Y Auditor Observation Y Written Communications Y Auditor Observation Y D) Oral statements made by management N Answer Terms: Audit evidence Diff: Moderate Objective: LO 1-1 AACSB: Reflective thinking skills Written Communications N Auditor Observation Y 3) Evidence is paramount to audit and attestation engagements. List the four basic types of audit evidence. 4) The criteria by which an auditor evaluates the information under audit may vary with...
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...conclusions on which the audit opinion is based. The basic sources of evidence are knowledge of the business and industry, analytical procedures, tests of controls, and direct tests of account balances and transactions. The auditor must decide how much evidence is needed (extent), what kind of evidence is needed (nature), and when to gather the evidence (timing). The assertions form the framework for gathering sufficient, competent audit evidence as required by the professional standards. The assertions tie into generally accepted accounting principles in that those assertions are also embodied in GAAP. The five main assertions are defined as: Existence/occurrence. The assets, liabilities, and equity interests exist and all transactions reflected in the financial statements actually occurred. Completeness. All assets, liabilities, equity interests, and transactions that should have been recorded have been recorded, i.e., nothing is left out of the financial statements. Rights/obligations. The entity holds or controls the legal ownership to assets, and liabilities are legally owed by the entity. Valuation/allocation. Assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. Presentation/disclosure. Assets, liabilities, and equity interests are appropriately classified on the financial statements, and are adequately described in the footnotes to the financial...
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...University GARP Chapter Meeting 29th July 2011 Agenda 1. Background 2. Credit Risk and the Case of Washington Mutual 3. Operational Risk and the Case of Rogue Brokers in Kenya and Barings 4. Market Risk and the Case of LTCM 5. Liquidity Risk and the Case of Northern Rock 6. Q&A BACKGROUND Main Types of Financial Risk Risk Type Definition Credit Risk The potential that a bank's borrower or counterparty will fail to meet its obligations in accordance with agreed terms. Market Risk The risk that movements in market prices will adversely affect the value of on- or off-balance sheet positions. The risk is attributable to movements in interest rates, foreign exchange (FX) rates, equity prices or prices of commodities. Operational Risk Risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The definition includes legal risk, but excludes reputational and strategic risk. Liquidity Risk Liquidity is the ability to fund increases in assets and meet obligations as they become due. It is crucial to the ongoing viability of any organization. Source: Financial Stability Institute CREDIT RISK AND THE CASE OF WASHINGTON MUTUAL Sources of Credit Risk Apart from traditional types of loans, credit risk can also be found in a bank's: Investment portfolio Overdrafts Letters of credit Credit risk also exists in a variety of bank products...
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...CHAPTER 1 AN INTRODUCTION TO ASSURANCE AND FINANCIAL STATEMENT AUDITING Answers to Review Questions 1-1 The study of auditing is more conceptual in nature compared to other accounting courses. Rather than focusing on learning the rules, techniques, and computations required to prepare financial statements, auditing emphasizes learning a framework of analytical and logical skills to evaluate the relevance and reliability of the systems and processes responsible for financial information, as well as the information itself. To be successful, students must learn the framework and then learn to use logic and common sense in applying auditing concepts to various circumstances and situations. Understanding auditing can improve the decision making ability of consultants, business managers, and accountants by providing a framework for evaluating the usefulness and reliability of information. 1-2 There is a demand for auditing in a free-market economy because the agency relationship between an absentee owner and a manager produces a natural conflict of interest due to the information asymmetry that exists between the owner and manager. As a result, the agent agrees to be monitored as part of his/her employment contract. Auditing appears to be a cost-effective form of monitoring. The empirical evidence suggests auditing was demanded prior to government regulation such as statutory audit requirements. Additionally, many private companies and other entities not subject...
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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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... buildings, equipment, and other assets not generally held for resale. In addition, investing activities include the purchase and sale of financial instruments not intended for trading purposes (discussed in chapter 18). Financing activities include transactions and events whereby cash is obtained from or repaid to creditors (debt financing) or owners (equity financing). Financing activities would include, for example, acquiring debt, capital leases, issuing bonds, or issuing preferred or common stock. Financing activities would also include payments to retire debt, reacquiring stock (treasury stock), and the payment of dividends. 17-2. When auditing the investing and financing cycles auditors typically address the following issues: • What assets are necessary to support the operations of the entity, and what are management’s long-range plans for growing the entity’s asset base? Answering this question assists the auditor in developing expectations of long-term assets needed to support operations. • What assets were acquired, or disposed of, during the period? Answering this question confirms the auditor’s expectations regarding assets needed to operate effectively. It also assists the auditor in developing expectations of regarding financing activities. • How were newly acquired assets financed? Answering this question completes the audit of the investing and financing cycles. These cycles are often audited together due to the strong connection...
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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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...BUS 424 Auditing Summary of Key Audit Planning Concepts Dr. Miller I. GAAP versus GAAS/SAS Generally Accepted Accounting Principles (GAAP) – Consists of Statements of Financial Accounting Standards (SFAS) created by FASB to guide the preparation of financial statements. Generally Accepted Auditing Standards (GAAS) – 10 general standards representing a framework from which AICPA can provide interpretations. They are organized into 3 groups – General Qualifications, Field Work Performance, and Reporting Results. They are broad guidelines. General Qualifications: 1. Adequate training & proficiency – technically qualified and experienced with the industry 2. Independence in mental attitude – both in fact and in appearance 3. Due professional care – auditors are professionals responsible for fulfilling their duties diligently and carefully. Field Work Performance: 1. Adequate planning & supervision – to ensure adequate audit and proper supervision of assistants. 2. Understanding the client’s internal control system – to determine the adequacy of client’s system to provide reliable data and safeguarding assets and records. 3. Sufficient competent evidence – how much and what types of evidence to accumulate for given set of circumstances. Requires professional judgment. Reporting Results: 1. Determine whether statements are prepared in accordance with GAAP. ...
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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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