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Chapter 01 – An Introduction to Assurance and Financial Statement Auditing 1-1 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 […]

Chapter 10 – Auditing the Revenue Process 10-1 CHAPTER 10 AUDITING THE REVENUE PROCESS Answers to Review Questions 10-1 FASB Statement of Financial Accounting Concepts No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises” (CON5), requires that before […]

Chapter 11 Auditing the Purchasing Process 11-1 CHAPTER 11 AUDITING THE PURCHASING PROCESS Answers to Review Questions 11-1 Expenses can be classified into three categories: 1. Product costs are expenses that can be matched directly with specific transactions or events […]

Chapter 12 – Auditing the Human Resource Management Process 12-1 CHAPTER 12 AUDITING THE HUMAN RESOURCE MANAGEMENT PROCESS Answers to Review Questions 12-1 In addition to policies and processes around payroll transactions, the human resource management process requires sound policies […]

Chapter 13 – Auditing the Inventory Management Process 13-1 CHAPTER 13 AUDITING THE INVENTORY MANAGEMENT PROCESS Answers to Review Questions 13-1 Inventory represents one of the most complex parts of the audit because the assignment of values to inventory quantities […]

Chapter 14 – Auditing the Financing/Investing Process: Prepaid Expenses, Intangible Assets, and Property, Plant, and Equipment 14-1 CHAPTER 14 AUDITING THE FINANCING/INVESTING PROCESS: PREPAID EXPENSES, INTANGIBLE ASSETS, AND PROPERTY, PLANT, AND EQUIPMENT Answers to Review Questions 14-1 Prepaid expenses provide […]

Chapter 15 – Auditing the Financing/Investing Process: Long-Term Liabilities, Stockholders’ Equity, and Income Statement Accounts 15-1 CHAPTER 15 AUDITING THE FINANCING/INVESTING PROCESS: LONG- TERM LIABILITIES, STOCKHOLDERS’ EQUITY, AND INCOME STATEMENT ACCOUNTS Answers to Review Questions 15-1 A substantive audit strategy […]

Chapter 16 – Auditing the Financing/Investing Process: Cash and Investments 16-1 CHAPTER 16 AUDITING THE FINANCING/INVESTING PROCESS: CASH AND INVESTMENTS Answers to Review Questions 16-1 The reliability of an entity’s control activities over cash receipts and cash disbursements affects the […]

Chapter 17 – Completing the Audit Engagement 17-1 CHAPTER 17 COMPLETING THE AUDIT ENGAGEMENT Answers to Review Questions 17-1 A contingent liability is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to […]

Chapter 18 – Reports on Audited Financial Statements 18-1 CHAPTER 18 REPORTS ON AUDITED FINANCIAL STATEMENTS Answers to Review Questions 18-1 An auditor is associated with financial statements when he or she has consented to the use of his or […]

Chapter 19 – Professional Conduct, Independence, and Quality Control 19-1 CHAPTER 19 PROFESSIONAL CONDUCT, INDEPENDENCE, AND QUALITY CONTROL Answers to Review Questions 19-1 The three theories of ethical behavior are (1) utilitarianism, (2) rights-based approach, and (3) justice-based approach. Utilitarian […]

Chapter 02 – The Financial Statement Auditing Environment 2-1 CHAPTER 2 THE FINANCIAL STATEMENT AUDITING ENVIRONMENT Answers to Review Questions 2-1 Auditors can be classified under four types: (1) external auditors, (2) internal auditors, (3) government auditors, and (4) forensic […]

Chapter 20 – Legal Liability 20-1 CHAPTER 20 LEGAL LIABILITY Answers to Review Questions 20-1 The four general stages in the initiation and disposition of audit-related disputes are: (1) the occurrence of events that result in losses for users of […]

Chapter 21 – Assurance, Attestation, and Internal Auditing Services 21-1 CHAPTER 21 ASSURANCE, ATTESTATION, AND INTERNAL AUDITING SERVICES Answers to Review Questions 21-1 Assurance services are independent professional services that improve the quality of information, or its context, for decision […]

Chapter 03 – Audit Planning, Types of Audit Tests, and Materiality 3-1 CHAPTER 3 AUDIT PLANNING, TYPES OF AUDIT TESTS, AND MATERIALITY Answers to Review Questions 3-1 The auditor should inquire of the prospective client’s bankers and attorneys, credit agencies, […]

Chapter 04 – Risk Assessment 4-1 CHAPTER 4 RISK ASSESSMENT Answers to Review Questions 4-1 Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Engagement risk is the risk […]

Chapter 05 – Evidence and Documentation 5-1 CHAPTER 5 EVIDENCE AND DOCUMENTATION Answers to Review Questions 5-1 Auditors typically divide the financial statements into components or segments in order to make the audit more manageable. A component can be a […]

Chapter 05 – Evidence and Documentation 5-10 5-38 a. The calculation of the expectation for the reserve for returns account can be made as follows: Months Monthly Sales (in 000s) Historical Return Rate Estimated Returns July $ 73,300,000 0.004 $ […]

Chapter 06 – Internal Control in a Financial Statement Audit 6-1 CHAPTER 6 INTERNAL CONTROL IN A FINANCIAL STATEMENT AUDIT Answers to Review Questions 6-1 From management’s perspective, internal control provides a way to accomplish management’s stewardship or agency responsibilities. […]

Chapter 07 – Auditing Internal Control over Financial Reporting 7-1 CHAPTER 7 AUDITING INTERNAL CONTROL OVER FINANCIAL REPORTING Answers to Review Questions 7-1 Following are management’s and the auditor’s responsibilities under Section 404 of the Sarbanes-Oxley Act of 2002: Management’s […]

Chapter 07 – Auditing Internal Control over Financial Reporting 7-10 NOTE: In answering Problems 7-35 and 7-36, you should refer to the Audit Policy of Willis & Adams LLP on Evaluating Control Deficiencies. A copy of the policy can be […]

Chapter 08 – Audit Sampling: An Overview and Application to Tests of Controls 8-1 CHAPTER 8 AUDIT SAMPLING: AN OVERVIEW AND APPLICATION TO TESTS OF CONTROLS Answers to Review Questions 8-1 Audit sampling is the application of audit procedures to […]

Chapter 09 – Audit Sampling: An Application to Substantive Tests of Account Balances © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not […]

Chapter 09 – Audit Sampling: An Application to Substantive Tests of Account Balances 9-13 To compute the upper error limit in IDEA, follow the steps outlined in the Chapter 9 IDEA problems and solutions available on the book’s online learning […]

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client’s financial statements? A. The CPA is liable only to third parties in privity […]

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement? A. The CPA’s lack of understanding of the prospective client’s internal auditor’s computer-assisted audit techniques. B. Management’s disregard of its […]

A confirmation is used to A. Verify the inventory count is correct. B. Verify that a control is being observed. C. Verify a representation from a third party. D. Verify that a specific trend is correct. In general, material frauds […]

Information asymmetry seldom occurs. A series of business and related auditing failures led to the passage of the Sarbanes-Oxley Act (2002). Answer: TRUE Confidence level and sampling risk are related to sample size. Answer: TRUE Internal control consists of six […]

Which of the following presumptions does not relate to the appropriateness of audit evidence? A. The more effective the internal control system, the more assurance it provides about the accounting data and financial statements. B. An auditor’s opinion, to be […]

Substantive analytical procedures should not be used in the audit of property, plant, and equipment. Common law is written law enacted by the legislative branches of governments. Answer: FALSE An auditor may be unable to express an unqualified opinion if […]

When obtaining evidence regarding litigation against an entity, the CPA would be least interested in determining A. an estimate of when the matter will be resolved. B. the period in which the underlying cause of the litigation occurred. C. the […]

Which of the following procedures most likely would give the greatest assurance that securities held as investments are safeguarded? A. There is no access to securities between the year-end and the date of the auditor’s security count. B. Proceeds from […]

Which of the following statements concerning control risk is correct? A. Assessing control risk and obtaining an understanding of an entity’s internal controls may be performed concurrently. B. When control risk is high, an auditor is required to document the […]

Engagement risk is A. The risk of issuing an incorrect audit opinion. B. The auditor’s risk of loss from events arising in connection with financial statements audited and reported upon. C. The overall risk of material misstatement. D. The risk […]

Which of the following is the best argument against the use of negative accounts receivable confirmations? A. The cost-per-response is excessively high. B. There is no way of knowing if the intended recipients received them. C. Recipients are likely to […]

Audit sampling is commonly used for which type of audit evidence? A. Reperformance. B. Analytical procedures. C. Inquiry. D. Observation. The tolerable deviation rate for a test of controls is generally A. lower than the expected rate of deviations in […]

When the entity fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the information, if […]

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor? A. Granting of credit. B. Shipment of goods. C. Determination of discounts. D. Selling of […]

One of the risks associated with internal control from IT is potential loss of data. To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the following except the: A. cutoff bank […]

Because of the low volume of purchase return transactions, the auditor normally does not test the controls associated with these transactions. The concept of internal control includes IT systems and manual systems. Answer: TRUE A going concern issue requires a […]

In which of the following cases would the auditor be most likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis? A. Tolerable deviation is large and […]

When auditing capital stock accounts, the cutoff assertion is the most important to consider. An approved purchase requisition form authorizes shipment of goods to customers. Answer: FALSE Materiality is based only on a quantitative analysis of the financial statements. Answer: […]

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when I. Typing client-prepared financial statements, without modification, as an accommodation to a client. II. Preparing standard monthly journal entries for depreciation […]

Examples of attest engagements include examination, review, and agreed-upon procedures engagements. Audit evidence includes only written information used by the auditor in arriving at an opinion about the fairness of financial statements. Answer: FALSE A purchase transaction usually begins with […]

Which of the following factors most likely would cause a CPA not to accept a new audit engagement? A. The prospective client’s unwillingness to permit inquiry of its legal counsel. B. The inability to review the predecessor auditor’s documentation. C. […]

An auditor’s analytical procedures performed during the overall review stage indicated that the entity’s accounts receivable balance had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about […]

When an auditor expresses an adverse opinion, the opinion paragraph should include A. the principal effects of the departure from generally accepted accounting principles. B. a direct reference to a separate paragraph disclosing the basis for the opinion. C. the […]

The existence of a related party transaction may be indicated when another entity A. Sells real estate to the corporation at a price that is comparable to its appraised value. B. Absorbs expenses of the corporation under audit. C. Borrows […]

When auditing a public company, a CPA must follow the auditing standards and Code of Professional Conduct of the PCAOB. There are typically only a couple of disclosure items that need to be considered for stockholders’ equity. Answer: TRUE An […]

Which of the following is not explicitly a part of the IIA’s definition of internal auditing? A. Internal auditing is an objective assurance activity. B. Internal auditing is a consulting activity. C. Internal auditing should help an organization accomplish its […]

Which of the following most likely would be an advantage in using classical variables sampling rather than monetary-unit sampling? A. An estimate of the standard deviation of the population’s recorded amounts is not required. B. The auditor rarely needs the […]

When auditing contingent liabilities, which of the following procedures would be least effective? A. Reading the minutes of the board of directors. B. Reviewing the bank confirmation letter. C. Examining customer confirmation replies. D. Examining invoices for legal services. Which […]

An entity erroneously recorded a large purchase twice. Which of the following internal controls would be most likely to detect this error in a timely and efficient manner? A. Footing the purchases journal. B. Reconciling vendors’ monthly statements with subsidiary […]

Limited assurance is provided in A. an audit engagement. B. a compilation engagement. C. a review engagement. D. none of the items listed. The fourth PCAOB standard of reporting requires an auditor to render a report whenever an auditor’s name […]

The revenue process affects numerous accounts in the financial statements. Monetary-unit sampling is commonly used by auditors to test controls. Answer: FALSE An auditor can be sued by a client for negligence under common law. Answer: TRUE Kiting is an […]

Auditors are most likely to ensure that no production activity is scheduled prior to A. determining standard costs. B. observing physical inventory. C. completing the book to physical adjustment. D. determining the amount of consigned inventory. Which of the following […]

Examples of entity-level controls include A. Management’s risk assessment process. B. Controls to monitor results of operations. C. The period-end financial reporting process. D. All of these are examples of entity-level controls. Which of the following statements is correct about […]

An auditor vouched data for a sample of employees in a payroll register to approved clock card/time sheet data to provide assurance that A. payments to employees are computed at authorized rates. B. employees worked the number of hours for […]