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Auditing HSG > Case Questions > Flashcards

Case Questions Flashcards

1
Q

Which procedures should an auditor perform when determining whether to accept a client? (name a few)

A
  • Obtain and review client financial information (e.g. annual reports)
  • Evaluate the integrity of client management
  • Communicate with previous auditor, after asking for permission by company
  • Determine the independence of your firm with respect to the client
  • Inquire third parties about the client (banks, lawyers, credit agencies)
  • Understand the business
  • Are there special circumstances that will require certain attention
  • Consider whether issues such as litigation or going concern problem exists for client
  • Perform preliminary analytical procedures
  • Evaluate opportunities and business risks posed by the client to your auditing firm
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2
Q

Name a few ratios relevant for analytical procedures

A
  • ROE
  • ROA
  • Accounts receivables turnover
  • Inventory turnover
  • Profit Margin
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3
Q

Name a few possible negative non-financial matters relevant for accepting a client (ocean case examples)

A
  • Staff/auditor turnover
  • Complicated new computer system
  • Communication
  • IPO
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4
Q

Are you able to provide consulting and auditing at the same time?

A
  • Some argue that this might impair objectivity
  • Others argue that efficiency is gained
  • For public companies under SOX, the auditor is not permitted to perform certain consulting services (US since 2002)
  • In Switzerland, some services are allowed
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5
Q

In Art. 728 in CO the following are constituting the cornerstones of auditor independence

A
  • Membership of board or any other decision making function
  • A direct or indirect significant financial interest (equity or debt)
  • Close relationship between auditor and the board, a member in decision making position or a major shareholder is not allowed
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6
Q

If being offered to audit a firm, what are the first steps after accepting the client?

A
  • Send a letter of acceptance
  • The letter will be sent to the commercial register and the audit firms name and function will be entered
    Afterwards:
  • Write an engagement letter
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7
Q

What are the components of an engagement letter? Is the auditor required to write one every year?

A
  • The objective and scope of the audit of the financial statements
  • The responsibilities of the auditor
  • The responsibilities of the management
  • Identification of applicable financial reporting framework for the preparation of financial statements
  • Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form an content
    Every year?
  • No, recurring audits do not need it, unless the terms of engagement has changed; e.g. misunderstandings, change in senior management, significant change in ownership, change in legal or regulatory environment
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8
Q

Why is the client acceptance process important?

A
  • Auditors are liable both to the company, individual shareholders and creditors for the losses arising from intentional or negligent breach of duties
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9
Q

Assume you have a population value of 2 500 000, tested inventory amounts of 1 000 000 and found 10 000 in overstatements. What is your estimate of the total misstatement in inventory?

A

The direct projection of error =
(Misstatements/amount sampled)population value
=> (10 000/1 000 000)2 500 000= 25 000

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10
Q

What should an auditor do if the analytical procedures performed indicate overstatement errors (i.e. estimations above materiality)

A
  • The auditor should either propose an audit adjustment so that the unadjusted amounts is less than materiality, and/or perform more testing to obtain a better estimate of the population misstatements
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11
Q

What factors should be considered when setting performance materiality for the asset accounts?

A
  • Overall audit assurance desired
  • Expected misstatements in a particular segment
  • Cost of obtaining audit evidence (efficiency)
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12
Q

Why is cash able to have the lowest performance materiality?

A
  • Cash can be completely audited
  • Typically there are no misstatements
  • Evidence is objective (more subjective when estimations and calculations are included)
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13
Q

Give an example of why you could set performance materiality for inventory at a lower amount as to compared to accounts receivables, PP&E, and other assets

A
  • It could be concerns that the inventory is out of date (obsolescence) and because inventory turnover is a ratio which is of interest to analysts. (Auditing standards suggest auditors should consider setting a lower materiality for segments of the audit where there is increased attention)
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14
Q

Give an example of giving accounts receivables the highest performance materiality

A
  • The account is large and requires sampling to test the balance
  • Customers generally pay their balance on time
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15
Q

Does setting materiality at a lower level result in collecting more or less audit evidence? (as compared to setting materiality at a higher level)

A
  • Setting materiality at a lower level results in collecting more audit evidence
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16
Q

Indicate whether the factor increases or decreases the risk of material misstatements. Which audit risk model component is affected by the factor: A new client

A

Risk of material misstatements:
- Increases
Audit risk model component
- Inherent risk

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17
Q

Indicate whether the factor increases or decreases the risk of material misstatements. Which audit risk model component is affected by the factor: Operating in regulated industry, which increases regulatory oversight and need for compliance with regulations

A

Risk of material misstatements:
- Increases
Audit risk model component
- Acceptable audit risk

18
Q

Indicate whether the factor increases or decreases the risk of material misstatements. Which audit risk model component is affected by the factor: Public stock

A

Risk of material misstatements:
- Increases
Audit risk model component
- Acceptable audit risk

19
Q

Indicate whether the factor increases or decreases the risk of material misstatements. Which audit risk model component is affected by the factor: Company is more profitable than competitors, but recent growth has strained operations

A

Risk of material misstatements:
- Increases
Audit risk model component
- Acceptable audit risk

20
Q

Indicate whether the factor increases or decreases the risk of material misstatements. Which audit risk model component is affected by the factor: Company has expanded its use of derivatives and hedging

A

Risk of material misstatements:
- Increases
Audit risk model component
- Inherent risk

21
Q

Indicate whether the factor increases or decreases the risk of material misstatements. Which audit risk model component is affected by the factor: Company has added competent accounting staff and has an internal audit function with direct reporting to the audit commitee

A

Risk of material misstatements:
- Decreases
Audit risk model component
- Control risk

22
Q

Indicate whether the factor increases or decreases the risk of material misstatements. Which audit risk model component is affected by the factor: The financial statements contain several accounting estimates that are based on management assumptions

A

Risk of material misstatements:
- Increases
Audit risk model component
- Inherent risk

23
Q

Indicate whether the factor increases or decreases the risk of material misstatements. Which audit risk model component is affected by the factor: The company has struggled in tracking property, plant & equipment

A

Risk of material misstatements:
- Increases
Audit risk model component
- Control risk

24
Q

Indicate whether the factor increases or decreases the risk of material misstatements. Which audit risk model component is affected by the factor: The company has acquired a regional electric company

A

Risk of material misstatements:
- Increases
Audit risk model component
- Inherent risk

25
Q

Which are the five COSO internal control components? (From base of pyramid and up)

A
  • Control Environment
  • Risk assessment
  • Information and Communication (on side of the one above and below)
  • Control activities
  • Monitoring
26
Q

Indicate which of the five COSO internal control components is best represented by the internal control: The company’s computer systems track individual transactions and automatically accumulate transactions to create a trial balance

A
  • Information and Communication
27
Q

Indicate which of the five COSO internal control components is best represented by the internal control: On a monthly basis, department heads review a budget to actual performance report and investigate unusual differences

A
  • Control activities
28
Q

Indicate which of the five COSO internal control components is best represented by the internal control: The company must receive university transcripts documenting all college degrees earned before an individual can begin their first day of employment with the company

A
  • Control Environment
29
Q

Indicate which of the five COSO internal control components is best represented by the internal control: Senior management obtains data about external events that might affect the entity and evaluates the impact of that information on its existing accounting processes

A
  • Risk assessment
30
Q

Indicate which of the five COSO internal control components is best represented by the internal control: Each quarter, department managers are required to perform a self-assessment of the department’s compliance with the company policies. Reports summarizing the results are to be submitted to the senior executive overseeing that department

A
  • Monitoring
31
Q

Indicate which of the five COSO internal control components is best represented by the internal control: Before a cash disbursement can be processed, all payee information must be verified by matching the payee to the company’s approved vendor listing

A
  • Control activities
32
Q

Indicate which of the five COSO internal control components is best represented by the internal control: The system automatically reconciles the detailed accounts receivable subsidiary ledger to the accounts receivable general account on a daily basis

A
  • Information and Communication
33
Q

Indicate which of the five COSO internal control components is best represented by the internal control: The company has developed a detailed series of accounting policy and procedures manuals to help provide detailed instructions to employees about how controls are to be performed

A
  • Control activities
34
Q

Indicate which of the five COSO internal control components is best represented by the internal control: The company has an organizational chart that establishes the formal lines of reporting and authorization protocols

A
  • Control Environment
35
Q

Indicate which of the five COSO internal control components is best represented by the internal control: The compensation committee reviews compensation plans for senior executives to determine if those plans create unintended pressures that might lead to inaccurate financial statements

A
  • Risk assessment
36
Q

In the following misstatement, identify:
- One or more types of controls that were absent
- The transaction related audit objectives that have not been met
And suggest:
- A control to correct deficiency

Misstatement: On the last day of the year, a truckload of beef was set aside for shipment but was not shipped. Because it was still on the hand when the inventory was counted. The shipment document was dated the last day of the year, so it was also included as a current-year sale

A
  • Adequate documents and records, and independent checks on performance
  • Transactions are recorded on correct dates
  • Carefully coordinate the physical count of inventory on the last day of the year with the recording of sales to make certain counted inventory has not been billed and billed inventory has not been counted
37
Q

In the following misstatement, identify:
- One or more types of controls that were absent
- The transaction related audit objectives that have not been met
And suggest:
- A control to correct deficiency

Misstatement: The incorrect price was used on sales invoices for billing shipments to customers because the wrong price was entered into the computer master file of prices

A
  • Adequate documents and records, and independent checks on performance
  • Transactions are recorded at the correct amounts
  • Changes to the computer master file of prices are reviewed when the master file is updated
38
Q

Conversation: My father’s company was liquidated after his death 3 years ago. We do not owe you 5 000.

Implication and follow-up?

A

Implication: Accuracy of client details, poor follow up on the existence of client

Follow-up: Suggest impairment of amount owed

39
Q

Conversation: I did not receive the clothes I ordered on 30th of December 2013 costing 3 000 on time. So I am not paying this. I received the shipment on 17th of January 2014. This is invoice is not due.

Implication and follow-up?

A

Implication: Sales/Inventory cut off

Follow-up: Check the shipping dates, invoicing dates. Make sure both the invoicing dates and shipping dates are within the same accounting period

40
Q

Conversation: Sorry I forgot to pay for the table cloth I ordered for Valentine’s day last year. Hese is a check for 2 000.

Implication and follow-up?

A

Implication: Follow up issues on credit given. Risk of bad debt could arise.

Follow-up: Go through the past transactions to see whether similar issues with other clients. IF there are any issues that slows down the collection of debt. Doubtful debt provisions might be required.

41
Q

Conversation: I transferred 500 to your account at Maybank online on 3rd of January 2014. You should have updated my account

Implication and follow-up?

A

Implication: Incomplete records pertaining to cash flow could result in client not having the correct information of funds to run the business

Follow-up: Go through the bank statements and cash book and check whether the client has done any reconciliation to the bank statements. Check also the completeness of the postings to cash book.

Auditing HSG (7 decks)

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