(a) Please completely define each of the above. (b) Indicate whether each of the statements below is true or false and explain your position: (1) The risk that material misstatement will not be prevented or detected on a timely basis by internal controls can be reduced to zero by having effective controls in place. (2) Detection Risk is a function of the efficiency of an auditing procedure. (3) Cash is more susceptible to theft than an inventory of coal because it has greater inherent risk? (4) The Inherent risk of the theft of an inventory of cellphones at a mall store is greater than the misappropriation of cash at a COSTCO Store?(Points : 30) 4.(TCO I) Accounts Receivable – For each of the following, please explain if an auditor’s review of the client’s sales cutoff would detect these problems: (a) Would excessive goods returned for credit be detected by a sales cut-off test – why or why not? (b) Would unrecorded sales discounts be detected by a sales cut-off test – why or why not? (c) Lapping of year-end accounts receivable be detected by a sales cut-off test – why or why not? (d) Inflated sales for the year – could it be detected by a sales-cut-off test – why or why not?(Points : 30) 5.(TCO J) One of the major problems in a computer system is that incompatible functions may be performed by the same individual. Identify from the below choices the control compensating for inadequate segregation of duties in a computer system. Explain why you have selected your response. (a) Echo Checks (b) A check digit system (c) Computer-Generated hash totals (d) A computer access log (Points : 30) 6.(TCO K) You are the Senior Auditor for WWZ Co. and you have completed the testing of all the accounts. However, prior to issuing your report, what are at least five other procedures or reviews that must be performed prior to issuing your report? Explain your responses(Points : 30) ACCT 555 Week 8 Final Exam (Version 2) 1. (TCO A) There are ten generally accepted auditing standards, divided into three categories. What are the standards of reporting? 2. (TCO A) Distinguish between generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP). What professional organization establishes GAAS? What professional organization establishes GAAP? 3. Assume you are the partner in charge of the audit of Franklin Corporation’s 2002 financial statements. The audit report has not yet been prepared. In each independent situation following, indicate the appropriate opinion you should issue and why you would issue that opinion 4. State whether there is any violation of the AICPA Code of Professional Conduct, and the nature of the violation. Where there is a violation, evaluate the potential legal liability the accountant may face. Justify your position 5. Discuss at least five of the actions that can be taken by individual CPAs, to protect themselves from legal liability 6. (TCO E) Bobby Thigpen, waiter at Relief Stop, has been taking cash from the restaurant. Thigpen prepares a customer’s check from which the customer pays. Thigpen then destroys the check, and prepares a new one with different items of lower cost. He presents the new check and indicated amount on the check to the cashier, and saves the excess cash for himself. Question: Formulate three internal control features that the restaurant could implement, to eliminate this defalcation 7. Three types of legal documents and records that auditors examine in the planning phase of an audit are the corporate charter and bylaws, corporate minutes of meetings of the board of directors and stockholders, and contracts.
Discuss the audit-relevant information contained in each of these three types of documents that an auditor should be aware of early in the audit. 8. (TCO F) What are specific audit objectives? Explain their relationship to the general audit objectives. (Points: 25) 2.(TCO H) Explain why it is necessary to allocate the preliminary judgment about materiality to individual accounts (segments) in the financial statements. Also explain why allocating to balance sheet accounts is more common than allocating to income statement accounts. (Points: 25) Allocating the preliminary judgment about materiality to individual segments is necessary because evidence is accumulated for segments rather than for the financial statements as a whole. Allocating to segments establishes a tolerable misstatement amount for each segment, which helps the auditor decide the appropriate audit evidence to accumulate for each segment. Most practitioners allocate materiality to balance sheet accounts rather than income statement accounts because there are fewer balance sheet than income statement accounts 3. (TCO I) For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement 4. (TCO I) Describe how the auditor tests the classification objective for accounts receivable. (Points: 25) The classification objective is tested by reviewing the aged trial balance for material receivables from affiliates, officers, directors, or other related parties. If notes receivable or accounts that should not be classified as a current asset are included with the regular accounts, these should also be segregated. Finally, if credit balances in accounts receivable are significant, it is appropriate to reclassify them as accounts payable 5. The design of tests of details of balances for inventory is affected by audit results from multiple cycles. Identify the cycles, other than the inventory and warehousing cycle, that affect the audit of inventory 6. Describe three computer auditing techniques available to the auditor 7. (TCO K) Match seven of the terms (a-p) with the description/definitions provided below (1-7):