Audit 11

Question 1

An auditor assess control because it

Answer 1

Affects the level of Detection Risk that the auditor may accept

Question 2

Fraud - when and to whom are you supposed to report if you come across it - at both low levels and at high management levels

Answer 2

• If it is at a low level and the amounts are inconsequential - it is sufficient to report it to a level of management above the one it occurred at. Would NOT require disclosure to senior management or the audit committee.
• • you are required to report all knowledge or suspicion of fraud to the client’s senior management and its audit committee - but would not ordinarily report it to regulators, SEC, or other officials

Question 3

What is meant by the term - GAAS

Answer 3

these are standards that provide a way of measuring the quality and adequacy of work being performed

Question 4

During planning of an audit what are some of the things that an auditor will do

Answer 4

• make preliminary judgements about materiality

Question 5

When do you get an engagement letter and when do you get written representations

Answer 5

Engagement letter - after you decide to take the audit engagement

Written rep - at the end of the engagement.

Question 6

What are examples of items with inherent risk

Answer 6

• assets highly susceptible to theft
• complex or high volume transactions
• assets requiring significant estimates or judgement to determine their value

Question 7

New innovation is introduced and therefore demand has declined only slightly - Risk? Why?

Answer 7

This is a relevant assertion level risk

• new tech may not be well understood and make warranty and liability estimates difficult

Question 8

New federal regulations threaten industry profitability

- Risk? Why?

Answer 8

F/S level risk

• changes to conform to compliance requirements may not be done correctly

Question 9

CEO and senior management are compensated on bonus tied to company net profits
- Risk? Why?

Answer 9

F/S level risk

• Pressure to meet bonus requirements might tempt them to misstate statements

Question 10

CEO sets goal of 25% increase in sales.- Risk? Why?

Answer 10

F/S level risk

• unrealistic goals may motivate employees to report false reports

Question 11

Prior firm it upset they lost audit - but there were no disagreements indicated
- Risk? Why?

Answer 11

No risk

No need to change your audit plan

Question 12

Part of the facility seem to require some minor repair

- Risk? Why?

Answer 12

No unforeseen risk

• This is not an extraordinary neglect of physical assets. If it was - it might indicate a going concern issue

minor repair is not out of the ordinary

Question 13

Several boats in inventory are much dustier than others

• Risk? Why?

Answer 13

ASSERTION level risk - inventory

• suggest possible obsolescence - the concern is limited to inventory valuation

Question 14

Clerical employees are complaining about their rate of pay

• Risk? Why?

Answer 14

• No risk
• Don’t need to change your audit plan - a little complaining is common
• unless there are picket lines or imminent strikes -
• If employees are committing fraud - they are more likely to be careful to appear innocuous

Question 15

A payroll clerk was caught embezzling. - discovered by company and dealt with

• Risk? Why?

Answer 15

• A F/S level risk

- Known weaknesses in I/C suggest the unknown internal control weaknesses exist

Question 16

CEO says that he is confident the payroll scheme was an isolated incidence.
- Risk? Why?

Answer 16

• F/S level risk

- This suggests that management is not very focused on internal controls causing concern about the tone at the top

Question 17

First year co. operated at a profit B/C received increased fed and state funding .

• What affect on audit risk of any?

Answer 17

decreased audit risk

Question 18

BoD, majority stake holder, and CEO = same person- What affect on audit risk of any?

Answer 18

Increased audit risk

Question 19

Internal Audit reports to controller who reports to CEO

• What affect on audit risk of any?

Answer 19

Increased audit risk - should report directly to BoD

Question 20

Acct dept. has experienced high rate of turnover of key personnel.- What affect on audit risk of any?

Answer 20

-Increased audit risk