DEVRY UNIVERSITY ACCT 555 FINAL EXAM. QUESTIONS AND ANSWERS.
DEVRY UNIVERSITY ACCT 555 FINAL EXAM.
ACCT 555
DEVRY UNIVERSITY ACCT 555 FINAL EXAM.
... [Show More] QUESTIONS AND ANSWERS. (Graded A)
1. (TCO B) An auditor was unable to obtain sufficient appropriate audit evidence concerning certain transactions due to an inadequacy in the entity's accounting records. The auditor would choose between issuing a(an): (Points : 5)
Disclaimer of opinion and a qualified opinion.
Qualified opinion and an unmodified opinion with an emphasis-of-matter paragraph.
Unqualified opinion with an emphasis-of-matter paragraph and an adverse opinion.
Adverse opinion and a disclaimer of opinion.
Question 2. (TCO K) An auditor should consider which of the following when evaluating the ability of a company to continue as a going concern? (Points : 5)
A lawsuit for which judgment is not anticipated for 18 months.
Management's plans for disposal of assets.
Future assurance services.
Audit fees.
Question 3. (TCO A) An auditor's independence is considered impaired if the auditor has: (Points : 5)
A joint, closely-held business investment with the client that is material to the auditor's net worth.
An automobile loan from a client bank, collateralized by the automobile.
A mortgage loan, executed with a financial institution client on March 1,1990, that is material to the auditor's net worth.
An immaterial, indirect financial interest in a client.
Question 4. (TCO H) Which of the following should be included as a written representation from management? (Points : 5)
The belief that the financial statements are completely accurate in all respects.
The belief that misstatements identified by the auditor and corrected are material.
The belief that the auditor is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles.
The belief that misstatements identified by the auditor and not corrected are immaterial.
Question 5. (TCO E) An auditor would most likely be concerned with internal controls that provide reasonable assurance about the: (Points : 5)
Methods of assigning production tasks to employees.
Appropriate prices the entity should charge for its products.
Efficiency of management's decision-making process.
Entity's ability to process and summarize financial data
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Question 1. (TCO A) In performing an ATTEST Engagement A CPA would be required to do what as part of the engagement? (Points : 19)
a. Services performed in accordance with Statements on Auditing Standards (SASs)
b. Services performed in accordance with Statements on Standards for Accounting and Review Services (SSARSs)
c. Services performed in accordance with the Statement on Standards for Consulting Services (SSCS), such as engagements in which the practitioner's role is solely to assist the client (for example, acting as the company accountant in preparing information other than financial statements), or engagements in which a practitioner is engaged to testify as an expert witness in accounting, auditing, taxation, or other matters, given certain stipulated facts.
d. Engagements in which the practitioner is engaged to advocate a client's position—for example, tax matters being reviewed by the Internal Revenue Service
e. Tax engagements in which a practitioner is engaged to prepare tax returns or provide tax advice
2. (TCO B) When a CPA performs an Audit the Client is always looking to receive a “CLEAN OPINION” or an Unqualified Opinion. Explain what your client must do for a CPA to justify that Unqualified Opinion? (Points : 19)
An Auditor gives a Clean opinion or Unqualified Opinion when he or she does not have any significant reservation in respect of matters contained in the Financial Statements. The most frequent type of report is referred to as the "Unqualified Opinion", and is regarded by many as the equivalent of a "clean bill of health" to a patient, which has led many to call it the "Clean Opinion", but in reality it is not a clean bill of health, because the Auditor can only provide reasonable assurance regarding the Financial Statements, not the health of the company itself, or the integrity of company records not part of the foundation of the Financial Statements.
An Unqualified Opinion indicates the following –
(1) The Financial Statements have been prepared using the Generally Accepted Accounting Principles which have been consistently applied;
(2) The Financial Statements comply with relevant statutory requirements and regulations;
(3) There is adequate disclosure of all material matters relevant to the proper presentation of the financial information subject to statutory requirements, where applicable;
(4) Any changes in the accounting principles or in the method of their application and the effects thereof have been properly determined and disclosed in the Financial Statements.
3. (TCO C) – Based upon the below 4 situations – explain your position of “why” or “why not” the following circumstances would have violated the professions ethical standards when you are a practicing CPA?
- 1. Expressed an unmodified opinion on the current year’s financial statements when fees for the prior year’s audit were unpaid.
- 2. Recommended a controller’s position description with candidate specifications to an audit client.
- 3. Purchased a CPA firm’s practice of monthly write-ups for a percentage of fees to be received over a 3 year period.
- 4. Made arrangements with a financial institution to collect notes issued by a client in payment of fees due for the current year’s audit. (Points : 19)
Audit fees that are long past due take on the characteristics of a loan under Conduct Rule 101. Independence is impaired if billed or unbilled fees, or a note arising from the fees, for client services rendered more than 1 year prior to the current year’s report date, remain unpaid when the current year’s report is issued. However, this ruling does not apply if the client is in bankruptcy. Moreover, long overdue fees do not preclude the CPA from performing services not requiring independence.
4. (TCO D) Discuss five steps individual practicing auditors can take to minimize their legal liability. (Points : 19)
The following steps can be taken to minimize legal liability against auditors:
At the professional level:
• Establishing stronger auditing and attestation standards.
• Continually updating the Code of Professional Conduct and sanctioning members who do not comply with it.
• Educating users.
At the firm level:
• Instituting sound quality control and review procedures.
• Ensuring that members of the firm are independent.
• Following sound client acceptance and retention procedures.
• Being alert for risk factors that may result in lawsuits.
• Performing and documenting work diligently.
5. (TCO F) Sarbanes Oxley requires that per Section 404 that Internal Controls within a publicly held company are to be reviewed, evaluated and tested at year end to insure that adequate controls are in place. In addition to understanding the Internal Controls present within your client’s company, the auditor must also evaluate whether these controls are in place, and implemented. How does an auditor evaluate these controls to see that they are working and in place?(Points : 19)
Internal controls may be described in terms of:
a) the pertinent objective or financial statement assertion; and
b) the nature of the control activity itself.
Objective or assertions categorization
Controls may be defined against the particular financial statement assertion to which they relate. There are five such assertions:
1. Existence/Occurrence/Validity: Only valid or authorized transactions are processed.
2. Completeness: All transactions are processed that should be.
3. Rights and obligations: Assets are the rights of the organization and the liabilities are its obligations as of a given date.
4. Valuation: Transactions are valued accurately using the proper methodology, such as a specified means of computation or formula.
5. Presentation and disclosure: Accounts and disclosures are properly described in the financial statements of the organization.
Activity categorization
Control activities may also be explained by the type or nature of activity. These include (but are not limited to):
• Segregation of Duties – separating authorization, custody, and record keeping roles to prevent fraud or error by one person.
• Authorization of transactions – review of particular transactions by an appropriate person.
• Retention of records – maintaining documentation to substantiate transactions.
• Supervision or monitoring of operations – observation or review of ongoing operational activity.
• Physical safeguards – usage of cameras, locks, physical barriers, etc. to protect property, such as merchandise inventory.
• Top-level reviews-analysis of actual results versus organizational goals or plans, periodic and regular operational reviews, metrics, and other Key Performance Indicators(KPIs).
• IT general controls – Controls related to: a) Security, to ensure access to systems and data is restricted to authorized personnel, such as usage of passwords and review of access logs; and b) Change management, to ensure program code is properly controlled, such as separation of production and test environments, system and user testing of changes prior to acceptance, and controls over migration of code into production.
Control precision describes the alignment or correlation between a particular control procedure and a given control objective or risk. A control with direct impact on the achievement of an objective (or mitigation of a risk) is said to be more precise than one with indirect impact on the objective or risk. Precision is distinct from sufficiency; that is, multiple controls with varying degrees of precision may be involved in achieving a control objective or mitigating a risk.
• IT application controls – Controls over information processing enforced by IT applications, such as edit checks to validate data entry, accounting for transactions in numerical sequences, and comparing file totals with control accounts.
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Question 1. (TCO E) What is COSO? Describe the 5 elements of COSO’s Internal Control-Integrated Framework. Provide an example of each of those components and explain why they are important in providing “Reliable Financial Reporting” for a company. Please provide a complete answer for full points. (Points : 30)
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a joint initiative of five private sector organizations, established in the United States, dedicated to providing thought leadership to executive management and governance entities on critical aspects of organizational governance, business ethics, internal control, enterprise risk management, fraud, and financial reporting.
Five Elements of COSO’s Internal Control-Integrated Framework are:
- Control Environment: relates to the control consciousness of the people within the organization. The control environment is the basis for all other components of internal control. The reason why it is important in providing “Reliable Financial Reporting” for a company is because it related to the control consciousness of the people.
Control environment factors include the integrity, ethical values etc.
- Risk assessment: refers to the organization's identification, analysis, and management of the risks that are related to financial statement preparation, in order to ensure that financial statements are presented fairly and in compliance with generally accepted accounting principles (GAAP). The reason why it is important in providing “Reliable Financial Reporting” for a company is it deals with the identification and analyzing of risks because Risk assessment factors include auditors risk assessment and client management’s risk assessment.
- Control activities: the organization's policies and procedures which help ensure that necessary actions are taken to address the potential risks involved in accomplishing the entity's objectives. The reason why it is important in providing “Reliable Financial Reporting” for a company is because it helps in addressing that the steps are taken in regard to potential risks. Control activities factors include adequate segregation of duties, proper authorization of transactions and activities.
- Information and communication: focuses "on the nature and quality of information needed for effective control, the systems used to develop such information, and reports necessary to communicate it effectively" (Internal Control Issues). The reason why it is important in providing “Reliable Financial Reporting” for a company is because its focus is on the quality and nature of the financial information.
Information and communication factors include a simple computerized accounting system, active involvement by the owner.
- Monitoring: involves assessing the quality and effectiveness of the organizations internal control process over time. It includes assessing the design and operation of controls, and assessing compliance with policies and procedures. It also provides for the implementation of appropriate actions when necessary. The reason why it is important in providing “Reliable Financial Reporting” for a company is because it deals with the effectiveness of the organization.
Monitoring factors includes internal audit department, internal audit independence
2. (TCO G) Business risk must be assessed in performing an audit.
(a) Define business risk in association with an audit and describe several sources of such risk.
(b) How does business risk relate to the performance of preliminary analytical procedures in an audit?
(c) There are four major areas in planning an audit engagement and there are subparts to each of the four major areas. Please identify the four major areas and the subparts that are associated with the major areas. (Points : 30)
A) Business risks are factors within and out of the organization that could hinder and also affect the manner in which the company approaches their organizational goals and also the overall missions that the organization has in place. Therefore, the business risks are a full organization problem. There are various business risks that are associated with the audit process. One of such business risks is Inadequacy in the finances of the company. The problem can be caused when the organization does not have the enough funds to drive the audit process and also take care of their day to day activities. The risk can also be accrued when the business does not have the capability to afford the timely audit fees for the CPAs who are involved in the whole process.
B) The business risks affect the manner in which the whole corporation engages in various activities. Therefore, the lack of funds in the company will affect the way in which they approach the audit process. Due to a lack of funds the business might not afford a good CPA to conduct the process. On the other hand, the business will not have the correct and required facilities that are supposed to be scrutinized and used in the course of the audit.
C) The audit planning process has different phases that are involved in ensuring that the correct measures are taken into consideration and also enacted. The first stage of the planning process thereof is the acceptance of the client and performance of the initial audit. This phase includes the sending of a letter of engagement top the customer and the determination of the usefulness of other experts and also the manner in which the financial statements will be used in the whole process.
The second phase is the analysis of the clients business and industry. This step requires the CPA to visit the clients company, review the type of industry and the accounting principles which are about the industry and also what kinds of departments require disclosure on the system.
The third step in the planning process, on the other hand, is the assessment of the business risks that are available. The phase entails the scrutinization of the management risks and the various procedures.
The final stage, on the other hand, is the performance of the initial analytical methods where the CPA addresses the different ratios of the company about the competitors in the same industry.
3. (TCO H) Audit Risk consists of inherent risk, control risk, and detection risk.
(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)
Inherent Risk: Inherent Risk is the risk that a material misstatement may be present in financial statements arising out of error or omission due to factors other than failure of controls. The degree of inherent risk is high when more judgment and estimation is involved or the business transactions are quite complicated.
Control Risk: Control Risk is the risk that a material misstatement may be present in financial statements because of the lack of or failure in the operation of significant controls in the company. The degree of control risk is high in those cases where the organization does not have proper internal controls to prevent and detect cases of fraud and error in financial statements.
Detection Risk: “Detection Risk is the risk that the auditors fail to detect a material misstatement in the financial statements.”
1) The statement is false. The control risk is always present in the operations of entity. The risk can be decreased to a minimum level by having effective controls in place, but it is not possible to make it zero. There will be some irregularities which will stay in the business and won’t make the risk as perfect zero.
2) The statement is true. “Detection Risk is a function of the effectiveness of an audit procedure and of its application by the auditor.” Detection Risk measures the effectiveness of the test implemented by the auditor, sample size taken by him.
3) The statement is false. Cash has lower inherent risk than coal because the measurement process used for cash is routine and factual. Cash has lower risk because no business entity would leave the cash unguarded. Cash can be easily and precisely measured than coal. On the other hand, coal needs an estimation of volume, average cost.
4) The statement is false. Inherent Risk will be higher in COSTCO store because in COSTCO store the payment is made in bulk and at different counters. So, it will not be possible to detect all the risk. In the cell phone store the control points will not be widespread, so the possibility of risk will be little less and generally the inventory of cell phone is quite limited and maintained properly.
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)
(D) Inflated sales for the year – could it be detected by a sales-cut-off test – Because Sales cutoff tests are designed to detect the client’s manipulation of sales. By examining recorded sales for several days before and after the balance sheet date and comparing them with sales invoices and shipping documents, the auditor may detect the recording of a sale in a period other than that in which title passed.
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)
(D) One of the major problems in a computer system is that incompatible functions may be performed by the same individual. In order to have better controls and to have proper segregation of the duties in computer system computer access log should be maintained which will clearly mention the person who has accessed the particular file, or the person who has performed the particular function. Access log is basically the list of all the requests for individual files that people have requested along with the reason why they need this particular file.
This will keep a check and will not allow the single persons to perform incompatible function, resulting into proper segregation of duty and better/accurate financial statements.
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)
As a senior auditor of WWZ co, I have completed the testing of all the accounts. Prior to the issue of report, the five procedures that must be performed are as follows:
- Analytical Procedure
Analytical procedures help in understanding the business of client and will also help in understanding the changes in the business. In this procedure auditor will identify the potential risks area in order to plan other audit procedures. In analytical procedures auditor will consider the different types of potential misstatements that may take place.
- Enquiry and Confirmation directly from third party
In this audit procedure, auditor enquires and confirms directly from the third party about their dealing with the company. Auditor will perform the following steps in case he/she wanted to enquire or confirm things directly from third party.
- Inspection of records or assets
Inspection of records, documents or assets provides auditor with the audit evidences of varying degrees of reliability depending on the nature and scope.
As an auditor it is my responsibility to inspect the records, documents and assets of WWZ co before finalizing the audit report.
- Observation
Observation consists of lolling at the process or procedures which are performed by others (management). As an auditor it is my responsibility to observe the procedure of inventory counting as conducted by the management.
- Recalculation and Reperformance
In order to confirm whether the figures shown in the financial statements are accurate or not, auditor can recalculate few calculations. Recalculation can also be done in order to check the internal controls of the company. If there is any discrepancy in the calculation of the financial information means the financial statements does not depict the true and fair view and qualified reports needs to be issued.
As an auditor it is my responsibility to recalculate the calculations of those items in which there are changes of fraud so as provide independent and accurate report.
- Documentation
Proper working papers validate professionalism and document the work that was done from the preliminary stages of a project audit through the final report.
Audit working papers also show whether due professional care was exercised and illustrate compliance with professional auditing standards. Careful documentation of work performed is necessary to support the findings, recommendations, and opinions contained in the final audit report or close-out letter.
As an auditor it is my responsibility to document all the audit evidences and all the audit procedures performed by me so as to represent my work in case of doubt and also to cross check my working in case any changes are made by the management. [Show Less]