Exam 5: Audit Responsibilities and Objectives

Frank has come to you because he is worried about recovering the cost of his share of a law firm partnership. His partner, Jennifer, is exercising the "shotgun" clause in their partnership agreement and wants to buy him out. Over the last two years, Frank and Jennifer have had numerous battles over the way that Frank handles his accounts receivable. Frank is lenient with his customers and has converted many of his accounts into long-term notes extending two and three years into the future. He is confident that these amounts are collectible because every one of his clients continues to make small monthly payments. Frank thinks that Jennifer may have been hiding profits from him and collecting some of her accounts in cash. He wants you to audit the books so that he can figure out what the "true" profits are and how much Jennifer should pay him for his share of the partnership. Required: A) Explain to Frank what you would be able to do during the audit engagement. B) List the management assertions that may have been violated. Justify your answer.

Which of the following is an example of a direct-effect illegal act that could be performed by a client? Violation of

At what point during the audit should the auditor conduct an independence threat analysis?

After the auditor has completed all the procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on

Management assertions are

What is one of the first things that an auditor would do upon discovering an illegal act at an audit client?

Georgina was working as the part-time accountant for three small businesses. Whenever she could, she pocketed cash and neglected to record the sale in the sales system. The general transaction-related audit objective affected by her actions is

When considering each material type (or class) of transaction during the audit, which general transaction-related audit objectives are assessed during the audit?

Big Bank had a program failure occur on Sunday night due to a maintenance program error. Transaction posting was interrupted, with several errors occurring in posting to the master files. Although sales had been posted to the general ledger, individual accounts were not recorded until subsequent days. The general transaction-related audit objective affected by this activity is

Bratlett Company has purchased all of the shares of another company but does not want to consolidate its financial statements. Management has drafted a rather long and confusing note to the financial statements that describes the transaction and states that debt has been acquired in a foreign currency. In your view, the transaction and its effect on the company and the accounts have not been properly disclosed. Required: List the audit objectives about presentation and disclosure that have been affected and explain how they are affected.

In May 2015, the firm of Chang and Crown (C&C) became the auditors of Laua Limited (LL) for the fiscal year ended December 31, 2014. LL's shareholders and Board approved the change from its previous audit firm on the recommendation of LL's senior management. One of the new board members is a bit confused about management's role with respect to the financial statements and thought that Chang and Crown would be preparing the financial statements. He was also glad that the auditors would be able to help prevent illegal acts and fraud. Required: A) Distinguish between management's responsibility and the auditor's responsibility for the financial statements under audit. B) Explain to the board member why the auditor does NOT help prevent illegal acts and fraud. What is the role of the auditor with respect to illegal acts and fraud?

Heavy Manufacturing Company is in the business of making steel plates, forming heavy metal slabs, and drilling and scoring metals. The company recently upgraded many of its forming machines. Five machines were purchased on four different invoices. Unfortunately, one of the invoices was recorded twice, resulting in five invoices being recorded. The general balance-related audit objective affected by this activity is

Which of the following is an example of fraudulent financial reporting (management fraud)?

Analytical procedures are those that

Your PA firm has been auditing Ontario Pulp Company for three years. Two years ago, a letter was received from the provincial government informing them that they needed to reduce the level of contaminants that they were releasing into the air and into local waterways. The deadline for this reduction is three months from today. The letter indicates significant fines (several hundred thousand dollars) if the targets are not met. Alternatively, the Company will need to shut down operations until the targets are met. During your audit planning process, management informed you that they have not taken any action but plan to start construction of the new pollution devices next month. Required: Explain the impact the above situation has upon your audit planning process.

The auditor's assessment relating to risk of material misstatement in financial statements is a part of

Tests of details of balances are specific procedures intended to

Professional skepticism during the financial statement audit requires an appropriate state of mind, being impartial and objective and continuing to be throughout the whole audit engagement. Which of the following illustrates an appropriate state of mind?

Frankinfurter Limited decided that it wanted to improve earnings. To do this, it understated its expenses by omitting unpaid expenses from the accrued liabilities account at year end. Which management assertion has been violated?

Auditing standards regarding the detection of illegal acts clearly state that the auditor provides