Deck 4: The Integrated Audit Process

Question 1

Identify at least five questions the auditor must investigate in order to being to obtain an understanding of the client.

Answer 1

Answers may vary. These are good example responses:
i) What are the company’s products? Who are the company’s customers? What are its markets?
ii) What is the company’s strategy for developing and maintaining a sustainable competitive advantage over its competition?
iii) What is the nature of the company’s operating cycle, i.e., how do they produce, market and deliver the product?
iv) What are the key processes and activities of the operating cycle?
v) What is the nature and composition of the company’s asset base and sources of financing?
vi) What is the nature of the company’s strategic relationships with outside organizations or companies?
vii) How sophisticated is the company’s information system(s) that is used to record the activities of each of the elements of the operating cycle?
viii) What is the company’s attitude and strategy for generating reliable accounting information?
ix) What financial reporting information needs to be generated and reported by the information system(s)?
x) What are the critical risks that the auditor should be aware of that reported information will not fairly present results?

Question 2

Assume you are a partner of Hornswaggle & Twitterpate, CPAs, and you are in charge of the audit of a new client, Big Computer Manufacturing Company, a leader in the personal computer industry. What information would you obtain in order to develop an understanding of the client?

Answer 2

{Note: While answers may vary, students should mention that they can review information gathered as part of the client acceptance process; use firm databases, industry Internet sites, the AICPA industry audit guides, Moody’s reports, the client’s corporate web site, marketing and investment literature, analyst reports, and corporate documents; talk to company personnel dealing with aspects of the business outside of the accounting department, talk with industry specialists within the accounting firm. }
a. Questions they will want to address include items like these:
i) What are the company’s products? Do they manufacture all of the computer parts or do they assemble computers from component parts manufactured by suppliers.
ii) Who are the company’s customers? Do they sell to wholesalers or individuals or in bulk to corporate clients?
iii) What are the company’s markets? Do they sell locally, nationally, internationally?
iv) What is the company’s strategy for developing and maintaining a sustainable competitive advantage over its competition? Who is the competition?
v) What is the nature of the company’s operating cycle, i.e., how do they produce, market and deliver the computers?
vi) What are the key processes and activities of the operating cycle?
vii) What is the nature and composition of the company’s asset base and sources of financing?
viii) What is the nature of the company’s strategic relationships with outside organizations or companies including suppliers and customers and, perhaps, competitors?
ix) How sophisticated is the company’s information system(s) that is used to record the activities of each of the elements of the operating cycle?
x) What is the company’s attitude and strategy for generating reliable accounting information?
xi) What financial reporting information needs to be generated and reported by the information system(s)?
xii) What are the critical risks that the auditor should be aware of that reported information will not fairly present results?

Question 3

Why are ethic standards particularly important to the audit profession?

Answer 3

The audit profession is unique in that, to serve the public interest, auditors must remain independent of the client who pays their fee. In addition, a great deal of individual judgment goes into the conduct of an audit; auditors must make choices and decisions that are consistent with the professional and ethical principles of the profession. Ethical standards have been developed to guide auditors in their decision making so as to avoid many common sources of bias or ethical breakdowns. The International Federation of Accountants requires that all member bodies, including the AICPA, have a professional code of conduct that defines the standards of ethical behavior for a professional accountant. These standards cover topics such as the responsibilities to clients and the public, professional integrity, and the nature of professional independence and objectivity.

Question 4

Describe the factors affecting the acceptability and retention of clients.

Question 5

Describe the quality control standards.

Question 6

Describe the preliminary planning that an auditor must do for an audit.

Question 7

What information must be included in an audit report?

Question 8

Describe three specific examples of ways a firm might address quality control.

Question 9

Assume you are a partner of Hornswaggle & Twitterpate, CPAs, and you are in charge of the audit of a new client, Big Company, which uses a calendar fiscal year. Draft an engagement letter.

Question 10

Describe the importance of the auditor's client acceptance decision.

Question 11

Identify and describe the generally accepted auditing standards.

Question 12

You are the auditor of a large retailer. Describe how the use of the internal audit department might affect your engagement planning.

Question 13

An important purpose of preliminary planning is to highlight potential problem areas or risk factors in the audit because some of these risk factors will have a broad impact on the reliability of the financial statements whereas others have an impact on individual transactions or accounts. What procedures are helpful to the auditor in identifying potential problems at the preliminary planning stage?

Question 14

Identify the two ethical standards that have the most direct affect on the conduct of the audit.

Question 15

Describe the process involved in the auditor's client acceptance decision.

Question 16

Identify some fraud risk factors for management fraud and financial reporting fraud that the auditor must consider in any audit.

Question 17

Specialists may be required to perform audit tasks that require knowledge or skills outside the auditor's abilities. For each of the following specialists, discuss how his or her services may be useful to an audit of a pharmaceutical company.
a. Chemist
b. Trial Attorney
c. Patent Attorney
d. Research Physician.

Question 18

Comment on these two opposing views. 1) Audits are systematic and should all be the same. 2) Every client is unique. Therefore every audit is completely different.

Question 19

Pat Prytain, CPA is the auditor of Gross Computers. Pat has undertaken the following and needs you to comment whether Pat's independence has been undermined.
a. Pat audits Gross Computers even though his grandfather owns 30 percent of the company's stock.
b. Pat's mother-in-law is the chief operating officer of Gross Computers.
c. Pat recommends Gross Computers' service and repair department to his other clients based on his understanding of the quality of these services.
d. Pat helps Gross Computers' by making adjusting entries to correct financial statements for any amount below a pre-established threshold.
e. Pat audits the income tax expense for Gross Computers, which is based on the taxable income computed for Gross Computers by the taxation division of Pat's firm.