Auditing And Assurance Services
17th Edition
ISBN: 9780134897431
Author: ARENS, Alvin A.
Publisher: PEARSON
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Chapter 10, Problem 22DQP
To determine
Based on the given information indicate whether the risk of fraud is increased and if yes, then which fraud condition is being indicated.
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Indicate whether the information indicates an increased risk for fraud.
If the information indicates an increased risk of fraud, indicate which fraud condition (incentives/pressures, opportunities, or attitudes/rationalization) is indicated.
During audit planning, an auditor obtained the following information:
The company has experienced low turnover in management and its internal audit function.
Significant operations are located and conducted across international borders in jurisdictions where differing business environments and cultures exist.
There are recurring attempts by management to justify marginal or inappropriate accounting on the basis of materiality.
The company’s financial performance is threatened by a high degree of competition and market saturation.
During audit planning, an auditor obtained the following information:1. The company’s controller works very hard, including evenings and weekends, andhas not taken a vacation in two years.2. The company’s board of directors includes a majority of directors who are independent of management.3. Assets and revenues are based on significant estimates that involve subjective judgments and uncertainties that are hard to corroborate.4. The company is marginally able to meet exchange listing and debt covenant requirements.5. The company’s financial performance is threatened by a high degree of competitionand market saturation.6. New accounting pronouncements have resulted in explanatory paragraphs forconsistency for the company and other firms in the industry.7. The company has experienced low turnover in management and its internal auditfunction.8. Significant operations are located and conducted across international borders injurisdictions where differing business environments and cultures…
Assume that you are an audit senior in charge of planning the audit of an entity that your firm has audited for the previous four years. During the audit planning meeting with the manager and partner in charge of the engagement, the partner noted that the entity recently adopted an IT-based accounting system to replace its manual system. The manager and partner have limited experience with IT-based accounting systems and are relying on you to help them understand the audit implications of the entity's change. Consequently, they have askd you to respond to a few concerns regarding automated accounting systems.
Required:
a. In previous years, the audit firm has relied heavily on substantive procedures as a source of audit evidence for this entity. Given that the entity now has changed its accounting system, what are some of the factors that should consider when deciding whether to move to a reliance strategy?
b. Under what conditions should the audit firm consider engaging an IT…
Chapter 10 Solutions
Auditing And Assurance Services
Ch. 10 - Prob. 1RQCh. 10 - Define misappropriation of assets and give two...Ch. 10 - Prob. 3RQCh. 10 - Prob. 4RQCh. 10 - Prob. 5RQCh. 10 - Prob. 6RQCh. 10 - Prob. 7RQCh. 10 - Prob. 8RQCh. 10 - Prob. 9RQCh. 10 - Prob. 10RQ
Ch. 10 - Prob. 11RQCh. 10 - Prob. 12RQCh. 10 - Prob. 13RQCh. 10 - Prob. 14RQCh. 10 - Prob. 15RQCh. 10 - Prob. 16RQCh. 10 - Prob. 17RQCh. 10 - Prob. 18.1MCQCh. 10 - Prob. 18.2MCQCh. 10 - Prob. 18.3MCQCh. 10 - Prob. 19.1MCQCh. 10 - Prob. 19.2MCQCh. 10 - Prob. 19.3MCQCh. 10 - Prob. 20.1MCQCh. 10 - Prob. 20.2MCQCh. 10 - Prob. 20.3MCQCh. 10 - Prob. 21.1MCQCh. 10 - Prob. 21.2MCQCh. 10 - Prob. 21.3MCQCh. 10 - Prob. 22DQPCh. 10 - Prob. 23DQPCh. 10 - Prob. 24DQPCh. 10 - Prob. 26DQPCh. 10 - Prob. 27DQPCh. 10 - Prob. 28DQPCh. 10 - Prob. 30DQPCh. 10 - Prob. 31DQPCh. 10 - Prob. 32DQPCh. 10 - Prob. 33DQP
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- Assume that you are an audit senior in charge of planning the audit of an entity that your firm has audited for the previous four years. During the audit planning meeting with the manager and partner in charge of the engagement, the partner noted that the entity recently adopted an IT-based accounting system to replace its manual system. The manager and partner have limited experience with IT-based accounting systems and are relying on you to help them understand the audit implications of the entity's change. Consequently, they have askd you to respond to a few concerns regarding automated accounting systems. a. In previous years, the audit firm has relied heavily on substantive procedures as a source of audit evidence for this entity. Given that the entity now has changed its accounting system, what are some of the factors that should consider when deciding whether to move to a reliance strategy? b. Under what conditions should the audit firm consider engaging an IT specialist to…arrow_forwardConsider the following independent and material situations:(i) The client, with reasonable justification, has changed its method of accounting for all factory and office equipment. The effect of this change is not material to the current year financial reports, but is likely to have a material effect in future years. The client will not disclose this change because of the immaterial effect on the current year financial reports.(ii) The audit was staffed primarily by three new audit assistants and a relatively inexperienced audit senior. The audit manager found numerous errors during the conduct of the audit and developed very long “to-do” lists for all members of the audit team to complete before the audit was concluded. Although the manager originally doubted the staff’s understanding of the audit procedures, by the time the audit was finished, he concluded that the new auditors did understand the client and the audit process and that no material errors existed in the financial…arrow_forwardThe internal control procedures in Dayton Company result in the following provisions.Identify the principles of internal control that are being followed in each case. (a) Employees who have physical custody of assets do not have access to the accounting records. Select the principle of internal control Human resource controlsSegregation of dutiesEstablishment of responsibilityPhysical controlsIndependent internal verificationDocumentation procedures (b) Each month, the assets on hand are compared to the accounting records by an internal auditor. Select the principle of internal control Establishment of responsibilityHuman resource controlsPhysical controlsIndependent internal verificationDocumentation proceduresSegregation of duties (c) A prenumbered shipping document is prepared for each shipment of goods to customers. Select the principle of…arrow_forward
- An audit manager has led the audit of Topaz Ltd for the last three years. Evidence of a fraud involving the falsification of timesheets and supplier invoices to a significant value have been found. Senior management within Topaz are implicated. Discuss the extent to which the external auditor should be criticised for not discovering this fraud.arrow_forwardaccountant reviews the report from the internal audit function that ensures the company's internal controls and risk management policies are functioning properly. According to report, there were discrepancies in the internal controls that are not in conformance with the organizational policy and applicable law. The accountant suspects that the CEO is pezzling approximately $30,000 per quarter. What should the accountant do about this discrepancy? te accountant fails to act on this issue, what standard according to the IMA Statement of Ethical Professifal Practice does the accountant violate? the toolbar, press ALT + F10 (PC) or ALT + FN + F10 (Mac).arrow_forwardPlease answer with reason for all why the option is correct and why the other options are incorrect Which of the following matters would an auditor most likely ask client management to affirm in an audit representation letter? Communications with those charged with governance concerning weaknesses in internal control Plans to acquire or merge with other entities in the subsequent year The reasonableness of significant assumptions used in making accounting estimates Management's acknowledgment of its responsibility for the detection of employee fraudarrow_forward
- You are an audit supervisor assigned to a new client which is listed on a Stock Exchange. You visited the corporate headquarters to become acquainted with key personnel and to conduct a preliminary review of the company’s accounting policies, controls, and systems. During this visit, (b) You recognized the treasurer who was convicted of fraud several years ago. Identify the problems and explain them in relation to the internal environment.arrow_forwardBelow are ten independent risk factors:1. The client lacks sufficient working capital to continue operations.2. The client fails to detect employee theft of inventory from the warehouse becausethere are no restrictions on warehouse access and the client does not reconcileinventory on hand to recorded amounts on a timely basis.3. The company is publicly traded.4. The auditor has identified numerous material misstatements during prior yearaudit engagements.5. The assigned staff on the audit engagement lack the necessary skills to identifyactual errors in an account balance when examining audit evidence accumulated.6. The client is one of the industry’s largest based on its size and market share.7. The client engages in several material transactions with entities owned by familymembers of several of the client’s senior executives.8. The allowance for doubtful accounts is based on significant assumptions made bymanagement.9. The audit program omits several necessary audit procedures.10.…arrow_forwardAn IT auditor is conducting data analysis procedures on an employee expense report file and notices several expenses for $24.99 from the same individual. The company’s policy requires that any expenses that are under $25.00 do not require a receipt. The IT auditor should: [SELECT ALL THAT APPLY a) Maintain professional skepticism and investigate these transactions further b) Pass on investigating these items further, focusing on higher dollar amounts c) Evaluate the business process approval controls, and related procedures d) Discuss fraud awareness and detection programs with management to gain an understanding of management’s commitment to fraud prevention and related entity-level anti-fraud controls.arrow_forward
- Which of the following statements would most likely appear in an auditor's engagement letter? a. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses. b. The auditor's preliminary assessment of the risk factors relating to misstatements arising from fraudulent financial reporting. c. A reminder that management is responsible for illegal acts committed by employees. d. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider necessary to complete the engagement. e. Required evidence is needed to issue a qualified opinion.arrow_forwardIn the normal course of performing their responsibilities, auditors often conduct audits or reviewsof the following:1. The computer operations of a large corporation to evaluate whether the internal controlsare likely to prevent misstatements in accounting and operating data.2. Financial statements for use by stockholders when there is an internal audit staff.3. A bond indenture agreement to make sure a company is following all requirements of thecontract.4. Internal controls at a casino to ensure the casino is in compliance with federal and stateregulations.5. Computer operations of a corporation to evaluate whether the computer center is beingoperated as efficiently as possible.6. Annual statements for the use of management.7. Operations of the IRS to determine whether the internal revenue agents are using theirtime efficiently in conducting audits.8. Statements for bankers and other creditors when the client is too small to have an auditstaff.9. Financial statements of a branch of…arrow_forwardThe PCAOB issues audit practice alerts to highlight new, emerging, or otherwise noteworthy circumstances. Revenue is the largest account in the financial statements for many companies, and many fraudulent financial reporting cases have involved the intentional overstatement of revenue. For these reasons, the audit of revenue is often a significant focus of PCAOB inspections. PCAOB Audit Staff Practice Alert No. 12, Matters Related to Auditing Revenue in an Audit of Financial Statements, provides guidance to auditors and also highlights several deficiencies in the audit of revenue as identified through inspections. Download the practice alert at www.pcaobus.org to answer the following questions: What are the deficiencies identified by the PCAOB related to the use of substantive analytical procedures in testing revenue? What sources of information does the PCAOB recommend auditors use to develop plausible expectations of revenue when performing substantive analytical procedures? What…arrow_forward
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