CABRERA APPLIED AUDITING SOLUTION MANUAL LATEST VERSION
5 views 0 purchase
Course
APPLIED AUDITING
Institution
APPLIED AUDITING
Auditor’s reports are important to users of financial statements because they
inform users of the auditor’s opinion as to whether or not the statements are fairly
stated or whether no conclusion can be made with regard to the fairness of their
presentation. Users especially look for any devi...
cabrera applied auditing solution manual latest ve
Written for
APPLIED AUDITING
All documents for this subject (1)
Seller
Follow
THEEXCELLENCELIBRARY
Reviews received
Content preview
CHAPTER
OVERVIEW OF THE
1 AUDIT PROCESS
1-1. Auditor’s reports are important to users of financial statements because they
inform users of the auditor’s opinion as to whether or not the statements are fairly
stated or whether no conclusion can be made with regard to the fairness of their
presentation. Users especially look for any deviation from the wording of the
standard unqualified report and the reasons and implications of such deviations.
1-2. Other requirements for an effective audit are:
a. Comprehensive knowledge of GAAP;
b. Understanding of internal control concepts;
c. Understanding of the client’s unique system of internal control; and
d. Knowledge of evidence gathering and evaluation methodology.
1-3. The scope paragraph tells what the auditor did, and whether or not the
examination was conducted in accordance with generally accepted auditing
standards (GAAS). The opinion paragraph tells what the auditor found, and
whether or not the financial statements conform to generally accepted accounting
principles (GAAP) in all material respects.
1-4. An engagement letter is the agreement or understanding between the CPA and
his/her client concerning the nature of the engagement. It provides protection for
the CPA in the event of subsequent legal action alleging negligence or breach of
contract. By committing the agreement to writing, the engagement letter also
minimizes future misunderstandings between the CPA and client concerning the
services to be performed by the CPA.
1-5. The audit program is an important part of the systematic approach to auditing, and
demonstrates that the audit was properly planned.
1-6. The pre-audit conference should be attended by all members of the audit team,
including the partner in charge of the examination. The conference should cover
the following areas:
a. Nature of the client’s activities;
b. General nature of the client’s system of internal control;
c. Unique accounting practices;
d. Duties of individual audit team members; and
e. Known areas of high audit risk.
,1-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
1-7. The main feature distinguishing the interim audit phase from the final audit phase
is the focal point. In the interim audit, the primary focus is on testing the client’s
internal controls as a means for further reduction of assessed control risk. In the
final audit, the auditor is primarily concerned with the examination of transactions
and balances.
1-8. The accuracy of transactions and balances is a function of the reliability of the
information system. An effective control environment, accounting system, and
control activities (the information system), together with a system of monitoring
such that controls adapt to a changing environment, serves to produce accurate
financial data. Weak controls are more likely to produce inaccurate financial data.
By first testing the information system, the auditor is able to increase or decrease
the nature, timing, and extent of transaction and balance testing according to
his/her assessment of control risk.
1-9. The ten generally accepted auditing standards, along with the related statements
on auditing standards, provide a framework by defining the requisite quality to be
achieved in performing an audit.
1-10. Attestation refers to an expert communicating a conclusion about the reliability of
someone else’s assertion. Auditing is a form of attestation in that the auditor
communicates, to third party financial statement users, his/her conclusions
regarding the fairness of management’s assertions contained in the financial
statements. The independent auditor is considered an “expert” in both accounting
and auditing.
1-11. In planning an audit, an auditor must be familiar with the client’s industry,
business activities, accounting system, and policies and procedures. Once the
assertions to be tested have been identified, the auditor must assess the risk of
their being misstated. Auditors must be reasonably sure of issuing an appropriate
opinion. Hence, they must consider the risk of misstatements and the various
procedures available for gathering audit evidence as a basis for forming an
opinion. Audit planning includes designing the specific procedures to be
performed and assigning personnel to work on the audit.
The audit report indicates that auditors conduct audits in accordance with
generally accepted auditing standards. Further, the report communicates the role
of risk in the audit process by stating that those standards require auditors to plan
and perform the audit to obtain reasonable assurance about (not to prove) whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. Hence, an audit involves risk. Finally, auditors express an
opinion, not a guarantee. However, they believe that their audit provides a
reasonable basis for their opinion.
, Overview of the Audit Process 1-3
1-12. Auditing standards indicate that auditors should report major issues discussed with
the entity’s management prior to being retained as auditor, including discussions
regarding the application of accounting principles and auditing standards.
Discussion of such matters may place pressure on the auditor to yield to
management’s view. Making the audit committee members aware of such matters
should enable them to better monitor the auditor’s independence. Standards do
not preclude clients from making suggestions about audit staff. Clients frequently
make requests to have persons on the audit who have experience in the industry.
If a client requests that minority persons not be assigned to an audit, however, the
auditor must carefully consider the ethical implications of that request.
1-13. Auditing standards require auditors associated with financial statements to issue a
report on them. An auditor is associated with financial statements when he or she
(a) “has consented to the use of his [her] name in a report, document, or written
communication containing the statements,” or (b) has prepared or assisted in
preparing the financial statements. An auditor who prepares or assists in
preparing financial statements is associated even if his or her name is not included
with the statements. Typing the financial statements on plain paper rather than on
the auditor’s letterhead therefore cannot be used to avoid association and the
requirement to issue a report.
1-14. In determining whether financial statements are presented fairly in conformity
with GAAP, the auditor should consider whether:
The accounting principles selected and applied have general acceptance. The
accounting principles followed in preparing the financial statements must
have general acceptance, which means that the principles must be GAAP.
Auditing standards define GAAP as a “technical accounting term which
encompasses the conventions, rules, and procedures necessary to define
accepted accounting practice at a particular time.” No single reference source
exists for GAAP. Rather, auditing standards establish a hierarchy of sources
to be followed when determining which principle applies to a particular
situation.
The accounting principles are appropriate in the circumstances.
The statements contain appropriate disclosures.
The financial statements reflect the underlying events and transactions in a
manner that presents the financial position, results of operations, and changes
in financial position within a range of acceptable limits; that is, limits that are
reasonable and practicable to attain in financial statements.
1-15. Auditing standards require the auditor to disclose the effects of deviations from
GAAP on the financial statements. As a result, clients often choose to adjust the
financial statements for the deviations.
1-16. An auditor may not offer reasons for the lack of independence since such
explanations might mitigate the lack of independence in the view of the reader.
, CHAPTER
2 AUDIT PLANNING
2-1. Audit risk: The risk that the auditor may unknowingly fail to appropriately
modify his/her opinion of financial statements that are materially misstated.
Inherent risk: Relates to the susceptibility of an account balance or class of
transactions to error that could be material. . .assuming that there were no related
internal controls.
Control risk: The risk that material errors or irregularities are not prevented or
detected by the system of internal control.
Detection risk: The risk that errors or irregularities which are not prevented or
detected by the system of internal control, are not detected by the independent
auditor.
2-2. Study of the business and industry, and application of analytical procedures during
the planning stage of the audit assist in evaluating inherent risk. These procedures
may permit the auditor to assess inherent risk below the initial 100% assumed
level.
2-3. Sources of business and industry information are the following:
a. Management inquiry
b. Permanent audit workpaper file
c. Internal client documents (e.g. correspondence files, minutes, accounting
manuals, and policy and procedures manuals)
d. PICPA audit and accounting guides
e. Industry trade publications
f. Government publications
g. Credit reports (Dunn & Bradstreet, banks, etc.)
h. Computer data bases
i. Business periodicals
2-4. a. The audit risk model is
Audit risk (AR) = Inherent risk (IR) x Control risk (CR) x Detection risk (DR)
b. The audit risk model is useful in managing audit risk for assertions. By
determining planned audit risk for an assertion, assessing inherent and control
risks, an auditor can determine the allowable detection risk (the amount of
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller THEEXCELLENCELIBRARY. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $37.99. You're not tied to anything after your purchase.
