If the Gobblecakes bakery in Problem 2 changes the selling price for a cupcake from $3.

20 to
$2.75, what effect will the change have on the break-even volume?

Is it ethical to read employees' email that they may consider private?

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The first part of this case gives salient details from BBs history (see the following case for more
detailed information). It then updates BB's situation from 2007-2010: Netflix stock selling at $70
per share, BB's at 30 cents per share, and BB's loss of $932 million from 2008-2009. In an
attempt to respond to competit

Suntrek in Problem 28 supplies its finished denim jeans to its customers' distribution centers in
the United States in New York and New Orleans, and in Europe in Bristol and Marseilles. Denim
jeans require 1.5 yards of denim fabric. Following are the contracted deliveries of jeans for each
of Suntrek's customer's distr

The Sav-Us Rental Car Agency has six lots in Nashville, and it wants to have a certain number
of cars available at each lot at the beginning of each day for local rental. The agency would like a
model it could quickly solve at the end of each day that would tell it how to redistribute the cars
among the six lots in the

Formulate homework Problem 35 in Chapter 1 as a linear programming model and solve using
the computer.

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During the war in Afghanistan, the Terraco Motor Company produced a lightweight, all-terrain
vehicle code-named "J99 Terra" for the military. The company is now planning to sell the Terra
to the public. It has five plants that manufacture the vehicle and four regional distribution
centers. The company is unsure of publ

Even while attempting to give your friend some tentative advice on the first two questions, are
there other issues you would want to understand or are there questions you would like to ask
your friend before providing a more definitive recommendation? If you could only ask three
questions, what would be your top prior

How many total subordinates should she go for? What should be her span of control?

Why would Kimberly-Clark executives restructure the company based on "grow, sustain, and
fix" categories? What disadvantages might result from such a structure?

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Formulate a linear programming model for Problem 34 in Chapter 1 and solve using the
computer. How does this solution differ from the solution to Problem 34 in Chapter 1?

Draper, where Tech is located, does not have a commercial airport; instead residents who are
flying on an airline must travel to the airport in Roanoke 40 miles away. The town council is
considering a joint economic development plan with the local Chamber of Commerce and the
university to start a bus service from the t

LDC seemed to follow a planning process that had worked well for its mid-level managerial
programs. Are there differences between senior executives and mid-level managers that might
explain why the plan did not work our as anticipated? Could these differences have been
anticipated? Should they have been?

How do you think the store personnel are going to respond to Charlie's new rules and
regulations, in light of the fact that they should have increased opportunities to earn bonuses?
Why?

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Do you believe the company is forcing the issue of diversity? Is it necessary to make diversity
training mandatory for all employees? Explain your answer.

Why is Dr. Lee so opposed to the potential change? Can anything be done to reduce his
resistance?

Why did Grace have problems making changes and maintaining discipline when she first was
promoted to a position that required leadership?

If the maximum operating capacity of the Gobblecakes bakery described in Problem 2 is 12,000
cupcakes annually, determine the break-even volume as a percentage of that capacity.

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Given the comments that Jones received from her first year trainers, what would she realistically
expect after finishing her training? What did she get? Using expectancy theory, explain why the
situation would not be motivating for her.

Sun trek, based in China, is a global supplier of denim jeans for apparel companies around the
world. They purchase raw cotton from producers in Arkansas, Mississippi, and Texas, where it is
picked, ginned, and baled and then transported by flatbed trucks to ports in Houston, New
Orleans, Savannah, and Charleston, wher

In Problem 58: a. If the fraternity buys a larger warming oven that has 25 shelves with the same
shelf dimensions, for an additional $2,000, how much would they increase profit? b. If they
could increase their budget to $1,500 per game how much would they increase profit? c. If they
increased the selling price of a

Were those of you who were illiterate still motivated to succeed?

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Solve the linear programming model for WeeMow Lawn Service in Problem 63 using the
computer. a. Which resources constrain how many jobs the service can contract for? b. If
WeeMow could increase its weekly budget by $50 per week, or increase its workday to 9 hours,
which would be more profitable? c. The solution to t

What kinds of barriers to communication can you find in each scenario?

Suntrek in Problem 27 manufactures denim fabric at its factories in Shanghai, Karachi, and
Saigon and ships it to its denim jeans manufacturing facilities in China, India, Japan, Turkey, and
Italy. A bale of cotton will produce approximately 325 yards of denim fabric. Following are the
fabric demand at each denim jeans

If you insist that it is impossible to decide, what information must you have in order to make the
decision?

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How easy, or difficult, is it to convert a traditional organization to a learning organization?

If the maximum operating capacity of the Rolling Creek Textile Mill described in Problem 3 is
25,000 yards of denim per month, determine the break-even volume as a percentage of capacity.

Why is Alliant so committed to diversity? How will this benefit the company?

This case presents the students with what is most likely an easily recognizable or at least
imaginable situation. It's the afternoon before a major paper is due, nothing is ready, various
members are not present, don't care, haven't prepared their parts, etc. The student group members
are described. The group leader ha

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"Wins above replacement," or WAR, is a complex statistical measure of a major league baseball
player's performance that sums up a player's total contribution to a team using various offensive
and defensive statistics. It reflects the number of additional wins a team has gained with a player
relative to the number of ex

Suntrek in Problem 26 ships the cotton it has purchased from the U.S. ports to overseas ports in
Shanghai, Karachi, and Saigon, where its denim fabric factories are also located. The shipping
and handling costs per bale of cotton from each U.S. port to each of Suntrek's overseas factories
and the demand at these factor

Comment on Chris's choice of media for (a) the announcement and (b) the meeting. Would you
have made the same choices?

Suppose, in talking individually with the guys in the squad, some say that they can see that a
couple of the younger, single guys might be a bit 'macho' in their conversations among
themselves. What would you do if these younger guys report that they feel the new female
recruit is simply eavesdropping on private conve

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We all fear taking our cars in to the repair shop. This case details a situation that explains why
we have these fears! The case consists of a lengthy letter from a customer, Sam Monahan, to
Steve Jackson, the General Manager of Cranston Nissan. The letter details the 17 day nightmare
that resulted when Monahan took

Is the use of positive reinforcement always the best approach to motivational problems? When
might other types of "consequences" be more appropriate?

What would be the likely influence of a collectivist culture (refer back to Chapter 4) on the
formal or informal aspects of an organization's structure? What would you expect the influence
of a strong hierarchical cultural value to be on the line of authority or chain of command in a
company's structure?

What specific actions should Jackson take immediately? What should some of his longer-term
goals be?

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Adolf Hitler, Joseph Stalin, Jim Jones, Kenneth Lay (Enron), Bernard Ebbers (WorldCom) - all
were "leaders." Were they effective leaders? Why or why not?

You have been assigned to the audit of Ford Motor Co. Ford is quite complex. In preparing for
the audit, the partner describes the following characteristics about the audit client: • Ford is
moving into e-business via the Web. It will allow vendors to bid on supplying products to Ford.
However, all vendors must first

Approximately a decade ago, the following comments appeared in the The Wall Street Journal.
In the article, the participants were talking about users expecting the auditors to do a better job of
finding fraud. Comment 1: (An accounting professor at Dartmouth College):"The very time an
auditor should be the most cynical
Gobblecakes is a bakery that specializes in cupcakes. The annual fixed cost to make cupcakes is
$18,000. The variable cost including ingredients and labor to make a cupcake is $0.90. The
bakery sells cupcakes for $3.20 apiece. a. If the bakery sells 12,000 cupcakes annually,
determine the total cost, total revenue, an

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The exact outcomes of change programs are often not evaluated, why do you think this is the
case?

Do you agree with Dov Frohman's decision in advance of the actual missile attacks to keep Intel
up and running? What about after the actual missile attacks began?

Big Mart is one of the largest retail organizations in the country. It has implemented POS to
record sales, bar codes, and EDI. Some vendors are given the authority to manage store space,
for example, making decisions about the style and size of jeans to stock in the store. Other
vendors fill requests ordered by the pu

What are illegal acts? What is the auditor's responsibility for detecting illegal acts? Does this
responsibility differ from the auditor's responsibility for detecting fraud?

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Why might some CPA firms develop customized audit software rather than using GAS?
Compare and contrast the relative advantages of GAS and customized audit software. Indicate
the type of client environment in which each type of software may have a competitive advantage.

During a discussion between two staff auditors, one remarks:"The only way computer control
procedures can be adequately tested for operation is to actually process test data through the
computer application. Otherwise, there is no effective way to know that the designed control
procedures are actually working." Do you

Explain the auditor's responsibility for reporting the following: • A defalcation that the client
is willing to correct and portray in the financial statements • A defalcation that is material, but
the client wishes to bury in an "other expense" category • A financial reporting fraud that the
client wishes to inc

Most of the legislation has dealt with financial reporting fraud that has taken place in publicly
traded companies. However, there has not been such legislation for non-public companies or for
audits of non-public companies. Required a. Is the auditor's responsibility for detecting fraud any
different for audits of no

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What is the auditor's primary responsibility for reporting a fraud that has been detected and
corrected?

Although each fraud is unique, there are commonalities among many of the major financial
reporting frauds that have taken place in the past decade. What are the major commonalities and
lessons that can be learned through an examination of the frauds at Enron, HealthSouth,
WorldCom, Addeco, Lucent, and Parmalat?

Identify the three primary methods for authenticating a user attempting to gain access to a
restricted program or file. Briefly identify the major advantages and disadvantages of each
method.

How prevalent is fraud? What is the effect of fraud on the profitability of U.S. business?

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What are the major lessons for the accounting profession that have been learned (or should have
been learned) from Equity Funding?

When is sampling appropriate to use in an audit?

The Integrated Test Facility (ITF) and the Tagging and Tracing approach have been identified as
audit approaches designed to test accuracy of computer processing of transactions. Required a.
Explain how the ITF and Tagging and Tracing audit approaches work, including an identification
of: (i) How each approach works (

For each of the following situations involving computer fraud, briefly describe the following: a.
A control procedure that would have been effective in preventing or detecting the fraud. b. An
audit procedure that would have detected the fraud. Computer Frauds a. A computer programmer
added a module to the payroll pro

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IDS Corporation processes mortgage payments and updates for itself, as well as for a number of
other mortgage service companies. The program tables are updated frequently for changes in
interest rates for variable mortgages, but not for the fixed rate mortgages. Because there are a
number of mortgage divisions as well

Assume the auditor wants to implement a tagging and tracing approach for a highly integrated
system that accepts orders from customers, ships the orders, and bills the orders. What audit
objectives would the tagging and tracing approach address?

You have been assigned to the audit of Mid-State Electronics Corporation, a medium-size
distributor of electronics equipment serving a geographic area within a radius of 150 miles. Mid-
State has installed a client-server computer and provides remote access to its sales people on the
road. Salespeople can enter sales or

What is the effect of increasing each of the following on an attribute estimation sample size? a.
The allowable risk of assessing control risk too low b. The tolerable failure rate c. The expected
failure rate d. Population size

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Ajax, Inc., an audit client, recently installed a new computer system to more efficiently process
its shipping, billing, and accounts receivable records. During interim work, an assistant reviewed
the accounting system and the internal controls. The assistant determined the following
information concerning the new comp

What are the major elements of an audit trail? How does an audit trail in a computerized
environment differ conceptually from an audit trail in a manual environment?

What is forensic accounting? How does it differ from auditing?

Is the "ability to rationalize" the fraud an important aspect of a fraud profile? What are some of
the common rationales used by fraud perpetrators?

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The auditing literature had traditionally classified fraud as either “defalcations” or

“financial reporting fraud.” Required a. What is the difference between the two types of
fraud? b. Does the auditor’s responsibility for detecting fraud vary with the nature of the
fraud committed? c. Is a defalcation or

What factors should be considered when determining whether to use non-statistical or statistical
sampling?

In what ways is the auditor required to increase the amount of fraud skepticism on every
financial statement audit engagement?

Why has financial reporting fraud become more prevalent as the financial markets have
expanded? What is the motivation for privately owned businesses to commit financial reporting
fraud; aren't the owners just fooling themselves?

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What is a virtual private network (VPN)? What are the primary characteristics of such networks?
What major risks are associated with VPNs?
Briefly describe how each of the following edit controls works and the types of errors each is
designed to detect. Give one example of each for a retail organization. a. Limit test b.
Reasonableness test c. Validity test d. Missing data test e. Invalid combination of items

Kent, CPA, is the engagement partner on the financial statement audit of Super Computer
Services Co. (SCS) for the year ended April 30, 2007. On May 6, 2007, Smith, the senior auditor
assigned to the engagement, had the following conversation with Kent concerning the planning
phase of the audit: Kent: Do you have all t

Assume that the client has an adequate access control plan and, based on your interviews, the
access policies are operating as described. The control procedures identified by the auditor
include restricted use of passwords, frequent changes in passwords to keep pace with job
changes, and monitoring of repeated attempts

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An auditor may have to perform "extended audit procedures" if the auditor identifies fraud risk
as high. Identify five examples of extended audit procedures that might be performed if the
auditor suspects there may be fraud in the revenue account.

What was the nature of the fraud at Equity Funding? How was the fraud covered up? What type
of business analysis would have revealed the fraud?

What is the potential danger of using a physical attribute, such as a retina scan or a fingerprint, to
authenticate a user?

The wauditor is to presume that there is fraud in revenue. Consider a company that manufactures
high-tech fiber-optic gear. Assume that the Wall Street analysts believe the industry has good
growth prospects. The audit client is predicting a 20% increase in sales and a 27% increase in
profits for the year under audit.

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The following is a list of defalcations that have occurred within various organizations. You may
assume that the amounts involved are material. Required For each defalcation, briefly indicate: a.
How the auditor would have identified the risk that led to the defalcation; that is, would the
auditor have identified the

What is generalized audit software (GAS)? What are the major audit tasks for which an auditor
would use it? What are its major advantages?

The facts below represent the audited financial statements of a public company for 2005 and
2006, along with management's representation regarding the unaudited amounts (i.e., the
UNAUDITED column) and the auditors' projected amounts for 2007 (i.e., the PROJECTED
column, which represents their expectations based on ind
Does the auditor presume that there is a fraud in some specific accounts? Which accounts? How
does this presumption change the nature of audit procedures?

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Explain why there should be a segregation of duties between data processing and users. Should
data processing be allowed to initiate transactions (for example, automatically initiating a
purchase order when inventory falls to a pre specified level)?

The existence of fraudulent financial reporting has been of great concern to both the accounting
profession and regulatory agencies such as the SEC. It has been asserted that companies in
trouble frequently go bankrupt shortly after receiving unqualified opinions from auditors. The
auditing profession has historically

Why is it important that the auditor review all major journal entries?

There are a number of factors that an auditor may consider when identifying opportunities to
commit fraud. The following represent areas that have often been associated with frauds.
Situations often associated with Fraud 1. Related-party transactions 2. Industry dominance 3.
Numerous subjective accounting judgments 4.

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Dot-com companies grew rapidly in the late 1990s. Many opened up “shopping malls”
through which they serve as a portal into several different companies. The SEC has expressed
concerns about revenue recognition at a variety of dot-com companies. Explicitly, the SEC is
concerned that some companies: • Inflated thei

Saris manufacture bicycle racks and wants to market on the Web. It also wants to cut production
cost by manufacturing various bicycle racks that are custom designed for cars by manufacturing
them after an order is received and shipping the bicycle rack to the customer within 48 hours of
receipt. Customers must pay for

Explain how "brainstorming" is supposed to work as part of the audit planning process. What are
the advantages of using a "brainstorming" approach to identify the possible existence of fraud?

A CPA's client, Boos & Baumkirchner, Inc., is a medium-size manufacturer of products for the
leisure-time activities market (camping equipment, scuba gear, bows and arrows, and so forth).
During the past year, a computer system was installed, and inventory records of finished goods
and parts were converted to computer

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A comprehensive program for controlling access to the computer equipment, computer

programs, and data is an important control. In evaluating the comprehensiveness of an access
policy, the auditor considers both physical and data access (that is, access to data by gaining
access to computer files through the computer).

1. In an automated payroll system, all employees in the finishing department were paid at the rate
of $7.45 per hour when the authorized rate was $7.15 per hour. Which of the following controls
would have been most effective in preventing such an error? a. Access controls that would
restrict access to the payroll wage

Dreyfet Department Store maintains online prices on minicomputers in stores connected to the
automatic cash registers. For most products, the product and price are read into the cash register
by scanning devices that read the bar codes on the merchandise. The product name (abbreviated)
and the prices are printed on the

What major groups failed in the Enron case? How did each group fail? What were the
motivations that influenced each group that partially led to the failure? To what extent did
Sarbanes-Oxley address many of the factors that caused the failures?

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Woodman's Grocery is a small chain of grocery retailers with four mega size stores. Each store
has a networked computer that runs the automated cash registers. The merchandising manager,
on the recommendation of the section managers, approves all price changes. The authorized
prices are maintained in a sales price tabl

How has the responsibility of auditors for planning and conducting the audit to detect fraud
changed over the past 30 years?

What risks are unique to auditing a client who engages in electronic commerce that might not be
present in other clients?

What are general controls? Do the general controls directly affect computer applications? How
does the auditor determine whether general control procedures should be tested?

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The responsibility of auditors for detecting fraud has increased as users have made it clear that
they expect auditors to detect material fraud. Required a. In addition to dollar amounts, what
other factors should an auditor consider in determining materiality for planning an engagement
to detect fraud? How would thes

How should the audit be adjusted when the auditor has identified a high risk of fraud occurring?

The following represent errors that could occur in a computerized environment. Required For
each error, identify a control procedure that would have been effective in either preventing or
detecting the error. Errors Found a. The selling price for all products handled by company
salespersons was consistently reduced by

The fraud risk model identifies motivations, incentives, opportunities, and capabilities as being
the major components of the fraud diamond. Define what is meant by each of these four factors
and explain how they work together to build a fraud risk profile.

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Paper-based documentation might not exist in an e-commerce environment, with the exception
of the trading partner agreement and a separate agreement with an intermediate processor
describing the confidentiality of data, control procedures by the processor, and the right to audit
by the client. In paper-based systems, t

The auditor has identified each of the following control procedures as important in reducing
control risk in major accounting applications. Required For each control procedure identified,
indicate how the auditor would test the control. Assume that all controls pertain to the input,
processing, and maintenance of file

How might an auditor perform an "overall file validity analysis" using GAS? What does the
auditor expect to learn from such an analysis? How would such information be utilized in
conducting the audit?

An audit client of the Peninsula CPA firm is extensively involved in defense contracting. During
the past year, the Defense Department has conducted an ongoing investigation of the client for
possible overbillings on governmental contracts. Most of these overbillings would be considered
illegal. After an extensive inve

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Define the term "materiality" as it applies to the concept of the auditor's responsibility for
detecting material fraud. What are the factors that would cause the materiality threshold in
dollars to be lower than might have otherwise been used in a financial statement audit?

You are asked to be interviewed by a student newspaper regarding the nature of accounting
fraud. The reporter says, "As I understand it, defalcations are more likely to be found in small
businesses, but not in larger businesses. On the other hand, financial reporting fraud is more
likely to be found in larger businesse

Explain how a fraud perpetrator could use a disbursement scheme to misappropriate assets from
the company.

What are the ten major steps that are included in the fraud risk model?

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The Equity Funding fraud was the first major financial reporting fraud. It was a fraud that people
believed would change auditing forever. However, the profession has taken a while to learn the
lessons from Equity Funding. Required a. The following describes some of the major
mechanisms used in conducting the fraud. F

When using sampling to test control procedures, what factors should the auditor consider in
setting the: a. Tolerable deviation rate b. Expected failure rate c. Allowable risk of assessing
control risk too low

Define the following types of fraud: • Defalcation • Asset misappropriation • Corruption
• Financial reporting fraud Does the auditor's responsibility for detecting a fraud differ by the
type of fraud that is perpetrated? Explain.

Explain how audit procedures should be linked to the identification of fraud risk indicators.

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What major principles should guide the development of a comprehensive access control program
for a data processing center? Assume that the organization uses automated access control
software to implement the principles.

What are the major objectives of the ITF approach? Would an ITF be well suited to monitoring
an organization for fraud? Explain.

Why is it important for the auditor to develop a list of "hypothesized frauds" as opposed to first
seeking management's explanations of differences in account balances?

What is a monitoring control? Identify a monitoring control that might be used to inform a
company whether its access controls are working effectively. How would the auditor evaluate the
effectiveness of the monitoring control?

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What are the most common approaches taken to commit financial reporting fraud?

Explain how an auditor should link control deficiencies to the design of audit tests. Identify the
logic process utilized by the auditor to make the linkage.

Bass Pro Shops is a catalog retailer concentrating on fishing and hunting equipment. It prints an
annual catalog containing over 200 pages of products, as well as approximately six special sale
catalogs during the year. Products range from fishing lures retailing for $1.29 to boat packages
for over $15,000. Purchases c

Explain the important role analytical procedures play in identifying fraud risk. Identify three
examples of analytical analysis that would increase the auditor's assessment of fraud risk.
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Identify the seven fundamental concepts important to evaluating the organization's data
processing control structure, and briefly indicate the importance of each to the auditor's risk
assessment process.

What are non-sampling and sampling risks? How can each be reduced?

Multiple Choice Questions 1. Which of the following statements regarding the incidence of fraud
is incorrect? a. Fraud is estimated to costs U.S. businesses less than 1 cent of every dollar of
sales. b. Defalcations occur more often than financial reporting fraud. c. Financial reporting
frauds are generally larger in d

What were the major findings of the second COSO Report on fraudulent financial reporting?

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Briefly describes the purposes of the following control procedures and how each works: (1)
financial total, (2) hash total and (3) record count.

Compare and contrast the tagging and tracing technique with an ITF. In your comparison,
specifically address: • Differences in audit approach • Assurances that can be gathered from
each approach • Mechanics of implementation

The auditor should consider known internal control deficiencies as part of the process of
planning the audit. Required a. The following is a list of internal control deficiencies that were
found at a small manufacturing business. For each deficiency identify the fraud risk, and identify
the extended audit procedures t

Identify five factors that would be strong indicators of opportunities to commit fraud.

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Explain why the auditor needs to examine the "tone at the top" in evaluating fraud risk. Identify
the key information the auditor should gather on each of the following areas: • Corporate
governance • Management • Audit committee • Corporate culture • Internal auditing
• Top level monitoring controls • Wh

Most CPA firms have responded to SAS 99 by performing detailed file validity analysis using
audit software. Required a. Identify the ways in which audit software might be used to perform
file validity analysis. b. Why is the file validity analysis an effective audit approach to search for
the possibility of fraud? c.

Why is it so important that a sample be as representative of the population as possible?

The Saginaw Steering Gear Company makes automotive steering gears that it supplies to
automobile manufacturers. The company, in turn, purchases a number of its component parts
from other suppliers. The company requires all its suppliers to utilize EDI and has established
trading agreements with all of its vendors. The

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Audit software can be very useful in reading a computer file and identifying potential fraud.
Identify the major fraud-related procedures that can be performed using audit software.

The ten step audit process is a systematic approach to ensure that every audit engagement
considers the possibility of fraud and how fraud might occur. Required a. Identify the ten steps in
the process and the decisions the auditor makes at the end of each step. Identify the key pieces of
information the auditor needs

Hastings Manufacturing Company makes special-order equipment to be used by other

manufacturers. The company has three major product lines and approximately 10 variations of
each product line. The company uses a job cost accounting system in which all labor and
materials are directly charged to the cost of building each

Briefly describe encryption and why it is important to controlling validity of transactions sent
over a public network.

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Describe the following types of computer software and their importance to processing and
controls: • Operating systems software • Communications software • Application
program software • Access control software

There are many factors that affect the auditor's decision as to how much direct testing of an
account balance will be required. Required a. Identify the factors that affect the auditor's decision
as to whether to perform direct tests of an account balance, and if so, how much testing is
required. b. For each factor id

Authorization of transactions is considered a key control in most organizations. Authorizations

should not be made by individuals who have incompatible functions. Required Indicate the
individual or function (for example, the head of a particular department) that should have the
ability to authorize each of the follow

What is a self-checking digit? Why is its use such an important control procedure? What happens
to a transaction if it is rejected from processing because it fails the self-checking digit test?

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How does random-number sample selection differ from systematic selection? What precaution(s)
must the auditor take when using systematic selection?

The following scenario and analytical information describe a company. Three sets of facts are
presented about this company. At the end of each set, perform a brainstorming analysis
identifying all the factors that will affect the planning and conduct of the audit. a. Company
Background. Brandon Apparel group is a manuf

The SEC took action against Gateway Computer in 2001 because they believed that Gateway
systematically understated their allowance for doubtful accounts to meet sales and earnings
targets. This is essentially the way the alleged fraud took place: • Gateway sold most of its
computers over the Internet and had a strong

Identify controls the auditor would be looking for to achieve the objective that "all transactions
that should have been recorded are recorded." For each control identified, briefly indicate how
the auditor would go about testing whether the control operated effectively.

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Explain how a walkthrough would help the auditor understand and document the adequacy of
controls in an accounting application.

In testing account balances such as accounts receivable, why is it important that some of the tests
be performed after year-end? Provide an example of a test that might be performed after year-
end.

What is management's responsibility to report on the effectiveness of internal controls over

financial reporting? How does the responsibility differ for public companies and privately-held
companies?

The COSO Internal Control, Integrated Framework describes an organization's internal controls
as consisting of five elements. Required a. Briefly describe the relationship among the five
components of an organization's internal controls. b. Briefly explain how a deficiency in any one
of the components of an organizati

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Why would a company's potential customers or suppliers be interested in the quality of an

organization's controls, particularly its computer controls?

The COSO internal control framework provides guidance to management to reduce residual risk
to an acceptable level. Required a. Define the term "residual risk." b. Should residual risk be
determined by: • Management • The external auditor • The audit committee • A
regulatory body such as the PCAOB c. What fact
Is it possible to have effective controls over a subjective accounting process? Choose an example
of a subjective process and use the process to explain your answer.

Does the auditor test the same transactions that management tested, or does the auditor test
similar transactions? Explain the rationale.

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The auditor determines that there may be misstatements in the inventory and cost of goods sold
account. During the conduct of the audit, the auditor found a material weakness in internal
controls in that (a) some shipments were recorded before the actual shipment took place (this
happened throughout the year at a rate

Assume an audit committee is not effective. It has weak directors with little financial knowledge
and they are not independent of management. How do the weaknesses affect the auditor's
evaluation of internal control over financial reporting? Would a non-effective audit committee
constitute a material weakness in intern

Identify the major processes the auditor goes through in developing an understanding of internal
control over financial reporting.

What types of controls might a large-scale organization use to ensure that its divisional
management is conducting business in a manner that will best achieve the objectives of the
business? What control risks might be associated with a compensation system that places a heavy
emphasis on year-end bonuses based on divis

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The auditor of a public company in the retailing industry is planning an integrated audit. The
company has approximately 260 retail stores, primarily in the southeast part of the United States.
Required a. Explain why an analysis of the company's control environment is important to the
planning of the integrated audit

During a discussion, a new auditor stated that an assessment of the organization's control
environment is not very meaningful because it does not directly affect the processing of
individual transactions, and it is the transactions that make up the account balance. As long as the
auditor can test the details making up

The following equipment schedule was prepared by the client and audited by Sam Staff, an audit
assistant, during the calendar-year 2001 audit of Roberta Enterprises, a continuing audit client.
As engagement supervisor, you are reviewing the documentation. Required Identify the
deficiencies in the auditdocumentation.

Various parties are taking an increased interest in the quality of an entity's internal controls.
Required a. Briefly explain the difference between internal control and internal control over
financial reporting. What are the major distinctions? b. The Sarbanes-Oxley Act requires public
reporting on the quality of int

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What is an organization's control environment? What are the major elements of a control
environment?

If a company's control risk is low, the auditor needs to gather evidence on the operating
effectiveness of the controls. Required a. For each of the following control activities, indicate the
audit procedure the auditor would use to determine its operating effectiveness. b. Briefly indicate
the audit implication; that

What is monitoring? Give two examples of internal control monitoring and explain how they
would be used by management.

How could a tour of the plant assist the auditor in gaining an understanding of the controls in
place for important accounting applications?

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For context, the auditor is assigned to analyze and test the controls related to purchasing,
including inventory items as well as items that are expensed. There are three purchasing agents
for a medium-sized company ($250 million in sales) with each specializing in areas. Department
heads are authorized to purchase "ex

The auditor might document the preliminary analysis of an organization's internal controls in
various ways. Three of the most common methods are (1) A flowchart, (2) An internal control
questionnaire, and (3) A written narrative. Required a. For each of the three approaches: 1.
Identify the relative strengths and w

Assume a stockholder or a creditor receives an audit report on a company's financial statements.

Why would they be interested in a report on the effectiveness of internal control over financial
reporting?

Brown Company provides the following office support services for more than 100 small clients:
1. Supplying temporary personnel 2. Providing monthly bookkeeping services 3. Designing and
printing small brochures 4. Copying and reproduction services 5. Preparing tax reports Some
clients pay for these services on a cash b

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What are the testing requirements of internal controls for: • A publicly-held company • A
non-publicly-held company Identify situations in which an auditor might choose not to test
internal controls.
Multiple Choice Questions 1. The auditor wants to develop an efficient approach to perform an
integrated audit of internal controls and financial statements for a public company. Which of the
following statements is correct regarding the integrated audit? a. The auditor should concentrate
on transaction processing syst

For each of the following situations, evaluate the segregation of duties implemented by the
company and indicate the following: a. Any deficiency in the segregation of duties described
(Indicate None if no deficiency is present.) b. The potential errors or irregularities that might
occur because of the inadequate segre

Auditing standards indicate that if control risk is assessed as low or moderate, the auditor must
gain assurance that the controls are operating effectively. Required a. What is meant by testing
the effectiveness of control procedures? How does an auditor decide which controls to test? b.
Do all control procedures nee

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Define the term "internal control over financial reporting." What are the main components of an
organization's internal control system? What is the difference between internal control and
internal control over financial reporting? What are the implications of the difference to the
auditor?

For the company identified in Problem 7-45, assume that the company has an internal audit
department that makes periodic test counts of inventory and management adjusts the inventory
records to the test counts. Required a. What factors should the auditor consider in determining
whether or not to rely on the work perfo

How might a company reduce the costs of complying with Section 404 of the Sarbanes-Oxley
Act of 2002? Explain.

Assume that internal controls are effective as assessed by the auditor through an analysis of their
design and operation. To what extent does the auditor still need to directly test account balances?
Explain.

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What are the advantages and disadvantages of using a questionnaire compared to a flowchart for
documenting and assessing internal control?

A review of corporate failures as described in the financial press, such as The Wall Street
Journal, often describes the tone at the top as one of the major contributors to the failure. Often
the tone at the top at the failed companies reflects a disdain for controls and an emphasis on
accomplishing specific objectives
What are the elements of the COSO Internal Control, Integrated Framework? How has the
Sarbanes-Oxley Act affected the use of the COSO framework?

Is the auditor required to test the operation of controls on every audit engagement? Explain.

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