Tameran Bruch

Auditing

Upper Iowa University

Professor Yelvington

Week Three Assignment

Objective Questions

5-45

A. 4
B. 4
C. 1
D. 2
E. 3
F. 2
G. 3
H. 4
I. 2
J. 1
K. 2
L. 4

5-46

A. 3
B. 4
C. 1
D. 6
E. 2
F. 5
G. 9
H. 7
I. 8
J. 10
K. 7

5-47

A. Incorrect
B. Correct
 C. Incorrect
D. Correct
E. Incorrect
F. Correct
G. Incorrect
H. Correct

5-48

A. 1
B. 3
C. 3
D. 1
E. 3

6-38

A. 3
B. 4
C. 4
D. 3
E. 4
F. 4
G. 3
H. 4
I. 3
J. 2
K. 3
L. 2

6-39

A. Decrease, no
B. Increase, yes
C. Decrease, no
D. Decrease, no
E. Increase, yes
F. Increase, yes
G. Increase, yes
H. Decrease, no
I. Decrease, no
J. Increase, yes
K. Increase, yes
 L. Decrease, no

6-40

A. D
B. I
C. I
D. I
E. D
F. NE
G. D
H. I
I. I
J. D
K. I
L. I
M. NE
N. I
O. I

Chapter Problems

5-50

A. Audit risk is the possibility that a material misstatement will occur and be reported in an
entity’s financial statements. Since an auditor can provide only reasonable assurance and
not absolute assurance, there is always going to be some risk that a material misstatement
will be present in the entity’s financial statements despite both the company’s internal
control and the independent auditor’s audit.
B. Inherent risk is the possibility that a material misstatement will occur within the reporting
company’s accounting information system. Control risk is the possibility that a material
misstatement that has occurred will not be detected on a timely basis by the company’s
control system. Detection risk is the possibility that a material misstatement that has
occurred will not be caught by the independent auditor’s testing.
C. Inherent risk and control risk are managed by management, so an auditor cannot control
them. Instead they will evaluate them before determining detection risk. Auditors can
only control detection risk. These components are interrelated because if a misstatement
occurs in the first place it is inherent risk, and if internal controls fail to
detect/correct/prevent the misstatement that is control risk. If the auditor fails to detect
the misstatement through performance of audit procedures, detection risk, then an auditor
will reach wrong conclusions and issue an inappropriate opinion which is audit risk.
 D. None of these components is completely a function of sufficiency of the evidence
gathered by the auditors’ procedures. Since there are no firm rules or guidelines on the
amount of evidence needed for a specific audit, the sufficiency of audit evidence is a
matter of judgement every time.
E. I find this statement to be misleading as the counting of equipment and similar assets
doesn’t establish the propriety of the dollar amount shown on the balance sheet. Neither
does a physical count of the assets to establish ownership.

5-51

A. Auditors would rely less on these types of documents as they could be easily manipulated
by the client.
B. Auditors would rely more on any physical evidence they can find.
C. Auditors would rely more on evidence provided by specialists.
D. Auditors may find it useful to apply analytical procedures at several different times
during the audit. They must be applied during the risk assessment stage to enhance the
auditors understanding of the clients business. Also auditors are required to apply
analytical procedures to the audited financial statements as a part of the final overview of
the engagement.
E. Auditors would rely less on accounting records as they could easily be manipulated by
the client.

6-44

Mr, John Bray

President
Cheviot Corporation

Dear Mr. Bray:

Our recent tour of Cheviot’s plant was a most pleasant and interesting experience.
The information obtained on this tour and during the review of your financial statements
and accounting records has enabled us to plan the scope of an audit especially suited to
your needs.
Our fees are based on the time spent on an engagement by various members of
our audit staff and will be billed at our established rates. The total time required for an
initial engagement is usually greater than that of a repeat examination since we will
require an analysis of past years transactions. Considerable saving in the cost of the audit
may be made by utilizing the services of your accounting staff to help us in certain phases
of the work. We can arrange for your employees to prepare for us a number of working
papers. If you approve, we can indicate to your chief accountant the exact nature of the
working papers to be prepared.
 Our audit will be performed in accordance with auditing standards generally
accepted in the US and will include all procedures that we consider necessary to provide
a basis for expression of our opinion on the fairness of the financial statements. The
audit will include:
 Obtain an understanding of the client and its environment, including internal
control.
 Assessment of risks of material misstatement and design further audit procedures.
 Tests of the financial statement accounts and balances to the extent we consider
necessary based on our consideration of risks and internal control.
 Preparation of the federal and state income tax returns.
 Issuance of our auditor’s report upon your financial statements.

If our investigation indicates the desirability of any changes in internal control

procedures, we shall prepare a report on this subject for your consideration. However, an
audit cannot be relied upon to identify all weaknesses in internal control. The purpose of
our audit is to enable us to express an opinion on the fairness of the financial statements;
the audit is designed to provide reasonable, but not absolute, assurance of detecting
material fraud and defalcations, and we will notify you if our audit does bring them to
light.

Although it is not possible to determine in advance the exact number of days required
for the engagement, our estimates indicate that the total fee will be between $12,500 and
$15,000. The audit will be completed and our report submitted by March 1, 2020.

We would like an opportunity during the next few days to discuss with you and your
chief accountant the nature of the preliminary work to be done by your staff. We shall
also be pleased to answer any further questions that you may have concerning the
determination of audit fees.

Very truly yours,

Tameran Bruch

6-45

A. Auditors may be on hand during the last business day of the current period to note the
serial number of the shipping advice for the last shipment. Since all shipments are FOB
shipping this last serial number should be recorded as sales of the current year. The
auditors may then determine that a proper cutoff has been made.
B. The effect of a cutoff error depends on whether the client has also included the cost of
those sales in the current year. Prematurely recording the costs of these sales will
partially offset the overstated revenue and limit the overstatement of the current year’s
 income, total assets, and retained earnings to the excess of the selling price of the
shipments over their cost.

6-46

A. Arguments that support acceptance of client:

 As auditors we know that some engagements involve more risk than others, but
we can handle that additional risk by designing a more thorough audit program.
 You do not grow by turning down the though engagements.
 Edmond probably has matured to a point where he would not engage in
questionable activities.
 Even though Edmond lied to the IRS, he probably will not lie to his auditors.
 All other information about Edmond indicates that he is a man of integrity.
B. Arguments against accepting the client:
 The fact that the audit opinion will be used to obtain substantial additional
financing make this audit a high risk engagement.
 The incident with the IRS clearly indicates that Edmond lacks integrity and we
should not be associated with his corporation.
 Management fraud is difficult to detect by customary audit procedures. If
Edmond does elect to misstate financial statements, it is possible we would fail to
detect the errors.
 The only way to assure that the reputation of the firm is not questions is to avoid
such high risk audit engagements.
C. We feel that the decision to accept this client depends on the degree of risk the firm is
willing to accept. Since all other information indicates that Edmond is a person of
integrity, the acceptance of the client is appropriate, so long as the auditors recognize the
high risk of the engagement and increase the extent of their auditing procedures
accordingly. At the first sign of inappropriate behavior on the part of Edmond the firm
should resign from the engagement.