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All Textbook Solutions for Auditing: A Risk Based-Approach (MindTap Course List)

1CYBK 2CYBK 3CYBK 4CYBK 5CYBK 6CYBK 7CYBK 8CYBK 9CYBK 10CYBK 11CYBK 12CYBK Utilitarian theory holds that what is ethical is the action that achieves the greatest good for the most important people. (T/F)14CYBK Which of the following statements related to rights theory is false? a. The highest order rights include the rights to life, autonomy, and human dignity. b. Second-order rights include rights granted by the government, such as civil rights and legal rights. c. Third-order rights include social rights, such as the right to higher education, to good health care, and to earning a living. d. Fourth-order rights include one’s essential interests or personal tastes.Utilitarianism does not require which of the following actions when a person considers how to resolve an ethical dilemma? a. Identification of the potential problem and courses of action. b. Identification of the potential direct or indirect impact of actions on each affected party who has an interest in the outcome. c. Identification of the motivation of the person facing the ethical dilemma. d. Assessment of the desirability of each action for each affected party.17CYBK 18CYBK 19CYBK Which of the following factors is not an example of a risk relevant to the client continuance decision? a. Client entity characteristics. b. Independence risk factors. c. Third-party/due diligence risk factors. d. Advocacy threat.1RQSC 2RQSC 3RQSC 4RQSC 5RQSC 6RQSC 7RQSC 8RQSC 9RQSC 10RQSC 11RQSC 12RQSC 13RQSC 14RQSC 15RQSC 16RQSC 17RQSC 18RQSC 19RQSC 20RQSC 21RQSC 22RQSC 23RQSC 24RQSC 25RQSC 26RQSC 27RQSC 28RQSC 29RQSC 30RQSC 31RQSC Refer to the Why It Matters feature “What Is Professional Judgment?” Explain the term professional judgment.33RQSC 34RQSC 35RQSC 36RQSC 37RQSC As the auditor for XYZ Company, you discover that a material sale ($500,000 sale; cost of goods of $300,000) was made to a customer this year. Because of poor internal accounting controls, the sale was never recorded. Your client makes a management decision not to bill the customer because such a long time has passed since the shipment was made. You determine, to the best of your ability, that the sale was not fraudulent. Using the framework for ethical decision making, determine whether the auditor should require either a recording or a disclosure of the sales transaction. Explain your reasoning.39RQSC 40RQSC 41RQSC 42RQSC 43FF 44FF 45FF 46FF The Great Salad Oil Swindle of 1963 is an asset misappropriation fraud. (T/F)2CYBK 3CYBK 4CYBK The three elements of the fraud triangle include incentive, opportunity, and rationalization. (T/F)6CYBK 7CYBK 8CYBK 9CYBK 10CYBK 11CYBK 12CYBK 13CYBK 14CYBK 15CYBK 16CYBK 17CYBK 18CYBK 19CYBK 20CYBK 21CYBK 22CYBK 23CYBK 24CYBK 1RQSC 2RQSC 3RQSC Refer to Exhibit 2.1 a. What is a Ponzi scheme? b. Describe the key elements of the Bernie Madoff fraud. c. Is this fraud primarily a case of asset misappropriation or fraudulent financial reporting?5RQSC 6RQSC 7RQSC 8RQSC 9RQSC 10RQSC 11RQSC 12RQSC 13RQSC 14RQSC Many consider the Enron fraud to be one of the most significant frauds of the early 2000s. a. Describe the various failures and environmental characteristics during this rime that enabled the Enron fraud to happen. b. What elements of the fraud triangle seem most relevant to the Enron fraud?16RQSC 17RQSC 18RQSC 19RQSC 20RQSC 21RQSC 22RQSC 23RQSC 24RQSC 25RQSC 26FF 27FF 28FF 1CYBK 2CYBK Which of the following are affected by the quality of an organization’s internal controls? a. Reliability of financial data. b. Ability of management to make informed business decisions. c. Ability of the organization to remain ¡n business. d. All of the above. e. Only a and c.4CYBK 5CYBK 6CYBK What are the components of internal control per COSO’s Internal Control—Integrated Framework? a. Organizational structure, management philosophy, planning, risk assessment, and control activities. b. Control environment, risk assessment, control activities, information and communication, and monitoring. c. Risk assessment, control structure, backup facilities, responsibility accounting, and natural laws. d. Legal environment of the firm, management philosophy, organizational structure, control activities, and control assessment.8CYBK 9CYBK The control environment is seen as the foundation for all other components of internal control. (T/F)11CYBK Which one of the following components of internal control over financial reporting sets the tone for the organization? a. Risk assessment. b. Control environment. c. Information and communication. d. Monitoring.13CYBK 14CYBK 15CYBK 16CYBK 17CYBK 18CYBK 19CYBK 20CYBK 21CYBK 22CYBK 23CYBK 24CYBK 25CYBK 26CYBK 27CYBK 28CYBK 29CYBK 30CYBK 31CYBK 32CYBK 33CYBK 34CYBK 35CYBK 36CYBK 37CYBK 38CYBK 39CYBK 40CYBK 1RQSC 2RQSC 3RQSC 4RQSC Distinguish between entity-wide and transaction controls. Which components of internal control are typically entity-wide controls? Which components of internal control are typically transaction controls?Refer to Exhibit 3.2. List the principles representing the fundamental concepts of the control environment component.7RQSC 8RQSC 9RQSC 10RQSC Refer to Exhibit 3.3. For each risk assessment principle, provide an example of how an organization might apply that principle.12RQSC 13RQSC 14RQSC 15RQSC 16RQSC 17RQSC 18RQSC Authorization of transactions is a key control in most organizations. Authorizations should not be made by individuals who have incompatible functions. For each transaction (listed as A through I), indicate the individual or function (e.g., the head of a particular department) that should have the ability to authorize that transaction. Briefly provide a rationale for your answer. a. Writing off old accounts receivable. B. Committing the organization to acquire another company that is half the size of the existing company. C. Paying an employee for overtime. D. Shipping goods on account to a new customer. E. Purchasing goods from a new vendor. F. Temporarily investing funds in common stock investments instead of money market funds. G. Purchasing a new line of manufacturing equipment to remodel a production line at one of the company’s major divisions (the purchase represents a major new investment for the organization). H. Replacing an older machine at one of the company’s major divisions. I. Rewriting the company’s major computer program for processing purchase orders and accounts payable (the cost of rewriting the program will represent one quarter of the organization’s computer development budget for the year).20RQSC 21RQSC 22RQSC 23RQSC 24RQSC 25RQSC 26RQSC 27RQSC 28RQSC Refer to Exhibit 3.9. What are the important features of management’s report on internal control over financial reporting?Refer to Exhibit 3.10 and Exhibit 3.11. Describe management’s process for evaluating internal control over financial reporting. For the control environment principles, identify evidence that management might obtain to assess the operating effectiveness of the control environment.31RQSC 32RQSC 33RQSC 34RQSC Assume that management is gathering evidence as part of its process for assessing the effectiveness of internal control over financial reporting. The company is a manufacturer of high-dollar specialized Control Tested machines used in the medical profession. The following table identifies important controls that management is testing regarding accounts related to revenue recognition, accounts receivable, and other sales related activities. The first column describes the control, and the second column describes the test results. Based on the test results, determine the conclusion that management should likely make about the deficiency. (Is it a control deficiency, a significant deficiency, or a material weakness?)36RQSC 37RQSC 38RQSC 39RQSC 40RQSC 39FF Diamond Foods, Inc. (LO 8, 9) In February 2012, the Wall Street Journal reported that Diamond Foods, Inc. fired its CEO and CFO, and would restate financial results for two years. The restatement was required after the company found that it had wrongly accounted for crop payments to walnut growers. The investigation focused primarily on whether payments to growers in September 2011 of approximately $60 million and payments to growers in August 2010 of approximately $20 million were accounted for in the correct periods. Shareholders suing the company allege the payments may have been used to shift costs from a prior fiscal year into a subsequent fiscal year. In a February 2012 filing with the SEC, the audit committee stated that Diamond had one or more material weak nesses in its internal control over financial reporting. In January 2014, the SEC charged Diamond Foods and two former executives for their roles in the accounting scheme to falsify walnut costs in order to boost earnings and meet estimates by stock analysts. Diamond Foods agreed to pay $5 million to settle the SEC’S charges. a. Does the restatement suggest that the company’s internal controls contained a material weakness? Explain your rationale. b. In September 2011, the company filed its annual report with the SEC for its fiscal year ended July 31, 2011. As part of that filing, the company maintained that it had effective internal controls over financial reporting as of its year-end date. Do you believe that management’s report on internal control over financial reporting was accurate? c. In February 2012, the audit committee indicated that the company had ineffective internal controls. What types of material weaknesses do you think might exist at Diamond?1CYBK 2CYBK 3CYBK 4CYBK 5CYBK 6CYBK 7CYBK 8CYBK 9CYBK 10CYBK 11CYBK 12CYBK 1RQSC 2RQSC 3RQSC 4RQSC 5RQSC 6RQSC Refer to the Focus on Fraud feature “Moss Adams and the Meridian Mortgage Funds Fraud.” a. Why was Moss Adams sued by the trustee for the bankrupt Meridian Mortgage? b. What would the trustee have to prove in order for the courts to hold Moss Adams liable for damages?8RQSC 9RQSC 10RQSC 11RQSC 12RQSC 13RQSC 14RQSC 15RQSC 16RQSC 17RQSC 18RQSC 19RQSC 20RQSC 21RQSC Able Corporation decided to make a public offering of bonds to raise needed capital. It publicly sold $2,500,000 of 8% debentures in accordance with the registration requirements of the Securities Act of 1933. The financial statements filed with the registration statement contained the unqualified opinion of Baker & Baker, CPAs. The financial statements overstated Able’s net income and net worth. Through negligence, Baker & Baker did not detect the overstatements. As a result, the bonds, which originally sold for $1,000 per bond, have dropped in value to $700. Ira is an investor who purchased $10,000 of the bonds. He promptly brought an action against Baker & Baker under the Securities Act of 1933. Answer the following, providing reasons for your conclusions: a. Will Ira likely prevail on his claim under the Securities Act of 1933? b. Identify the primary issues that will determine the likelihood of Ira’s prevailing on the claim.KPMG (LO 1, 2, 3) KPMG LLP served as the external auditor for some of the largest sub-prime mortgage lenders in the U.S. leading up to and during the housing market crisis of the mid to late-2000s. The audits of two of their largest lending clients, New Century Financial Corporation and Countrywide, ultimately led the firm to settle litigation charges in 2010 for $44.7 and $24 million, respectively. The business model of these two subprime mortgage lenders consisted of providing loans to borrowers with weak credit histories. The business model had begun to fail during 2007, when the economy weakened, borrowers began defaulting, and home prices declined drastically. New Century filed for bankruptcy and Countrywide was purchased by Bank of America, which subsequently suffered massive losses related to business failures at Countrywide. Just before the housing crash of 2007 put the companies in severe financial crises, KPMG had given both companies unqualified audit opinions. In both cases, KPMG was subsequently accused of violating professional standards, lacking independence, and being negligent. K PMG defended itself by arguing that its audits were not the cause of the financial woes at New century and Countrywide. Rather, the firm contended that the failed business model of the two companies led to investor losses. a. How does the economic environment affect the litigation risk faced by audit firms? b. Should auditors be held liable if their client’s business fails or if the financial statements contain a fraud that the auditors did not detect? c. What defenses do auditors use in response to litigation? d. What actions can auditors take to minimize litigation exposure?ToshIba, EY (LO 1, 2, 3) In 2015, the business press reported that Japan’s Toshiba Corp. over stated its operating profit by 151.8 billion yen ($1.22 billion) over several years through accounting irregularities involving top management. This overstatement represents approximately one-third of Toshiba’s pre-tax profits during the misstatement period. Toshiba had a corporate culture in which one could not go against the wishes of superiors. An investigation report noted that when top management presented ‘challenges’, division presidents, line managers and employees below them continually carried our inappropriate accounting practices to meet targets in line with the wishes of their superiors. Improper accounting included overstatements and booking profits early or pushing back the recording of losses or charges, and such steps often led to even higher targets being set for divisions in the following period. The report said much of the improper accounting, stretching back to fiscal year 2008, was intentional and would have been difficult for auditors to detect. The audit firm during this misstatement period was EY (Ernst & Young ShinNihon) who incurred significant reputational damage after they were accused of failing to detect the misstatement and fined $17.4 million by Japanese regulators. The investigation into Toshiba’s accounting practices was initially limited to its home country. However, in 2016 the U.S. Justice Department and the Securities and Exchange Commission began looking into the case since part of the alleged fraud involved a Toshiba unit based in the US (Westinghouse Electric Company). a. Based on this limited information, does this case represent a business failure, an audit failure, or both? b. Should auditors be held liable if their client’s business fails or if the financial statements contain a fraud that the auditors did not detect? c. Under what law would the SEC be likely to pursue this case?1CYBK 2CYBK 3CYBK 4CYBK 5CYBK 6CYBK 7CYBK 8CYBK 9CYBK 10CYBK 11CYBK 12CYBK 13CYBK 14CYBK 15CYBK Which of the following accounts would not be included in the Acquisition and Payment for Long-Lived Assets Cycle? a. Revenue b. Depreciation expense c. Gain on disposal d. Equipment 17CYBK 18CYBK 19CYBK Which management assertion is usually most relevant for liability accounts? a. Completeness. b. Existence. c. Rights and obligations. d. Presentation and disclosure. e. None of the above.21CYBK 22CYBK 23CYBK 24CYBK 25CYBK 26CYBK 27CYBK 28CYBK 29CYBK 30CYBK 31CYBK 32CYBK 33CYBK 34CYBK 35CYBK 36CYBK 37CYBK 38CYBK 39CYBK 40CYBK 41CYBK 42CYBK 43CYBK 44CYBK 45CYBK 46CYBK 47CYBK 48CYBK 1RQSC 2RQSC 3RQSC 4RQSC 5RQSC 6RQSC Professional guidance indicates that the auditor should consider revenue recognition to be high risk in planning an audit of a company’s financial statements. a. Identify the activities that affect the revenue cycle. b. Identify the financial statement accounts typically associated with the revenue cycle.Identify the accounts associated with the acquisitions and payments for long-lived assets cycle.Assume that an organization asserts that it has $35 million in net accounts receivable. Describe specifically what management is asserting with respect to net accounts receivable.10RQSC 11RQSC 12RQSC 13RQSC List factors that might affect an audit firm’s client portfolio.15RQSC 16RQSC

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