Auditing Exam 1 with working in excel

1. (TCO A) You have been hired by a Regional CPA firm to perform audits on their
largest clients. Explain what Standards of Field work you would be required to
adhere to and why

Question 2.2. (TCO B) Below is an audit report please explain what is wrong with
this report. Note: There are at least 17 deficiencies please give at least 5 of those
deficiencies:

An audit report prepared by Henry and George, CPAs, is provided below. The audit
for the year ended December 31, 2010 was completed on March 1, 2011, and the
report was issued to Nelson Corporation, a publicly held company, on March 13,
2011. List any deficiencies in this report. Do not rewrite the report.
We have examined the accompanying financial statements of Novak Corporation as
of December 31, 2010. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with generally accepted accounting
principles. Those principles require that we plan and perform the audit to provide
reasonable assurance about whether the financial statements are free of
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, except for the effects of not capitalizing certain lease obligations that
should be capitalized in order to conform with generally accepted accounting
principles, the financial statements referred to above present accurately the
financial position of Novak Corporation as of December 31, 2010, in conformity with
generally accepted accounting principles.
Henry and George, CPA

Question 3.3.
Given these facts, calculate return on assets, current ratio, and return on equity:

Sales

$8,200,000
Net income

2,050,000
Average total assets

7,100,000
Average total liabilities

3,500,000
Current Assets-yr-end 1,800,000
Current LiabilitiesYear-end 1,600,000
Total Year-end Assets 7,400,000

All information for solution is available.

Show your work!

(Points : 18)

Question 4.4. Your client shows interest expense on the books of $26,500. You
receive bank loan balances which reflect loan balances at each month-end as :

Jan 1-April 30th..........$500,000

May 1-October 31......$725,000

Nov 1-Dec 31st..........$425,000

The interest rate was 5% from Jan 1- Oct 31 and 6.5% from Nov thru Dec.

1) What is the correct interest expense that should be on the books at year end?

2) Where would you get your information on the interest rate and loan balances
each month?

Question 5.5.
Two auditors, Mary and Susan, independently assessed the risks associated with
their client's accounts receivable. The appropriate audit risk is determined to be 5%
for Mary. Susan determines that the audit risk for his client is 6%.
The inherent risk is assessed at 35% and 72% for Mary and Susan respectively.
Mary evaluates the control risk at 55% while Susan assesses control risk at a
relatively low 30%. Using the audit risk model please answer the following
questions:

a, What is the detection risk percent for both Mary and Susan?
b. Which auditor, Mary or Susan , will have to collect the most account balance
evidence for accounts receivable based on their evaluation in part a above?

1. (TCO E) A Remington School District employee has been charged with theft and
forgery for allegedly stealing approximately $72,000 in district funds.
Mary Blaner, 51, was charged in District Court with one count of second-degree
felony theft and five counts of third-degree felony forgery. She is the second school
district employee to be formally charged with stealing from the district. Both
individuals were charged in separate and apparently unrelated cases.
Blaner, who was the district's payroll clerk, allegedly arranged electronic direct
deposits of funds for nonexistent employees that then went to her, according to the
police. Blaner was a trusted employee who had worked at the district for over 10
years. (Note: she just went through a divorce and has 4 children to support. She
needs money for her children and a new car and had plans to pay the money back
later).
"Over the course of the last 15 months, she was able to allegedly siphon funds out
of their (the district's) account into her account, and she allegedly set up fictitious
employees," School district officials became suspicious when they had trouble
balancing the district's account. After an internal audit, school officials came across
payroll listings for workers that did not have any matching Social Security numbers.
Another school district employee, Cindy Heap, who formerly worked as an
elementary school secretary, earlier was charged with theft and 11 counts of
forgery in a different case, according to Gary Searle, deputy county attorney. Heap
allegedly took just under $90,000 in district funds, Searle said. Heap, 32, resigned
from her job.
(1) What factors allowed these frauds to occur?
(2) What do you think the school district should do in the future to prevent fraud
from occurring in the future?
(3) What responsibility do you feel the current school external auditor has to detect
this fraud?
(4) How have the three elements of the Fraud Triangle enabled Mary to commit this
fraud?

Question 2.2. (TCO G) The 1136 Tenants v. Max Rothenberg and Company case
(Chapter 5) established the need for an Engagement Letter at the start of an
audit. Discuss at least six of the matters that should be specified in an
engagement letter. Explain why this upfront Engagement Letter is so important.

Question 3.3. (TCO H) One objective of audit of a water utility for a small city is to
determine whether all customers are being billed. Select the best "direction of
testing" from the options below and explain why you selected that option.
(a) Meter Department records to the sales register.
(b) Sales Register to the meter department records.
(c) Accounts receivable ledger to the sales register.
(d) Sales Register to the Accounts receivable ledger

1. (TCO I) Accounts Receivable - For each of the following, please explain if an

auditor's review of the client's sales cutoff would detect these problems:
(a) Would excessive goods returned for credit be detected by a sales cut-off test
why or why not?
(b) Would unrecorded sales discounts be detected by a sales cut-off test why or
why not?
(c) Lapping of year-end accounts receivable be detected by a sales cut-off test
why or why not?
(d) Inflated sales for the year could it be detected by a sales-cut-off test why or
why not? (Points : 25)

Question 3.3. (TCO K) You are the Senior Auditor for WWZ Co. and you have
completed the testing of all the accounts. However, prior to issuing your report,
what are at least five other procedures or reviews that must be performed prior to
issuing your report? Explain your responses

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