Ch 8

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  Chapter 8Homework SolutionsAudit Planning and Analytical Procedures  Multiple Choice Questions From CPA Examinations8! a.(3)b.(3)c.(4) d.(1) 8!# a.(1)b.(4)c.(4) 8!$ a.(4)b.(1)c.(2)d.(4)  %iscussion Questions And Pro&lems8!8Audit Acti'ities(elated Planning Procedure 1. Send an engagement letter to the client.(1) Accept client and perform initial audit planning2. Tour the client’s plant and offices.(2) Understand the client’s business and industr3. !ompare e ratios for the compan to industr competitors.(4) #erform preliminar analtical procedures4. $e%ie& management’s controls and procedures.(3) Assess client’s business ris '. $e%ie& the accounting principles uniue to the client’s industr.(2) Understand the client’s business and industr.. *etermine the li el users of the financial statements.(1) Accept client and perform initial audit planning.+. ,dentif potential related parties that ma reuire disclosure.(2) Understand the client’s business and industr-. ,dentif &hether an specialists are reuired for the engagement.(1) Accept client and perform initial audit planning-3+  8)* a./irst0 the minutes of each meeting refer to the minutes of a pre%iousmeeting. The auditor should ensure that the ha%e been pro%idedaccess to all noted minutes0 including the net ear’s minutes0probabl for arch 2120 to ma e sure the pre%ious minutes referredto &ere those from ctober 210 211. Additionall0 the auditor &ill reuest the client to include astatement in the client representation letter stating that all minutes&ere pro%ided to the auditor.b. +,F-(MA.+-, (E/E0A,..- !*11 A2%+.A2%+. AC.+-, (EQ2+(E%March 3 1.,ncrease in annual di%idend pament.!alculate the total di%idends and determine that di%idends paid to shareholders are properl reflected in the financial statements.2.Appro%al of additional administration epenses to open offices in #ortland.*uring analtical procedures0 an increase in administrati%e epenses should be included in the auditor’s epectation of the epense balance. The auditor should be alert for other potential commitments that ma ha%e been made to open offices in the 5orth&est region.3.Appro%al to engage in negotiations for a potential acuisition.*etermine the status of an potential acuisition or merger negotiations. 6e alert for an commitments that ma ha%e been made as part of the negotiations process that ma &arrant financial statement disclosure. -3-  8)* 4continued5 +,F-(MA.+-, (E/E0A,..- !*11 A2%+.A2%+. AC.+-, (EQ2+(E% 4.#otential negati%e findings from 7#A in%estigation.7%aluate the status of an resolution of negotiations &iththe 7#A regarding findings in their report. *etermine if an final determinations ha%e been made about potentialfines. 7%aluate the need for recording an pro%isions for a loss contingenc or disclosure of the status of the negotiations.'.fficers’ bonuses.*etermine &hether bonuses &ere accrued at 12311 and &ere paid in 211. !onsider the ta implications of unpaid bonuses to officers..*iscussion at the  Audit !ommittee and !ompensation !ommittee.*etermine &hat0 if an0 decisions made at either meetingha%e an impact on the audit of the financial statements. -cto&er !13 1.$eduction in sales and the related cutbac in labor and shipping costs.*uring analtical procedures0 both the decrease in re%enues and the decreases in labor and shipping costs should be included in the auditor’s epectation of the related account balances. The auditor should be alert to the fact that the drop in operating performance might create undue incenti%es and pressures that could highlight the ris of fraud.2.Appro%al of the acuisition and related financing.7amine acuisition documentation and financing documentation to understand the impact to the financial statements for recording the acuisition and the debt transaction. !onsider &hat commitments and contingencies eist and e%aluate the appropriateness of the recording of the acuisition transaction and related disclosures.3.!onsideration of a ne& incenti%e stoc option plan.*etermine if the ne& incenti%e stoc option plan has been appro%ed. ,f so0 consider an accounting treatments reuired to reflect an commitments on the part of the compan and e%aluate the ta implication of the plan and need for related disclosure.4.,dentification of deficiencies in internal control.*iscuss &ith management the nature of the deficiencies in internal control and e%aluate the impact of an remediation acti%ities to address the deficiencies. 7%aluate the impact of remediation on the auditor’s testsof controls and need for substanti%e procedures. -38  8)* 4continued5 +,F-(MA.+-, (E/E0A,..- !*11 A2%+.A2%+. AC.+-, (EQ2+(E% '.$esolution of the 7#A report findings.7amine the 7#A resolution agreement and determine if the pro%ision has been recorded for the epected costs to modif the air handling euipment . !onsider the needfor an additional disclosures of this resolution..*iscussion at the Audit !ommittee and !ompensation !ommittee.*etermine &hat0 if an0 decisions made at either meetingha%e an impact on the audit of the financial statements. c.The auditor should ha%e obtained and read the arch minutes0before completing the 12311 audit. T&o items &ere especiallrele%ant and reuire follo&up for the 12311 audit9 the in%estigationb the 7#A and appro%al for the 12311 bonuses. 8)1Statement(elated Stage o6 Audit 1.5ot reuired during this stage.2.Substanti%e testing2.Should focus on enhancing the auditor’s understanding of the client’s business and the transactions and e%ents that ha%e occurred since the last audit date.1.#lanning the audit3.Should focus on identifing areas that ma represent specific ris s rele%ant to the audit.1.#lanning the audit4.$euire documentation in the &or ing papers of the auditor’s epectation of the ratio or account balance.2.Substanti%e testing'.*o not result in detection of misstatements.4.Statement is not correct concerninganaltical procedures.*esigned to obtain e%idential matter about particular assertions related to account balances or classes of transactions.2.Substanti%e testing-4
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