Audit Mid

3-3 There is a special need for ethical behavior by professionals to maintain
public confidence in the profession, and in the services provided by members of

that profession. The ethical requirements for CPAs are similar to the ethical
requirements of other professions. All professionals are expected to be
competent,
perform services with due professional care, and recognize their responsibility to
clients. The major difference between other professional groups and CPAs is
independence. Because CPAs have a responsibility to financial statement users,
it is essential that auditors be independent in fact and appearance. Most other
professionals, such as attorneys, are expected to be an advocate for their clients.
3-5 Independence of mind exists when the auditor is actually able to maintain
an unbiased attitude throughout the audit, whereas independence in appearance
is dependent on others' interpretation of this independence and hence their faith
in the auditor.
Activities which may not affect independence of mind, but which are likely
to affect independence in appearance are: (Notice that the first two are
violations
of the Code of Professional Conduct.)
1. Ownership of a financial interest in the audited client.
2. Directorship or officer of an audit client.
3. Performance of management advisory or bookkeeping or accounting
services and audits for the same company.
4. Dependence upon a client for a large percentage of audit fees.
5. Engagement of the CPA and payment of audit fees by management.
3-10A fee based upon the amount of time it takes to complete is not a violation
of Rule 302. Rule 302 on contingent fees states that professional services for
clients receiving assertion opinions shall not be offered or rendered under an
agreement whereby no fee will be charged unless a specific finding or result is
attained, or where the fee is otherwise contingent upon the findings or results of
such services. The purpose of the rule is to prevent sacrificing the quality of
audits because of the pressure felt by the auditor in producing the required audit
outcome. An example would be the fee being dependent upon the issuance of an
unqualified opinion or the obtaining of a loan by a client.
3-12 Audits should be maintained at a high level of quality even if solicitation,
advertising, and competitive bidding are allowed for several reasons:
1. Professionals do high quality work because it is a characteristic of
being a professional.
2. A reputation of doing high quality work usually pays off in more clients
and a more profitable practice.
3. Potential legal liability is also a deterrent to substandard work.
4. The Code of Professional Conduct requires a high quality of performance.
6-5 True, the auditor must rely on management for certain information in the
conduct of the audit. However, the auditor must not accept management's
representations blindly. The auditor must, whenever possible, obtain appropriate
evidence to support the representations of management. As an example, if
management represents that certain inventory is not obsolete, the auditor
should
be able to examine purchase orders from customers that prove part of the
inventory is being sold at a price that is higher than the company's cost plus
selling expenses. If management represents an account receivable as being fully
collectible, the auditor should be able to examine subsequent payments by the
customer or correspondence from the customer that indicates a willingness and
ability to pay.
6-7 The cycle approach is a method of dividing the audit such that closely
related types of transactions and account balances are included in the same
cycle. For example, sales, sales returns, and cash receipts transactions and the
accounts receivable balance are all a part of the sales and collection cycle. The
advantages of dividing the audit into different cycles are to divide the audit into
more manageable parts, to assign tasks to different members of the audit team,
and to keep closely related parts of the audit together
6-8 GENERAL LEDGER ACCOUNT CYCLE

Sales
Accounts Payable
Retained Earnings
Accounts Receivable
Inventory
Repairs & Maintenance
Sales & Collection
Acquisition & Payment

Capital Acquisition & Repayment
Sales & Collection
Inventory & Warehousing
Acquisition & Payment
4-11 General audit objectives follow from and are closely related to management
assertions. General audit objectives, however, are intended to provide a
framework
to help the auditor accumulate sufficient appropriate evidence required by the
third standard of field work. Audit objectives are more useful to auditors than
assertions because they are more detailed and more closely related to helping
the auditor accumulate sufficient appropriate evidence.
4-14 Specific audit objectives are the application of the general audit objectives
to a given class of transactions, account balance, or presentation and disclosure.
There must be at least one specific audit objective for each general audit
objective and in many cases there should be more. Specific audit objectives for a
class of transactions, account balance, or presentation and disclosure should be
designed such that, once they have been satisfied, the related general audit
objective should also have been satisfied for that class of transactions, account,
or presentation and disclosure.
6-15 For the specific balance-related audit objective, all recorded fixed assets
exist at the balance sheet date, the management assertion and the general
balance-related audit objective are both "existence."
7-4 An audit program for accounts receivable is a list of audit procedures that
will be used to audit accounts receivable for a given client. The audit procedures,
sample size, items to select, and timing should be included in the audit program.
5-6 bcs we take the sampling
5-7 The two determinants of the persuasiveness of evidence are appropriateness

and sufficiency. Appropriateness refers to the relevance and reliability of
evidence, or the degree to which evidence can be considered believable or
worthy
of trust. Appropriateness related to the audit procedures selected, including the
timing of when those procedures are performed. Sufficiency refers to the
quantity
of evidence and it is related to sample size and items to select.
5-10 The characteristics of a confirmation are:

1. Receipt
2. Written or electronic response
3. From independent third party
4. Requested by the auditor
A confirmation is prepared specifically for the auditor and comes from an

external source. External documentation is in the hands of the client at the time
of the audit and was prepared for the client's use in the day-to-day operation of
the business.
6-3 The new auditor (successor) is required by auditing standards to

communicate
with the predecessor auditor. This enables the successor to obtain information
about
the client so that he or she may evaluate whether to accept the engagement.
Permission must be obtained from the client before communication can be made
because of the confidentiality requirement in the Code of Professional Conduct.
The
predecessor is required to respond to the successors request for information;
however, the response may be limited to stating that no information will be
given.
The successor auditor should be wary if the predecessor is reluctant to provide
information about the client.
6-10 One type of information the auditor obtains in gaining knowledge about the
clients industry is the nature of the clients products, including the likelihood of
their technological obsolescence and future salability. This information is
essential
in helping the auditor evaluate whether the clients inventory may be obsolete or
have a market value lower than cost.
8-11 A related party is defined by auditing standards as an affiliated company,

principal owner of the client company, or any other party with which the client
deals where one of the parties can influence the management or operating
policies
of the other.
Material related party transactions must be disclosed in the financial
statements by management. Therefore, the auditor must identify related parties
and make a reasonable effort to determine that all material related party
transactions have been properly disclosed in the financial statements. Because
instances of fraudulent financial reporting often involve transactions with related
parties, auditors should be alert for the presence of fraud risk.
8-23 Roger Morris performs ratio and trend analysis at the end of every audit.
By that time, the audit procedures are completed. If the analysis was done at an
interim date, the scope of the audit could be adjusted to compensate for the
findings, especially when the results suggest a greater likelihood of material
misstatements. Analytical procedures must be performed in the planning phase
of the audit and near the completion of the audit.
The use of ratio and trend analysis appears to give Roger Morris an insight
into his client's business and affords him an opportunity to provide excellent
business advice to his client. It also helps provide a richer context for Roger to
really understand his clients business, which should help Roger in assessing the
risk of material misstatements.

Audit Mid

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3-3 There is a special need for ethical behavior by professionals to maintain

public confidence in the profession, and in the services provided by members of

6-8 GENERAL LEDGER ACCOUNT CYCLE

Acquisition & Payment

5-6 bcs we take the sampling

5-7 The two determinants of the persuasiveness of evidence are appropriateness

5-10 The characteristics of a confirmation are:

A confirmation is prepared specifically for the auditor and comes from an

6-3 The new auditor (successor) is required by auditing standards to

8-11 A related party is defined by auditing standards as an affiliated company,

parties, auditors should be alert for the presence of fraud risk.

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