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Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter5: Professional Auditing Standards And The Audit Opinion Formulation Process

Section: Chapter Questions

Problem 7RQSC: Professional guidance indicates that the auditor should consider revenue recognition to be high risk...

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Similar questions

An important task ¡n the audit of the revenue cycle is determining whether a client has appropriately recognized revenue. a. What is the five-step process that companies should use in recognizing revenue? Why might the auditor need to do additional research and consider additional criteria on revenue recognition? b. The following are situations in which the auditor will make decisions about the amount of revenue to be recognized. For each of the following scenarios, labeled (1) through (6): . Identify the key issues to address in determining whether or not revenue should he recognized. . Identify additional information the auditor may want to gather in making a decision on revenue recognition. . Based only on the information presented, develop a rationale for either the recognition or nonrecognition of revenue. 1. AOL sells software that is unique as a provider of Internet services. The software contract includes a service fee of $19.95 for up to 500 hours of Internet service each month. The minimum requirement is a one-year contract. The company proposes to immediately recognize 30% of the first-year’s contract as revenue from the sale of software and 70% as Internet services on a monthly basis as fees are collected from the customer. 2. Modis Manufacturing builds specialty packaging machinery for other manufacturers. All of the products are high end and range in sales price from $5 million to $25 million. A major customer is rebuilding one of its factories and has ordered three machines with total revenue for Modis of $45 million. The contracted date to complete the production was November, and the company met the contract dare. The customer acknowledges the contract and confirms the amount. However, because the factory is not yet complete, it has asked Modis to hold the products in the ware house as a courtesy until its building is complete. 3. Standish Stoneware has developed a new low-end line of baking products that will be sold directly to consumers and to low-end discount retailers. The company had previously sold high-end silverware products to specialty stores and has a track record of returned items for the high-end stores. The new products tend to have more defects, but the defects are not necessarily recognizable ¡n production. For example, they are more likely to crack when first used in baking. The company does not have a history of returns from these products, but because the products are new, it grants each customer the right to return the merchandise for a full refund or replacement within one year of purchase. 4. Omer Technologies is a high-growth company that sells electronic products to the custom copying business. It is an industry with high innovation, but Omer’s technology is basic. In order to achieve growth, management has empowered the sales staff to make special deals to increase sales in the fourth quarter of the year. The sales deals include a price break and an increased salesperson commission but not an extension of either the product warranty or the customer’s right to return the product. 5. Electric City is a new company that has the exclusive right to a new technology that saves municipalities a substantial amount of energy for large-scale lighting purposes (e.g., for ball fields, parking lots, and shop ping centers). The technology has been shown to be very cost effective in Europe. In order to get new customers to try the product, the sales force allows customers to try the product for up to six months to prove the amount of energy savings they will realize. The company is so confident that customers will buy the product that it allows this pilot-testing period. Revenue is recognized at the time the product is installed at the customer location, with a small provision made for potential returns. 6. Jackson Products decided to quit manufacturing a line of its products and outsourced the production. However, much of its manufacturing equipment could be used by other companies. In addition, it had over $5 million of new manufacturing equipment on order in a noncancelable deal. The company decided to become a sales representative to sell the new equipment ordered and its existing equipment. All of the sales were recorded as revenue.
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.
Think about the accounting courses you have taken to date. Assets, Liabilities, Stockholders Equity are sections in the balance sheet. The auditor must consider each section in their audit. Discuss the sections and the accounts in those sections that you believe require enhanced focus in an audit and explain your choices.
You are required to read the following statement carefully, and then, discuss the factors behind the statement content, stating examples of how this content can be implemented: "Auditors develop overall audit plans to ensure that they obtain sufficient appropriate audit evidence. The timing and extent of audit procedures auditors use is a matter of professional judgement, which depends upon a number of factors". Plz don’t make it long answer
If the group engagement partner decides that the component auditor cannot access sufficient appropriate audit evidence regarding the component of the financial statements audited, what type of modified opinion will they consider issuing? O modified opinion due to GAAP departure O modified opinion due to scope limitation O adverse opinion O modified opinion due to GAAS departure
The use of an audit engagement letter is the best method of assuring the auditor will have which of the following?Select one: a. Cooperation from other auditors b. Auditor will obtain sufficient appropriate audit evidence. c. Access to all books, accounts and vouchers required for audit purpose d. Management representation letter
TRUE OR FALSE. AUDITING 1. Financial statement users need to have an understanding of both the accounting and audit functions in order to better appreciate the assurance provided by an independent auditor on the fairness of the financial statements 2. The practitioner can accept an engagement if preliminary knowledge of the engagement circumstances indicate that ethical requirements regarding professional competence may not be satisfied 3. Professional competence can be satisfied by the practitioner using the work of persons from other professional disciplines referred to as experts 4. The practitioner plans and performs an assurance engagement using his professional judgment to obtain sufficient appropriate evidence about whether the subject matter information is free from material misstatement.
TRUE OR FALSE: auditing 2. The concepts and principles on auditing and assurance introduce students to the theories underlying auditing services and provides opportunities to develop technical expertise in applying the concepts learned 3. The practitioner is required to pursue any matter which may lead to a material adjustment or modification to the subject matter of information 4. An independent auditor may participate in preparing financial statements including accompanying notes. 5. Nature of financial reporting involves preparation of financial statements based on the management’s judgment in applying an applicable financial reporting framework through coordination with the external auditor
Auditors perform analytical procedures in the planning stage of an audit for the purpose ofa. Deciding the matters to cover in an engagement letter.b. Identifying unusual conditions that deserve more auditing effort.c. Determining which of the financial statement assertions are the most important for theclient’s financial statements.d. Determining the nature, timing, and extent of further audit procedures for auditing theinventory.
An audit strategy memorandum containsa. Specifications of auditing standards relevant to the financial statements being audited.b. Specifications of procedures the auditors believe appropriate for the financial statements under audit.c. Documentation of the assertions under audit, the evidence obtained, and the conclusions reached.d. Reconciliation of the account balances in the financial statements with the account balances in the client’s general ledger.
Please solve all questions. Please
Consider the concepts of sufficient and appropriate audit evidence. Assess how audit risk relates to audit evidence. How do auditors audit accounting estimates and other subjective information? What are analytical procedures, and why are they a useful audit tool? Explain the importance of audit documentation.