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S1 - Homework - Chapter 1&2

Here are the summaries for the types of audits: a. This is a compliance audit that would likely be performed by an internal auditor. A compliance audit evaluates whether an entity is complying with relevant laws and regulations. b. This is a financial statement audit that would be performed by an external auditor. A financial statement audit determines whether financial statements are fairly presented in accordance with generally accepted accounting principles. c. This is an audit of internal controls that would be performed by an internal auditor. An internal control audit evaluates the design and operating effectiveness of an entity's internal control system. d. This could be considered either an audit of internal controls or a forensic audit that would be performed by an internal auditor. An

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148 views2 pages

S1 - Homework - Chapter 1&2

Here are the summaries for the types of audits: a. This is a compliance audit that would likely be performed by an internal auditor. A compliance audit evaluates whether an entity is complying with relevant laws and regulations. b. This is a financial statement audit that would be performed by an external auditor. A financial statement audit determines whether financial statements are fairly presented in accordance with generally accepted accounting principles. c. This is an audit of internal controls that would be performed by an internal auditor. An internal control audit evaluates the design and operating effectiveness of an entity's internal control system. d. This could be considered either an audit of internal controls or a forensic audit that would be performed by an internal auditor. An

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1-24

Greenbloom Garden Centers is a small, privately held corporation that has two stores in
Orlando, Florida. The Greenbloom family owns 100 percent of the company’s stock, and
family members manage the operations. Sales at the company’s stores have been growing
rapidly, and there appears to be a market for the company’s sales concept—providing bulk
garden equipment and supplies at low prices. The controller prepares the company’s
financial statements, which are not audited. The company has no debt but is considering
expanding to other cities in Florida. Such expansion may require long-term borrowings and
is likely to reduce the family’s day-to-day involvement in all of the company’s operations.
The family does not intend to sell stock in the company.
Required:
Discuss the factors that may make an audit necessary and potentially valuable for the
company. Be sure to consider the concept of information risk

Answer
→ In order to expand their business into other cities and hire employees, the company needs to
consider having an audit. Even if the company does not intend to sell stock, the company still needs
to raise funds from other sources such as banks which require audited financial statements before
lending funds. In this case, a clean audited financial statement can reduce lender’s risk and make it
easier for the company to raise capital.
→ In addition, an auditor provides investors with a form of insurance. The auditor can provide a
monitoring activity for the Greenbloom and get insurance when investors lose money.

2-24
Audits can be categorized into five types: (1) financial statement audits, (2) audits of internal
control, (3) compliance audits, (4) operational audits, and (5) forensic audits.
Required:
For each of the following descriptions, indicate which type of audit (financial statement audit,
audit of internal control, compliance audit, operational audit, or forensic audit) best
characterizes the nature of the audit being conducted. Also indicate which type of auditor
(external auditor, internal auditor, government auditor, or forensic auditor) is likely to perform
the audit engagement.

a. Evaluate the policies and procedures of the Food and Drug Administration in terms of
bringing new drugs to market.
compliance audits\ internal auditor

b. Determine the fair presentation of Ajax Chemical’s balance sheet, income statement, and
statement of cash flows.
financial statement audits\ external auditor

c. Review the payment procedures of the accounts payable department for a large
manufacturer.
audits of internal control\ internal auditor
d. Examine the financial records of a division of a corporation to determine if any accounting
irregularities have occurred.
audits of internal control\ internal auditor

e. Evaluate the feasibility of forecasted rental income for a planned low-income public
housing project.
operational audits\ government auditor

f. Evaluate a company’s computer services department in terms of the efficient and effective
use of corporate resources.
operational audits\ internal auditor, external auditor

g. Audit the partnership tax return of a real estate development company.


compliance audits\ external auditor

h. Investigate the possibility of payroll fraud in a labor union pension fund.


forensic audits\ forensic auditor

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