Sullivan and Peters, CPAs have audited the financial statements of XYZ, Inc. as of December 31, 2014 and gave them a clean opinion on their financial statements.

Since XYZ is publicly traded, they also audited the firm's internal controls.

They identified material weaknesses related to the method of accounting for sales commissions and separation of duties related to purchasing transactions.

Sullivan and Peters was able to gather sufficient evidence and did not encounter any scope limitations.

Review their draft audit report attached to the end of this exam and identify five deficiencies.

Group your deficiencies by paragraph in the report and provide a brief explanation of why you feel they were deficiencies.

PRQ's management identified a material weakness in the company's internal controls during its assessment process.

They corrected this weakness about a month prior to the end of the annual reporting period.

Management reassessed controls in the area, and believes they were effective as of the end of the reporting period.

After reevaluating and retesting the relevant controls, you agree that the new controls are well designed, but since the controls over this particular area are applied only once at the end of each month (i.e., the controls have only operated two times since being corrected), you do not believe you have sufficient audit evidence to assess their operating effectiveness.

Management's written assessment concludes that the company's internal control was effective as of the report date. The transaction stream over which these controls operate process a relatively minor amount of money each year.

Assume that you are the partner in charge of the PRQ audit engagement.

Explain all the modifications you would make to your audit report on internal controls and explain why you recommend the changes, if any.

You are auditing a major consumer products manufacturer.

You are building your audit plan and trying to determine your approach to auditing their ending inventory balance as well as the long-term debt balance.

Their inventory consists of a large number of items that are similar in value.

Your assessment of the design of internal controls over inventory recording and valuation is that these controls are well-designed and haven't changed since you audited them last year and found they were working properly.

However, you have not been able to retest the controls yet for this year.

They only have three major bond issues that make up the long-term debt account balance and each bond issue contains complex provisions like conversion features and debt covenants.

Would you use a sampling technique to test their inventory balance and, if so, would you use statistical or non-statistical sampling? Explain your answer.


Would you use a sampling technique to test their long-term debt balance and, if so, would you use statistical or non-statistical sampling? Explain your answer.


You are auditing a firm's ending inventory balance. You got a complete listing of every item that made up the ending inventory balance.

At the same time that the client took its physical count of the items in ending inventory, you selected a sample of items from the listing and performed you own count of the number of that item in ending inventory.

You then compared your count to the client's count and noted any differences in your working papers.

Then you obtained a listing of the costs assigned to each item of inventory in your sample and verified the cost to purchase invoices from the vendors.

Finally, you multiplied the number in your count by your costs and compared the resulting amount to a listing that the client had provided that included their totals for each item.

You traced the total of their listing to their general ledger account.

For each of the following tests you performed, describe the purpose of the test to include all the financial statement assertion(s) involved.
Counting the items in inventory

Verifying the costs per item

Tracing the total to the general ledger

The total amount shown on the client's inventory listing you used for your tests did match their general ledger balance, but you found differences in both the number of items in inventory and costs per items that totaled to more than your tolerable misstatement. Discuss what alternatives you have to address this difference.


Describe one condition relevant to this example that might warrant using a non-statistical sampling technique and explain why non-statistical sampling would be appropriate under that condition.


For each of the following misstatements that might be found in a year-end account balances balance
state what PCAOB financial statement assertion was violated because of the error and why;
describe a control activity that might have prevented or detected the misstatement;
and a test of balance audit procedure that might detect it.

Make sure you answers are sufficiently detailed to be clear about how the error violated the assertion and how each internal control or testing procedure would detect the error.

Assume in all cases that the Cash Management function in the Treasurer's office of the firm involved prepares monthly bank reconciliations.