COLLEGE OF FINANCE, MANAGEMENT & DEVELOP MENT DEPARTMENT OF ACCOUN TING AND FINANCE Course Title: Auditing principles & Practices II Course number: AcFn 3301 Final exam time 2:00 Name______________________________ Id. __________ Part I Chose the correct answer from the given alternatives 1. Which of the following can be used as substantive test for receivables and sales transactions? A. Confirm receivable with debtors. B. Perform analytical procedures. C. Review the year-end cutoff of sales transactions. D. All of the above. 2. Which of the following is (are) primary audit objective for receivables/sales? A. Clerical accuracy B. Existence C. Valuation D. Statement Presentation E. All of the above 3. Which assertions relating to receivables/sales are addressed when auditors select a Sample of sales invoices and compare details to shipping documents? A. Existence B. Ownership C. Valuation D. All 4. The most important test of details of balances to determine the existence of recorded Accounts receivable is; A. Tracing sales entries to shipping documents. B. Tracing the credits in accounts receivable to bank deposits. C. Tracing sales returns entries to credit memos issued and receiving room reports. D. The confirmation of customers' balances 5. The use of the positive form of receivables confirmation is preferred when A. internal control surrounding accounts receivable is considered to be effective. B. there is reason to believe that a substantial number of accounts may be in dispute. C. a large number of small balances are involved. D. there is reason to believe a significant portion of the requests will be made. 6. Most tests of accounts receivable and the allowance for uncollectible accounts are based on A. The general ledger balance of each account. B. The results of analytical procedures. C. The results of confirmations. D. The aged trial balance. 7. The most important test of details of balances for accounts receivable is A. Confirmations. B. Recalculation of the aged receivables and uncollectible accounts. C. tracing credit memos for returned merchandise to receiving room reports. D. tracing from shipping documents to journals to the accounts receivable ledger 8. Which of the following is the most common audit procedure for verification of ownership of land held by an enterprise? A. Examination of correspondence with the solicitors of the company concerning acquisition of land B. Examination of title deeds C. Examination of minutes of meeting of the board of directors concerning acquisition of the land D. Physical verification of the eland 9. Which of the following audit procedures is most likely to enable an auditor to discover unrecorded disposals of fixed assets? A. Examination of capital budget B. Review of repairs and maintenance expenses C. Examination of invoices relating to additions to fixed assets D. Examination of insurance policies 10. Which of the following procedures is most likely to enable an auditor to discover unrecorded additions to fixed assets? A. Examination of capital budget. B. Review of repairs and maintenance expenses. C. Examination of invoices relating to additions to fixed assets. D. None of the above. 11. Which of the following statements best describes the duties of an independent financial auditor with regard to physical verification of fixed assets? A. It is the responsibility of the management to carry out physical verification of fixed assets. The auditor has no duty in this regard B. It is the responsibility of the management to carry out physical verification of fixed assets. However, the auditor should satisfy himself that the method and frequency of verification are reasonable in the circumstances of th e case. It is no part of an auditor’s duty to attend the verification being conducted by the management. C. It is the responsibility of the management to carry out physical verification of fixed assets. However, the auditor should satisfy himself that the physical verification was carried out properly by observing the verification being conducted by the management, wherever possible, and by examining the written instructions issued by the management to the staff responsible for verification and the relevant working papers. D. It is the responsibility of the auditor the conduct physical verification of fixed assets. 12 . The auditor’s attendance at physical stock -taking is one of the audit procedures often employed in an audit of inventories. What, in your view, is the role of the auditor in stock-taking, where the auditor decides to attend the stock-taking? A. He conducts physical stock-taking himself B. He supervises the stock-taking while it is conducted by personnel who are specially assigned by the management for this task C. He observes the stock-taking conducted by personnel who are specially assigned by the management for this purpose. D. He observes the stock-taking as at above and also performs test counts himself in appropriate cases. 13. While-auditing wages and salaries, the auditors often examines entries in the payroll with reference to the time cards of the employees concerned. What evidence does this procedure provide to the auditor? A. The employees concerned were actually in the services of the enterprise. B. The allocation of wages to various jobs on which the employees concerned worked during the relevant period is reasonable C. The employees concerned actually worked for the number of hours for which the wages were paid to them. D. None of the above. 14. Which of these would not be considered an important control in the cash disbursements function? A. Signing of checks by an individual with proper authority. B. Separation of check signing from the accounts payable function. C. examination of the supporting documents by the controller at the time the check is signed. D. physical control over the blank, voided, and signed checks. 15. The major balance sheet account in the acquisition and payment cycle is. A. purchases .B. Common stock. C. accounts payable. D. Merchandise inventory. 16. When auditing accounts payable, auditors are usually especially concerned about the A. Existence and Completeness objectives. B. Completeness and cutoff objectives. C. Existence and cutoff objectives. D. Existence and accuracy objectives. 17. One of the following is not the part of the sales and collection cycle that cause accounts receivable to increase and decrease, A. Sales B. Sales returns C. Cash receipts D. Charge-offs of uncollectible accounts E. None of the above. 18. How would increases in tolerable misstatement and assessed level of control risk affect the sample size in substantive tests of details? Increase in Tolerable Misstatement Increase in Assessed Level of Control Risk A. Increase sample size Increase sample size B. Increase sample size Decrease sample size C. Decrease sample size Increase sample size D. Decrease sample size Decrease sample size 19. Which of the following is the most important consideration of an auditor when examining the stockholders’ equity section of a client’s balance sheet? A. Changes in the capital stock account are verified by an independent stock transfer agent. B. Stock dividends and/or stock splits during the year under audit were approved by the stockholders. C. Stock dividends are capitalized as par or at stated value on the dividend declaration date. D. Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors meetings. E. None of the above Part III : Fill the Blank Spaces 1. ___________ used to obtain monetary estimates of the total error amount or confidence limits for the total error amount in a particular account. 2. _________________ is the probability that the sample results are not representative of the entire population. Part IV: Match column B to column A. Column A column B 1. The purpose of substantive procedures A. Risk of incorrect acceptance B. Tests performed to obtain audit evidence 2. Substantive procedures C. Process of selecting a subset of a Population of items 3. Audit risk D. Inherent risk 4. Sampling 5. Sampling risk E. providing audit evidence Part V: Match column B to column A. The following are various management assertions (1 through 13) related to sales and accounts receivable management assertion. Column A 1. All sales transactions have been recorded. 2. Receivables are appropriately classified. 3. Accounts receivable are recorded at the correct amounts.. 4. Sales transactions have been recorded in the proper period. 5. Sales transactions have been recorded in the appropriate accounts. 6. All required disclosures about sales and receivables have been made. 7. All accounts receivable have been recorded. 8. There are no liens or other restrictions on accounts receivable. 9. Disclosures related to receivables are at the correct amounts. 10. Recorded sales transactions have occurred. 11. Recorded accounts receivable exist. 12. Sales transactions have been recorded at the correct amounts. 13. Disclosures related to sales and receivables relate to the entity. Column B A. an assertion about classes of transactions events B. an assertion about presentation and disclosure C. an assertion about account balances Identify the specific audit objective (1-18) that each of the following specific audit procedures (a. through l.) satisfies in the audit of sales, accounts receivable and cash receipts for fiscal year ended December 31, 2011. a. Examine a sample of duplicate sales invoices to determine whether each one has a shipping document attached. b. Add all customer balances in the accounts receivable trial balance and agree the amount to the general ledger. c. For a sample of sales transactions selected from the sales journal, verify that the amount of the transaction has been recorded in the correct customer account in the accounts receivable sub ledger. d. Inquire of the client whether any accounts receivable balances have been pledge as collateral on long-term debt and determine whether all required information is included in the footnote description for long-term debt. e. For a sample of shipping documents selected from shipping records, trace each shipping document to a transaction recorded in the sales journal. f. Discuss with credit department personnel the likelihood of collection of all accounts as of December 31, 2011 with a balance greater than $100,000 and greater than 90 days old as of year end. g. Examine sales invoices for the last five sales transactions recorded in the sales journal in 2011 and examine shipping documents to determine they are recorded in the correct period. h. For a sample of customer accounts receivable balances at December 31, 2011, examine subsequent cash receipts in January 2012 to determine whether the customer paid the balance due. i. Determine whether all risks related to accounts receivable are adequately disclosed. j. Foot the sales journal for the month of July and trace postings to the general ledger. k. Send letters to a sample of accounts receivable customers to verify whether they have an outstanding balance at December 31, 2011. l. Determine whether long-term receivables and related party receivables are reported separately in the financial statements. Part V. Describe the following shortly. A. What is the effect of assessing control risk too low? How should the auditor avoid such step? B. Why are substantive tests performed by the auditor? C. List the advantages and disadvantages of statistical sampling? D. What is the advantage of a substantive test sample? E. List the procedures for determining a sample for a substantive test? F. Discuss why sampling and why not to sample. G. Explain Probability-proportional-to-size /PPS / H. Difference and ratio estimation techniques generally produce more efficient samples than Mean per-unit estimation. What do you think the reason behind? What differences do you Observe from other sampling techniques? I. Mention; Classes of transactions, Business functions and Documents & records auditors need to understand in the sales and collection cycle. J. Distinguish between lapping and kiting. Describe audit procedures that can be used to detect each of them. K. Give examples of tests of controls over purchases of inventory and services. L. List three Management Assertions and their corresponding audit objectives in relation to Fixed Assets auditing. M. Mention; Classes of transactions, Business functions and Documents & records auditors need to understand in the Acquisition and payment cycle. N. What are the five types of tests auditors use to determine whether financial statements are fairly stated? Identify which tests are performed to reduce control risk and which tests are performed to reduce planned detection risk. Also, identify which tests will be used when auditing internal control over financial reporting. O. Distinguish between substantive tests of transactions and tests of details of balances. Give one example of each for the acquisition and payment cycle