Questions 4 Auditing two, Questions 4 Auditing two PDF

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Questions 4 Auditing, Questions 4 Auditing, Questions 4 Auditing...

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1- The following are 11 audit procedures taken from an audit program: 1. Foot the accounts payable trial balance and compare the total with the general ledger. 2. Examine vendors’ invoices to verify the ending balance in accounts payable. 3. Compare the balance in payroll tax expense with previous years. The comparison takes the increase in payroll tax rates into account. 4. Discuss the duties of the cash disbursements clerk with him and observe whether he has responsibility for handling cash or preparing the bank reconciliation. 5. Confirm accounts payable balances directly with vendors. 6. Account for a sequence of checks in the cash disbursements journal to determine whether any have been omitted. 7. Examine the internal auditor’s initials on monthly bank reconciliations as an indication of whether they have been reviewed. 8. Examine vendors’ invoices and other documentation in support of recorded transactions in the acquisitions journal. 9. Multiply the commission rate by total sales and compare the result with commission expense. 10. Examine vendors’ invoices and other supporting documents to determine whether large amounts in the repair and maintenance account should be capitalized. 11. Inquire about the accounts payable supervisor’s monthly review of a computer generated exception report of receiving reports and purchase orders that have not been matched with a vendor invoice. a . Indicate whether each procedure is a test of control, substantive test of transactions, analytical procedure, or a test of details of balances. b . Identify the type of evidence for each procedure Answer:

a.

b.

1. Test of details of balances

Reperformance

2. Test of details of balances

Documentation

3. Analytical procedures

Analytical procedures

4. Test of control

Inquiry and observation

5. Test of details of balances

Confirmation

6. Test of control

Documentation

7. Test of control

Documentation

8. Substantive test of transactions

Documentation

9. Analytical procedures

Analytical procedures

10.Test of details of balances

Documentation

11. Test of control

Inquiry

2- For each of the seven types of evidence, identify whether it is applicable for risk assessment procedures, tests of controls, substantive tests of transactions, analytical procedures, and tests of details of balances. Answer:

The following shows which types of evidence are applicable for the five types of tests. TYPE OF EVIDENCE -Physical examination -Confirmation -Documentation -Observation -Inquiries of the client

TYPES OF TESTS -Tests of details of balances -Tests of details of balances -All except analytical procedures Procedures to obtain an understanding of internal control and tests of controls -All five types

-Reperformance

-Tests of controls, substantive tests of transactions, and tests of details of balances

-Analytical procedures

-Analytical procedures

3- Rank the following types of tests from most costly to least costly: analytical procedures, tests of details of balances, risk assessment procedures, tests of controls, and substantive tests of transactions. Answer:

:Going from most to least costly, the types of tests are     

Tests of details of balances Substantive tests of transactions Tests of controls Procedures to obtain an understanding of internal controls Analytical procedures

4- List the balance-related audit objectives in the verification of the ending balance in inventory and provide one useful audit procedure for each of the objectives.

Answer:

The balance-related audit objectives and related procedures are as follows: GENERAL BALANCERELATED AUDIT SPECIFIC OBJECTIVE OBJECTIVE

AUDIT PROCEDURE

Detail tie-in

Inventory on the inventory summary agrees with the physical count, the extensions are correct, and the total is correctly added and agrees with the general ledger.

Check extensions of price times quantity on a sample basis, foot the detailed inventory summary, and trace the balance to the general ledger and financial statements.

Existence

Inventory as stated in Trace inventory from final financial statements inventory summary to actually exists. actual inventory and physically count selected items.

Completeness

Existing inventory items have been counted and included in the financial statements.

Select items from the physical inventory and trace to the client's final summary to make sure that all items are included.

Accuracy

Inventory items included in the financial statements are stated at the correct amounts.

Perform price tests of inventory by examining supporting vendors' invoices for selected inventory items and reverify price times quantity.

Classification

Inventory as included in Compare the the financial statements classification of inventory is properly classified. into raw materials, work in process, and finished goods by comparing the description on physical inventory count tags with the client's final inventory listing.

Cutoff

Inventory cutoff is Trace selected receiving properly recorded at the reports several days before and after the balance sheet date. balance sheet date to determine whether inventory purchases are recorded in the proper period and related physical inventory counts are included or excluded from inventory.

Realizable value

Inventory on the Inquire of factory financial statements employees and excludes unusable items. management regarding obsolescence of inventory, and examine storeroom for evidence of damaged or obsolete inventory.

Rights and obligations

Inventory items in the Review contracts with financial statements are suppliers and customers owned by the client. for the possibility of the inclusion of consigned or other non-owned inventory.

Presentation and disclosure

Inventory and related accounts in the inventory and warehousing cycle are properly presented .and disclosed

Examine financial statements for proper presentation and disclosure including proper description of pledged inventory and inclusion of significant sales and purchase .commitments

5- The following are audit procedures from different transaction cycles: 1. Use audit software to foot and cross-foot the cash disbursements journal and trace the balance to the general ledger. 2. Select a sample of entries in the acquisitions journal and trace each one to a related vendor’s invoice to determine whether one exists. 3. Compute inventory turnover for each major product and compare with previous years. 4. Confirm a sample of notes payable balances, interest rates, and collateral with lenders. 5. Use audit software to foot the accounts receivable trial balance and compare the balance with the general ledger. 6. Examine documentation for acquisition transactions before and after the balance sheet date to determine whether they are recorded in the proper period. 7. Inquire of the credit manager whether each account receivable on the aged trial balance is collectible. 8. Examine sales invoices for evidence of internal verification of prices, quantities, and extensions. 9. Select items from the client’s perpetual inventory records and examine the items in the company’s warehouse. a . For each audit procedure, identify the transaction cycle being audited. b . For each audit procedure, identify the type of evidence. c . For each audit procedure, identify whether it is a test of control or a substantive test. d . For each substantive audit procedure, identify whether it is a substantive test of transactions, a test of details of balances, or an analytical procedure. e . For each test of control or substantive test of transactions procedure, identify the transactionrelated audit objective or objectives being satisfied. f . For each analytical procedure or test of details of balances procedure, identify the balancerelated audit objective or objectives being satisfied.

.f N/A

.e Posting and

.d S T of T

.c Substantive

.b Reperformance

1.

summarizati N/A

on Existence

.a Acquisition and Payment

S T of T

Test of control or

Realizable value

N/A

AP

Substantive Substantive

Existence

N/A

T D of B

Substantive

Documentation

2.

Acquisition and

Analytical procedure

3.

Payment Inventory and

Confirmation

4.

Warehousing Capital Acquisition and Repayment

Accuracy Presentation and disclosure Detail tie-in Cutoff

N/A N/A

T D of B T D of B

Substantive Substantive

Reperformance Documentation

Realizable value N/A

N/A Accuracy

T D of B N/A

Substantive Test of control

Inquiry Inspection

Existence

N/A

T D of B

Substantive

Physical Examination

5. 6.

Sales and Collections Acquisition and

Payment 7. Sales and Collection 8. Revenue

Documentation 9. Inventory and Warehousing...