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23-08-2018

Product code: Accounts-AW389

 

Instructions:

You may complete this exam in Word You may also print the exam out, complete it by hand, and scan it.

  1. You must submit the exam electronically using the Homework tab in Katalyst.
  2. For multiple choice questions, if you complete the exam in Word, please highlight your answer choice.
  3. You may use any electronic or print resources available to you.  YOU MAY NOT WORK WITH OTHER PEOPLE.  Prior to the due date, you may not communicate about the content of the exam in any way with anyone, whether they are a member of the class or not.  You must work on the exam by yourself.  Anyone caught violating this rule will receive a failing grade for the course.
  4. If you are aware of others who are violating the above rule, you must notify Prof. Janes immediately. 
  5. If you have questions regarding the exam (e.g. about the meaning of a question), you may email or call Prof. Janes
  6. A penny saved may be a penny earned, but it is a waste of a deposit slip and it really ticks off the tellers.

 

I have read and I understand the above instructions.  I certify that I have not obtained help in completing this exam from other people.  I further certify that I have not provided help in completing this exam to anyone else, nor I have I communicated with anyone else regarding the content of the exam. (Note: If you complete your exam electronically, typing your name in the box below will be accepted as a signature)

 

Extra credit question:        The Auditing Standards Board consists of how many members? (2 pts.)

 

Extra credit question answer:

 

 

 Multiple Choice Questions: Circle or highlight the best answer for each question (3 points each)

 

1.

 An auditor examines a sample of cancelled checks to verify that the checks were signed by two authorized people, in accordance with company policy. This is an example of a:  
 

A.

 Test of a control

B.

 Substantive test

 

C.

 Cutoff test

 

D.

 Statistical test

 

         

 

 

 

2.

 Which of the following is the best procedure to test the completeness of accounts payable?  
 

A.

 Examine cash payments after year-end

B.

 Confirm payables

 

C.

 Examine dates of sales orders

 

D.

 Foot the payables sub-ledger

 

         

 

 

 

3.

 If the auditor assesses the risk of misstatement of revenues as high, which type of strategy would she pursue?  
 

A.

 Low risk strategy

B.

 Reliance strategy

 

C.

 Control strategy

 

D.

 Substantive strategy

 

 

 

 

         

 

 

4.

Which of the following is not a specific procedure that contributes to good internal control over accounts receivable?
 

A.

The approval of customer orders by the credit department.

 

B.

Prenumbered shipping documents, sales invoices, and credit memoranda, and regular accounting for all numbers in the series.

 

C.

Having authorized price lists for items sold.

D.

Having one person responsible for recording credit memoranda and cash receipts for accounts receivable.

 

         

 

 

 

 

5.

Which of the following is the most important audit procedure in the audit of inventories (i.e. addresses the most relevant assertion? 
 

A.

Agreement of invoices to shipping documents

 

B.

Observation of the inventory count

 

C.

Recomputing valuation of inventory using the appropriate cost flow assumption

D.

Assessing the level of control risk as low

 

       

 

 

6.

Auditors should perform audit procedures to identify and assess subsequent events: 
 

A.

Through year end

 

B.

Through issuance of the audit report

 

C.

Through the last day of field work

 

D.

For a reasonable period after year end

         

 

 

 

7.

Revenue cutoff procedures should be designed to test whether all revenues are: 
 

A.

Recorded in the accounting period in which the customer order was received.

B.

Recorded in the accounting period in which the customer order was shipped.

 

C.

Recorded at their net realizable value.

 

D.

Recorded to reflect appropriate sales discounts.

 

         

 

 

 

8.

Which of the following audit procedures would provide the most reliable evidence that the entity has legal title to inventories? 
 

A. 

Confirmation of inventories at locations outside the entity's facilities.

B. 

Analytical review of inventory balances compared to purchasing and sales activities.

C. 

Observation of physical inventory counts.

D. 

Examination of paid vendors' invoices.

 

 

 

 

9.

 The auditor was unable to observe the physical count of inventory.  The client uses a perpetual inventory system.  Control risk was assessed as high.  What should the auditor do?   
 

A.

 Issue a qualified opinion on the financial statements.

 

B.

 Vouch inventory purchases and sales to source documents as an alternative procedure.

 

C.

 Issue an adverse opinion on the financial statements.

 

D.

 Issue an unqualified opinion with an explanatory paragraph explaining the issue.

         

 

 

 

 

10.

Which of the following is true relating to the auditors' observation of the client's inventory count? 
 

A.

The auditors should arrange for a specialist to count physical inventory.

 

B.

If the auditor’s test counts identify errors in counting, the identified misstatement is projected to the population.

 

C.

The auditors should determine in advance if the client's counting procedures are appropriate.

D.

The auditors must observe counting of inventory at each location where inventory is located.

 

 

         

 

 

11.

One reason why auditors perform analytical procedures on the client's long-term debt balances is to provide evidence that:
 

A.

 Aids the auditor in assessing inherent risk relating to long-term debt.

 

B.

 Long-term debt may be understated.

C.

 Long-term debt is properly classified.

D.

 The existence and obligation assertions are valid.

 

       

 

 

 

12.

In assessing control risk for purchases, an auditor examines a sample of vouchers for evidence that they have been cancelled to prevent reuse. Which assertion would this test of controls most likely support? 
 

A. 

Completeness.

B. 

Occurrence.

C. 

Accuracy.

D. 

Classification.

 

 

 

13.

When there are numerous property and equipment transactions during the year, an auditor who assessed control risk as high usually would plan to perform 
 

A. 

Tests of controls and extensive tests of property and equipment balances at the end of the year.

B. 

Extensive tests of current year property and equipment transactions.

C. 

Tests of controls and limited tests of current year property and equipment transactions.

D. 

Analytical procedures for property and equipment balances at the end of the year.

 

 

 

14.

The most relevant assertion for the audit of property, plant and equipment is 
 

A. 

Existence.

B. 

Rights.

C. 

Completeness.

D. 

Valuation.

 

 

15.

Which of the following situations would require adjustment of financial statement numbers if they occurred after the balance sheet date? 
 

A. 

A merger announcement.

B. 

Bankruptcy of a major customer that owed immaterial amounts at the balance sheet date.

C. 

Signing of a new contract that could lead to a 25% increase in the revenues.

D. 

A financial penalty imposed by a regulatory body for infractions that occurred six months previously.

 

Essay/Short Answer Questions

16.       DKB & Co. is conducting the audit of  Tsacmoc Corp.  They have chosen to confirm a sample of accounts receivable.  Control risk for receivables was assessed as high, so DKB decided to use negative confirmations.  After statistically selecting a sample of Tsacmoc customers, the auditors obtained the customer addresses from Tsacmoc.  The auditors prepared confirmation requests and gave them to Robert Brian, Tsacmoc’s CFO, for his signature.  Robert offered to drop the letters in the outside mailbox on his way to lunch, which the auditors accepted.  By the end of the audit, two confirmation requests had been returned to the offices of DKB indicating a disagreement with the balance on the confirmation.  Since the total of the two disputed confirmations was not material, the auditors concluded that the account balance was fairly stated.

 

Please comment on the things that DKB did incorrectly in performing this procedure.  (8 points)

 

 

17.  Auditing standards require auditors to confirm accounts receivable but not accounts payable.  Explain why. (5 points)

 

 

18. Which audit procedure that is useful in identifying subsequent events is also useful in auditing payables? (3 points)

 

 

19. Describe how an auditor would trace an expense in the purchasing process. (5 points)

 

 

20.  You are auditing the financial statements of the Westside Shopping Center for the year ending December 31, 2014.  Tenants in the shopping center are required under the terms of their leases to reimburse the shopping center for maintenance of the common areas of the shopping center (e.g. walkways, parking lot, exterior lighting, etc.).  These are referred to as common area maintenance charges (CAM).  This is standard practice in commercial real estate, and you can read more about it at

 

If there are vacant stores, Westside will not be reimbursed for those expenses.  Therefore, the income statement reflects the unreimbursed expenses as an operating expense (CAM Expenses, Net of Reimbursement).

 

The following narrative explains the process:

 

Westside Shopping Center makes necessary expenditures to maintain the common areas.  After the end of each quarter, the accounting clerk at Westside computes the amount to be billed to each tenant and sends the tenant a bill.  This is normally done about one month after the end of the quarter to ensure that Westside has received all relevant invoices for services performed.  Note that at the time of your audit, tenants have not been billed for 4th quarter CAM charges.  This resulted in an accrued receivable on the balance sheet (Accrued Reimbursements from Tenants) for the amounts to be billed.

 

Each tenant is billed for their pro-rata share of CAM charges:

 

Tenant A CAM Charges = (Tenant A’s Square Feet / Total Square Feet) x CAM Expenses

 

If there are vacant stores, Westside will not be reimbursed for all of the CAM Expenses.  Therefore, the income statement reflects the unreimbursed expenses (CAM Expenses, Net of Reimbursement) as an operating expense.

 

The following documentary evidence is available to the auditors:

  • Copies of tenant billings from the first three quarters.
  • Cash receipts records for the entire year.
  • Cash disbursement records for the entire year.
  • Cancelled checks for the entire year.
  • Voucher packages for expenses (containing purchase orders, receiving reports, vendor invoices).
  • Tenant leases.
  • Schedule of 4th Quarter CAM billing calculation (see separate file in FINAL EXAM folder on Katalyst).
  • Financial Statements (see separate file in FINAL EXAM folder on Katalyst).

 

Required:

On the following form, prepare an audit program for the audit of Accrued Reimbursements from Tenants and CAM Expenses, Net of Reimbursement.  You may add/delete rows to/from the form as needed.  (34 points)

 

 

 

Comprehensive Section  (40 points)

 

1.  The financial reporting model includes implicit assertions by management about the financial statements.  Testing whether these assertions have been met then becomes the objective of the financial statement audit.  The management assertions are organized by the ASB into three categories as shown below:

     

      1. Classes of Transactions                         2. Account Balances               3. Presentation and Disclosure

      Occurrence                                                Existence                                 Occurrence/Rights/Obligations

      Completeness                                            Rights/Obligations                  Completeness

      Authorization                                            Completeness                          Classification/Understandability

      Accuracy                                                   Valuation/Allocation               Accuracy/Valuation

      Cutoff

      Classification

 

      For each of the statements below, choose the assertion and category that the statement best describes.  You may use each assertion once, more than once, or not at all.  (2 points each)

 

 

 

Assertion

Category (1, 2, or 3)

 

Statement

 

 

a) Testing the mathematical accuracy of a sales invoice provides evidence about this assertion.

 

 

b) Recording revenue from a transaction that occurred after the balance sheet date violates this assertion.

 

 

c) The auditor completes a GAAP Disclosure Checklist to gain evidence about this assertion.

 

 

d) Touring a manufacturing facility primarily provides evidence about this assertion.

 

 

e) Vouching provides evidence about which assertion?

 

 

f) Tracing provides evidence about which assertion?

 

 

g) Examination of a property deed will provide evidence about this assertion.

 

 

h) Recording the proceeds of debt as revenues (as Enron did) invalidates this assertion.

 

2.         Vendors’ statements and accounts payable confirmations are both forms of documentary evidence created outside the client organization and useful in audit work on accounts payable.  Which if these two represents higher quality evidence?  Why? (5 points)

 

 

3.   After evaluating the evidence gathered during the audit, the auditor issues a report in which an opinion on the fairness of the financial statements is expressed.  For each situation below, state which type of opinion would be expressed. (6 points)

 

 

Opinion

 

Situation

 

a) The auditor is unable to audit a foreign subsidiary of the client.  The subsidiary represents a material part of the client’s consolidated financial statements.  The auditor was able to audit the rest of the parent company and its subsidiaries.

 

 

b) The auditor has identified several extremely material misstatements affecting many of the major items on the financial statements.

 

 

c) The client declares bankruptcy subsequent to the balance sheet date but before the audit report is issued.  There were no other material audit issues.

 

 

 

 

 

4.   The audit report for a company has the following title: Report of Independent

 

a) Explain why the word “independent” is included in the title.

 

 

b) Explain what the word “registered” means in this context.

 

c) Can you buy this company’s securities on a US exchange?  How do you know?

 

 

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Product code: Accounts-AW389

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