ESSAY:
Q1:
Below are 12 audit procedures. Classify each procedure according to the
following types of audit evidence: (1) physical examination, (2)
confirmation, (3) documentation, (4) observation, (5) inquiry of the
client, (6) reperformance, and (7) analytical procedure.
Type of
Evidence
observation
Audit Procedures
1.
Watch client employees count inventory to determine whether company
procedures are being followed.
analytical
procedure
2.
Calculate the ratio of cost of goods sold to sales as a test of overall
reasonableness of gross margin relative to the preceding year.
inquiry of the 3.
client
Obtain information about the client’s internal controls by asking
questions of client personnel.
physical
examination
4.
Examine a piece of equipment to make sure a recent purchase of
equipment was actually received and is in operation.
documentation
5.
Compare vendor names and amounts on purchases invoices with entries
in the purchases journal.
confirmation
6.
Obtain a written statement from the client’s bank stating the client’s
year-end balance on deposit.
reperformance
7.
Reposting from the sales journal to the general ledger accounts.
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Q2:
Below are 5 documents typically examined during an audit. Classify each
document as either internal or external.
Type of
Document
internal
Documents
1.
Payroll time cards.
external
2.
Canceled checks for payments of accounts payable.
external
3.
Bank statements.
internal
4.
Notes receivable.
internal
5.
Signed lease agreements.
Q3:
The following is a portion of a qualified audit report issued for a private
company:
Independent Auditor’s Report
To the shareholders of Tamarak Corporation
We have audited the accompanying balance sheet of Tamarak Corporation
as of October 31, 2007, and the related statements of income, retained earnings,
and cash flows for the year then ended. These financial statements are the
responsibility of the company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
The company has included in property and debt in the accompanying
balance sheet certain lease obligations that, in our opinion, should be expensed
in order to conform with generally accepted accounting principles. If these lease
obligations were capitalized, property would be decreased by $4,000,000, longterm debt by $2,000,000, and retained earnings by $180,000 as of October 31,
2005, and net income and earnings per share would be decreased by $180,000
and $.62, respectively, for the year then ended.
Required:
Complete the above qualified audit report by preparing the opinion paragraph.
Do not date or sign the report.
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Answer:
In our opinion, except for the effects of capitalizing lease obligations, as
discussed in the preceding paragraph, the financial statements referred
to above present fairly, in all material respects, the financial position of
Tamarak Corporation as of October 31, 2007, and the results of its
operations and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
Choose the most correct answer to the following questions:
1. Which of the following is a type of audit evidence?
a. Oral responses to the auditor from employees of the company under audit.
b. Written communications from company employees or outsiders.
c. Observations made by an auditor.
d. Evidence may take any of the above forms.
2. Audit report must be directed to:
a. Financial authorities.
b. Financial markets.
c. General Authority for shareholders
d. Nun of above
3. Expression of opinion on financial statements is requirement of:
a. General qualifications and conduct standards
b. Field work standards
c. A+B.
d. Nun of above
4. An examination of part of an organization’s procedures and methods for the
purpose of evaluating efficiency and effectiveness is what type of audit?
a. Operational audit.
b. Compliance audit.
c. Financial statement audit.
d. Production audit.
5 . Three common types of attestation services are:
a. audits, reviews, and “other” attestation services.
b. audits, verifications, and “other” attestation services.
c. reviews, verifications, and “other” attestation services.
d. audits, reviews, and verifications.
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6. Management consulting services is part of:
a. Assurance services.
b. Non Assurance services.
c. A+B.
d. Nun of above
7. When there is substantial doubt about the entity’s ability to continue as a
going concern, that would discovered by:
a. physical examination.
b. observation.
c. analytical procedures.
d. either a or b.
8. Conditions requiring a departure from an unqualified audit report include
many cases, but which of the following is right?
a. Management refused to allow the auditor to confirm significant accounts receivable
for which there were no alternative procedures performed.
b. Management decided not to allow the auditor to confirm significant accounts
receivable, but the auditor obtained sufficient appropriate evidence by examining
subsequent cash receipts.
c. Management has determined that fixed assets should be reported in the balance
sheet at their replacement values rather than historical costs. The auditors do not
concur.
d. all of above.
9. The ___________ rate may be defined as approximately the rate a bank could
earn by investing in U.S. treasury notes for the same length as the length of a
business loan.
a. nominal
b. stated
c. risk-free
d. prevailing
10. When auditors use documents to support recorded transactions, the process
is often called:
a. inquiry.
b. confirmation.
c. documentation.
d. physical examination.
11. “Evaluations of financial information made by a study of plausible
relationships among financial and nonfinancial data involving comparisons of
recorded amounts to expectations developed by the auditor” is a definition of:
a. analytical procedures.
b. tests of transactions.
c. tests of balances.
d. auditing.
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12. When the question arises whether a CPA firm may do both bookkeeping and
auditing services for the same public company client, the Interpretations of the
AICPA’s Code of Professional Conduct:
a. encourage it.
b. prohibit it.
c. allow it.
d. allow each firm to determine the answer on a case-by-case basis.
13. “Physical examination” is the inspection or count by the auditor of items to
make sure of:
a. existence (quantity).
b. quality.
c. a+b.
d. non of above
14. Which of the following is not one of the major types of analytical procedures?
a. Compare client with industry averages.
b. Compare client with prior year.
c. Compare client with budget.
d. non of above.
15. Which of the following forms of evidence would be least persuasive in
forming the auditor’s opinion?
a. Responses to auditor’s questions by the president and controller regarding the
investments account.
b. conformation received from clients.
c. a+b
d. The auditor’s count of marketable securities.
16. Which of the following statements most accurately captures the intent of the
standards of field work?
a. Field work standards are primarily concerned with personal attributes necessary
during the conduct of the audit.
b. Field work standards provide extensive guidance regarding the conduct of an audit.
c. Field work standards are primarily directed at the auditor’s planning, understanding
of internal control, and evidence accumulation.
d. Field work standards are primarily concerned with the conduct of substantive
testing as opposed to testing of internal controls.
17. As a result of management’s refusal to permit the auditor to physically
examine inventory, the auditor has not accumulated sufficient appropriate
evidence to conclude whether financial statements are stated in accordance with
GAAP. The auditor must depart from the unqualified audit report because:
a. the financial statements have not been prepared in accordance with GAAP.
b. the scope of the audit has been restricted by circumstances beyond either the
client’s or auditor’s control.
c. the auditor has lost independence.
d. the scope of the audit has been restricted.
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18. Which of the following is the most objective type of evidence?
a. A letter written by the client’s attorney discussing the likely outcome of outstanding
lawsuits.
b. The physical count of securities and cash.
c. Inquiries of the credit manager about the collectibility of noncurrent accounts
receivable.
d. Observation of cobwebs on some inventory bins.
19. Traditionally, confirmations are used to verify:
a. individual transactions between organizations, such as sales transactions.
b. bank balances and accounts receivable.
c. fixed asset additions.
d. payroll expenses.
20. Calculating the gross margin as a percent of sales and comparing it with
previous periods is what type of evidence?
a. Physical examination.
b. Analytical procedures.
c. Observation.
d. Inquiry
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