Fundamental of Auditing

Exercise Topic 2-3 – Ethics & Internal Controls

MULTIPLE CHOICE QUESTIONS
1) An audit of financial statements is conducted to determine whether the:
A) organisation is operating efficiently and effectively.
B) auditee is following specific procedures or rules set down by a peer group authority.
C) overall financial statements are stated in accordance with specified criteria.
D) none of the above
2) Using the same auditor team on an assurance engagement over a long period of time most likely creates
which of the following threats to auditor independence?
A) self-interest.
B) self-review.
C) intimidation.
D) familiarity.
3) Which one of the following is NOT one of the five fundamental principles of professional conduct set
out in the Code of Ethics for Professional Accountants?
A) continuing education
B) confidentiality
C) integrity
D) objectivity
4) When considering the arrangement of staff to an engagement, an audit partner must always:
A) ensure confidentiality is not compromised.
B) ensure the audit staff are satisfied.
C) be satisfied that the staff has the appropriate expertise and independence.
D) ensure the client is satisfied.
5) Proper segregation of functional responsibilities calls for separation of the functions of:
A) authorisation, payment, and recording.
B) custody, execution, and reporting.
C) authorisation, recording, and custody.
D) authorisation, execution, and payment.
6) When controls leave no documentary evidence or trail:
A) the only way available as verification of their effectiveness is inquiry of management.
B) it is impossible to verify them so the auditor will have to rely on substantive tests.
C) the auditor generally observes them being applied.
D) it is impossible to audit that area of the client's system.
7) Which of the following would not be considered an inherent limitation of the potential effectiveness of
an entity's internal control structure?
A) Incompatible duties
B) Management override
C) Mistakes in judgment
D) Collusion among employees
8) Actions, policies, and procedures that reflect the overall attitude of management, directors, and owners
of the entity about internal control relates to which of the following internal control components?
A) Control environment
B) Information and communication
 C) Risk assessment
D) Monitoring
9) What requirements are usually necessary to become licensed as a certified public accountant?
A. Successful completion of the Uniform CPA Examination.
B. Experience in the accounting field.
C. Education.
D. All of the above.
10) Compliance auditing often extends beyond audits leading to the expression of opinions on the fairness
of financial presentation and includes audits of efficiency, economy, effectiveness, as well as
A) accuracy.
B) adherence to specific rules or procedures.
C) evaluation.
D) internal control
11) Which of the following correctly describes an internal control component?
A) Control activities set the tone of the organization.
B) Information and communication systems have to do with management's analysis of risk.
C) Risk assessment relates to assessing the quality of the internal control structure over time.
D) Monitoring relates to ongoing assessment by management to determine whether controls are
operating as intended.
12) Which of the following best describes the operational audit?
A) It requires the constant review by internal auditors of the administrative controls as they relate
to the operations of the company.
B) It concentrates on implementing financial and accounting control in a newly organized company.
C) It focuses on verifying the fair presentation of a company’s results of operations.
D) It concentrates on seeking aspects of operations in which waste could be reduced by the
introduction of controls.
DISCUSSION PROBLEMS
Required: Indicate which of the five COSO internal control components is best represented by each internal
control. (Control environment, Risk assessment, Control activities, Information and communication, and
Monitoring)
1. The company’s computer systems track individual transactions and automatically accumulate
transactions to create a trial balance.
Answer:............................................................................................................................................
2. On a monthly basis, department heads compare a budget to an actual performance report and investigate
unusual differences.
Answer:............................................................................................................................................
3. The company must receive university transcripts documenting all college degrees earned before an
individual can begin his or her first day of employment with the company.
Answer:.............................................................................................................................................
4. Senior management obtains data about external events that might affect the entity and evaluates the
impact of that information on its existing accounting processes.
Answer:.............................................................................................................................................
5. Each quarter, department managers are required to perform a self-assessment of the department’s
compliance with company policies. Reports summarizing the results are to be submitted to the senior
executive overseeing that department.
Answer:.............................................................................................................................................
6. Before a cash disbursement can be processed, all payee information must be verified by matching the
payee to the company’s approved vendor listing.
Answer:.............................................................................................................................................
7. The system automatically reconciles the detailed accounts receivable subsidiary ledger to the accounts
receivable general ledger account on a daily basis.
Answer:.............................................................................................................................................
8. The company has developed a detailed series of accounting policy and procedures manuals to help
provide detailed instructions to employees about how controls are to be performed.
Answer:.............................................................................................................................................
9. The company has an organizational chart that establishes the formal lines of reporting and authorization
protocols.
Answer:.............................................................................................................................................
10. The compensation committee reviews compensation plans for senior executives to determine if those
plans create unintended pressures that might lead to distorted financial statements.
Answer:.............................................................................................................................................

Exercise for Topic 4 – Audit planning

PART A: MULTIPLE CHOICE QUESTIONS
Indicate the most appropriate response to each question on the computer marking sheet provided.
1) Which of the following best describes the reason why an independent auditor reports on financial
statements?
A. A misappropriation of assets may exist, and it is more likely to be detected by independent
auditors.
B. Different interests may exist between the company preparing the statements and the persons
using the statements.
C. A misstatements of account balances may exist and is generally corrected as the result of the
independent auditor's work.
D. Poorly designed internal controls may be in existence
2) Because of the risk of material misstatement, an audit should be planned and performed with an attitude
of
A. Objective judgment.
B. independent integrity.
C. professional skepticism.
D. impartial conservatism.
3) The major reason an independent auditor gathers audit evidence is to
A. form an opinion of the financial statements.
B. detect fraud.
C. evaluated management.
D. assess control risk
4) An independent auditor has the responsibility to design the audit to provide reasonable assurance of
detecting errors and fraud that might have a material effect on the financial statements. Which of the
following, if material is a fraud as defined in auditing standards?
A. Misappropriation of an asset or group of assets
B. Clerical mistakes in the accounting data underlying the financial statements
 C. Mistakes in the application of accounting principles
D. Misinterpretation of facts that existed when the financial statements were prepared
5) An auditor reviews aged accounts receivable to assess likelihood of collection to support management's
assertions about account balances of
A. existence
B. completeness
C. valuation and allocation.
D. rights and obligations
6) An auditor will most likely review an entity's periodic accounting for the numerical sequence of shipping
documents to ensure all documents are included to support management's assertion about classes of
transactions of
A. occurrence
B. completeness
C. accuracy
D. classification
7) In the audit of accounts payable, an auditor's procedures will most likely focus primarily on
management's assertion about account balances of
A. existence
B. completeness
C. valuation and allocation.
D. classification and understandability
8) The auditor's responsibility regarding material misstatements caused by fraud is
A. less than the auditor's responsibility regarding material misstatements caused by error
B. greater than the auditor's responsibility regarding material misstatements caused by error
C. the same as the auditor's responsibility regarding material misstatements caused by error
D. either less than or greater than the auditor's responsibility regarding material misstatements
caused by error, depending on the circumstances
PART B: DISCUSSION PROBLEMS AND CASE STUDIES
Question 1: The following are various management assertions related to sales and accounts receivable.
Management Assertion:
1. Receivables are appropriately classified as to trade and other receivables in the financial
statements and are clearly described.
2. Sales transactions have been recorded in the proper period.
3. Accounts receivable are recorded at the correct amounts.
4. Sales transactions have been recorded in the appropriate accounts.
5. All required disclosures about sales and receivables have been made.
6. All accounts receivable have been recorded.
7. Disclosures related to receivables are at the correct amounts.
8. Sales transactions have been recorded at the correct amounts.
9. Recorded accounts receivable exist.
10. Disclosures related to sales and receivables relate to the entity.
11. Recorded sales transactions have occurred.
12. There are no liens (rights) or other restrictions on accounts receivable.
13. All sales transactions have been recorded.
Required:
a. Explain the differences among management assertions about classes of transactions and events,
management assertions about account balances, and management assertions about presentation and
disclosure.

b. For each assertion, indicate whether it is an assertion about classes of transactions and events, an assertion
about account balances, or an assertion about presentation and disclosure.

c. Indicate the name of the assertion made by management.

Question 2: The following are specific balance-related audit objectives applied to the audit of accounts
receivable and management assertions about account balances. The list referred to in the specific balance-
related audit objectives is the list of the accounts receivable from each customer at the balance sheet date.

Specific Balance-Related Audit Objective Assertions

a. There are no unrecorded receivables.

b. Uncollectible accounts have been provided for.

c. Receivables that have become uncollectible have been written off.

d. All accounts on the list are expected to be collected within one year.

e. The total of the amounts on the accounts receivable listing agrees with
the general ledger balance for accounts receivable.

f. All accounts on the list arose from the normal course of business and
are not due from related parties.

g. Sales cut-off at year-end is proper

h. Receivables have not been sold or discounted

Question 3: The following are specific transaction-related audit objectives applied to the audit of cash
disbursement transactions, management assertions about classes of transactions and general transaction-
related audit objectives
 Specific Transaction-Related Audit Objective Assertions

a. Existing cash disbursement transactions are recorded.

b. Recorded cash disbursement transactions are for the amount of

goods or services received and are correctly recorded.

c. Cash disbursement transactions are properly included in the

accounts payable master file and are correctly summarized.

d. Recorded cash disbursements are for goods and services actually

received.

e. Cash disbursement transactions are properly classified.

f. Cash disbursement transactions are recorded on the correct dates.

Question 4: Identify the specific audit objective that each of the following specific audit procedures
satisfies in the audit of sales, accounts receivable, and cash receipts for fiscal year ended December 31,
2016.

Specific balance-related, transaction- related, and presentation and Assertions

disclosure-related audit objectives

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 pledged 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 AR as of December 31, 2016 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 2016 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, 2016, examine subsequent cash receipts in January 2017 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, 2016.

l. Determine whether long-term receivables and related party

receivables are reported separately in the financial statements.

Exercise for Topic 6 – Audit report

Question 1:
a. During an audit completion of a manufacturer of advanced electrical components, the auditor
identified that the changes in the market resulted in a significant decrease in the demand for their products,
which are now being sold significantly below cost. However, management refuses to write-off the products
or to increase the reserve for obsolescence. Auditors considered that this decrease in the inventory account
was material and pervasive.
b. Subsequent to the date of the FS as part of his post-balance sheet date audit procedures, a CPA
learned that a recent fire caused heavy damage to one of a client's two plants; the loss will not be reimbursed
by insurance. The newspapers described the event in detail. The financial statements and appended notes
as prepared by the client did not disclose the loss caused by the fire.
Required: For the above situation, please identify the most appropriate “type of audit opinion” that the
auditor would issue. Explain and write out the reasons for your choosing.

Question 2:
The following are independent and material situations:
a. An auditor is engaged to audit a client’s financial statements after the annual physical inventory
count. The accounting records are not sufficiently reliable to enable the auditor to become satisfied as to
the year-end inventory balances.
b. The client changes its method of accounting for the cost of inventories from FIFO to weighted
average. The auditor does not agree with the change. Furthermore, it has a material effect on the financial
statements and has not been disclosed.
c. The client fails to record an immaterial amount of prepaid insurance as an asset.
d. There is substantial doubt about the client's ability to continue as a going concern.
Required: For each of the above situations you are required to indicate the type of audit opinion you would
issue and explain your reasons