m1 Exercise

Download as pdf or txt
Download as pdf or txt
You are on page 1of 33

M1-EXERCISE

c 1. The definition of auditing contained within A Statement of Basic Auditing Concepts


recognizes that auditing includes both a(an)
a. Documentation process and an evaluation process.
b. Evaluation process and a reporting process.
c. Investigative process and a reporting process.
d. Documentation process and a reporting process.

a 2. An operational audit is designed to


a. Assess the efficiency and effectiveness of management's operating procedures.
b. Assess the presentation of management's financial statements in accordance with
generally accepted accounting principles.
c. Determine whether management has complied with applicable laws and regulations.
d. Determine whether the audit committee of the board of directors is effectively
discharging its responsibility to oversee management's operations.

b 3. The market for auditing services is driven by


a. The regulatory authority of the Securities and Exchange Commission.
b. A demand by external users of financial statements.
c. Pronouncements issued by the Auditing Standards Board.
d. Congress at the federal level and elected legislative bodies at the state level.

a 4. Early appointment of the auditor enables preliminary work to be performed by the


auditor, which benefits the client in that it permits the examination to be performed in
a. A more efficient manner.
b. A more thorough manner.
c. Accordance with quality control standards.
d. Accordance with generally accepted auditing standards. (AICPA
ADAPTED)

d 5. Which of the following should an auditor obtain from the predecessor auditor prior to
accepting an audit engagement?
a. Analysis of balance sheet accounts.
b. Analysis of income statement accounts.
c. All matters of continuing accounting significance.
d. Facts that might bear on the integrity of management. (AICPA
ADAPTED)

a 6. The audit process is


a. A special application of the scientific method of inquiry.
b. Regulated by the PICPA.
c. The only service a CPA is allowed to perform by law.
d. Performed only by CPAs.
d 7. Which of the following has historically had the least influence on the practice of public
accounting?
a. The Bureau of Internal Revenue.
b. The Institute of Internal Auditors.
c. The Securities and Exchange Commission.
d. The House of Representatives

b 8. Independent auditing can best be described as


a. A subset of accounting.
b. A professional activity that attests to the fair presentation of financial statements.
c. A professional activity that measures and communicates financial accounting data.
d. A regulatory activity that prevents the issuance of improper financial information.

a 9. The reason an independent auditor gathers evidence is to


a. Form an opinion on the financial statements.
b. Detect fraud.
c. Evaluate management.
d. Evaluate internal controls. (AICPA ADAPTED)

d 10. A difference of opinion over accounting and auditing matters relative to a


particular phase of the audit arises between an assistant auditor and the auditor
responsible for the engagement. After appropriate consultation, the assistant auditor
asks to be disassociated from the resolution of the matter. The working papers would
probably be
a. Silent on the matter since it is an internal matter of the firm.
b. Expanded to note that the assistant auditor is completely disassociated from
responsibility for the auditor's opinion.
c. Expanded to document the additional work required since all disagreements of this type
will require expanded substantive testing.
d. Expanded to document the assistant auditor's position and how the difference of
opinion was resolved. (AICPA ADAPTE
M2 AUDIT WORKING PAPER

M2 Exercise
1. The permanent file section of the working papers that is kept for each audit client
most likely contains
a.Review notes pertaining to questions and comments regarding the audit work
performed.
b.A schedule of time spent on the engagement by each individual auditor.
c.Correspondence with the client's legal counsel concerning pending litigation.
d. Narrative descriptions of the client's internal control policies and procedures

2. Of the following procedures, which is not considered part of “obtaining an


understanding of the client’s environment?”
a. Examining trade publications to gain a better understanding of the client's
industry.
b. Confirming customer accounts receivable for existence and valuation.
c. Touring the client's manufacturing and warehousing
facilities to gain a clearer understanding of
operations.
d. Studying the internal controls over cash receipts and disbursements.

3. If working papers are to have the characteristics that willensure that they achieve
their primary purposes, which of the following is the most important?
a. Working papers must be of standard format and standard content.
b. Working papers must be properly indexed and cross-referenced to the draft
audit report.
c. Working papers must provide sufficient, competent, and useful information
to support the audit report.
d. Working papers must be arranged in logical order following the audit
program sequence.

4. An initial (first-time) audit requires more audit time to complete than a


recurring audit. One of the reasons for this is that
a. New auditors are usually assigned to an initial audit.
b. Predecessor auditors need to be consulted.
c. The client's business, industry, and internal control are unfamiliar to
the auditor and need to be carefully studied.
d. A larger proportion of customer accounts receivable need to be
confirmed on an initial audit.
5. An auditor is examining accounts receivable. What is the most competent type
of evidence in this situation?
a. Interviewing the personnel who record accounts receivable.
b. Verifying that postings to the receivable account from journals have been
made.
c. Receipt by the auditor of a positive confirmation.
d. No response received for a request for a negative confirmation.

6. Which of the following statements about working papers is correct?


a. Working papers are not permitted to be used as a reference source by
the client.
b. The auditor should document the understanding of the client's internal
control obtained to plan the audit
c. Working papers may be regarded as a substitute for the client's
accounting records.
d. When reporting on comparative financial statements, the independent
auditor may discard working papers after two years.

7. The procedures specifically outlined in an audit program are primarily designed


to
a. Protect the auditor in the event of litigation.
b. Detect errors or fraud.
c. Test internal evidence.
d. Gather evidence.

8. When reviewing audit working papers, the primary responsibility of an


audit supervisor is to determine that:
a. Each worksheet is properly identified with a descriptive heading.
b. Working papers are properly referenced and kept in logical groupings.
c. Standard departmental procedures are adhered to with regard to work
paper preparation and technique.
d. Working papers adequately support the audit findings, conclusions, and
report.

9. Which of the following factors is most important in determining the competence


of audit evidence?
a. The reliability of the evidence in meeting the audit objective.
b. The objectivity of the auditor gathering the evidence.
c. The quantity of the evidence obtained.
d. The independence of the source of evidence.

10. Which of the following workpapers would one normally expect to find in the
permanent file?
a. A copy of a long-term bond indenture.
b. The working trial balance.
c. An analysis of additions and disposals relating to marketable securities.
d. A workpaper analyzing customer replies to confirmation requests.
KEY

1. ANSWER: D
2. ANSWER: B
3. ANSWER: C
4 ANSWER: C
5 ANSWER: C
6 ANSWER: B
7 ANSWER: D
8 ANSWER: D
9 ANSWER: A
10 ANSWER: A

1.
M3 INTERNAL CONTROL

M3 SELF-ASSESSMENT

Indicate by letter the internal control that best describes


each of the listed control procedures.

a. Accuracy control--prevention
b. Accuracy control--detection
c. Safeguard control--prevention
d. Safeguard control--detection

____1. All incoming checks are restrictively endorsed


immediately upon receipt

____2. Accounting manuals are used to determine debit and


credit
accounts for nonrecurring transactions

____3. Bank accounts are reconciled monthly by persons not


having access to either financial assets or accounting
records

____4. Newly-hired accounting personnel undergo rigorous


training before assuming responsibility for
transaction
processing

____5. Members of the internal audit staff perform a monthly


review of all non routine journal entries

____6. All cash receipts are prelisted and deposited intact


daily

____7. A member of the controller’s staff compares the


receipted bank deposit ticket with the cash prelisting

____8. A set of standard journal entries is used to record


such
monthly journal entries as depreciation, amortization,
accrued payroll, accrued interest, and bad debts expense

____9. All revenue and expense budget variances in excess of


predetermined levels are investigated for cause on a
monthly basis

____10. Before signing checks, the treasurer reviews all


documentation
KEY

1. c
2. a
3. d
4. a
5. b
6. c
7. d
8. a
9. b
10. b
M3 INTERNAL CONTROL

M3 EXERCISE

1. The basic concept of internal control which recognizes


that the cost of internal control should not exceed the
benefits expected to be derived is known as
a. Management by exception.
b. Management responsibility.
c. Limited liability.
d. Reasonable assurance.

2. Of the following control environment characteristics,


identify the one that contributes most to effective
internal control
a. The audit committee consists of the president, two
vice- presidents, and the corporate controller.
b. The company does not have a centralized human
resources function.
c. The company has an effective internal audit staff
that monitors controls on a continuous basis.
d. The company routinely transacts business with
related parties.

3. It would be appropriate for the payroll accounting


department to be responsible for which of the following
functions?
a. Approval of employee time records.
b. Maintenance of records of employment, discharges,
and pay increases.
c. Preparation of periodic governmental reports as to
employees' earnings and withholding taxes.
d. Temporary retention of unclaimed employee paychecks.

4. The most effective control to prevent unbilled and


unrecorded shipments of finished goods is to
a. Require all outgoing shipments to be accompanied
by a prenumbered shipping order and bill of lading
(signed by the carrier). Forward a copy of these
documents to accounting, to be placed in an open
file awaiting receipt of the customer invoice copy.

b. Forward a copy of the shipping order and bill of


lading to billing.
c. Implement a policy that prevents sales invoices
from being mailed to customers in the absence of
a properly approved shipping order and bill of
lading signed by the carrier.
d. Forward a copy a the signed bill of lading to the
stores manager.

5. Apex Manufacturing Corporation mass produces eight


different products. The controller, who is interested
in strengthening internal controls over the accounting
for materials used in production, would be most likely
to implement
a. An economic order quantity (EOQ) system.
b. A job order cost accounting system.
c. A perpetual inventory system.
d. A separation of duties among production personnel.

6. Which of the following activities represents both an


appropriate human resources function and a deterrent to
payroll fraud?
a. Distribution of paychecks.
b. Authorization of overtime.
c. Authorization of additions to and deletions from
the
payroll.
d. Collection and retention of unclaimed paychecks.

7. Alpha Company uses its sales invoices for posting


perpetual inventory records. Inadequate internal
control procedures over the invoicing function allow
goods to be shipped that are not invoiced. The
inadequate controls could cause an
a. Understatement of revenues, receivables, and
inventory.
b. Overstatement of revenues and receivables, and an
understatement of inventory.
c. Understatement of revenues and receivables, and an
overstatement of inventory.
d. Overstatement of revenues, receivables, and
inventory.
8. The human resources department receives an edit listing
of payroll changes processed at every payroll cycle. If
they do not verify the changes processed, this could
result in:
a. Undetected errors in payroll rates for new
employees.
b. Inaccurate social security deductions.
c. Labor hours charged to the wrong account in the cost
reporting system.
d. Employees not being asked if they want to contribute
to the company pension plan.

9. Property acquisitions that are misclassified as


maintenance expense would most likely be detected by
internal control procedures that provide for
a. Investigation of variances within a formal
budgeting system.
b. Review and approval of the monthly depreciation
entry by the plant supervisor.
c. Segregation of duties of employees in the accounts
payable department.
d. Examination by the internal auditor of vendor
invoices and canceled checks for property
acquisitions.

10. During the review of a small business client's internal


control system, the auditor discovered that the accounts
receivable clerk approves credit memos and has access
to cash. Which of the following controls would be most
effective in offsetting this weakness?
a. The owner reviews errors in billings to customers
and postings to the subsidiary ledger.
b. The controller receives the monthly bank statement
directly and reconciles the checking accounts.
c. The owner reviews credit memos after they are
recorded.
d. The controller reconciles the total of the detail
accounts receivable accounts to the amount shown
in the ledger.
KEY

1 ANSWER: D

2 ANSWER: C
3 ANSWER: C
4 ANSWER: A
5 ANSWER: C
6 ANSWER: C
7 ANSWER: C
8 ANSWER: A
9 ANSWER: A
10 ANSWER: C
M4 Auditing the revenue/receipt cycle

M4 SELF-ASSESSMENT

Multiple-Choice Questions

1 Which of the following is not a balance-related audit objective evaluated in the audit of accounts
receivable?
a. Timing
b. Realizable value
c. Completeness
d. Accuracy

2 The two primary classes of transactions in the sales and collection cycle are:
a. sales and sales discounts.
b. sales and cash receipts.
c. sales and sales returns.
d. sales and accounts receivable.

3 The appropriate evidence to be obtained from tests of details must be decided on a(n):
a. efficiency basis.
b. effectiveness basis.
c. audit objectives basis.
d. none of the above.

4 Which of the following is not a balance-related audit objective evaluated in the audit of accounts
receivable?
a. Occurrence
b. Completeness
c. Rights
d. Accuracy

5 Tests of which balance-related audit objective are normally performed first in an audit of the sales and
collection?
a. Accuracy
b. Completeness
c. Rights
d. Detail tie-in

6 For most audits, inherent risk for accounts receivable is moderate or low except for which balance-related
audit objectives?
a. Timing and realizable value.
b. Completeness and existence.
c. Existence and accuracy.
d. Realizable value and cutoff.

7 Which of the following types of receivables would not deserve the special attention of the auditor?
a. Accounts receivables with credit balances.
b. Accounts that have been outstanding for a long time.
c. Receivables from affiliated companies.
d. Each of the above would receive special attention.

8 A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance
outstanding and by the amount of time the component parts have been outstanding, is the:
a. customer list.
b. aged trial balance.
c. accounts receivable ledger.
d. schedule of accounts receivable.

9 Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which
would normally include:

Test-footing the total column


and the columns depicting the Comparing the total of the aged trial balance with
aging the general ledger accounts receivable account
a. Yes Yes
b. No No
c. Yes No
d. No Yes

10 Auditors are often concerned with three aspects of internal controls related to the sales and collection cycle.
Which of the following is not one of those controls?
a. Controls that detect or prevent embezzlements.
b. Controls over cutoff.
c. Controls over acquisitions.
d. Controls related to the allowance for doubtful accounts.

11 Cutoff misstatements occur when:

The auditor fails to obtain the


end-of-year bank statement directly Subsequent period Current period
from the bank, obtaining instead the transactions are transactions are
statement which includes the two recorded in the recorded in the
succeeding weeks current period subsequent period
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. No Yes No

12 Cutoff misstatements occur:


a. either by error or fraud.
b. by error only.
c. by fraud only.
d. randomly without causes related to errors or fraud.

13 Generally accepted accounting principles require that material sales returns and allowances be:
a. recorded in the period when the merchandise is returned.
b. recorded in the period when the credit memo is issued.
c. matched with related sales.
d. recorded as a debit to the sales account.

14 Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on
the communication is correct or incorrect is a:
a. representation letter.
b. negative confirmation.
c. bank confirmation.
d. positive confirmation.

15 A type of positive confirmation known as a blank confirmation:


a. requests the recipient to fill in the amount of the balance.
b. is considered less reliable than the regular positive confirmation.
c. generates as high a response rate as the regular positive confirmation form.
d. is used when the auditor is confirming several small balances.

KEY
1.
easy
a

2.
easy
b

3.
easy
c

4.
easy
a

5.
easy
d

6.
easy
d

7.
easy
d

8.
easy
b

9.
easy
a
10.
easy
c

11.
easy
c

12.
easy
a

13.
easy
c

14.
easy
d

15.
easy
a
M4 Auditing the revenue/receipt cycle

M4 EXERCISE

TRUE OR FALSE

1 Tests of details of balances must be designed for each balance-related audit objective.
a. True
b. False

2 Favorable results from analytical procedures reduce the extent to which the auditor needs to test details of
balances.
a. True
b. False

3 Tests of detail tie-in are normally conducted last in the audit of the sales and collections cycle.
a. True
b. False

4 The criterion used by most merchandising and manufacturing clients for determining when a sale takes place
is whether title to the goods has passed.
a. True
b. False

5 For sales, the completeness transaction-related audit objective affects the existence balance-related audit
objective.
a. True
b. False

6 For cash receipts, the occurrence transaction-related audit objective affects the completeness balance-related
audit objective.
a. True
b. False

7 The balance-related audit objectives of realizable value and rights are affected by assessed control risk.
a. True
b. False

8 Tests of the presentation and disclosure-related objectives are generally done as part of the completion phase
of the audit.
a. True
b. False

9 Tests of details of balances focus on testing the year-end balances of balance sheet accounts.
a. True
b. False

10 Confirmation of accounts receivable provide evidence related to the existence, accuracy and cutoff objectives.
a. True
b. False
KEY

1.
easy
a
2.
easy
a
3.
easy
b
4.
easy
a
5.
medium
b
6.
medium
a
7.
medium
b
8.
medium
a
9.
medium
a
10.
medium
a
Audit of Cash

PROBLEM on Cash Count

In connection with the audit of the financial statements of KHU-PITCompany for the
year ended December 31, 2022, you performed a surprise count of the petty cash fund
and undeposited collections under the custody of Ms. Au at 8:15 a.m. on January 3,
2023. Your count disclosed the following:

Bills and Coins


Bills Coins
P100 10 pieces P1.00 410 pieces
50 80 pieces 0.50 324 pieces
20 70 pieces 0.25 64 pieces
10 54 pieces

Unused postage stamps – P730

Checks
Date Payee Drawer Amount
Dec. 30 Cash Ms. Au P 2,400
Dec. 30 KHU-PITCompany Emong De Leon 28,000
Dec. 31 KHU-PITCompany Apol Boba, sales manager 3,360
Dec. 31 KHU-PITCompany Datu Macmod 35,600
Dec. 31 KHU-PITCompany Tom Guts 16,600
Dec. 31 German Corp. KHU-PITCompany 54,000
(not endorsed)

Expense Vouchers
Date Payee Description Amount
Dec. 23 Apol Boba, Cash advance for trip to P14,000
sales manager Baguio City
Dec. 27 Central Post Office Postage stamps 3,240
Dec. 29 Messengers Transportation 300
Dec. 29 PC Express Computer repair 1,600

Other items found inside the cash box:

Two pay envelopes which had been opened and the contents aggregating P15,000
representing unclaimed salaries had been removed.

The sales manager’s liquidation report for his Baguio trip:

Cash advance received on Dec. 23 P14,000


Less: Hotel accommodation P9,000
Bus fare for two 800
Cash given to Pedro, salesman 600 10,400
Balance P 3,600

Accounted for as follows:


Cash returned by Pedro to the sales manager P 240
Personal check of sales manager 3,360
Total P 3,600

Additional information:

The custodian is not authorized to cash checks.

The last official receipt included in the deposit on December 30 is No. 351 and the
last official receipt issued for the current year is No. 355. The following official
receipts are all dated December 31, 2022.

O.R. No. Amount Form of payment


352 P27,200 Cash
353 35,600 Check
354 7,200 Cash
355 16,600 Check

The Petty Cash balance per general ledger is P20,000. The last replenishment of the
fund was made on December 22, 2022.

REQUIRED:

1. Prepare a cash count sheet.


2. Computation of shortage or overage, if any
3. Computation of the Petty Cash Balance as of Dec. 31, 2022.
4. Adjusting entries as of December 31, 2022

SOLUTION: KHU-PIT COMPANY


Requirements No. 1 and 2
Bills and coins
Denomination Quantity Amount Total
P100.00 10 1,000
50.00 80 4,000
20.00 70 1,400
10.00 54 540
1.00 410 410
0.50 324 162
0.25 64 16 7,528
Checks
Date Drawer Amount
Dec. 30 Ms. Au 2,400
Dec. 30 Emong De Leon 28,000
Dec. 31 Apol Boba 3,360
Dec. 31 Datu Macmod 35,600
Dec. 31 Tom Guts 16,600 85,960
Unreplenished vouchers
Date Account Amount
Dec. 23 Advances 14,000
Dec. 27 Postage 3,240
Dec. 29 Transportation 300
Dec. 29 Repairs 1,600 19,140 AJE 1
Total cash and cash items counted 112,628
Less accountabilities:
Petty cash 20,000
Unclaimed salaries 15,000 AJE 3
Excess travel advance returned 3,360 AJE 4
Collections per offical receipts 86,600
Unreceipted collection from Emong De Leon 28,000 152,960 AJE 5
Cash shortage (40,332) AJE 6

Requirement No. 3
Petty cash fund per GL 20,000
Unreplenished vouchers (19,140)
Excess travel advance 3,360
Petty cash fund balance, 12/31/05 4,220

Requirement No. 4
1 Advances to officers and employees 14,000
Postage expense 3,240
Transportation expense 300
Repairs and maintenance 1,600
Petty cash fund 19,140

2 Unused postage 730


Postage expense 730

3 Cash 15,000
Salaries payable 15,000

4 Travel expense [P9,000+P800+(P600-P240)] 10,160


Petty cash fund (personal check of sales manager) 3,360
Advances to officers and employees 13,520

5 Cash 28,000
Accounts receivable 28,000

6 Receivable from custodian 40,332


Cash 40,332
PRACTICE/REVIEWER

Audit of Revenue, Receivable & Receipt Cycle

FTG REVISED

CASH-CASHAN, OPC

You were able to gather the following from the December 31, 2020 trial balance of
CASH-CASHAN, OPC in connection with your audit of the company:
Cash on hand 372,000
Petty cash fund 10,000
BDO current account 950,000
METRO Bank current account No. 01 1,280,000
METRO Bank current account No. 02 (40,000)
EAST-WEST savings account 500,000
EAST-WEST time deposit 300,000

Cash on hand includes the following items:


a. Customer’s check for P60,000 returned by bank on December 26, 2020 due to
insufficient fund but subsequently redeposited and cleared by the bank on January 8,
2021.
b. Customer’s check for P30,000 dated January 2, 2021, received on December 29,
2020.
c. Postal money orders received from customers, P36,000.
d. Employee Union dues collected in a separate envelope, P25,000.

The petty cash fund consisted of the following items as of December 31, 2020.
Currency and coins P 2,100
SM Gift check purchased by the petty cash custodian for personal use. 500
Employees’ vales 1,600
Currency in an envelope marked “collections for charity” with names
attached 1,200
Unreplenished petty cash vouchers 800
Check drawn by CASH-CASHAN OPC, payable to the petty cashier 4,100
P10,300

Included among the checks drawn by CASH-CASHAN OPC against the BDO current
account and recorded in December 2020 are the following:
a. Check written and dated December 29, 2020 and delivered to payee on January 2,
2021, P50,000.

b. Check written on December 25, 2020, dated December 30, 2020 collected by the
supplier on January 5, 2021, P15,000.

c. Check written on December 27, 2020, dated January 2, 2021, delivered to payee on
December 29, 2020, P86,000.

The credit balance in the METRO Bank current account No. 2 represents checks drawn in
excess of the deposit balance. These checks were still outstanding at December 31, 2020.
The savings account deposit in EAST-WEST has been set aside by the board of directors for
acquisition of new equipment. This account is expected to be disbursed in the next 3 months
from the balance sheet date.

QUESTIONS:

Based on the above and the result of your audit, compute for the adjusted balances of
following:
1. Cash on hand
a. P282,000 b. P257,000 c. P246,000 d. P342,000

2. Petty cash fund


a. P6,200 b. P6,700 c. P9,100 d. P10,000

3. BDO current account


a. P1,086,000 b. P1,000,000 c. P1,101,000 d. P950,000

4. Cash and cash equivalents


a. P2,914,700 b. P2,614,200 c. P2,954,700 d. P2,904,200

CASH-CASHAN, OPC

Requirement
No. 1
Cash on hand, per trial balance 372,000
NSF check (60,000)
Post dated check received (30,000)
Employee Union Dues (25,000)
Cash on hand, as adjusted 257,000

Requirement
No. 2
Petty cash fund per total 10,300
Employees' vales (1,600)
Currency in envelope marked "collections for
charity" (1,200)
Unreplenished petty cash vouchers (800)
SM Gift check (500)
Petty cash fund, as adjusted 6,200

Requirement
No. 3
BDO current account, per trial balance 950,000
Unreleased check 50,000
Post dated check delivered 86,000
Uncollected check 15,000
BDO current account, as adjusted
1,101,000

Requirement
No. 4
Cash on hand (see no. 1) 257,000
Petty cash fund (see no. 2) 6,200

BPI current account (see no. 3) 1,101,000

METRO Bank current account no. 1 1,280,000

METRO Bank current account no. 2 (40,000) 1,240,000


EAST-WEST time deposit (assumed can be
preterminated) 300,000

Cash and cash equivalents, as adjusted 2,904,200

Note: The P500,000 EAST-WEST savings


account will be presented separately from
cash and cash equivalents since it has been
earmarked for the acquisition
of a noncurrent asset.

KITA Company’s income statement for the year ended December 31, 2020, as prepared by
KITA’s controller, reported income before taxes of P125,000. The auditor questioned the
following amounts that had been included in income before taxes:

Equity in earnings of LUGHI Company 40,000


Dividends received from LUGHI 8,000
Adjustments to profits of prior years
for arithmetical errors in depreciation (35,000)

KITA owns 40% of LUGHI’s ordinary share. KITA’s December 31, 2020, income statement
should report income before taxes of

a. 85,000
b. 117,000
c. 120,000
d. 152,000

SOLUTION Answer: d

Reported income before taxes 125,000


Add: Adjustments to profits of prior years 35,000
Total 160,000
Less: Dividends received from LUGHI 8,000
Corrected income before taxes 152,000

The prior period adjustment is added back to income because it is shown as a deduction in
the statement of retained earnings.

The dividend received from LUGHI is deducted from income because it is treated as a return
of investment since the interest is 40% and therefore the equity method is used.
The equity in earnings of LUGHI Company is properly part of income because the company is
applying the equity method.

(ftg orig)

The following information was gathered during the audit SINIBAK Company
for2020:

Accounts Receivable, Jan. 1, 2020


150,000
Disbursements for purchases 580,000
Decrease in Trade accounts payable 50,000
Decrease in merchandise inventory 121,000
Collection on account 750,000

Allowance for doubtful accounts, Dec. 31, 2020


12,000

Gross profit based on sales is 40% for three years up to 2020 of the current
audit year.

Of the total sales, 30% is cash sales.

The sales reported per BIR is net of 12% value added tax (VAT)

Sales return on account sales excluding 12% VAT, P 12,500

Based on the evidence you gathered, what is the total cash sales?

What is the amount of net realizable accounts receivable as of December


31,2020?

SOLUTION Answer: 6. 325,500


7. 224,640

Disbursements for purchases 580,000


Decrease in trade accounts payable (_50,000)
Purchases 530,000
Add: Decrease in inventory _121,000
Cost of goods sold 651,000

Gross profit 40% (CGS 60%) divide


by .60
Sales net of VAT
1,085,000
VAT x 1.12
Gross sales 1,215,200
Collection on Cash sales (30%) x .70
Cash sales (30%x 1,215,200 /1.12=325,500)
Sales on account including VAT 850,640
A/R Jan. 150,000
Total AR 1,000,640

Collection on account (750,000)


Sales return on account (12,500 x 1.12) ( 14,000)
A/R Dec. 31 236,640
Less- Allowance for D/A 12,000

NRV A/R 224,640


Reviewer

Auditing Theory

Audit of Cash & Audit of Revenue, Receivable & Receipt Cycle

Select the best answer for each of the following questions.

1. Broadly defined, the subject matter of any audit consists of


a) Financial statements
b) Economic data
c) Assertions
d) Operating data

2. The third standard of field work states that sufficient competent evidential matter may in part
be obtained through the following methods except
a) Inspection
b) Observation
c) Confirmation
d) Reconciliation

3. If an auditor believes that material error or fraud exist, the auditor should
a) Consider the implications and discuss the matter with appropriate levels of management
b) Make the investigation necessary to determine whether errors or fraud have in fact
occurred
c) Request that management investigate whether errors or fraud have in fact occurred
d) Consider whether errors or fraud where the result of employee's failure to comply with
specific controls

4. Which of the following is not normally performed in the pre-planning or pre-engagement


phase?
a) Deciding whether to accept or reject an audit engagement
b) Inquiring from predecessor auditor
c) Preparing an engagement letter
d) Making a preliminary estimate of materiality

5. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the
assessed level of control risk from that originally planned. To achieve an overall audit risk level
that is substantially the same as the planned audit risk level, the auditor would

a) Decrease substantive testing


b) Increase inherent risk
c) Decrease detection risk
d) Increase materiality levels

6. An effective internal control


a) Cannot be circumvented by management
b) Can reduce the cost of an external audit
c) Can prevent collusion among employees d) Eliminates risks and potential loss to
the organization

7. In auditing through a computer, the test data method is used by auditors to test the
a) Accuracy of input data b) Validity of the output
c) Procedures contained within the program
d) Normalcy of distribution of test data

8.An auditor's working papers will generally be least likely to include documentation showing how the
a)Client's schedules were prepared
b)Engagement had been planned
c)Client's system of internal control had been reviewed and evaluated
d)Unusual matters were resolved

9.Which of the following sampling methods would be most appropriate in performing tests of controls
over authorization of cash disbursements
a) Attributes
b) Variables
c) Ratio
d) Stratified

10.Analytical procedures used in the overall review stage of an audit generally include
a) Considering unusual or unexpected account balances that were not previously identified
b) Performing test of transactions to corroborate management's financial statement assertions
c)Gathering evidence concerning account balances that have not changed from the prior year
d)Re-testing control procedures that appeared to be ineffective during the assessment of control risk

11.Results of the financial statement audit are communicated to users through


a)Financial statement
b)Written management assertion
c)Audit report
d)None of the above

12.What is the primary difference between financial reporting risk and audit risk?
a)The application of accounting principles
b)Responsibilities of the respective parties involved
c)Demands of users of financial statements d) Risks of being sued by third parties

13.Relationship between control risk and detection risk is ordinarily


a) Parallel b) Inverse c) Direct d) Equal

14.A representation letter issued by a client


a) Is essential for the preparation of the audit program
b) Is a substitute for testing
c) Does not reduce the auditor's responsibility
d) Reduces the auditor's responsibility only to the extent that it is relied upon

15.The recruitment of senior management for an assurance client, such as those in a position to affect
the subject of the assurance engagement may least likely create
a) Self-interest threat
b) Advocacy threat
c) Intimidation threat
d) Familiarity threat

16. The following are the assertions of management except


a. Financial Statements
b. Valuation
c. Allocation
d. Presentation

17. ______ is the measure of the quality of audit evidence and its relevance to a
particular assertion and its reliability.
a. Assurance
a. Appropriateness
b. Valuation
c. Allocation
18. It sets out the nature, timing and extent of planned audit procedures required to implement
the overall audit plan.
a. Audit
b. Audit opinion
c. Audit risk
d. Audit program
19. The risk that the auditor gives an inappropriate audit opinion when the financial statements
are materially misstated.
a. Control risk
b. Audit risk
c. Inherent risk
d. Information risk
20. An error that arises from an isolated event that has not recurred other than on specifically
identifiable occasions and is therefore not representative of errors in the population.
a. Expected error
b. Negligence
c. Anomalous error
d. Fraud
21. The maximum error in a population that the auditor is willing to accept.
a. Expected error
b. Tolerable error
c. Anomalous error
d. Gross negligence
22. Environmental matters are defined by the following except
a. Consequences of vicarious liability imposed by management
b. Consequences of violating environmental laws and regulations.
c. Initiatives to prevent, abate, or remedy damage to the environment.
d. Consequences of environmental damage done to others or to natural resources.
23. Describes the role of persons entrusted with the supervision, control and direction of an
entity.
a. Accounting manual
b. Quality control
c. Internal control system
d. Governance
24. In an audit engagement, the auditor provides a high, but not absolute, level of assurance,
expressed positively in the audit report as ______, that the information subject to audit is
free from material misstatement.
a. Reasonable assurance
b. High level of assurance
c. Low level of assurance
d. No assurance

25. A Special purpose auditor’s report issued in connection with the independent audit of
financial information other than an auditor’s report of financial statements includes the
following except
a. Specified accounts, elements of accounts, or items in a financial statements
b. Compliance with contractual agreements
c. Audit risk involves during the audit procedures
d. Summarized financial statements
26. Which of the following is the best example of a corroborating evidence?
a. General journal
b. Worksheet cost allocation
c. Vendor’s invoice
d. Cash receipts journal

27. Which of the following statements about audit evidence is correct?


e. Appropriateness is the measure of the quantity of audit evidence.
f. Sufficiency is the measure of the quality of audit
evidence and its relevance to a particular assertion
and its reliability.
g. Audit evidence is more persuasive when items of evidence from
different
sources or of different nature are consistent.
h. There should be a one-to-one relationship between audit
objective and audit procedure.

28. Evidence is generally considered appropriate when:


i. it has been obtained by random selection.
j. there is enough of it to afford a reasonable basis for an
opinion on financial statements.
k. it has the qualities of being relevant, objective, and free from known
bias.
l. it consists of written statements made by
managers of the enterprise under audit.

29. Evidence are generally considered sufficient when:


m. it is appropriate.
n. there is enough of it to afford a reasonable basis for an
opinion on financial statements.
o. it has the qualities of being relevant, objective and free from
unknown
bias.
p. it has been obtained by random selection.

30. Appropriateness of evidence is a measure of the:


q. quantity of evidence.
r. quality of evidence.
s. sufficiency of evidence.
t. meaning of evidence.

31. Of the following procedures, which does not produce analytical evidence?
a. Compare revenue, cost of sales, and gross profit with the prior year and
investigate significant variations
b. Examine monthly performance reports and investigate significant revenue
and expense variances
c. Confirm customers account receivable and clear all material exceptions.
d. Compare sales trends and profit margins with industry average and
investigate significant differences
32. Which of the following comparisons is most useful to an auditor in evaluating
the results of an entity’s operations?
e. Prior year accounts payable to current year accounts payable
f. Prior year payroll expense to budgeted current year payroll expense
g. Current year revenue to budgeted current year revenue
h. Current year warranty expense to current year contingent liabilities.

33. Which of the following analytical procedures should be applied to the income
statement?
i. Select sales and expense items and trace amounts to related supporting
documents
j. Ascertain that the new income amount in the statement of cash flows
agrees with the net income amount in the income statements
k. Obtain from the client representatives, the beginning and ending
inventory amounts that were used to determine costs of sales
l. Compare the actual revenues and expenses with the corresponding figures
of the previous year and investigate significant differences.

34. Which of the following tends to be most predictable for the purpose of analytical
procedures applied as substantive test?
m. Relationships involving balance sheet accounts
n. Transactions subject to management discretion
o. Relationships involving income statement accounts.
p. Data subject to audit testing in the prior year

2. 35. uditors try to identify predictable relationships when using analytical


procedures. Relationships involving transactions from which of the following
accounts most likely would yield the highest level of evidence?
a. Accounts payable
b. Advertising expense
c. Accounts receivable
d. Interest expense.

36. The primary emphasis in most tests of details of balances is on the


a. Balance sheet accounts
b. Revenue accounts
c. Cash flow statements accounts.
d. Expense account
2. 37.Evidence is usually more persuasive for balance sheet accounts where it is
obtained:
a. As close to the balance sheet date as possible
b. Only from transactions occurring on the balance sheet date
c. From various times throughout the client’s year
d. From time period when transactions during the fiscal year.

3. 38. Which of the following assertions is relevant to whether the company has
title to the cash accounts as of the balance sheet date?
a. Existence or occurrence
b. Completeness
c. Rights and obligations.
d. Valuation or allocation

4. 39. Which of the following assertions is relevant to whether the cash


balances reflect the true underlying economic value of those assets?
a. Existence or occurrence
b. Completeness
c. Rights and obligations
d. Valuation or allocation.

40. Employee steals a payment from Customer X. To cover the theft, the employee
applies a payment from Customer Y to Customer X’s account. Before Customer Y has
time to notice that its account has not been appropriately credited, the employee
applies a payment from Customer Z to Customer Y’s account.
a. Skimming
b. Kiting
c. Collateralizing
d. Lapping.

7. 41. Which of the following controls represents a control over cash that is unique to
cash accounts?
a. Separation of duties
b. Restrictive endorsements of customer checks.
c. Periodic internal audits
d. Competent, well-trained employees
8. 42. Which of the following assertions is relevant to the audit procedure for
marketable securities that requires the auditor to examine selected documents to
identify any restrictions on the marketability of securities?
a. Existence or occurrence
b. Completeness
c. Rights and obligations.
d. Valuation or allocation

9. 43. Which of the following represents a reasonable test of controls for cash
receipts and cash management controls?
a. Document internal controls over cash by completing the internal control
questionnaire or by flowcharting the process.
b. Prepare an independent bank reconciliation
c. Obtain a bank confirmation
d. Obtain a bank cutoff statement
10. 44.Which of the following assertions is relevant to whether the marketable
securities balances
include all securities transactions that have taken place during the period?
a. Existence or occurrence
b. Completeness.
c. Rights and obligations
d. Valuation or allocation

45.When obtaining audit evidence about the effective operation of internal


controls, the auditor considers all of the following except
a. How they were applied
b. The consistency with which they were applied during the period
c. By whom they were applied
d. Why they were applied

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy