When auditing financial statements of a private company 2023 Business Finance
2023 1 When auditing financial statements of a private company the minimum work an auditor must perform in connection
1. When auditing financial statements of a private company, the minimum work an auditor must perform in connection with a company’s internal control is best described by which of the following statements:
a. Perform exhaustive tests of accounting controls and evaluate the company’s control system effectiveness
b. Determine whether the company’s control policies are designed well enough to prevent material errors
c. Prepare auditing working papers documenting the understanding of the company’s internal control
d. Design procedures to search for significant deficiencies in the actual operation of the company’s internal control
2. If the amount of a check is altered by an employee after it has cleared the bank, the change can be detected by
a. Comparing the amount written on the check face to the amount written in the cash disbursements journal
b. Comparing the magnetic imprint of the amount paid to the amount written on the check face
c. Examining the endorsement on the back of the check
d. Comparing the check number on the face of the check to the check number in the cash disbursements journal
3. Which of the following is an example of the accuracy control assertion for sales invoices?
a. Recorded sales in the sales journal are supported by invoices
b. Invoices, shipping documents, and sales orders are prenumbered and the numerical sequence is checked
c. Sales are recorded in the proper account
d. Invoice quantities are compared to shipment and customer order quantities
4. A customer reply on a positive confirmation says “We dispute the $250 charge. We believe it is excessive.” This confirmation
a. Provides evidence of existence
b. Does not provide evidence of existence because the customer may refuse to pay the $250 charge
c. Provides evidence that the account was understated
d. Provides evidence that the account should be written off
5. Which of the following is not a purpose of the review of audit documentation by a supervisor during field work?
a. To ensure that all appropriate steps in the audit program were performed
b. To ensure that referencing among audit documentation is clear
c. To ensure that the explanations included in the audit documentation are understandable
d. To ensure that the overall scope of the audit was appropriate
6. Long and Short, CPAs, were auditing Island Corporation for the year ended December 31, 2008. On January 11, 2009, a major customer of Island Corporation declared bankruptcy as the result of an uninsured loss due to a major fire in their warehouse on January 8, 2009. As a result, a material accounts receivable from the customer was determined to be uncollectible. Long and Short, CPAs, would expect the client to
a. Record the loss on uncollectible accounts as a routine transaction in the year 2009
b. Treat the loss as a Type II event and provide a footnote about the loss in the 2008 financial statements
c. Treat the loss as a Type I event and adjust the 2008 financial statements to record the loss on uncollectible accounts
d. File a lawsuit against the customer in hopes of collecting some of the money owed to the client
1. Below are the nine ASB management assertions.
C. Rights and obligations
D. Allocation or valuation
For each of the following control procedures, identify the management assertion that applies by placing the correct letter in the blank.
1. Match shipping documents with sales invoices before a sale is recorded.
2. Balance total of individual customers’ receivables with the control account.
3. Sales manager approves taking discounts.
4. Computer check for billing the quantity shipped, list price, and total.
5. Account for numerical sequence of prenumbered shipping documents.
2. Auditors are auditing the cash receipts for Great Wall Corporation. For each audit procedure performed (numbered 1 – 5 below) select the control objective being tested by placing the correct letter in the blank.
F. Accounting and posting
G. Proper period
1. For a sample of recorded cash receipts, the auditors compared the date of receipt to the recording date.
2. The auditors traced a sample of daily cash reports to the cash receipts journal.
3. The auditors vouched a sample of recorded cash receipts to the deposits in the bank statement.
4. The auditors recalculate the cash listed on the daily deposit for a sample of recorded cash receipts.
5. The auditors traced a sample of recorded cash receipts to postings in the correct customers’ accounts.
3. For each of the tests of controls for sales and receivables, indicate the control assertion by placing the correct letter in the blank.
1. Scan sales invoices for missing numbers in sequence.
2. Perform arithmetic recalculation of a sample of recorded sales invoices.
3. For a sample of recorded sales invoices from the sales journal, determine whether credit was approved.
4. Trace a sample of credit memos to postings in customers’ accounts.
5. Select a sample of customer accounts and vouch debits to supporting sales invoices.
4. Match the number of the applicable audit procedure with the objective.
I. Audit procedures for revenues:
1. Select a sample of shipping documents, and identify those for which no related invoice exists.
2. Select a sample of entries in the sales journal and compare with the related shipping documents.
3. Select a sample of entries in the sales journal and compare with the related invoices.
4. Select a sample of shipping documents, and identify those for which no related cash receipt exists.
5. Select shipping documents from just after year-end and verify that the related sale is included in the sales register.
6. Select shipping documents from just before year-end and verify that the related sale is included in the sales register.
7. Select shipping documents from just before year-end and verify that the related sale is excluded from the sales register.
a. Verify that recorded sales are valid.
b. Verify that all valid ales were recorded.
c. Test for proper cutoff of sales.
d. Test for overstatement of receivables.
II. Audit procedures for Expenditures
1. Select a sample of entries in the cash disbursements journal and compare with related voucher packages.
2. Select a sample of voucher packages and verify proper cancellation.
3. Select a sample of voucher packages, and identify those for which no cash disbursement exists.
4. Select a sample of cash payments made after year-end, and identify those for which there is no related purchase order.
5. Select a sample of cash payments made before year-end and identify those for which there is no related purchase order.
6. Select a sample of cash payments made after year-end and identify those for which there is no related year-end payable.
7. Select a sample of cash payments made before year-end, and identify those for which there is no related payable.
a. Test for understatement of accounts payable.
b. Verify that cash disbursements were properly authorized.
5. Match the number of the shenanigan an auditor would be alert to if he or she saw the listed warning signs (a-e):
1. Accelerating discretionary expenses into the current period.
2. Creating reserves and releasing them into income in a later period.
3. Releasing questionable reserves into income
4. Capitalizing normal operating costs, particularly if recently changed from expensing.
5. Improperly inflating the amount included in a special charge.
Warning Signs #
a. The auditor sees the following account: “Deferred membership charges.”
b. The company has written down its inventory and included a “strategic repositioning” charge, incurred to revise the way the inventory is carried in its stores.
c. The company revised its allowance for doubtful accounts from 5 percent of accounts receivable to 3 percent.
d. Operating expenses increased by 35% over the previous year.
e. The company created a liability for an anticipated upcoming reorganization last year, but it turned out the reorganization cost less than anticipated, and the company removed 50 percent of the liability it booked for this anticipated cost.
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