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Auditing The Art And Science Of Assurance Engagements, Canadian 12th Edition By Arens – Test Bank
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Sample Questions Are Posted Below
Auditing, 12e (Arens)
Chapter 5 Audit Responsibilities and Objectives
5.1 Describe the objective of conducting an audit of financial statements
1) The objective of the audit of financial statements by the auditor is the expression of an opinion on
Answer: C
Diff: 1 Type: MC Page Ref: 102
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
2) CAS 200 explains that the purpose of the financial statement audit is to express an opinion on the financial statements. This opinion is an assessment of whether the financial statements are presented fairly using
Answer: B
Diff: 2 Type: MC Page Ref: 102
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
3) The reason auditors accumulate evidence is to
Answer: D
Diff: 1 Type: MC Page Ref: 102
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
4) The auditor gives an audit opinion on the fair presentation of the financial statements and associates his or her name with it when, on the basis of adequate evidence, the auditor concludes that the financial statements are unlikely to mislead
Answer: A
Diff: 2 Type: MC Page Ref: 102
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
5) The responsibility for adopting a sound and appropriate financial reporting framework and corresponding accounting policies, maintaining adequate internal controls, and making fair representations in the financial statements rests
Answer: A
Diff: 2 Type: MC Page Ref: 102
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
6) The audit process has three categories of audit phases: risk assessment, risk response and reporting. Which of the following are the phases that are part of the risk assessment process?
Answer: C
Diff: 2 Type: MC Page Ref: 103
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
7) There are three phases in the risk response category of the audit process (design further audit procedures, tests of control, substantive tests). When will the auditor conduct tests of controls?
Answer: B
Diff: 3 Type: MC Page Ref: 103
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
8) The responsibility for the preparation of the financial statements and the accompanying footnotes belongs to
Answer: B
Diff: 2 Type: MC Page Ref: 104
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
9) Professional skepticism during the financial statement audit requires an appropriate state of mind, being impartial and objective and continuing to be throughout the whole audit engagement. Which of the following illustrates an appropriate state of mind?
Answer: D
Diff: 3 Type: MC Page Ref: 105
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
10) The requirement for an attitude of skepticism means that the auditor should
Answer: A
Diff: 2 Type: MC Page Ref: 105
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
11) The auditor has considerable responsibility for notifying users whether the financial statements are fairly stated. This imposes upon the auditor a duty to
Answer: D
Diff: 2 Type: MC Page Ref: 105
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
12) The factor which distinguishes an error from fraud and other irregularity is
Answer: B
Diff: 1 Type: MC Page Ref: 105
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
13) Which of the following is an example of fraudulent financial reporting (management fraud)?
Answer: A
Diff: 3 Type: MC Page Ref: 105
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
14) In comparing management fraud with employee fraud, the auditor’s risk of failing to discover the fraud is greater for
Answer: C
Diff: 2 Type: MC Page Ref: 105
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
15) If the auditor were responsible for making certain that all the assertions of management in the statements were correct,
Answer: D
Diff: 2 Type: MC Page Ref: 107
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
16) When comparing the auditor’s responsibility for detecting employee fraud and for detecting errors, the profession has placed the responsibility
Answer: A
Diff: 2 Type: MC Page Ref: 107
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
17) The auditor’s evaluation of the likelihood of material employee fraud is normally done initially as a part of
Answer: B
Diff: 3 Type: MC Page Ref: 107
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
18) What is the auditor’s role in the detection of computer fraud?
Answer: C
Diff: 3 Type: MC Page Ref: 107
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
19) Auditing standards regarding the detection of illegal acts clearly state that the auditor provides
Answer: A
Diff: 3 Type: MC Page Ref: 107
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
20) Which of the following is an example of a direct-effect illegal act that could be performed by a client? Violation of
Answer: D
Diff: 3 Type: MC Page Ref: 108
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
21) What is one of the first things that an auditor would do upon discovering an illegal act at an audit client?
Answer: C
Diff: 2 Type: MC Page Ref: 108
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
22) A financial statement audit typically consists of three sections. Identify each of the three sections of an audit and discuss the major activities performed by the auditor in each section.
Answer:
I: Risk assessment. In this section, the auditor obtains an understanding of the client’s business and industry. In addition, the auditor obtains an understanding of the client’s internal control structure and makes a preliminary assessment of control risk. The planning takes place in this phase by developing a strategic audit approach overall and by cycle.
II: Risk Response. In this section, the auditor develops audit programs and tests internal controls. The auditor also performs substantive tests and assesses the impact upon the risk of material misstatements. The results of the tests are evaluated and risk is reassessed if required. Final evidence and documentation is gathered.
III: Reporting. In this section, the auditor communicates with the audit committee and management as required. A final quality control review is also performed before the report is issued.
Diff: 3 Type: ES Page Ref: 103
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
23) In May 2012, the firm of Chang and Crown (C&C) became the auditors of Laua Limited (LL) for the fiscal year ended December 31, 2011. LL’s shareholders and Board approved the change from its previous audit firm on the recommendation of LL’s senior management. One of the new board members is a bit confused about management’s role with respect to the financial statements and thought that Chang and Crown would be preparing the financial statements. He was also glad that the auditors would be able to help prevent illegal acts and fraud.
Required:
Answer:
Management:
Management is responsible for adopting appropriate accounting policies, maintaining adequate internal control, and making fair representations in the financial statements.
Auditor:
The auditor is required to plan and perform the audit with an attitude of professional skepticism, recognizing that circumstances may exist that cause the financial statements to be materially misstated.
The auditor considers fraud and illegal acts in the context of whether they have a material effect upon the financial statements. Accordingly, the auditor is responsible for obtaining reasonable assurance that the financial statements are free of material error, which includes illegal acts that may have a material indirect effect on the financial statements, and material fraud, which may have a direct effect on the financial statements.
Audits cannot be expected to provide the same degree of assurance for the detection of material management fraud, since concealment by management makes fraud more difficult for auditors to find.
Diff: 1 Type: ES Page Ref: A102; B104-108
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements
24) Frank has come to you because he is worried about recovering the cost of his share of a law firm partnership. His partner, Jennifer, is exercising the “shotgun” clause in their partnership agreement, and wants to buy him out. Over the last two years, Frank and Jennifer have had numerous battles over the way that Frank handles his accounts receivable. Frank is lenient with his customers, and has converted many of his accounts into long term notes extending two and three years into the future. He is confident that these amounts are collectible, because every one of his clients continues to make small monthly payments.
Frank thinks that Jennifer may have been hiding profits from him and collecting some of her accounts in cash. He wants you to audit the books so that he can figure out what the ‘true’ profits are and how much Jennifer should pay him for his share of the partnership.
Required:
Answer:
∙ The purpose of an audit is to provide reasonable assurance that the financial statements are free of material error or fraud.
∙ The financial statements may not be 100% accurate.
∙ Since management fraud is difficult to detect, it would be impossible for you to quantify the amount of money that Jennifer has taken, if any.
∙ Frank might not be happy with the audit results, because one of the things that you would have to do would be to assess the collectability of the accounts receivable.
Existence: some accounts receivable may not be recorded, if Jennifer took funds.
Completeness: some sales may not have been recorded, if Jennifer took the funds.
Valuation: accounts receivable may be overvalued for Frank’s receivables, if they are not collectible.
Classification: If some receivables are long term rather than current, they may be incorrectly recorded as current in the financial statements.
Diff: 3 Type: ES Page Ref: A)104-108, B)125-127
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements; 5-5 Describe management assertions about financial information
25) Your PA firm has been auditing Ontario Pulp Company for three years. Two years ago, a letter was received from the provincial government informing them that they needed to reduce the level of contaminants that they were releasing into the air and into local waterways. The deadline for this reduction is three months from today. The letter indicates significant fines (several hundred thousand dollars) if the targets are not met. Alternatively, the Company will need to shut down operations until the targets are met.
During your audit planning process management informed you that they have not taken any action, but plan to start construction of the new pollution devices next month.
Required:
Explain the impact the above situation has upon your audit planning process.
Answer:
∙ The above situation seems to indicate that management does not take the letter from the provincial government seriously.
∙ This could affect the ability of the company to continue as a going concern, and as a minimum would require disclosure in the financial statements, with possibly a qualification.
∙ The audit planning process would need to include gathering knowledge about other companies in this sector—have they also received such letters and have they complied? Have there been charges laid by the provinces where compliance did not occur? The answers to these questions will help assess the potential impact upon the client.
∙ The auditor should also look at any proposals that the company has received about implementing the anti-pollution equipment to see how quickly it can be implemented.
∙ The negative attitude about the anti-pollution equipment may also apply to other areas of the business.
∙ The auditor will need to assess the quality of corporate governance and of management integrity and assess the effect upon the engagement. Why has management really decided to wait so long?
Diff: 3 Type: ES Page Ref: 102, 112-118
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements; 5-5 Describe management assertions about financial information
26) The controller who had been with Bianca Limited for six years was fired last month, allegedly for pocketing cash. Unfortunately, there was a fire in the accounting department the week before he was fired, destroying the accounting records, including the computer equipment and current backup disks.
The only records available for the current year is a copy of the computer system that is a month old. There are also disks for the year ends going back three years. These were at the president’s home, the place where the company kept archival records.
Required:
Explain how this situation might affect the audit process.
Answer:
∙ The absence of records will make it difficult to complete the audit; management actions with respect to reconstructing the one month of lost records will need to be assessed and the potential for material error considered.
∙ If records cannot be obtained from alternative sources (e.g. customers and suppliers and financial institutions) then a qualified audit report may be required.
∙ Due to the possible management fraud, it will be necessary to conduct extensive additional testing; it may not be possible to quantify the amount of the fraud (if any).
∙ It will be necessary to look at the quality of internal controls—if this fraud was possible, then other errors and irregularities could also have occurred at the business.
∙ It will not be possible to conduct tests of internal controls or tests of details of balances if there are no records.
Diff: 3 Type: ES Page Ref: 102, 112-118
Learning Obj.: 5-1 Describe the objective of conducting an audit of financial statements; 5-5 Describe management assertions about financial information
5.2 Examine the preplanning steps that the auditor completes before accepting the financial statement audit engagement
1) At what point during the audit should the auditor conduct an independence threat analysis?
Answer: B
Diff: 2 Type: MC Page Ref: 108-109
Learning Obj.: 5-2 Examine the preplanning steps that the auditor completes before accepting the financial statement audit engagement
2) The decision to continue doing the audit of an existing client is
Answer: A
Diff: 1 Type: MC Page Ref: 110
Learning Obj.: 5-2 Examine the preplanning steps that the auditor completes before accepting the financial statement audit engagement
5.3 Describe the eight phases of a financial statement audit and provide an overview of the audit process
1) Your PA firm has just obtained a new client and you have been assigned the task of preparing the knowledge of business section of the file. Which of the following best describes the process of gathering the knowledge of business for a client?
Answer: C
Diff: 2 Type: MC Page Ref: 116
Learning Obj.: 5-3 Describe the eight phases of a financial statement audit and provide an overview of the audit process
2) Analytical procedures are those that
Answer: B
Diff: 1 Type: MC Page Ref: 116
Learning Obj.: 5-3 Describe the eight phases of a financial statement audit and provide an overview of the audit process
3) Where the auditor has decided to rely upon internal controls, he or she will then
Answer: B
Diff: 1 Type: MC Page Ref: 117
Learning Obj.: 5-3 Describe the eight phases of a financial statement audit and provide an overview of the audit process
4) Tests of details of balances are specific procedures intended to
Answer: C
Diff: 1 Type: MC Page Ref: 117
Learning Obj.: 5-3 Describe the eight phases of a financial statement audit and provide an overview of the audit process
5) After the auditor has completed all the procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on
Answer: D
Diff: 2 Type: MC Page Ref: 118
Learning Obj.: 5-3 Describe the eight phases of a financial statement audit and provide an overview of the audit process
6) You have been assigned the in-charge-auditor for a new client, Beltair House. Beltair House is a non-profit charitable organization which operates a home for unwed mothers who have decided that they would like to keep their child. In the past, the organization had been almost fully funded by the provincial government. However, due to recent budget cut-backs, Beltair has to raise operating funds from public donations.
Because of financial constraints, there is now only one full time manager, Joan Ng. Joan has the help of several volunteers, and the residents help out with the chores and with maintenance and cleaning. Ng has been able to arrange for a local food bank to provide a large portion of the food required for meals. Door-to-door canvassers have been able to raise money to keep the House going, but Ng is concerned that this will change.
Required:
Identify issues that you will need to consider that affect the risk of this audit engagement.
Answer: Factors impacting risk include:
∙ a first time audit engagement (increases inherent risk)
∙ the reduction in government funding, affecting the going concern of the House
∙ numerous financial statement users (e.g. government, donors)
∙ cash collected by volunteers is subject to theft (receipts may not be issued for all donations —this may result in a need to qualify the audit report)
∙ a lack of segregation of duties (there is only one employee)
∙ there may be inexperienced people recording accounting transactions, leading to the potential for more errors (especially if accounting transactions are recorded by volunteers)
∙ since the food bank is providing a large portion of the food, this donation may need to be recorded at fair market value (need to determine how it is being recorded, and whether there are any additional services that need to be recorded)
∙ the lack of volunteers will hinder the canvassing to raise money and prevent the chores they perform from getting done (which threatens the viability and continuity of the charity).
Diff: 3 Type: ES Page Ref: 115-116
Learning Obj.: 5-3 Describe the eight phases of a financial statement audit and provide an overview of the audit process
7) Sean Clem has done a review engagement and prepared the tax return for your web design business for the last five years. The books and records have always been well organized, although year end adjusting entries have been required. You do some of the accounting yourself and the rest of the accounting records are handled by your wife, who is also an employee of the business.
This year, you would like to expand your business to provide ISP (internet service provider) services to your clients. This would entail you purchasing additional computer equipment and software. You are also considering hiring an additional employee (you currently have three), and you are looking at obtaining a loan for $100,000 from the bank. The bank says that you should have your records audited, but you are not sure what this will mean.
Required:
Answer:
∙ An audit has a higher degree of assurance, so additional work will be required.
∙ This will result in a higher fee for the work completed.
∙ It will be important to clearly document the role of the auditor and management.
∙ The report may be qualified if it is not possible to audit the opening balances.
∙ It may be possible to continue to have a review engagement rather than an audit if the owner (you) has other collateral to offer—then the bank would not require such a high level of assurance.
B)
∙ This is a first audit engagement, so additional time will be needed to develop a client risk profile, document knowledge of business and knowledge of the industry.
∙ There is a need to conduct an independence threat analysis.
∙ Since the bank will be requiring the audit to possibly review the collectability of the loan, this increases the risk of the engagement.
∙ Internal controls will be poor since records are kept by a husband and wife team.
∙ Risks of management override or management deception are high because of the incentive to obtain the bank loan.
∙ Any bank covenants imposed on the new loan and the ability of the client to meet them.
Diff: 3 Type: ES Page Ref: 112-118
Learning Obj.: 5-3 Describe the eight phases of a financial statement audit and provide an overview of the audit process
8) Pet Shop Ltd. is a large retail outlet with ten full time employees in addition to the owner. You dropped by on your way home one day to organize the audit planning process for the coming year, and noticed brand new terminals at the cashier’s desk. One of the employees was having fun zapping inventory items. The owner teased him about the new laser scanning devices and told him to get to work to see which items needed to be ordered. It turns out that Pet Shop Ltd. has implemented a new point of sale computer system that is integrated with inventory. The last time you were there to buy dog food (about three months ago) there were old computer terminals that were no longer functional and recorded sales transactions manually in the sales journal.
Required:
List the three sections of the audit. For each section, explain how these new computer systems might affect the audit process.
Answer:
Risk assessment:
∙ The auditor will need to gather information about how internal controls have changed with the use of the new computer system.
∙ Since there are two different systems of internal control, the audit will need to consider both systems during the risk assessment, planning and execution phases.
∙ Depending upon the nature of the information that was stored in the old systems, the auditor may need to conduct a conversion audit.
Risk Response:
∙ The controls will be different, so the auditor will need to design different tests of controls for each of the two systems. The audit programs will need to be updated.
∙ The system conversion will also have to be tested to ensure that data integrity was not compromised.
∙ Particular attention should also be given to the inventory and sales account. Given the scanning of items by the employee, it is possible that this recorded false sales and also recorded false decreases in inventory.
∙ Analytical procedures will need to take account of the fact that there may be a large shift in amounts in the accounts (for example, there may be capital expenditures for the computer equipment and software; inventory amounts may be lower if inventory management has improved with the new system).
Reporting:
∙ The audit report will be prepared and total evidence gathered in the risk response section will be analyzed to determine if there is a material misstatement. An audit opinion will be formed based on the results and the audit report can be issued.
Diff: 3 Type: ES Page Ref: 112-118
Learning Obj.: 5-3 Describe the eight phases of a financial statement audit and provide an overview of the audit process
5.4 Show how transactions underlying financial statements are divided into cycles
1) Prior to looking at the specific cycles, the auditor will first
Answer: A
Diff: 2 Type: MC Page Ref: 118
Learning Obj.: 5-4 Show how transactions underlying financial statements are divided into cycles
2) Marianne is currently performing tests of controls on the presence of an employee code of conduct, the presence of a whistle blower line and on how management responded and implemented systematic penalties for instances where violations of the code of conduct existed. Marianne is currently evaluating the
Answer: D
Diff: 3 Type: MC Page Ref: 118
Learning Obj.: 5-4 Show how transactions underlying financial statements are divided into cycles
3) Transaction cycles begin and end at
Answer: D
Diff: 3 Type: MC Page Ref: 122
Learning Obj.: 5-4 Show how transactions underlying financial statements are divided into cycles
4) For the most part, auditors treat each transaction cycle
Answer: A
Diff: 3 Type: MC Page Ref: 123
Learning Obj.: 5-4 Show how transactions underlying financial statements are divided into cycles
5) Often, numerous classes of transactions affect the ending balance of a particular general ledger account. This is handled during the audit engagement by
Answer: C
Diff: 3 Type: MC Page Ref: 123-124
Learning Obj.: 5-4 Show how transactions underlying financial statements are divided into cycles
6) Your PA firm audits the Barney Bloke Parts company, which manufactures plastic bumpers and other automobile parts in eight factories scattered across southern Ontario. The company has a December year end. It is now November 14.
The planning file indicates that internal controls in the accounts receivable area are poor, as there has been significant employee turnover. A review of the prior year’s working paper file indicates that there was a poor response to the accounts receivable and accounts payable confirmation requests. There were several errors in inventory pricing and problems with obsolescence.
Required:
List the financial statement cycles that need to be tested. For each cycle, identify at least one transaction that needs to be examined. For that transaction, identify a management assertion that may have a high risk of error associated with it and explain why you believe the risk of error is high.
Answer:
| Financial statement cycle | Transaction to be tested | Management assertion at risk with reason |
| Sales and collection | Cash receipts | Cutoff: new employees may record the transaction in the wrong period or on the wrong date |
| Acquisition and payment | Cash disbursement | Classification: new employees may post transactions to the wrong account |
| Human resources and payroll | Payroll disbursement | Accuracy: employees could be paid the wrong wage rate |
| Inventory and distribution | Inventory issuance | Accuracy: inventory issued might be recorded at the wrong cost or wrong sales price |
| Capital acquisition and repayment | Note payment | Cutoff: payments may be recorded in the wrong period or on the wrong date |
[Note: Students may select other transactions that are at high risk. Above is a representative response.]
Diff: 3 Type: ES Page Ref: 122, 125-127
Learning Obj.: 5-4 Show how transactions underlying financial statements are divided into cycles; 5-5 Describe management assertions about financial information
5.5 Describe management assertions about financial information
1) Management assertions are
Answer: B
Diff: 2 Type: MC Page Ref: 125
Learning Obj.: 5-5 Describe management assertions about financial information
2) Management assertions are
Answer: B
Diff: 2 Type: MC Page Ref: 125
Learning Obj.: 5-5 Describe management assertions about financial information
3) Frankinfurter Limited decided that it wanted to improve earnings. To do this, it understated its expenses by omitting unpaid expenses from the accrued liabilities account at year end. Which management assertion has been violated?
Answer: D
Diff: 3 Type: MC Page Ref: 126
Learning Obj.: 5-5 Describe management assertions about financial information
4) Gabori Company would like to pay less income tax this year. It decided that it could do this by understating its inventory values, increasing costs of goods sold. This was done by deliberately pricing the inventory at incorrect amounts, so that it would be shown at a lower value than it was really worth (for example, items worth five dollars each were shown at fifty cents each). Which management assertion has been violated?
Answer: B
Diff: 3 Type: MC Page Ref: 126
Learning Obj.: 5-5 Describe management assertions about financial information
5) If the purchase of a long-term note receivable is included as cost of goods sold, there is a violation of the
Answer: C
Diff: 1 Type: MC Page Ref: 126
Learning Obj.: 5-5 Describe management assertions about financial information
6) When considering each material type (or class) of transactions during the audit, which general transaction-related audit objectives are assessed during the audit?
Answer: B
Diff: 3 Type: MC Page Ref: 127
Learning Obj.: 5-5 Describe management assertions about financial information
7) XYZ Brick Company decided to inflate sales by recording fictitious sales. Several non-existent clients were created and the sales were added into the sales journal throughout the year. The general transaction-related audit objective affected by these actions is
Answer: A
Diff: 3 Type: MC Page Ref: 128
Learning Obj.: 5-5 Describe management assertions about financial information
8) Georgina was working as the part time accountant for three small businesses. Whenever she could, she pocketed cash and neglected to record the sale in the sales system. The general transaction-related audit objective affected by her actions is
Answer: B
Diff: 3 Type: MC Page Ref: 128
Learning Obj.: 5-5 Describe management assertions about financial information
9) Flagpole Company Limited recently upgraded its accounting software due to changes in the payroll income tax rates. Unfortunately, there was an error in the software, and income tax was calculated incorrectly. The general transaction-related audit objective affected by these errors is
Answer: C
Diff: 3 Type: MC Page Ref: 128
Learning Obj.: 5-5 Describe management assertions about financial information
10) Big Bank had a program failure occur on Sunday night due to a maintenance program error. Transaction posting was interrupted, with several errors occurring in posting to the master files. Although sales had been posted to the general ledger, individual accounts were not recorded until subsequent days. The general transaction-related audit objective affected by this activity is
Answer: B
Diff: 3 Type: MC Page Ref: 130
Learning Obj.: 5-5 Describe management assertions about financial information
11) In testing for cutoff, the objective is to determine
Answer: D
Diff: 2 Type: MC Page Ref: 130
Learning Obj.: 5-5 Describe management assertions about financial information
12) Heavy Manufacturing Company is in the business of making steel plates, forming heavy metal slabs and drilling and scoring metals. Recently, it upgraded many of its forming machines. Fortunately, the company was able to sell its old equipment at a reasonable price. The effect was that sales for the quarter are substantially improved over the same period in the prior year. The general transaction-related audit objective affected by this activity is
Answer: D
Diff: 3 Type: MC Page Ref: 130
Learning Obj.: 5-5 Describe management assertions about financial information
13) Balance-related audit objectives are applied to which types of general ledger accounts?
Answer: C
Diff: 2 Type: MC Page Ref: 130
Learning Obj.: 5-5 Describe management assertions about financial information
14) Heavy Manufacturing Company is in the business of making steel plates, forming heavy metal slabs and drilling and scoring metals. Recently, it upgraded many of its forming machines. There were five machines purchased on four different invoices. Unfortunately, one of the invoices was recorded twice, resulting in five invoices being recorded. The general balance-related audit objective affected by this activity is
Answer: D
Diff: 3 Type: MC Page Ref: 130
Learning Obj.: 5-5 Describe management assertions about financial information
15) Camilla is preparing the audit program for the inventory of Summers, a large department store. Camilla listed “select a sample of invoices from suppliers to verify that the risks and rewards of the inventory were transferred to Summers”. Camilla is concerned that some of the inventory in the store might be on consignment. The account balance related objective that Camilla is concerned about is
Answer: A
Diff: 2 Type: MC Page Ref: 131
Learning Obj.: 5-5 Describe management assertions about financial information
16) The sole shareholder of Jade Company had a contractor pave the parking lot at the company building, and also pave the driveway of his home. Both paving jobs were billed to the company on a single invoice. The general balance-related audit objective affected by this activity is
Answer: D
Diff: 3 Type: MC Page Ref: 131
Learning Obj.: 5-5 Describe management assertions about financial information
17) The Big Insurance Company implemented a new computer system to track and record insurance premiums receivable. The program automatically prints invoices and sends them to customers when premiums are due. Due to a program error, a whole series of invoices were included in sales but not in accounts receivable. The general balance-related audit objective affected by this activity is
Answer: A
Diff: 2 Type: MC Page Ref: 131
Learning Obj.: 5-5 Describe management assertions about financial information
18) Radio Supplies Limited sells parts and components to organizations that repair radios and other forms of audio equipment. It has many parts on its inventory listing at cost that were purchased up to fifteen years ago. Some of these parts have not seen any movement in the last ten years. The general balance-related audit objective affected by this activity is
Answer: C
Diff: 3 Type: MC Page Ref: 131
Learning Obj.: 5-5 Describe management assertions about financial information
19) To help improve the cash balance on the financial statements, the controller recorded several deposits from early January in the month of December. The general balance-related audit objective affected by this activity is
Answer: A
Diff: 2 Type: MC Page Ref: 131
Learning Obj.: 5-5 Describe management assertions about financial information
20) Jane’s employer purchased a new calculator this month. When Jane added up the sales for the day, she was a bit confused with the new calculator and made numerous adding errors. The daily sales total for the next week was incorrectly posted to the general ledger. The general balance-related audit objective affected by this activity is
Answer: B
Diff: 2 Type: MC Page Ref: 131
Learning Obj.: 5-5 Describe management assertions about financial information
21) Formamould Inc. sells plastic moulds to a variety of companies. Some moulds are custom made and cost thousands of dollars. To help customers finance these purchases, Formamould uses a variety of methods, such as payment terms stretched over three years, delayed payment, and pay-as-you-produce models tailored to the individual customer’s needs. The outstanding balance is included in current accounts receivable. The general balance-related audit objective affected by this activity is
Answer: C
Diff: 3 Type: MC Page Ref: 131
Learning Obj.: 5-5 Describe management assertions about financial information
22) In the following table, there are listed common audit objectives for accounts payable or purchases. For each procedure, list the management assertion, and the related general audit objective. State whether the audit objective is transaction-related or balance-related.
| Accounts payable or purchases objectives | Management assertion | Audit objective | Transaction-related? (Y/N) | Balance-
related? (Y/N) |
| 1. Accounts payable in the accounts payable trial balance are for valid purchases. | ||||
| 2. Recorded acquisitions are for goods and services received, consistent with the best interests of the client. | ||||
| 3. All acquisition transactions are recorded. | ||||
| 4. Recorded acquisition transactions are recorded at the correct amount. | ||||
| 5. Acquisition transactions are correctly allocated between current and long-term. | ||||
| 6. Acquisition transactions are recorded on the correct dates. | ||||
| 7. Purchase transactions are properly included in the vendor and inventory master files, and are correctly posted to the general ledger. | ||||
| 8. The accounts payable recorded in liabilities are obligations of the company. |
Answer:
| Accounts payable or purchases objectives | Management assertion | Audit objective | Transaction-related? (Y/N) | Balance-
related? (Y/N) |
| 1. Accounts payable in the accounts payable trial balance are for valid purchases. | Existence | Existence | Y | |
| 2. Recorded acquisitions are for goods and services received, consistent with the best interests of the client. | Occurrence | Occurrence | Y | |
| 3. All acquisition transactions are recorded. | Completeness | Completeness | Y | |
| 4. Recorded acquisition transactions are recorded at the correct amount. | Accuracy | Accuracy | Y | |
| 5. Acquisition transactions are correctly allocated between current and long-term. | Classification | Classification | Y | |
| 6. Acquisition transactions are recorded on the correct dates. | Cutoff | Cutoff | Y | |
| 7. Purchase transactions are properly included in the vendor and inventory master files, and are correctly posted to the general ledger. | Classification | Classification | Y | |
| 8. The accounts payable recorded in liabilities are obligations of the company. | Rights and obligations | Rights and obligations | Y |
Diff: 3 Type: ES Page Ref: 125-132
Learning Obj.: 5-5 Describe management assertions about financial information
23) Bratlett Company has purchased all of the shares of another company, but does not want to consolidate its financial statements. Management has drafted a rather long and confusing note to the financial statements that describes the transaction that took place briefly, and states that debt has been acquired in a foreign currency. In your view, the transaction, its effect on the company and the accounts have not properly been disclosed.
Required:
List the audit objectives about presentation and disclosure that have been affected and explain how they are affected.
Answer: Rights and obligations: Assets and liabilities belonging to the consolidated entity, such as the nature of the debt and of the new entity, will not be properly disclosed in the financial statements.
Completeness: Disclosures about the debt and the consolidation are inadequate.
Accuracy: Account balances shown in the financial statements are inaccurate because they are not consolidated.
Valuation: Accounts such as goodwill may be inaccurately valued.
Classification: Amounts are shown in the incorrect accounts since they are not consolidated.
Understandability: The economic events that have taken place (the purchase, the financing and the combined results of operations) are not fully disclosed in an understandable way.
Diff: 3 Type: ES Page Ref: 129, 132
Learning Obj.: 5-5 Describe management assertions about financial information
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
