acc 403 question
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acc_403.odtACC 403 HOMEWORK QUESTIONS
12-18(a-d),
a . Which of the following client IT systems generally can be audited without examining or directly testing the computer programs of the system?
( 1) A system that performs relatively uncomplicated processes and produces detailed output.
( 2) A system that affects a number of essential master files and produces limited output.
( 3) A system that updates a few essential master files and produces no printed output other than final balances.
( 4) A system that does relatively complicated processing and produces little detailed output.
b . Which of the following procedures most likely could prevent IT personnel from modifying programs to bypass automated controls?
( 1) Periodic management review of computer utilization reports and systems documentation.
( 2) Segregation of duties within IT for computer programming and computer operations.
( 3) Participation of user department personnel in designing and approving new systems.
( 4) Physical security of IT facilities in limiting access to IT equipment.
c . Before processing, the system validates the sequence of items to identify any breaks in sequence of input documents. This automated control is primarily designed to ensure the
( 1) accuracy of input. ( 3) completeness of input. ( 2) authorization of data entry. ( 4) restriction of duplicate entries.
d . An auditor will use the test data approach to obtain certain assurances with respect to the ( 1) input data. ( 2) machine capacity. ( 3) procedures contained within the program. ( 4) degree of data entry accuracy.
12-20(a-d), You are doing the audit of Phelps College, a private school with approximately 2,500 students. With your firm’s consultation, they have instituted an IT system that separates the responsibilities of the computer operator, systems analyst, librarian, programmer, and data control group by having a different person do each function. Now, a budget reduction is necessary and one of the five people must be laid off. You are requested to give the college advice as to how the five functions could be done with reduced personnel and minimal negative effects on internal control. The amount of time the functions take is not relevant because all five people also do nonaccounting functions.
a . Divide the five functions among four people in such a way as to maintain the best possible control system.
b . Assume that economic times become worse for Phelps College and it must terminate employment of another person. Divide the five functions among three people in such a way as to maintain the best possible internal control. Again, the amount of time each function takes should not be a consideration in your decision.
c . Assume that economic times become so severe for Phelps College that only two people can be employed to do IT functions. Divide the five functions between two people in such a way as to maintain the best possible control system.
d . If the five functions were done by one person, will internal controls be so inadequate that an audit cannot be done? Discuss.
12-24(a-b) A CPA’s client, Boos & Baumkirchner, Inc., is a medium- size manufacturer of products for the leisure- time activities market ( camping equipment, scuba gear, bows and arrows, and so forth). During the past year, a computer system was installed and inventory records of finished goods and parts were converted to computer processing. The inventory master file is maintained on a disk. Each record of the file contains the following information: • Item or part number • Total value of inventory on hand at cost • Description • Date of last sale or usage • Size • Quantity used or sold this year • Unit- of- measure code • Economic order quantity • Quantity on hand • Code number of major vendor • Cost per unit • Code number of secondary vendor In preparation for year- end inventory, the client has two identical sets of preprinted inventory count cards. One set is for the client’s inventory counts, and the other is for the CPA’s use to make audit test counts. The following information is on each card: • Item or part number • Size • Description • Unit- of- measure code In taking the year- end inventory, the client’s personnel will write the actual counted quantity on the face of each card. When all counts are complete, the counted quantity will be entered into the system. The cards will be processed against the inventory database, and quantity- on- hand figures will be adjusted to reflect the actual count. A computer-generated edit listing will be prepared to show any missing inventory count cards and all quantity adjustments of more than $ 100 in value. These items will be investigated by client personnel, and all required adjustments will be made. When adjustments have been completed, the final year- end balances will be computed and posted to the general ledger. The CPA has available generalized audit software that will run on the client’s computer and can process both card and disk files.
a . In general and without regard to the facts in this case, discuss the nature of generalized audit software and list the various types and uses.
b . List and describe at least five ways generalized audit software can be used to assist in all aspects of the audit of the inventory of Boos & Baumkirchner, Inc. ( For example, the software can be used to read the disk inventory master file and list items and parts with a high unit cost or total value. Such items can be included in the test counts to increase the dollar coverage of the audit verification.)
13-23(a-d) The following questions deal with tests of controls. Choose the best response.
a . To support the auditor’s initial assessment of control risk below maximum, the auditor performs procedures to determine that internal controls are operating effectively. Which of the following audit procedures is the auditor performing?
( 1) Tests of details of balances
( 3) Tests of controls
( 2) Substantive tests of transactions
( 4) Tests of trends and ratios
b . The primary objective of performing tests of controls is to obtain
( 1) a reasonable degree of assurance that the client’s internal controls are operating effectively on a consistent basis throughout the year.
( 2) sufficient, appropriate audit evidence to afford a reasonable basis for the auditor’s opinion, without the need for additional evidence.
( 3) assurances that informative disclosures in the financial statements are reasonably adequate. ( 4) knowledge and understanding of the client’s prescribed procedures and methods.
c . To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques, including
( 1) analysis.
( 3) reperformance.
( 2) confirmation.
( 4) comparison.
d . Tests of controls are most likely to be omitted when
( 1) an account balance reflects many transactions.
( 2) control risk is assessed at less than the maximum.
( 3) the understanding of the control structure indicates that evaluating the effectiveness of control policies and procedures is likely to be inefficient.
( 4) the auditor wishes to increase the acceptable level of detection risk.
13-24(a-b) The following are 11 audit procedures taken from an audit program: 1. Foot the accounts payable trial balance and compare the total with the general ledger. 2. Confirm accounts payable balances directly with vendors. 3. Account for a sequence of checks in the cash disbursements journal to determine whether any have been omitted. 4. Examine vendors’ invoices to verify the ending balance in accounts payable. 5. Compare the balance in payroll tax expense with previous years. The comparison takes the increase in payroll tax rates into account. 6. Examine the internal auditor’s initials on monthly bank reconciliations as an indication of whether they have been reviewed. 7. Examine vendors’ invoices and other documentation in support of recorded transactions in the acquisitions journal. 8. Multiply the commission rate by total sales and compare the result with commission expense. 9. Examine vendors’ invoices and other supporting documents to determine whether large amounts in the repair and maintenance account should be capitalized. 10. Discuss the duties of the cash disbursements clerk with him and observe whether he has responsibility for handling cash or preparing the bank reconciliation. 11. Inquire about the accounts payable supervisor’s monthly review of a computer-generated exception report of receiving reports and purchase orders that have not been matched with a vendor invoice.
a . Indicate whether each procedure is a test of control, substantive test of transactions, analytical procedure, or a test of details of balances.
b . Identify the type of evidence for each procedure.
13-27(a-c) The following are independent internal controls commonly found in the acquisition and payment cycle. Each control is to be considered independently. 1. Before a check is prepared to pay for acquisitions by the accounts payable department, the related purchase order and receiving report are attached to the vendor’s invoice being paid. A clerk compares the quantity on the invoice with the receiving report and purchase order, compares the price with the purchase order, recomputes the extensions, re- adds the total, and examines the account number indicated on the invoice to determine whether it is correctly classified. He indicates his performance of these procedures by initialing the invoice. 2. At the end of each month, an accounting clerk accounts for all prenumbered receiving reports ( documents evidencing the receipt of goods) issued during the month and traces each one to the related vendor’s invoice and acquisitions journal entry. The clerk’s tests do not include testing the quantity or description of the merchandise received. 3. The cash disbursements clerk is prohibited from handling cash. The bank account is reconciled by another person even though the clerk has sufficient expertise and time to do it. 4. Before a check is signed by the controller, she examines the supporting documentation accompanying the check. At that time, she initials each vendor’s invoice to indicate her approval. 5. After the controller signs the checks, her secretary writes the check number and the date the check was issued on each of the supporting documents to prevent their reuse.
a . For each of the internal controls, state the transaction- related audit objective( s) the control is meant to fulfill.
b . For each control, list one test of control the auditor could perform to test the effectiveness of the control.
c . For each control, list one substantive test the auditor could perform to determine whether financial misstatements are actually taking place
14-23(a-c) The following questions deal with audit evidence for the sales and collection cycle. Choose the best response.
a . An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable master file back to the supporting duplicate sales invoices. What will the auditor intend to establish by this step? ( 1) Sales invoices represent existing sales. ( 2) All sales have been recorded. ( 3) All sales invoices have been correctly posted to customer accounts. ( 4) Debit entries in the accounts receivable master file are correctly supported by sales invoices.
b . Which audit procedure is most effective in testing credit sales for overstatement? ( 1) Trace a sample of postings from the sales journal to the sales account in the general ledger. ( 2) Vouch a sample of recorded sales from the sales journal to shipping documents. ( 3) Prepare an aging of accounts receivable. ( 4) Trace a sample of initial sales orders to sales recorded in the sales journal.
c . To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor would most likely select a sample of transactions from the population represented by the ( 1) sales order file. ( 3) shipping document file. ( 2) customer order file. ( 4) sales invoice file.
14-26(a-c) The following are commonly performed tests of controls and substantive tests of transactions audit procedures in the sales and collection cycle: 1. Account for a sequence of shipping documents and examine each one to make sure that a duplicate sales invoice is attached. 2. Account for a sequence of sales invoices and examine each one to make sure that a duplicate copy of the shipping document is attached. 3. Compare the quantity and description of items on shipping documents with the related duplicate sales invoices. 4. Trace recorded sales in the sales journal to the related accounts receivable master file and compare the customer name, date, and amount for each one. 5. Examine sales returns for approval by an authorized official. 6. Review the prelisting of cash receipts to determine whether cash is prelisted daily. 7. Reconcile the recorded cash receipts on the prelisting with the cash receipts journal and the bank statement for a 1- month period.
a . Identify whether each audit procedure is a test of control or a substantive test of transactions.
15-24(a-c) The following questions concern sampling for attributes. Choose the best response.
a . An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor
( 1) minimize the failure to detect errors and fraud.
( 2) eliminate the risk of nonsampling errors.
( 3) design more effective audit procedures.
( 4) measure the sufficiency of the audit evidence by quantifying sampling risk.
b . Which of the following best illustrates the concept of sampling risk?
( 1) The documents related to the chosen sample may not be available to the auditor for inspection.
( 2) An auditor may fail to recognize errors in the documents from the sample.
( 3) A randomly chosen sample may not be representative of the population as a whole for the characteristic of interest.
( 4) An auditor may select audit procedures that are not appropriate to achieve the specific objective.
c . For which of the following tests would an auditor most likely use attribute sampling?
( 1) Selecting accounts receivable for confirmation of account balances.
( 2) Inspecting employee time cards for proper approval by supervisors.
( 3) Making an independent estimate of the amount of a LIFO inventory.
( 4) Examining invoices in support of the valuation of fixed asset additions.
15-28(a-f) The following questions concern the determination of the proper sample size in audit sampling using the following table: 1 2 3 4 5 6 7 ARO ( in percent) 10 5 5 5 10 10 5 TER 6 6 5 6 20 20 2 EPER ( in percent) 2 2 2 2 8 2 0 Population size 1,000 100,000 6,000 1,000 500 500 1,000,000
a . Assume that the initial sample size for column 1 using nonstatistical sampling is 90 items. For each of columns 2 through 7, use your judgment to decide the appropriate nonstatistical sample size. In deciding each sample size, consider the effects of changes in each of the four factors ( ARO, TER, EPER, and population size) compared with column 1.
b . For each of the columns numbered 1 through 7, determine the initial sample size needed to satisfy the auditor’s requirements using attributes sampling from the appropriate part of Table 15- 8 ( p. 502).
c . Using your understanding of the relationship between the following factors and sample size, state the effect on the initial sample size ( increase or decrease) of changing each of the following factors while the other three are held constant:
( 1) An increase in ARO
( 2) An increase in the TER
( 3) An increase in the EPER
( 4) An increase in the population size
d . Explain why there is such a large difference in the sample sizes for columns 3 and 6.
e . Compare your answers in part c. with the results you determined in part
a. ( nonstatistical sampling) or part b. ( attributes sampling). Which of the four factors appears to have the greatest effect on the initial sample size? Which one appears to have the least effect?
f . Why is the sample size called the initial sample size?
