Southern College

Kolej Selatan
南方学院

Final Examination
Semester 3 / Year 2008

COURSE : AUDITING
COURSE CODE : ACCT3013
TIME : 2 1/2 HOURS
DEPARTMENT : FINANCE & ACCOUNTING
LECTURER : FIONA LEE YEAN THEAN

Student’s ID :
Batch No. :

Notes to candidates:
1) The question paper consists of 6 pages and 24 questions.
2) Answer all questions.
3) Return the question paper with your answer booklet.
 AUDITING

PART A : MULTIPLE CHOICE QUESTIONS (20x1=20 marks)

1. An audit to determine whether an entity is following specific procedures or rules set down
by some higher authority is classified as a(n) :

A. audit of financial statements.

B. compliance audit.
C. operational audit.
D. production audit.

2. Auditing standards require that the audit report must be titled and that the title must :

A. include the word “independent”.

B. indicate if the auditor is a CPA.
C. indicate if the auditor is a proprietorship, partnership, or incorporated.
D. not include any discriminatory language.

3. Both disclaimer and adverse opinions are used :

A. only when a condition is highly material.

B. Whether the condition affecting the financial statements is material or not.
C. Regardless of the auditor’s independence.
D. Regardless of client’s choice of a non-GAAP accounting method.

4. Initial audit planning involves four matters. Which of the following is not one of these ?

A. Develop an overall audit strategy.

B. Request that bank balances be confirmed.
C. Schedule engagement staff and audit specialists.
D. Identify the client’s reason for the audit.

5. An understanding of a company’s industry and external environment includes :

A. general economic conditions.

B. the extent of competition within the industry.
C. regulatory requirements.
D. all of the above.

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 AUDITING

6. Which of the following is not an account affected by the sales and collection cycle ?

A. Cash.
B. Accounts receivable.
C. Allowance for doubtful accounts.
D. Gross margin.

7. What critical event must take place before goods can be shipped ?

A. Determination of correct delivery address.

B. Credit approval.
C. Receipt of cash.
D. Receipt of sales order from the customer.

8. Most companies recognize sales revenue when :

A. sales are invoiced.

B. customer orders are received.
C. goods are shipped.
D. customer orders are approved.

9. The most important test of details of balances for accounts receivable is :

A. confirmations.
B. Recalculation of the aged receivables and uncollectible accounts.
C. Tracing credit memos for returned merchandise to receiving goods reports.
D. Tracing from shipping documents to journals to the accounts receivable ledger.

10. Which of the following most likely would be detected by a review of a client’s sales
cutoff ?

A. Excessive sales discount.

B. Unrecorded sales for the year.
C. Unauthorized goods returned for credit.
D. Lapping of year-end accounts receivable.

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 AUDITING

11. When examining payroll transactions, an auditor is primarily concerned with the
possibility of :

A. incorrect summaries of employee time records.

B. overpayments and unauthorized payments.
C. under withholding of amounts required to be withheld.
D. posting of gross payroll amounts to incorrect salary expense accounts.

12. Which of the following best describes proper internal control over payroll ?

A. The preparation of the payroll must be under the control of the personnel department.
B. The confidentiality of employee payroll data should be carefully protected to prevent
fraud.
C. The duties of hiring, payroll computations, and payment to employees should be
segregated.
D. The payment of cash to employees should be replaced with payment by checks.

13. Failure to capitalize a fixed asset at the correct amount affects______________ until the
company disposes of the assets.

A. the balance sheet.

B. the income statement.
C. the cash flow statement.
D. both the income statement and the balance sheet.

14. The audit to verify that the client is using an inventory method which is generally
accepted and to verify that physical counts were correctly summarized are performed
during the audit of the :

A. acquisition and payment cycle.

B. payroll and personnel cycle.
C. inventory and warehousing cycle.
D. sales and collection cycle.

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 AUDITING

15. Which of the following controls would be appropriate regarding the release of materials
from a storeroom ?

A. Production employees request materials be delivered to their work areas as they them.
B. Storeroom employees deliver materials to work areas throughout the day to maintain
acceptable levels of safety stock – no written records are maintained.
C. Production employees submit approved requisition forms to the storeroom for
materials needed.
D. None of the above is appropriate.

16. Cash is important to auditors primarily because of the potential for :

A. errors.
B. fraud.
C. liquidity.
D. expenditure.

17. The starting point for the verification of the balance in the general bank account is to
obtain :

A. a bank reconciliation from the client.

B. the client’s cash account from the general ledger.
C. a cutoff bank statement directly from the bank.
D. the client’s year-end bank statement and reconcile it.

18. Which of the following subsequent events is most likely to result in an adjustment to a
company’s financial statement ?

A. Merger or acquisition activities.

B. Bankruptcy (due to deteriorating financial condition) of a customer with an
outstanding accounts receivable balance.
C. Issuance of common stock.
D. An uninsured loss of inventories due to a fire.

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 AUDITING

19. With which of the following client personnel would it generally not be appropriate to
inquire about commitments or contingent liabilities ?

A. Financial controller.
B. President.
C. Accounts receivable clerk.
D. Vice president of sales.

20. Which of the following statements regarding the letter of representation is not correct ?

A. it is prepared on the client’s letterhead.

B. It is addressed to the CPA firm.
C. It is signed by high-level corporate officials, usually the president and chief financial
officer.
D. It is optional, not required. That the auditor obtains such a letter from management.

PART B : STRUCTURED QUESTIONS

21. (i). Distinguish between contingent liabilities and commitments. (10 marks)

(ii). What are the three required conditions for a contingent liability to exist ? (10 marks)

{Total : 20 mark}

22. (i). What are the three factors affecting the complexity of the audit of inventory ?
(9 marks)

(ii). Identify three analytical procedures commonly used when auditing accounts in the
inventory and warehousing cycle. (9 marks)

{Total : 18 marks}

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 AUDITING

23. Match seven of the terms for documents and records (a – m) used in the acquisition and
cash disbursement cycle with the descriptions provided below (1 – 7) : (20 marks)

a. Purchase requisition
b. Purchase order
c. Receiving report
d. Acquisition journal
e. Summary acquisition report
f. Vendor’s invoice
g. Debit memo
h. Voucher
i. Accounts payable master file
j. Accounts payable trial balance
k. Vendor’s statement
l. Check
m. Cash disbursement journal

________ 1. A document indicating a reduction in the amount owed to a vendor

because of returned goods or an allowance granted.

________ 2. A document that specifies the details of an acquisition transaction

and amount of money owed to the vendor for an acquisition.

________ 3. A document prepared by the purchasing department indicating the

description, quantity, and related information for goods and services
that the company intends to purchase.

________ 4. A listing of the amount owed to each vendor at a point in time.

________ 5. A document used to request goods and services by an authorized

employee.

24. (i). Describe the differences between positive and negative confirmation. (10 marks)

(ii). Discuss the advantages and disadvantages of using negative accounts receivable
confirmations rather than positive confirmations. (12 marks)

{Total : 22 marks}

000

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