FINAL EXAMINATION. 1. There are 4 sections in this examination (There is choice in section #2).

Transcription

1 FINAL EXAMINATION Date: DECEMBER 14, 2002 School Year: Course and No.: ADMN4827EA Time: 1:00 PM 4:00 PM Professor: RYAN, J Department: Arts & Science Number of Pages: 13 Pages (Including Cover) Time Allowed: 3 Hours Special Instructions: 1. There are 4 sections in this examination (There is choice in section #2). 2. To assist in budgeting your time during the test, the number of minutes available for each question (calculated at approximately 1.8 minutes per mark) is shown at the beginning of the question. Draw a quick picture of your favorite festive activity for one bonus mark. 3. All answers should be completed on the paper provided. Make sure that you finish your thoughts and answer fully in order to receive full marks. 4. Multiple Choice answers should be circled on this examination. 5. Show ALL calculations! 6. Calculators are Allowed 7. GOOD LUCK!

2 Final Examination ADMN4827EA Page 2 PART 1 - MULTIPLE CHOICE (15 MARKS TOTAL) (27 Minutes)(Circle the Correct Answer) 1. The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because A) Many customers merely sign and return the confirmation without verifying its details. B) Recipients usually respond only if they disagree with the information on the request. C) Customers may not be inclined to report understatement errors in their accounts. D) Auditors typically select may accounts with low recorded balances to be confirmed. 2. Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of A) Presentation. B) Completeness. C) Rights. D) Existence. 3. For which of the following audit tests would an auditor most likely use attribute sampling? A) Making an independent estimate of the amount of a LIFO inventory. B) Examining invoices in support of the valuation of fixed asset additions. C) Selecting accounts receivable for confirmation of account balances. D) Inspecting employee time cards for proper approval by supervisors. 4. A client's physical count of inventories was higher than the inventory quantities per the perpetual records. This situation could be the result of the failure to record A) Sales. B) Sales discounts. C) Purchases. D) Purchase returns.

3 Final Examination ADMN4827EA Page 3 5. As a result of tests of controls, an auditor overrelied on internal control and decreased substantive testing. This overreliance occurred because the true deviation rate in the population was A) Less than the risk of overreliance on the auditor's sample. B) Less than the deviation rate in the auditor's sample. C) More than the risk of overreliance on the auditor's sample. D) More than the deviation rate in the auditor's sample. 6. What is the primary objective of using stratification as a sampling method in auditing? A) To increase the audit risk at which a decision will be reached from the results of the sample selected. B) To determine the tolerable deviation rate for a given characteristic in the population being studied. C) To decrease the effect of variance in the total population. D) To determine the precision range of the sample selected. 7. Which of the following control procedures may prevent the failure to bill customers for some shipments? A) Each shipment should be supported by a prenumbered sales invoice that is accounted for. B) Each sales order should be approved by authorized personnel. C) Sales journal entries should be reconciled to daily sales summaries. D) Each sales invoice should be supported by a shipping document. 8. Unrecorded liabilities are most likely to be found during the review of which of the following documents? A) Unpaid bills. B) Shipping records. C) Bills of lading. D) Unmatched sales invoices.

4 Final Examination ADMN4827EA Page 4 9. The purpose of segregating the duties of hiring personnel and distributing payroll cheques is to separate the A) Administrative controls from the internal accounting controls. B) Human resources function from the controllership function. C) Operational responsibility from the record keeping responsibility. D) Authorization of transactions from the custody of related assets. 10. While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. The situation illustrates the risk of A) Incorrect rejection. B) Incorrect acceptance. C) Assessing control risk too high. D) Assessing control risk too low. 11. The accounts payable department receives the purchase order and performs all of the following except: A) Compare invoice price to purchase order price. B) Ensure the purchase had been properly authorized. C) Ensure the goods had been received by the party requesting the goods. D) Compare quantity ordered to quantity received. 12. An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence about management's assertion of A) Rights and obligations. B) Completeness. C) Validity or occurrence. D) Valuation.

5 Final Examination ADMN4827EA Page Harvey Jones, CA, uses statistical sampling to test control procedures. Why does Jones use this statistical sampling technique? A) It provides a means of measuring mathematically the sampling risk that results from examining only a part of the data. B) It reduces the use of judgment required of Jones because the CICA has established numerical criteria for this type of testing. C) It increases Jones' knowledge of the client's prescribed procedures and their limitations. D) It is specified by generally accepted auditing standards. 14. A distinguishing characteristic of random number sample selection is that each A) Item in the population is selected from a layer having minimum variability. B) Item's chance for selection is proportional to its dollar value. C) Item in the population has an equal chance of being selected. D) Layer in the population has an equal number of items selected. 15. Which of the following is a control activity that is most likely to prevent employee payroll fraud? A) The personnel department promptly sends employee termination notices to the payroll supervisor. B) Employees who distribute payroll cheques forward unclaimed payroll cheques to the absent employees' supervisors. C) Salary rates resulting from new hires are approved by the payroll supervisor. D) Total hours used for determination of gross pay are calculated by the payroll supervisor. 16. In testing the payroll of a large company, the auditor wants to establish that the individuals included in a sample actually were employees of the company during the period under review. What will be the best source to determine this? A) Telephone contacts with the employees. B) Tracing from the payroll register to the employee's earnings records. C) Confirmation with the union or other independent organization. D) Examination of Personnel Department records.

6 Final Examination ADMN4827EA Page For several years a client's physical inventory count has been lower than what was shown on the books at the time of the count so that downward adjustments to the inventory account were required. Contributing to the inventory problem could be weaknesses in internal control that led to the failure to record some A) Purchases returned to vendors. B) Sales returns received. C) Sales discounts allowed. D) Cash purchases. 18. When confirming accounts payable, emphasis should be put on what kind of accounts? A) Accounts with small or zero balances. B) All accounts should be equally emphasized. C) Accounts with large balances. D) Accounts listed in the accounts payable subsidiary ledger. 19. In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audit amount of $2,000. The projected error of this sample was A) $3,000 B) $4,000 C) $6,000 D) $8, Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories? A) Confirmation of inventories at locations outside the client's facilities. B) Analytical review of inventory balances compared to purchasing and sales activities. C) Observation of physical inventory counts. D) Examination of paid vendors' invoices.

7 Final Examination ADMN4827EA Page 7 PART 2 THEORY (20 MARKS TOTAL) (36 MINUTES) Choose 2 of the following 3 questions and answer fully. Only the first two will be marked. Each one is worth 10 marks. Choice #1 It s no wonder there are cases of accounting fraud everywhere. Auditors only look at a sample of transactions and then expect that they can reasonably make an opinion on the financial statements. Based on this auditors should be sued when companies get in trouble. Required: Comment on this statement Choice #2 Payroll is a very sensitive area to auditors and there are some key audit objectives. Using your knowledge of the payroll area, prepare a memo designed to go to a first year accountant that will help them understand the importance of payroll and auditing. Choice #3 Auditors will attend inventory counts of various companies from mining companies to hotels and restaurants but for what purpose. All companies have to do is change the inventory quantities after the count. Auditors would never know. Respond to this. PART 3 DIRECTED (20 MARKS TOTAL) (36 MINUTES) Question #1(10 Marks) (18 Minutes) The accounting firm of Ryan CA, performed the work below. The partner is worried about the work completed and about properly applying standards regarding audit sampling. She has asked for your advice. Treat each one independently. Frosty selected three purchase orders for raw materials from the FRZ Corporation files. He started at this beginning point in the accounting process and traced each one through the accounting system. He saw the receiving reports, purchasing agent s approvals, receiving clerks approvals, the vendors invoices (now stamped paid), the entry in the cash disbursement records, and the canceled cheques. This work gave him a firsthand familiarity with the cash disbursement system, and he felt confident about understanding related questions in the internal control questionnaire completed later.

8 Final Examination ADMN4827EA Page 8 Rudolph observed the inventory taking at Santa Corporation. He had an inventory list of the different inventory descriptions with the quantities taken from the perpetual inventory records. He selected the 200 items with the largest quantities and counted them after the client s shop foreman had completed his count. He decided not to check out the count accuracy on the other 800 items. The shop foreman miscounted 16 cases. Rudolph concluded the rate of miscount was 8 percent, so as many as 80 of the 1,000 items might be counted wrong. He asked the foreman to recount everything. Question #2 (10 Marks) (18 Minutes) You are in charge of the accounts receivable section of an audit file and have the following information to work with at year end: Accounts Receivable Balance $4,500,789 Allowance for doubtful Accounts $1,045 Materiality $80,000 Book Value of Sample $1,575,276 Accounts receivable confirmations were sent (a haphazard sample selection was used) and all confirms were either returned in agreement or satisfactory alternate procedures performed with the exception of the following: Book Value $23,789 $20,089 $65,785 $60,236 $99,765 $96,467 Audit Value Assume the differences are errors and that you will be extrapolating these errors. Conclude on your test. Are there any other questions you wish to ask? Show all calculations.

9 Final Examination ADMN4827EA Page 9 PART 4 CASE (40 MARKS) (72 MINUTES) Part 4 CASE (25 MARKS) (45 Minutes) You take one more sip of eggnog and then decide that the only way to get out of the office is to begin drafting the report your partner asked you to prepare. It is December 24 th and you work for Grinch Chartered Accountants. Your partner, Ebenezer Scrooge has informed you that he will be in tomorrow and needs you to prepare a draft report that analyzes the audit issues faced by your firm and one of your clients, Tiny Tim Ltd. (TTL). The year end for TTL was November 30 th. TTL has been in operation for 20 years and sells a variety of baking supplies and equipment to wholesalers and retailers across Canada and the Northern United States. TTL has been quite successful posting increasing profits for the past seven years. As a result it has undertaken an expansion program this year some of these are highlighted below. As a result of this expansion program, TTL has announced to your firm that they will be issuing more shares in TTL is a public company with 65% of the shares being held by Tiny Tim and the balance being widely held. This is your first year as audit manager and your audit senior has left you with the audit file for TTL and has left for the Christmas holidays. The former manager on the audit engagement left to go work for a large public company two days ago. TTL would like the financial statements issued the first week in January and you have yet to review the file in detail. Your audit senior is a transfer from another accounting firm and you and your partner are a little unsure of their competency and the competency of the audit manager who was in charge of the engagement. As a result your partner will be looking for your report that critically evaluates the work the audit team has done with rationale and recommendations where necessary. In the wake of accounting scandals, your CA firm wishes to ensure that all audit files are properly completed. TTL has a standard set of committees including a Board of Directors and audit committee. Rudolph is the Chief Financial Officer and receives a $500,000 bonus if TTL earns a net income before tax of $3,000,000. The unaudited statements show a pre-tax profit of $3,010,000. You begin to sift through components of the audit file. Exhibit #1 details some of the activities that have taken place during the year for TTL. Exhibit #2 details some of the audit work completed on the file. Your job is to complete the report to the Partner before you can go and enjoy the holidays. Good Luck.

10 Final Examination ADMN4827EA Page 10 EXHIBIT #1 In July 2002, TTL began selling its new turbo charged BreadMaker Plus bread making machine. In is expected that this machine will be a hot item and sales are expected to continually increase over the next four years and then remain constant for another four years. At the end of the eight years, TTL expects that it will need to introduce a new product and that the machines used to produce this unit will need to be replaced. In order to produce this new bread machine, TTL had to buy two special pieces of equipment. Each one cost $3,550,000 with installation costing $25,000 (each). Each machine has an expected total capacity of 650,000 bread machines (units). TTL has decided that it makes sense to amortize these machines over 20 years the expected equipment life. In previous years, TTL has amortized equipment from the date of purchase. TTL decided to not take any amortization on this equipment this year and will take a full year of amortization in the year of disposal. In September, TTL s main computer system crashed and all data was lost. TTL restored most of the data from a backup. The most recent backup before the fire was five days prior to the crash. TTL employees manually entered the five days of information from paper backup. TTL did not produce the pan that the bread dough goes in (this is for the BreadMaker Plus machine). Two different manufacturers made the pans and both used a non-stick coating so that the dough would not stick to the pan. TTL has found out that in some of the pans from one of the manufacturers, the non-stick coating is not withstanding the bread making of some consumers. As a result, they have received several complaints from unhappy customers. TTL has decided to issue new bread pans to any customer calling to complain along with several coupons for free bread supplies. The total cost to TTL for this replacement is $25 per customer. TTL expects anywhere from 1,000 to 1,500 customers to call and request this. You notice a legal letter that states that TTL has sued the manufacturer for $600,000. This has not yet gone to court and the lawyers are unsure of the outcome. TTL has recorded the $600,000 as an extraordinary item. It has not recorded anything yet with respect to the customers except for $200 the number of replacement pans that has already been shipped.

11 Final Examination ADMN4827EA Page 11 During the year TTL had two staff members that left. These members both worked in the accounts receivable area. The department manager noted several errors made by the new staff but corrected those before the audit began. TTL also has a division that manufactures and sells Candy Canes. The candy cane division has had difficulty this year due in part to an increased consumer dislike to candy canes. The profits of this division are down 30% from last year as Santa Claus ordered Smarties instead of Candy Canes this year for stockings. Currently candy cane inventory is 50% above the previous year. The candy cane inventory accounts for 30% of TTL inventory.

12 Final Examination ADMN4827EA Page 12 EXHIBIT #2 The completion part of the audit file shows that the audit team concluded that the financial statements were fairly stated. The team also stated that there was nothing to report to the Board of Directors or the Audit Committee. The audit senior completed the planning file and assessed the overall audit risk as low stating the following in the file: Grinch CA has audited TTL for several years and has a good relationship with the senior members of the company. It appears as though there are few issues this year that would warrant increasing inherent risk and control risk above last years level which was low. The audit team noted the problem with the computer system while talking to client staff. The audit file notes the issue in the narrative. The audit member who completed the section said the following in the file. Noted in discussions with client staff that TTL had a computer problem during the year. Most data was recovered by using a backup with the balance (5 days worth) being re-entered by the client. Discussed the issue with Rudolph who said that everything went okay. Results satisfactory, no further audit work required. The audit senior discussed the turnover of staff with Rudolph. The audit working paper notes the discussion as follows: Discussed the staff turnover with Rudolph who commented that at least one of the staff members was suspected of taking some money. Rudolph stated that there were some minor control issues this year but that everything has been resolved. Based on discussion, results satisfactory. The capital asset section of the audit file noted the following audit procedures completed: Recalculated the amortization on the new bread machines amortization recorded is correct. Results Satisfactory. The audit senior noted the lawsuit and concluded that it was not material to the financial statements.

13 Final Examination ADMN4827EA Page 13 The staff accountant attended the inventory count at November 30 th and included candy canes in the inventory count. The accountant noted that it appeared that the candy cane inventory was reasonably stated. The accountant also noted that it counted a variety of candy canes (small ones, large ones, green and white and traditional stripe). No discrepancies noted. No other audit work was performed. *** End of Examination Happy Holidays! ***