POLYTECHNIC OF NAMIBIA SCHOOL OF MANAGEMENT SCIENCES

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1 POLYTECHNIC OF NAMIBIA SCHOOL OF MANAGEMENT SCIENCES DEPARTMENT ACCOUNTING, ECONOMICS & FINANCE 23BACF BACHELOR OF ACCOUNTING COURSE: AUDITING 38 COURSE CODE: AUD312S SECOND OPPORTUNITY EXAMINATION QUESTION PAPER DATE: JUNE 2014 DURATION: 3 HOURS TOTAL MARKS: 100 INSTRUCTIONS 1. This paper consists of 4 (four) questions. 2. Answer ALL the questions. 3. Start each question on a NEW PAGE. 4. Only black ink is allowed. 5. No Tippex is allowed. EXAMINER: MODERATOR: Ms ZE Stellmacher Mr ED Beukes THIS PAPER CONSISTS OF ELEVEN PAGES EXCLUDING THE COVER PAGE

2 SECTION A (25 Marks) Multiple Choice Write down the LETTER that represents the correct answer to the various alternatives given in each case. Each correct multiple choice answer is worth one (1) mark. 1. When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, objective? a. Accuracy b. Existence c. Completeness d. None of the above 2. To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with: a. the original invoices. b. an approved price list. c. the amounts recorded in the sales journal for that transaction. d. the amounts posted to the customer's account in the accounts receivable master file. 3. The advantage of systematic sample selection is that: a. it is easy to use. b. there is limited possibility of it being biased. c. it is unnecessary to determine if the population is arranged randomly. d. it automatically selects items material to the financial statements. 1

3 4. Sampling risk may be controlled by: Adjusting the sample size Always using random sampling a. Yes Yes b. No No c. Yes No d. No Yes 5. Which of the following forms of evidence would be least persuasive in forming the auditor's opinion? a. Responses to auditor's questions by the CEO and financial controller regarding the investments account. b. Correspondence with a stockbroker regarding the quantity of client's investments held in street name by the broker. c. Minutes of the board of directors authorizing the purchase of shares as an investment. d. The auditor's count of marketable securities. 6. Which of the following is not a purpose of analytical procedures? a. Understand the client's industry. b. Assess the client's ability to continue as a going concern. c. Evaluate internal controls. d. Reduce detailed audit tests. 2

4 7. Evidence is usually more persuasive for balance sheet accounts when it is obtained: a. as close to the balance sheet date as possible. b. only from transactions occurring on the balance sheet date. c. from various times throughout the client's year. d. from the time period when transactions in that account were most numerous during the fiscal period. 8. Auditors commonly allocate materiality to balance sheet accounts rather than income statement accounts because most income statement misstatements have a(n) effect on the balance sheet. a. reduced b. equal c. undetermined d. increased 9. Why do auditors establish a preliminary judgment about materiality? a. To determine the appropriate level of audit experience required for the work. b. So that the client can know what records to make available to the auditor. c. To plan the appropriate audit evidence to accumulate and develop an overall audit strategy. d. To finalize the assessment of control risk. 3

5 10. Auditors are responsible for determining whether financial statements are materially misstated, so upon discovering a material misstatement they must bring it to the attention of: a. regulators. b. the audit firm's managing partner. c. no one in particular. d. the client's management. 11. The advantage of using the negative form of confirmations is that: a. larger sample sizes can be used without increasing the costs above what would have been required for positive confirmations. b. a non-response from the customer proves that the balance is correct. c. follow-up procedures are scheduled automatically. d. they provide greater reliance. 12. The auditor's starting point for verifying disposals of property, plant, and equipment is the: a. equipment account in the general ledger. b. file of shipping documents. c. client's schedule of recorded disposals. d. equipment subsidiary ledger. 13. The tests of details of balances procedure for fixed assets which require the auditor to examine vendors' invoices of closely related accounts such as repairs and maintenance to uncover items that should be fixed assets would satisfy the audit objective of: 4

6 a. accuracy. b. existence. c. detail tie-in. d. completeness. 14. The physical counting of inventory may be performed at which of the following times? Interim dates On a cycle basis during the year a. Yes Yes b. No No c. Yes No d. No Yes 15. Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because: a. this is a duplication of cutoff tests. b. there is likely to be other reliable external evidence available to support the balances. c. accounts payable balances at the balance sheet date may not be paid before the audit is completed. d. correspondence with the audit client's attorney will reveal all legal action by vendors for nonpayment. 5

7 16. Misstatements must be compared with some measurement base before a decision can be made about materiality. A commonly accepted measurement base includes: a. net income. b. total assets. c. working capital. d. all of the above. 17. Which of the following statements is false? a. The ownership objective is an important part of verifying assets but not liabilities. b. In auditing liabilities, the emphasis is on the search for understatements rather than overstatements. c. Because of the emphasis on understatements in liability accounts, out-of-period liability tests are important for accounts payable. d. The success of the auditor's search for unrecorded liabilities is not dependent upon the materiality of the potential balance in the account. 18. When determining whether an exception is "highly material," the extent to which the exception affects different elements of the financial statements must be considered. This concept is called: a. materiality. b. pervasiveness. c. financial analysis. d. ratio analysis. 6

8 19. Which of the following is correct with respect to the use of analytical procedures? a. Analytical procedures may be used in evaluating balances in the testing phase as long as the auditor also uses them in assessing the going concern assumption. b. Analytical procedures must be used throughout the audit. c. Analytical procedures used in the testing phase of the audit are primarily used to direct an auditor's attention so that the auditor's understanding of the business is improved. d. Analytical procedures are performed by studying plausible relationships between financial and nonfinancial data. 20. 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. 21. Which of the following types of owners' equity transactions would not require authorization by the board of directors? a. Issuance of capital stock. b. Repurchase of capital stock. c. Declaration of dividends. d. None of the above. 7

9 22. What type of audit test will auditors use when testing to see if the amounts of capital stock transactions are accurately recorded? Tests of details of Tests of Tests of controls balances transactions a. b. c. d. No Yes Yes Yes No Yes No Yes No Yes No No 23. The direct receipt of a confirmation from every bank with which the client does business is: a. required by auditing standards for every audit. b. not necessary unless material fraud is suspected. c. typically done but not required by auditing standards. d. necessary for every audit except when there are an unusually large number of active accounts. 24. The reason for testing the client's bank reconciliation is to verify whether the client's recorded bank balance is the same amount as the actual cash in bank, except for deposits in transit, checks outstanding, and other reconciling items. The information needed to complete the tests of the reconciliation are provided by the: a. client's records and ledgers for the year under audit. b. cutoff bank statement. c. client's records and ledgers for the subsequent year. d. canceled checks for the year under audit. 8

10 25. Which of the following tests are typically not necessary when auditing a client's schedule of recorded disposals? SECTION B a. Footing the schedule. b. Tracing schedule totals to the general ledger. c. Tracing cost and accumulated depreciation of the disposals to the property master file. d. All of the above are necessary. Question 2 (25 Marks) At the beginning of 2013, you were appointed as a junior audit clerk in Shoomba Shoes, a manufacturer of various types of leather shoes in Ondangwa. The business' year end is the of August The audit senior is off sick and will not be able to audit the trade creditors and the accruals balances. The audit partner has requested that you please assist in auditing this section. You have already ascertained the following: Mr Shoomba believes in supporting Namibian businesses therefore all the suppliers are locals. The creditors department receives a copy of the signed goods received note and the delivery note. These documents are filed by goods received note number. The last goods received note number for the year ending 31 August 2013, is SS Monthly creditors reconciliations are performed and reviewed. The reconciliations are signed off by the supervisor as proof of review. The creditors and accruals balance for 2013 amounted to N$ , while the 2012 balance amounted ton$ Required: a) Provide the substantive audit procedures to verify the trade creditors at 31 August (15 Marks) Notes: You do not have to deal with the obligations and existence assertions. 9

11 , You do not have to deal with procedures regarding creditors' reconciliations and disclosure. b) List the substantive audit procedures for the share capital account balance of a private company. (10 Marks) Question 3 (25 Marks) a) What do you understand by the term "pervasive effects" in the context of an audit report? (3 Marks) b) Explain why an auditor might need to modify the audit report. (1 0 Marks) c) "Even if the auditor modifies the audit report, there will be some instances where the auditors opinion will not be affected." Explain this statement.(4 Marks) d) Provide three (3) situations which may lead to financial statements as a whole to not be free from material misstatement. (3 Marks) e) List situations which can result in the auditor being unable to gather enough evidence to conclude that the financial statements are free from misstatement. Provide a clear example for each situation listed. (5 Marks) Question 4 (25 Marks) a) You have been given the following risk factors: i) The client is experiencing cash flow problems which may cause it to cease operations. ii) The warehouse is easily accessible and monthly inventory counts are not performed. This leads to inventory theft not being detected. iii) The company is listed on the stock exchange. iv) Many material misstatements were identified by the audit team during the previous year's audit. v) The audit team does not have the necessary skills to identify misstatements in the accounts. vi) The client is one of the largest businesses in the industry. vii) The client is involved in many related party transactions. viii) The obsolescence inventory allowance is based on a lot of judgement by management. ix) The audit programs do not contain all the audit procedures required for testing accounts. 10

12 x) The client does not perform reconciliations on a monthly basis. Required: Provide the audit risk component most relevant to each of the above scenarios. The audit risk components are: Acceptable audit risk Inherent risk Control risk Planned detection risk Your answer to each scenario should only contain ONE of the components.(1 0 Marks) b) Explain the effect of each of the following scenarios below on the sample size e.g. larger or smaller sample size. Also give the reason for each effect. Your answer must be provided in column format as follows: Scenario number Effect on sample size Reason for effect Scenario x Larger sample size XXX Each scenario must be treated in isolation. (15 Marks) i) The company has a high inherent risk. ii) Internal controls are not effective. iii) No exceptions were found in substantive test of transactions. iv) The likelihood of bankruptcy is low. v) Analytical procedures indicated likely misstatements. vi) Tolerable misstatement for the debtors account is higher. vii) The dollar amount of the fixed assets increased. viii) The number of items in the population to be tested increased. END OF EXAMINATION QUESTION PAPER 11