St. Vincent de Ferrer College of Camarin, Inc.

SVFC Compound,
San Vicente Ferrer St., Area D, Brgy. 178, Camarin, Caloocan City
Telephone Number: 668-25-75; Email address: st.vincentdeferrercollegeofccc@yahoo.com
Website: www.stvfc.com

Final Examination
Accounting 14 - Applied Auditing

Name: ________________________________ Year: ___________________________

Date: _____________________

1-5. what are five types of tests auditors use to determine whether financial statements are fairly
stated? Identify which tests are performed to reduce control risk and which tests are performed to
reduce planned detection.

6. What is the purpose of tests controls? Identify specific accounts on the financial statements
that are affected by performing tests of controls for the acquisition and payment cycle.

7. Distinguish between a test control and substantive tests of transactions. Give two examples of
each.

8. A considerable portion of the tests of transactions are performed simultaneously as a matter of

audit convenience. But the substantive tests of transaction procedures and sample size, in part,
depend on the results of the tests controls. How can the auditor resolve this apparent
inconsistency?

9. Distinguish between substantive tests of transactions and tests of details of balances. Give one
example of each for the acquisition and payment cycle.

10. Assume that the client’s internal controls over the recording and classifying of fixed asset
additions are considered weak because the individual response for recording new acquisitions has
inadequate technical training and limited experience in accounting. How would this situation
affect the evidence you should accumulate in auditing fixed assets as compared with another
audit in which the controls are excellent? Be as specific as possible.

11. The following are three decision factors related to assess control risk: effectiveness of
internal controls, cost-effectiveness of a reduced assessed control risk, and results of tests of
controls. Identify the combination of conditions for these factors that s required before reduced
substantive testing is permitted.

12. For each of the following controls, identify whether the controls leaves an audit trail. Also
identify a test of control audit procedure the auditor can use to test the effectiveness of the
control.
 a. An accounting clerk accounts for all shipping documents on a monthly basis and initials
the monthly shipping log.
b. Bank reconciliations are prepared by the controller, who does not have access to cash
receipts.
c. As employees check in daily buy using time clocks a supervisor observes to make certain
that no individual “punches in” more than one time card.
d. Vendor’s invoices are approved by the controller after the examines the purchase order
and receiving report attached to each invoice.
e. The cashier, who has no access to accounting records, prepares the deposit slip and
delivers the deposit directly to the daily.
f. An accounting clerk verifies the price, extensions, and footing of all sales invoices in
excess of P300 and initials the duplicate sales invoice when he has completed the
procedure.
g. All mail is opened and cash is prelisted daily by the president’s secretary, who has no
other responsibility for handling assets or recording accounting data.

Maria Cabrera, CPA, follows the philosophy of performing interim tests of controls and
substantive tests of transactions on every December 31 audit as means of keeping overtime to a
minimum. Typically, the interim tests are performed sometime between August and November.

REQUIRED:

a. Evaluate her decisions to perform interim tests of controls and substantive tests of
transactions.
b. Under what circumstances is it acceptable for her to perform no additional tests of
controls and substantive tests of transactions work as part of the year-end audit tests?
c. If she decides to perform no additional testing, what is the effect on other tests performs
during the remainder of the engagement?

13. Following are several decisions that the auditor must make in an audit. Letters indicate
alternative conclusions that could be made:

Decisions Alternative Conclusions

1. Determine whether it is cost-effective to A. It I cost- effective
perform tests of controls B. It is no cost-effective
2. Perform substantive tests of details of balances C. Perform reduced tests
D. Perform expanded test
3. Complete initial assessment of control risk E. Controls are effective
F. Controls are ineffective
4. Perform tests of controls G. Controls are effective
H. Controls are ineffective

REQUIRED:

a. Identify the sequence in which the auditor should make decisions 1-4 above.
 b. For the auditor of the sales and collection cycle and accounts receivable an auditor
reached the following conclusions: A, D, E, H. Put the letters in the appropriate sequence
and evaluate whether the auditor’s logic was reasonable. Explain your answer.
c. For the audit of inventory and related inventory cost records, an auditor reached the
following conclusions: B, C, E, G. Put the letters in the appropriate sequence and
evaluate whether the auditor used good professional judgment. Explain your answer.
d. Fort the audit of property, plant and equipment and related acquisition records, an auditor
reached the following conclusions: A, C, F, G. Put the letters in the appropriate sequence
and evaluate whether the auditor used good professional judgment. Explain your answer.
e. For the audit of payroll expenses and related liabilities, an auditor recorded the following
conclusions: D, F. Put the letters in the appropriate sequence and evaluate whether the
auditor used good professional judgment. Explain your answer.

14. Hazel Jess, a new staff auditor, is confused by the inconsistency if the three audit partners
she has been assigned on her first three audit engagements. On the first engagement, she spent a
considerable amount of time in the audit of cash disbursements by examining cancelled checks
and supporting documents, but almost no testing was spent in the verification of fixed assets. On
the second engagement, a different partner had her or less intensive tests in the cash
disbursements area and take smaller sample sizes than in the first audit, even though the company
was much larger. On her most recent engagement under a third audit partner, there was a
thorough test of cash disbursement transactions, far beyond that of the other two audits, and an
extensive verification of fixed assets. In fact, this partner insisted on a complete physical
examination of all fixed assets recorded on the books. The total audit time on the most recent
audit was longer than that of either of the first two audits despite the smaller size of the company.
Hazel’s conclusion is that the amount of evidence to accumulate depends on the audit partner in
charge of the engagement.

REQUIRED:

a. State several factor that could explain the difference in the amount of evidence
accumulated in each of the three audit engagements as well as the total time spent.
b. What could the audit partners have done to help Hazel understand the difference in the
audit emphasis on the three audits?
c. Explain how these three audits are useful in developing Hazel’s professional judgment.
How cold the quality of her judgment have been improved on the audits?

15. The following are three situations in which the auditor is required to develop an audit
strategy:

1. The client has inventory at approximately 50 locations in the Philippines. The inventory
is difficult to count and can be observed only by traveling by automobile. The internal
controls over acquisitions, cash disbursements, and perpetual records are considered
effective. This is the fifth year that you have done the audit, and audit results in past
years have always been excellent. The client is in excellent financial condition and is
privately held.
2. This is the first year of an audit of a medium-sized company that is considering selling its
 business because of severe under financing. A review of the acquisition and payment
cycle indicates that controls over cash disbursements are excellent, but controls over
acquisitions. When you review the general ledger, you observe that there are many large
adjusting entries to correct accounts payable.
3. You are doing the audit of a small loan company with extensive receivables from
customers. Controls over granting loans, collections, and loans outstanding are
considered effective, and there is extensive follow-u of all outstanding loans weekly. You
have recommended a computer system for the past two years, but management believes
the cost is too great, given their low profitability. Collections are an ongoing problem
because many of the customers have severe financial problems. Because of adverse
economic conditions, loans receivable have significantly increased and collections are
less than normal. In previous years, you have had relatively few adjusting entries.

REQUIRED:

a. For audit1, recommended an evidence mix for the five types of tests for the audit of
inventory and cost of goods sold. Justify your answer. Include in your recommendations
both tests of controls and substantive tests.
b. For audit 2, recommend an evidence mix for the audit of the acquisition and payment
cycle, including accounts payable. Justify your answer
c. For audit 3, recommend an evidence mix for the audit of outstanding loans. Justify your
answer.

16. The following are parts of a typical audit for a company with a fiscal year-end of July 31.

1. Confirm accounts payable

2. Do tests of controls and substantive tests of transactions for the acquisition and payment
and payroll and personnel cycles
3. Do other tests of details of balances for accounts payable.
4. Do tests of review of subsequent events
5. Preplan the audit
6. Issue the audit report’
7. Understand internal control and assess control risk.
8. Do analytical procedures for accounts payable
9. Set applicable audit risk and decide preliminary judgment about materiality and tolerable
misstatement.

REQUIRED:

a. Put parts 1 through 9 of the audit in the sequential order in which you would expect them
to be performed in a typical audit
b. Identify those parts that would frequently be done before July 31.

Multiple Choice Questions

Questions No. 1 through 4 deals with tests of controls. Choose the best response.
 1. Which of the following statements about tests of controls is most accurate?

a. Auditing procedures cannot concurrently provide both evidence of the effectiveness of

internal control procedures and evidence required for substantive tests.
b. Tests of controls include observations of the proper segregation of the duties
c. Tests of controls provide direct evidence about monetary misstatements in transactions
d. Tests of controls ordinarily should be performed as of the statement of financial position
date of during the period subsequent to that date.

2. Which of the following would be least likely to be included in an auditor’s tests of controls?

a. Documentation
b. Observation
c. Inquiry
d. Confirmation

3. The two phases of the auditor’s involvement with internal control are sometimes called
“understanding and assessment” and “tests of controls”. In the tests of controls phase, the
auditor attempts to obtain:

a. A reasonable degree of assurance that the client’s internal controls are operating
effectively on a consistent basis throughout the year.
b. Sufficient competent evidential matter to afford a reasonable basis for the auditor’s
opinion.
c. Assurances that informative disclosures in the financial statements are reasonably
adequate.
d. Knowledge and understanding of the client’s prescribed procedures and methods.

4. Which of the following is ordinarily considered a test of control audit procedures?

a. Send confirmation letters to banks.

b. Count and list cash on hand
c. Examine signatures on check

d. Prepare reconciliations of bank accounts as of the statement of financial position date.

Question No. 5 through 7 concern types of audit tests. Choose the best response.

5. Analytical procedures may be classified as being primarily

a. Tests of controls
b. Substantive test
c. Tests of ratios
d. Tests of details of balances
6. To support the auditor’s initial assessment of control risk below maximum, the holder
performs procedures to determine that internal controls are operating effectively. Which of
 the following audit procedures is the auditor performing?

a. Tests of details of balances

b. Substantive test of transactions
c. Tests of controls
d. Tests of details of balances

7. The auditor faces risk that the audit will not detect material misstatements that occur in the
accounting process. To minimize this risk, the auditor relies primarily on

a. Substantive test
b. Tests of controls
c. Internal control
d. Statistical analysis.

Questions No. 8 and 9 concern the sequence and timing of audit tests. Choose the best
response

8. A conceptually logical approach to the auditor’s evaluation of internal control consists of the
following four steps:

I. Determine the internal controls that should prevent or detect errors and fraud

II. Identify weakness to determine their effect of nature, timing or extent of auditing
procedures to be applied and suggestions to be made to the client

III. Determine whether the necessary procedures are prescribed and are being followed
satisfactorily.

IV. Consider the types of errors and fraud that could occur What should be the order

in which these four steps are performed?

a. I, II, III, and IV

b. I, III, IV and II
c. III, IV,I and II
d. IV, I, III and II

9. The sequence of steps in gathering evidence as the basis of the auditors opinion is:

a. Substantive tests, initial assessment of control risk, and test of controls.

b. Initial assessment of control risk, substantive tests, and tests of controls
c. Initial assessment of control risk, tests of controls, and substantive tests.
d. Tests of controls, initial assessment of control risk, and substantive tests.