UNIVERSITY OF ZIMBABWE

2015 May Examinations

Faculty: Commerce

Department: Accountancy

Paper code and Title: (AC220) Auditing II

Duration: 3 hours

Examiner: Mrs L Nyikahadzoi

Authorized Materials: Calculator

INSTRUCTIONS:

1. This paper contains 5 Questions

2. Answer All questions
3. Start each question on a new page
4. This question paper comprises 14 printed pages

NB: DO NOT TURN OVER THE QUESTION PAPER OR COMMENCE WRITING

UNTIL INSTRUCTED TO DO SO.
QUESTION 1 [14 MARKS]
The audit documentation represents the auditor's accumulation of evidence and
conclusions reached on an audit engagement. Prior year audit documentation
can provide insight into an audit engagement that will be useful in planning the
current year audit.

Required
a. What are the purposes or primary functions of audit documentation? (5marks)
b. Comment ownership, custody period of keeping, access to and legal liability
with regards audit documentation. (8 marks)
c. The auditor often requests the client to prepare a schedule, such as a
schedule listing all repair and maintenance expenses over $5,000 for the past
year. The client asks for a copy of the previous year's documentation to serve as
a guide. What should the auditor do and what procedures should the auditor use
to ensure that the client has properly prepared the requested documentation?
(1 mark)

QUESTION 2 [30 MARKS]

Audit procedures vary according to the risks associated with the client and the
methods used to record transactions. The third standard of fieldwork requires
that an auditor gathers sufficient and appropriate audit evidence.
a) The following are examples of audit procedures:
1. Review the accounts receivable with the credit manager to evaluate their
collectability.
2. Compare a duplicate sales invoice with the sales journal for customer name
and amount.
3. Add the sales journal entries to determine whether they were correctly totalled.
4. Count inventory items and record the amount in the audit files.
5. Obtain a letter from the client's attorney addressed to the CPA firm stating that
the attorney is not aware of any existing lawsuits.
6. Extend the cost of inventory times the quantity on an inventory listing to test
whether it is accurate.
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7. Obtain a letter from an insurance company to the CPA firm stating the amount
of the fire insurance coverage on buildings and equipment.
8. Examine an insurance policy stating the amount of the fire insurance coverage
on buildings and equipment.
9. Calculate the ratio of cost of goods sold to sales as a test of overall
reasonableness of gross margin relative to the preceding year.
10. Obtain information about internal control by requesting the client to fill out a
questionnaire.
11. Trace the total in the cash disbursements journal to the general ledger.
12. Watch employees count inventory to determine whether company procedures
are being followed.
13. Examine a piece of equipment to make sure that a major acquisition was
actually received and is in operation.
14. Calculate the ratio of sales commission expense to sales as a test of sales
commissions.
15. Examine corporate minutes to determine the authorization of the issue of
bonds.
16. Obtain a letter from management stating that there are no unrecorded
liabilities.
17. Review the total of repairs and maintenance for each month to determine
whether any month's total was unusually large.
18. Obtain a written statement from a bank stating that the client has $15,671 on
deposit and liabilities of $500,000 on a demand note.

REQUIRED:
Classify each of the preceding items according to the eight types of audit
evidence:
(1) physical examination, (2) confirmation, (3) documentation, (4) analytical
procedures,
(5) inquiries of the client, (6) recalculation, (7) re-performance, and (8)
observation (18 marks)

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 b) Following are 10 audit procedures with words missing and a list of
several terms commonly used in audit procedures.
Audit Procedures
1. the unit selling price times quantity on the duplicate sales invoice and
compare the total to the amount on the duplicate sales invoice.
2. whether the accounts receivable bookkeeper is prohibited from handling
cash.
3. the ratio of cost of goods sold to sales and compare the ratio to previous
years.
4. the sales journal and the total to the general ledger.
5. the sales journal, looking for large and unusual transactions requiring
investigation.
6. of management whether all accounting employees are required to take
annual vacations.
7. all marketable securities as of the balance sheet date to determine
whether they equal the total on the client's list.
8. the balance in the bank account directly with the East State Bank.
9. a sample of duplicate sales invoices to determine if the controller's
approval is included and each duplicate sales invoice to the sales journal
for agreement of name and amount.
10. the agreement between Johnson Wholesale Company and the client to
determine whether the shipment is a sale or a consignment.

Terms
a. Examine
b. Scan
c. Read
d. Compute
e. Re-compute
f. Foot
g. Trace
h. Compare
i.Count

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j. Observe
k. Inquire
I. Confirm
REQUIRED
For each of the 12 blanks in procedures 1 through 10, identify the most
appropriate term. No term can be used more than once. (12 marks)

QUESTION 3 [20 MARKS]

List numbers 1 through 20 in a vertical line and against each number write the
letter of the response that best answers the question.

1. In an automated payroll system, all employees in the finishing department

were paid at the rate of $7.45 per hour when the authorized rate was $7.15 per

hour. Which of the following controls would have been most effective in
preventing such an error?

A. Access controls that would restrict access to the payroll wage rate file to the

personnel department

B. A review of all authorized pay rate changes by the foreman in charge of the

department

C. The use of batch control totals by department

D. A limit test that compares the pay rates per department with the maximum rate

for all employees

2 A deposit for Julie A. Smith at the local bank was inadvertently recorded as a

deposit in the account of June A. Smith. The control that would most likely have
detected the error in depositing the amount to the wrong account would be:

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A. The use of self-checking digits on account numbers

B. Range tests on accounts in which the deposit is related to the size of the

account

C. Limit tests

D. Validity tests to determine whether Julie Smith is a valid customer

3 Which of the following independent errors would not be detected by batch

controls?

A. The computer operator added a fictitious employee to the processing of the

weekly time cards.

B. An employee who worked only 5 hours in the week was paid for 50 hours.

C. The time card for one employee was not processed because it was lost in

transit between the payroll department and the data entry function.

D. All of the above.

4. A mail-order retail organization sells complex electronic equipment through its

catalogs. Orders are taken over phone lines and transmitted via terminal to the

company's main warehouse for processing, shipping, and invoicing. Which of the

following would be the most effective control procedure to ensure that proper
inventory items are identified and shipped?

A. Require use of self-checking digits on the customer's account number.

B. Require oral verification of part description and price with the customer over

the phone.

C. Require sales order personnel to verify that inventory items are on hand by

referring to current inventory quantities before processing the order.

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D. Require use of batch control totals to reconcile total amount ordered by

terminal with total amount recorded in the inventory file for the same period.

5. Which of the following statements are correct regarding access controls:

I.Proper implementation of access controls requires the firm to identify all users

and the access they should have to data.

II.Retinal scans cannot be duplicated and thus are the best method to

authenticate users.

III. Passwords are the most widely used method of authentication.

a. I

b. I and III

c. II and III

d. I, II, and Ill

6 Which of the following would not be an appropriate use of GAS?

A. Developing an aging report of accounts receivable

B. Reading a complete master file for an overall integrity review

C. Reading a file to select accounts receivable transactions over $5,000 and over

30 days past due for subsequent audit analysis

D. Generating transactions for submission to an integrated test facility

7 Tagging and tracing would be effective in addressing all of the following audit
objectives except:

A. Ensuring that submitted transactions have been fully processed

B. Ensuring that all valid transactions have been submitted for processing

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C. Determining that appropriate account balances have been updated

D. Determining that calculations have been made correctly

8. Which of the following procedures is least likely to be performed by an auditor

using GAS?

A. Selection and printing of accounts receivable confirmations from a client's

master file

B. Evaluation of the audit results based on a statistical sample of inventory

C. Identification and selection of inventory items that have characteristics that the
auditor believes indicate obsolete inventory

D. Creation of a detailed printout of a file so that an auditor can read the

complete file and select items for audit verification

9. Detailed testing of controls in a computer system through the use of an ITF:

A. Can be performed using simulated transactions

B. Is not convincing because many of the computer controls leave no visible

evidence of operation

C. Is likely to contaminate the client's master files and thus should be used only
as a last resort

D. Is insufficient unless all controls and elements of processing are identified and

tested

10. Which of the following statements is correct regarding the use of computer

audit tools in the audit of a company that utilizes e-commerce extensively?

A. Generalized audit software is not likely to be used because it is oriented to

testing account balances, not processes.

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B. Tagging and tracing can be used but it can only record information about the

client's processing.

C. Integrated test facility is ideally suited for e-commerce.

D All of the above

11 Which of the following statements regarding the incidence of fraud is

incorrect?

A. Fraud is estimated to costs U.S. businesses less than 1 cent of every dollar of

sales.

B. Defalcations occur more often than financial reporting fraud.

C. Financial reporting frauds are generally larger in dollar amounts.

D. Research shows that only about 1/5 of all frauds are discovered and

prosecuted.

12. Which of the following best describes the auditor's responsibility for detecting
financial reporting fraud vs. detecting a defalcation?

A. There is more responsibility for detecting financial reporting fraud

because audits are designed to look for financial misstatements.

B. The auditor is responsible for detecting financial reporting fraud

only if it is material, but is responsible for detecting all defalcations caused by a

known deficiency in the client's internal control.

C. The auditor is responsible for detecting material misstatements in the financial

statements; thus there is no difference in the responsibility of detecting financial

reporting fraud or a defalcation as long as it is material.

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D. The auditor is responsible for detecting financial reporting fraud of any amount

if collusion and red flags were present.

13 Fraudulent financial reporting includes all of the following except

A. Misappropriation of assets for personal use

B. Manipulation, falsification, or alteration of accounting records or supporting

documents

C. Misrepresentation or omission of events, transactions, or other significant

information

D. Intentional misapplication of accounting principles

14 Which of the following statement(s) is/are correct regarding the auditor's use
of materiality as it applies to a financial statement audit:

A. The auditor is required to report all incidences of material fraud to the audit
committee.

B. The discovery of a material fraud indicates a company has a material

deficiency in internal control.

C. There is no difference in the dollar amount of planning materiality when

searching for a defalcation vs. searching for financial reporting fraud.

D. The auditor must consider qualitative factors such as whether or not

senior management is involved in determining the materiality of fraud.

E. All of the above.

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15 An auditor discovers a material defalcation involving the theft of $500,000 of

inventory. Restitution will not be made. Which of the following statements is not

correct regarding the auditor's responsibility for reporting the defalcation?

A. Because theft was involved, the auditor must report it to the client's legal

counsel with a follow-up to see that it had been reported to the proper legal
enforcement group.

B. The theft, because it is material, should be separately reported as a line item

in the financial statements because it is unusual, nonrecurring, and there will be

no restitution.

C. The theft must be reported to the audit committee.

D. The theft must be reported to top management.

16 Which of the following is not a correct statement regarding the use or

brainstorming as part of a financial statement audit?

A. It is required as a normal part of every engagement.

B. it should include all members of the audit team.

C. it should include an analysis of known internal control deficiencies.

D. it should be performed jointly with the internal audit department.

17. The auditor notes the following changes in ratios:

Current Last Year

Inventory Turnover 7.3 4.2

Accounts Receivable Turnover 2.8 7.3

Revenue Growth 15% 8%

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From just this information, the auditor should conclude all of the following about
fraud risk except

A. Inventory has declined in quality because of the emphasis on increased sales.

B. Accounts receivable growth may be caused by increased sales.

C. Accounts receivable is older and may be less collectible.

D. Revenue growth likely includes contracts that have deferred payment terms.

E. The data would support a hypothesis of fictitious sales near year end.

18. Which of the following would not be considered a motivation to commit fraud:

A. Personal financial problems

B. Stock compensation programs

C. Poor internal controls

D. Tight debt covenants

19. The accounting profession may have contributed to the downfall of Enron and
the large public losses in all of the following ways except:

A. Accounting became very rule-oriented and created a group of auditors who

perceived value in finding the limits of the rules.

B. Auditors were hired and fired by management.

C. Audit committees were ineffective.

D. The accounting firm earned more from Enron in non-audit fees than it earned

in audit fees.
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20. The largest form of defalcation (both in dollars and frequency) is:

A. Theft of cash directly from the company

B. Theft of cash through disbursement schemes

C. Theft of inventory and small tools

D. Theft of cash by taking customer receipts and writing off accounts receivable

QUESTION 4 [14 MARKS]

a) Audit sampling applies whenever the auditor plans to reach conclusions about
a population based on a sample. When auditors sample for tests of details of
balances, the objective is to determine whether the account balance being
audited is fairly stated.
Required:
Outline the 14 steps used for sampling for tests of controls and substantive tests
of transactions. (14 marks)

QUESTION 5 (22 MARKS)

"Cash" reported in the financial statements represents currency on hand and
cash on deposit in bank accounts, including certificates of deposit, time deposits
and savings accounts. "Cash equivalents" are frequently combined with cash for
presentation in the financial statements.

REQUIRED
i) Match the following assertions with their associated description:
(a) existence or occurrence,
(b) completeness,
(c) rights and obligations,
(d) valuation or allocation,
(e) presentation and disclosure.

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 Cash accounts are properly classified on the balance sheet and
1.
disclosed in the notes to the financial statements.

2. Cash balances exist at the balance sheet date.

The recorded balances reflect the true underlying economic value of those
3.
assets.
The company has title to the cash accounts as of the balance
4.
sheet date.
Cash balances include all cash transactions that have taken
5.
place during the period. (5 MARKS)

ii) Explain the following terms relating to auditing the cash cycle

a) Turnaround document,
b) cut off bank statement,
c) collateral,
d) lapping,
e) skimming,
f)
g) invest account
h) marketable securities. (8 MARKS)

iii) List any tests of controls or procedures carried out during substantive tests of

controls for marketable securities (9 MARKS)

BLESSED ********************
***************END OF EXAMINATION. BE

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