Review Questions

3. What audit procedures can be completed only at or after period end?

The audit procedures that can be performed only at or after period end are:
- Agreeing the financial statements to the accounting records,
- Examining adjustments made during the course of preparing the financial statements, and
- Procedures to respond to a risk that the entity may have entered into improper sales
contracts, or that transactions may not have been finalized at period end.

4. What are the five types of tests auditors use to determine whether financial statements are fairly
stated? Identify which tests are performed to reduce planned detection risk.

The five types of tests that auditors use to determine whether financial statements are fairly stated
are:
a. Procedures to gain an understanding of internal control
b. Tests of controls
c. Substantive tests of transactions
d. Analytical procedures
e. Tests of details of balances

Procedures to gain an understanding of internal control helps the auditor to obtain information
from financial statements to make an initial assessment of control risks. Tests of controls in
performing tests of controls it obtains evidence regarding on effectiveness of controls which may
allow the auditor to assess control risks that is below maximum and if controls are found to be
effective and functioning, the substantive evidence may be reduced. Substantive evidence is
obtained to reduce detection risk which includes evidence from Substantive tests of transactions,
Analytical procedures and Tests of details of balances.

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

Test of control are auditing procedure used to evaluate a company’s internal controls. The
purpose of tests of control in auditing is to determine whether these internal controls are sufficient
to detect or prevent risks of material misstatements. The specific accounts on the financial
statements that are affected by performing tests of controls for the acquisition and payment cycle
include cash, accounts payable, purchases, purchase returns and allowances, purchase
discounts, manufacturing expenses, selling expenses, prepaid insurance, leasehold
improvements, and various administrative expenses.

Exercise 1
A. An accounting clerk accounts for all shipping documents on a monthly basis and initials the
monthly shipping log.

Yes, a control leaves an audit trail which is the independent checks on performance. Based on
situation A, a test of control in audit procedure that the auditor can use to test the effectiveness of
the control is to provide completeness both in posting and summarization, so that an accounting
clerk provide necessary information in auditing engagement.

B. Bank reconciliation are prepared by the controller, who does not have access to cash receipts.

Yes, a control leaves an audit trail which is the independent checks on performance. In
accordance to the situation B, a test of control in audit procedure that the auditor can use to test
the effectiveness of the control is to achieve completeness, existence and accuracy. The bank
reconciliation which prepared by the controller must give completeness and existence of all the
accounts necessary and the amounts reconcile must be accurate.

Exercise 3
A. Identify the sequence in which the auditor should make decision 1-4 above.

Auditors provide a complete 360-degree view of the company and would allow the management to
understand the potential bottlenecks of the company well in advance. Auditors conduct auditing
process to have a better decision making. The proper sequence in which the auditor should make
a decision, First, is to Complete initial assessment of control risk to evaluate the effectiveness of
the design and operation of an entity’s internal control structure policies. Second, is to Determine
whether it is cost effective to perform tests of controls. Third, is to Perform tests of controls to
examine the internal control of the entity. And Lastly, Perform substantive tests of details of
balances to examine if they contain errors. To conclude, 3,1,4,2 is the proper sequence in decision
making of an auditor.

Exercise 4
A. State several factors that could explain the difference in the amount of evidence accumulated in
each of the three audit engagement as well as the total time spent.

Some of the factors that I notice to the assigned three audit engagement to Hazel Jess which
explains the difference in the amount of evidences accumulated are internal controls, size of the
population, materiality of account balance, making an error in financial statements and reliance by
third parties on audited financial statements.