Professional Documents
Culture Documents
UNIVERSITY OF PADJADJARAN
(I).THEORY (30%)
1. What are the primary control concerns regarding equity transactions, and why is auditing
retained earnings a relatively simple audit procedure?
2. Distinguish between a contingent liability and an actual liability and give three examples of
each.
3. Distinguish between the two general types of subsequent events and explain how they
differ. Give two examples of each type.
4. On February 17, 2012, a CPA completed all the evidence gathering procedures on the audit
of the financial statements for the Buckheizer Technology Corporation for the year ended
December 31, 2011. The audit is satisfactory in all respects except for the existence of a
change in accounting principles from FIFO to LIFO inventory valuation, which results in an
explanatory paragraph on consistency. On February 26, the auditor completed the tax
return and the draft of the financial statements. The final audit report was completed,
attached to the financial statements, and delivered to the client on March 7. What is the
appropriate date on the auditor’s report?
5. What are the different levels of financial statement assurance provided by the following
engagements: Audits, Reviews, and Compilations?
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FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITY OF PADJADJARAN
Required
a. Prepare a bank reconciliation that shows both the unadjusted and adjusted balance per books.
b. Prepare all adjusting entries.
c. What audit procedures would you use to verify each item in the bank reconciliation?
d. What is the cash balance that should appear on the July 31, 2011, financial statements?
In your audit of Aviary Industries for calendar year 2011, you found a number of matters that
you believe represent possible adjustments to the company’s books. These matters are described
below. Management’s attitude is that “once the books are closed, they’re closed,” and
management does not want to make any adjustments. Planning materiality for the audit was
$100,000, determined by computing 5% of expected income before taxes. Actual income before
taxes on the financial statements prior to any adjustments is $1,652,867.
Possible adjustments:
1) Several credit memos that were processed and recorded after year-end relate to sales and
accounts receivable for 2011. These total $26,451.
2) Inventory cutoff tests indicate that $25,673 of inventory received on December 30, 2011,
was recorded as purchases and accounts payable in 2012. These items were included in
the inventory count at year-end and therefore were included in ending inventory.
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FACULTY OF ECONOMICS AND BUSINESS
UNIVERSITY OF PADJADJARAN
3) Inventory cutoff tests also indicate several sales invoices recorded in 2011 for goods that
were shipped in early 2012. The goods were included in inventory even though they were
set aside in a separate shipping area. The total amount of these shipments was $41,814.
4) The company wrote several checks at the end of 2011 for accounts payable that were held
and not mailed until January 15, 2012. These totaled $43,671. Recorded cash and accounts
payable at December 31, 2011, are $2,356,553 and $2,666,290, respectively.
5) The company has not established a reserve for obsolescence of inventories. Your tests
indicate that such a reserve is appropriate in an amount somewhere between $15,000 and
$30,000.
6) Your review of the allowance for uncollectible accounts indicates that it may be
understated by between $35,000 and $55,000.
Required
a) Determine the adjustments that you believe must be made for Aviary’s financial
statements to be fairly presented. Include the amounts and accounts affected by each
adjustment.
b) Why may Aviary Industries’ management resist making these adjustments?
c) Explain what you consider the most positive way of approaching management personnel
to convince them to make your proposed changes.
d) Describe your responsibilities related to unadjusted misstatements that management has
determined are immaterial individually and in the aggregate.
e) Assuming Aviary Industries is an accelerated filer public company, describe how the
noted adjustments might impact your audit report.