ACCT403: Auditing and Assurance: Specialized Industries

Final Examination
Miles Nicko M. Santos, CPA
College of St. John – Roxas
AY 2020-2021

Essay

1. What is a specialized industry?

2. Give five examples of specialized industries and briefly describe its business model.
3. Enumerate the three specialized activities formulated by the IFRSC.

Multiple Choice Questions

1.       Which of the following statements best describes “control environment”?

a.        Policies and procedures that help ensure that management directives are carried out.
b.        The system for transferring information from transaction processing systems to the
general ledger or the financial reporting system.
c.         The entity’s process for identifying business risks relevant to financial reporting
objectives
and deciding about actions to address those risks and the results thereof.
d.        This includes the governance and management functions and the attitudes,
awareness,and actions of those charged with governance and management concerning
the entity’s internal control and its importance to the entity. 
2.       Which of the following considered control environment elements?
To competence                      Risk                          Structure
a.                     Yes                                            No                                        Yes
b.                     Yes                                            Yes                                       Yes
c.                     No                             No                                        No
d.                     No                             No                                        Yes 
3.       An entity’s risk assessment process includes how management:
 A        B        C        D
•  Identifies risk                                                 Yes     Yes     No      Yes
•  Assess significance and likelihood
     of occurrence of these identified risks   Yes     Yes     Yes     No
•  Decides upon actions to manage
     these risks                                                      Yes     No      Yes     No
4. Risks can arise or change due to circumstances such as the following, except:
a. There is a change in the regulatory or operating environment (i.e. a new law has been
passed which prohibits the use of a chemical which is a main ingredient of the
company’s major product).
b. New employees have been hired by the company.
c. The company switched from manual information systems to a computerized system.
d. The accounting and financial reporting framework has remained stable for the past five
years, and no new pronouncements have been made.
5. As part of a periodic planning exercise, Cedric Naranjo Company discovers that a political
dispute may interfere with the company’s supply sources.
This is an example of:
     a.        Control environment                                 c.         Control activities
b.        Risk assessment                                          d.        Monitoring of controls
6. Under PSA 315, monitoring of controls is an internal control component that involves a process
of assessing the quality of internal control performance over time. It involves assessing the design and
operation of controls on a timely basis and taking necessary corrective actions.
Monitoring of controls is accomplished through ongoing monitoring activities, separate evaluations, or a
combination of the two. An entity’s ongoing monitoring activities often include
a.        Periodic reporting by the entity’s internal auditors about the functioning of internal
control.
b.        The audit of the annual financial statements
c.         Periodic audits by the audit committee
d.        Reviewing the purchasing account
 

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ACCT403: Auditing and Assurance: Specialized Industries
Final Examination
 7. Control activities constitute one of the five components of internal control.
     Which of the following is not included in this internal control component?
     a.        Segregation of duties                                 c.         An internal audit function
     b.        Performance reviews                                d.        Authorization

8. Which of the following statements concerning the relevance of various types of controls to a financial
statement audit is correct?
     a.        All controls are ordinarily relevant to a financial statement audit.
     b.        Controls over the reliability of assets and liabilities are of primary importance, while
controls over the reliability of financial reporting may also be relevant.
             c.         Controls over the reliability of financial reporting are ordinarily most directly
relevant to
a financial statement audit, but other controls may also be relevant.
             d.        An auditor may ordinarily ignore a consideration of controls when a substantive audit
approach is taken.
9. An internal control system that is working effectively
     a.        Eliminates risk and potential loss of to the entity
     b.        Cannot be circumvented by management
     c.         Reduces the need for management the review exception reports on a day-to-day basis
     d.        Is unaffected by changing circumstances and conditions encountered by the entity
 
10.  When considering an entity’s system of internal control, one of the auditor’s major concerns is
to ascertain whether internal control is designed to provide reasonable assurance that
a.        Financial statements are fairly presented
b.        The accounting manager reviews all accounting transactions
c.         Profit margins are maximized, and operational efficiency is optimized
d.        Corporate morale problems are addressed immediately and effectively
  
1. The overall objective in the audit of the sales and collection cycle is to evaluate whether
     a.        The sales account and the accounts receivable account are free of errors.
     b.        The sales account and the accounts receivable are free of material errors.
     c.         The account balances affected by the cycle are fairly presented in accordance with
                     GAAP.
     d.        The sales account and the accounts receivable account are presented fairly in accordance with
GAAP.
 
2. Which of the following business function is associated with the revenue / receipt cycle?
     a.        Resources are held, used or transformed.
     b.        Obligations are paid to vendors and employees.
     c.         Capital funds are received from investors and creditors.
     d.        Resources are distributed to outsiders in exchange for promises of future payments.
 
3. The internal controls surrounding the revenue cycle provide the organization with several
     assurances that include all of the following except the
     a.        Approval of all credit sales transactions after they are processed.
     b.        Accurate recording, shipping, and billing of all valid sales transactions.
     c.         Proper authorization of all sales and sales return and allowance transactions.
     d.        Proper safeguarding of finished goods inventories while in stock and during the
                     shipment process.
4. The internal control objectives of the revenue cycle include all of the following except
     a.        Revenue cycle transactions are properly executed.
     b.        Transactions relating to revenue are properly recorded.
     c.         Appropriate goods are ordered so that sales can be made.
     d.        Custody over assets resulting from the revenue cycle is properly maintained.
 
5. Which of the following is not typically included in the sales and collection cycle?
     a.        Bad debt expense.
     b.        Sales returns and allowances.
     c.         Allowance for uncollectible accounts.
     d.        Cash credits from the cash disbursement journal.
 
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ACCT403: Auditing and Assurance: Specialized Industries
Final Examination
 6. Which of the following functions is not common to expenditure / disbursement cycle?
     a.        Obligations to vendors are paid.
     b.        Resources are held, used or transformed
     c.         Resources are acquired from vendors in exchange for obligations pay.
     d.        Resources are acquired from employees in exchange for obligations pay.
 
7. The primary audit objective regarding the purchasing of materials by client is to
     a.        Observe the annual physical count.
     b.        Ascertain that materials paid for are on hand.
     c.         Investigate the recording of unusual transactions regarding materials.
     d.        Determine the reliability of financial reporting by the purchasing function.
 
8. A request by an authorized employee for goods or services is made on the
     a.        Debit memo
     b.        Purchase order
     c.         Purchase requisition
     d.        Acquisition transaction file
 
9. Which of the following is a primary function of the purchasing department?
     a.        Authorizing the acquisition of goods
     b.        Reducing expenditures for goods acquired
     c.         Verifying the propriety of goods of a specified quality
     d.        Ensuring the acquisition of goods of a specified quality
 
10.  If internal control is well-designed, employees in the same department most likely would
     approve purchase orders and also
     a.        Inspect goods upon receipt
     b.        Authorize requisition of goods
     c.         Negotiate terms with vendors
     d.        Reconcile the open invoice file
 
11.  Which of the following departments most likely would approve changes in pay rates and
     deductions from employee salaries?
     a.        Payroll
     b.        Controller
     c.         Treasurer
     d.        Personnel
 
12.  For appropriate segregation of duties, journalizing and posting summary payroll transactions
     should be assigned to
     a.        Payroll accounting
     b.        General accounting
     c.         Treasury department
     d.        Timekeeping department
 
13.  Which of the following is not a common activity within personnel and payroll?
     a.        Initiating terminations
     b.        Preparing and recording payroll
     c.         Distributing paychecks to employees
     d.        Preparing and updating personnel records
 
14.  Which of the following best describes proper internal control over payroll?
     a.        The preparation of the payroll must be under the control of the personnel department.
     b.        The confidentiality of employee payroll data should be carefully protected to prevent
                     fraud.
     c.         The duties of hiring, payroll computation, and payment to employees should be
                     segregated.
     d.        The payment of cash to employees should be replaced with payment by checks.
 
15.  The proper use of pre-numbered termination notice forms by the payroll department should
     provide assurance that all
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ACCT403: Auditing and Assurance: Specialized Industries
Final Examination
      a.        Personnel files are kept up to date.
     b.        Terminated employees are removed from the payroll.
     c.         Employees who have not been terminated receive their payroll checks.
     d.        Uncashed payroll checks were issued to employees who have not been terminated.
 
16.  A company holds bearer bonds as a short-term investment. Responsibility for custody of these
     bonds and submission of coupons for periodic interest collections probably should be delegated
     to the
     a.        Chief Accountant
     b.        Internal Auditor
     c.         Cashier
     d.        Treasurer
 
17.  A company has additional funds to invest. The Board of Directors decided to purchase
     marketable securities and assigned the future purchase and sale decisions to a responsible
     financial executive. The best person(s) to make periodic reviews of the investment activity
     should be
     a.        An investment committee of Board of Directors.
     b.        The chief operating officer.
     c.         The corporate controller.
     d.        The treasurer.
 
18.  Which of the following is a responsibility that should not be assigned to only one employee?
     a.        Access to securities in the company’s safe deposit box
     b.        Custodianship of tools and small equipment
     c.         Custodianship of the cash working fund
     d.        Reconciliation of bank statements
 
19.  In reviewing and evaluating internal control over marketable securities, the auditor would be
     specially concerned about:
     a.        Recording of stock investments by the controller.
     b.        Approval of stock investment purchases by the Board of Directors.
     c.         Access to stock certificates by the corporate treasurer.
     d.        Access to stock certificates by the controller.
 
20.  When no independent stock transfer agents are employed and the corporation issues its own stocks
and maintains stock records, canceled stock certificates should
     a.        Not be defaced but segregated from other stock certificates and retained in a canceled
                     certificates file.
     b.        Be destroyed to prevent fraudulent reissuance.
     c.         Be defaced and sent to the secretary of state.
     d.        Be defaced to prevent reissuance and attached to their corresponding stubs.

---Nothing follows.

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ACCT403: Auditing and Assurance: Specialized Industries
Final Examination