Ch.

18 and 19 Hw:

1. Which documents will be used to verify accrued property taxes and the related expense
accounts?
a. Invoices from the taxing authority
b. Cancelled checks
c. Deeds to properties
d. Property tax returns
2. The following questions concern the audit of income and expense accounts. Choose the best
response.
a. The auditor may note that annual depreciation expense is too low for a class of assets by
noting
i. excessive recurring losses on assets retired.
b. An auditor's principal objective in analyzing repairs and maintenance expense accounts
is to
i. discover expenditures that were expensed but should have been capitalized.
c. Which of the following comparisons will be most useful to an auditor in auditing an
entity's income and expense accounts?
i. Current year revenue to budgeted current year revenue
3. The following questions concern internal controls and tests for property, plant, and equipment.
Choose the best response
a. An audit firm performs a preliminary review of the client's internal controls over its
property, plant, and equipment cycle. Which of the following would represent a
weakness in internal control?
i. The purchasing department generates a special requisition form upon oral or
written approval by senior management.
b. In searching for unrecorded retirements, an auditor selects older fixed assets from the
subsidiary ledger and then tries to locate those assets. This procedure primarily relates
to management's assertion of
i. existence.
c. When auditing a client's property, plant, and equipment transactions, which of the
following tests of details can be used to support the existence and occurrence assertion?
i. Vouch a sample of purchases to the vendor invoice and receiving report.
4. The following types of internal controls are commonly used by organizations for property, plant,
and equipment:

a. State the purpose of each of the internal controls just listed. Your answer should be in
the form of the type of misstatement that is likely to be reduced because of the control

b. For each internal control, list one test of control the auditor can use to test for its
existence.
 i.

c. List one substantive procedure for testing whether the control is actually preventing
misstatements in property, plant, and equipment.

5. The following program has been prepared for the audit of accrued real estate taxes of a client
that pays taxes on 25 different pieces of property, some of which have been acquired in the
current year:
1. Obtain a schedule of accrued taxes from the client and tie the total to the general ledger.
2. Compare the charges for annual tax payments with property tax assessment bills.
3. Recompute accrued/prepaid amounts for all bills on the basis of the portion of the year
expired.
a. Select the appropriate purpose of each procedure
i. To assure that the client’s detailed schedule equals the total in the general
ledger. (Detail tie-in).
ii. To assure that taxes on property included on the schedule of accrued taxes are
not over- or underpaid. (Accuracy).
iii. To assure that the accrued/prepaid account is correctly stated. (Accuracy).
 b. Evaluate the adequacy of the audit program.
i. This procedure is necessary as a starting point to perform detailed tests.
ii. This procedure is adequate for its purpose.
iii. This procedure is adequate for its pupose.
6. List five asset accounts, three liability accounts, and five expense accounts included in the
acquisition and payment cycle for a typical manufacturing company.

7. The following questions concern internal controls and accumulating evidence in the acquisition
and payment cycle. Choose the best answer.
a. In assessing control risk for purchases, an auditor vouches a sample of entries in the
voucher register to the supporting documents. Which assertion would this test of
controls most likely support?
i. Occurrence
b. Which of the following tests would an auditor be least likely to perform during an audit
of accounts payable?
i. Send out accounts payable confirmations.
c. While auditing a client's purchase transactions, an auditor selects a sample of vouchers
and then compares the dates on the vouchers to the dates on which the corresponding
transactions were actually recorded in the client's purchase journal. The audit procedure
is most likely designed to test the
i. cutoff assertion.
8. In testing cash disbursements for the Jay Klein Company, you obtained an understanding of
internal control. The controls are reasonably good, and no unusual audit problems arose in
previous years. Although there are not many individuals in the accounting department, there is a
reasonable separation of duties in the organization. There is a separate purchasing agent who is
responsible for ordering goods and a separate receiving department that counts the goods when
they are received and prepares receiving reports. There is a separation of duties between
recording acquisitions and cash disbursements, and all information is recorded in the two
journals independently. The controller reviews all supporting documents before signing the
checks, and he immediately mails the checks to the vendors. Check copies are used for
subsequent recording.
All aspects of internal control seem satisfactory to you, and you perform minimum tests of 25
transactions as a means of assessing control risk. In your tests, you discover the following
exceptions:
a. Identify whether each of 1 through 7 is a control test deviation, a monetary
misstatement, or both.
i. Monetary misstatement
ii. Control test deviation
iii. Monetary misstatement
iv. Monetary misstatement
v. Control test deviation
vi. Monetary misstatement
vii. Both
b. For each exception, identify which transaction-related audit objective was not met.
i. Accuracy
ii. Completeness
iii. Occurrence
iv. Classification
v. Occurrence
vi. Timing
vii. Accuracy and occurrence
c. What is the audit importance of each of these exceptions? Match each exception with
the corresponding letter (from the list below) that correlates to its audit importance. Use
each letter only once.
 i. F
ii. G
iii. E
iv. C
v. D
vi. B
vii. A
d. What follow-up procedures would you use to determine more about the nature of each
exception? Match each exception with the corresponding Roman numeral (from the list
below) that correlates the appropriate follow-up procedure. Use each numeral only
 once.

i. VI
ii. I
iii. V
iv. II
v. III
vi. IV
vii. VII
e. How would each of these exceptions affect the rest of your audit? Be specific. Match
each exception with the corresponding letter (from the list below) that correlates to the
 effect on the audit as a result of the exception. Use each letter only once.

i. E
ii. A
iii. G
iv. B
v. C
vi. F
vii. D
f. Identify internal controls that should have prevented each misstatement. Match each
exception with the corresponding number (from the list below) that correlates to the
internal control that should have prevented the exception. Use each number only once.
 i. 2
ii. 5
iii. 4
iv. 3
v. 1
vi. 6
vii. 7
9. You were in the final stages of your audit of the financial statements of Ozine Corporation for the
year ended December 31, 2016, when you were consulted by the corporation's president, who
believes there is no point to your examining the year 2017 acquisitions journal and testing data
in support of year 2017 entries. He stated that (a) bills pertaining to 2016 that were received too
late to be included in the December acquisitions journal were recorded as of the year-end by the
corporation by journal entry, (b) the internal auditor made tests after the year-end, and (c) he
will furnish you with a letter certifying that there were no unrecorded liabilities.
a. Should a CPA's test for unrecorded liabilities be affected by the fact that the client made
a journal entry to record 2016 bills that were received late? Explain.
i. The fact that the client made a journal entry to record vendors' invoices which
were received late should simplify the CPA's test for unrecorded liabilities. It may
reduce the possibility of a need for a further adjustment, but the CPA's test is
nevertheless required. Clients normally are expected to make necessary
adjustments to their books so that the CPA may audit financial statements that
the client believes are complete and correct. If the client has not recorded late
invoices, the CPA is compelled in his or her testing to substantiate what will be
recorded as an adjusting entry. In this audit, the CPA should test entries in the
2017 voucher register to ascertain that all items that were applicable to 2016
have been included in the journal entry recorded by the client.
A: should simplify, may reduce the possibility of a, but the CPA’s test is
nevertheless required, normally are expected to make necessary, may audit
 financial statements that the client believes are complete and correct. Is
compelled, the CPA should, to ascertain
b. Should a CPA's test for unrecorded liabilities be eliminated or reduced because of the
internal audit tests? Explain
i. Whenever a CPA is justified in relying on work done by an internal auditor he or
she can reduce (but not eliminate) his or her own audit work.
ii. In this case, in consideration of the internal audit tests, the CPA should do the
following: (Select all responses that apply.)
1. Determine early in his or her audit that Ozine's internal auditor is
qualified by being both technically competent and reasonably
independent.
2. If the Ozine internal auditor is qualified and has made tests for
unrecorded liabilities, the CPA may limit his or her work to a less
extensive test in this audit area if the results of the internal auditor's
tests were satisfactory.
3. If satisfied with the internal auditors qualifications the CPA should
discuss the nature and scope of the internal audit program with the
internal auditor .
c. Should a CPA's test for unrecorded liabilities be affected by the fact that a letter is
obtained in which a responsible management official certifies that to the best of his or
her knowledge all liabilities have been recorded? Explain.
i. No. Response to inquiry alone generally does not constitute sufficient
appropriate evidence. The CPA should obtain a letter in which responsible
executives of the client's organization represent that to the best of their
knowledge all liabilities have been recognized. This is done as a normal audit
procedure to remind the client of his or her responsibilities and the statements
that have been made. It does not relieve the CPA of the responsibility for making
his or her own tests.
A: no, generally does not, should, a normal, does not
d. Assume that the corporation, which handled some government contracts, had no
internal auditor but that an auditor for a federal agency spent three weeks auditing the
records and was just completing his work at this time. How will the CPA's unrecorded
liability test be affected by the work of the auditor for a federal agency?
i. Work done by an auditor for a federal agency will normally have no effect on the
scope of the CPA's audit, since the concern of government auditors is usually
limited to matters which are unrelated to the financial statements.
A: have no effect, unrelated
ii. With respect to the audit work of the federal agency, the CPA should do and
consider the following.  (Select all responses that apply.)
1. Government auditors are usually interested primarily in substantiating
as valid and allowable those costs which a company has allocated
against specific government contracts or sales to the government, and
consequently there is little likelihood that the auditor for a federal
agency at Ozine would check for unrecorded liabilities.
2. Discuss the government auditor's work program with him or her, as
there are isolated situations where specific procedures followed to a
 satisfactory conclusion by a government auditor will furnish the CPA
with added assurance and therefore permit him or her to reduce certain
work in an area.
e. What sources in addition to the year 2017 acquisitions journal should the CPA consider
to locate possible unrecorded liabilities? In addition to the 2017 acquisitions journal, the
CPA should consider the following sources for possible unrecorded liabilities: (If a box is
not used in the table leave the box empty; do not select a label.)
i. Comparison of account balances with preceding year.
ii. If a separate cash disbursement journal exists, examine documentation for
isbursements recorded early in 2017.
iii. Examination of individual accounts during the audit.
iv. Determine if any disbursements in early 2017 relate to acquisitions that should
have been recorded in 2016.
v. Status of tax returns for prior years still open.
vi. Vendors’ invoices that have not been entered in the acquisitions journal.
vii. Discussions with employees.
viii. Representations from management.
ix. Existing contracts and agreements.
x. Minutes.
xi. Attorney’s bill and letters of representation.
xii. Status of renegotiable business.
xiii. Correspondence with principal suppliers.
xiv. Audit testing of cutoff date for reciprocal accounts, ex. Inventory and fixed
assets.
10. Even though Bergeron Wholesale Company is privately held, management has decided that it is
worthwhile to have effective internal controls to the extent it is practical in a small company, as a
way to reduce the likelihood of error and fraud. They have implemented the following system for
acquisitions and payments.
a. List at least ten internal controls in the Bergeron acquisition and payment cycle. Be as
specific as possible. For each control, identify the transaction-related audit objective(s)
to which the control relates and identify one test of control that is useful to test the
effectiveness of the control. Be as specific as possible.
In the first column (a), choose ten internal controls (from the list below) used in the
Bergeron acquisition and payment cycle. In the next column (b), for each control,
identify the transaction-related audit objective(s) to which the control relates. In the
third column, (c) identify the test of control(s) that are useful to test the effectiveness of
the control. Be as specific as possible.
b.