Wednes

day, December, 1st 2020

Auditing (2ND PART)

Multiple Choice Questions (FIRST PART)

1. Recording, classifying, and summarizing economic events in a

logical manner for the purpose of providing financial information
for decision making is commonly called:
a. finance.
b. auditing.
c. accounting.
d. economics.

2. In the audit of historical financial statements, which of the following

accounting bases is the most common?
a. Regulatory accounting principles.
b. Cash basis of accounting.
c. Generally accepted accounting principles.
d. Liquidation basis of accounting.

3. Any service that requires a CPA firm to issue a report about the
reliability of an assertion that is made by another party is a(n):
a. accounting and bookkeeping service.
b. attestation service.
c. assurance service.
d. tax service.

4.
. Providing quantitative information that management and others can
use to make decisions is the function of:
a. management information systems.
b. auditing.
c. finance.
d. accounting.
5. An audit of historical financial statements most commonly includes
the:
a. balance sheet, the income statement, and the statement of cash
flows.
b. income statement, the statement of cash flows, and the statement
of net working capital.
c. statement of cash flows, the balance sheet, and the retained
earnings statement.
d. balance sheet, the income statement, and the statement of cash
flows.

6 The use of the Certified Public Accountant title is regulated by:

a. the federal government.
b. state law through a licensing department or agency of each state.
c. the American Institute of Certified Public Accountants through
the licensing departments of the tax and auditing committees.
d. the Securities and Exchange Commission.

7. An operational audit has as one of its objectives to:

a. determine whether the financial statements fairly present the
entity’s operations.
b. evaluate the feasibility of attaining the entity’s operational
objectives.
c. make recommendations for improving performance.
d. report on the entity’s relative success in attaining profit
maximization.

8. An audit of historical financial statements is most often performed

to determine whether the:
a. organization is operating efficiently and effectively.
b. entity is following specific procedures or rules set down by
some higher authority.
c. management team is fulfilling its fiduciary responsibilities to
shareholders.
d. none of these choices.

9. An examination of part of an organization’s procedures and methods

for the purpose of evaluating efficiency and effectiveness is what
type of audit?
a. Operational audit.
b. Compliance audit.
c. Financial statement audit.
 d. Production audit.

10-The three requirements for becoming a CPA include all but

which of the following?
a. Uniform CPA examination requirement.
b. Educational requirements.
c. Character requirements.
d. Experience requirement.

Second Part:

A-To do an audit, it is necessary for information to be in a verifiable

form and some criteria by which the auditor can evaluate the
information.
(A) What information and criteria would an independent CPA
firm use when auditing a company’s historical financial
statements?

The information used by a CPA firm in a financial statement audit is

the financial information in the company’s financial statements. The
most commonly used criteria are accounting principles Generally
accepted in the US.
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B-Explain what is meant by information risk, and discuss the four

causes of this risk.
Information risk is the possibility that information upon which a
business decision is made is inaccurate.
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 Biases and motives of the provider
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 Voluminous data ……………………………………………..
 Complex exchange transactions
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 Remoteness of information
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C-Discuss four factors that are likely to significantly reduce

information risk in the next five to ten years.
 Technological advances
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 Setting new accounting and auditing standards
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Writing: (The auditor’s letter to management)

A management letter is an auditor's letter addressed to
the client.  It is a letter written by company management
that confirms the accuracy of an audit. An audit is an
examination and verification of a company's financial and
accounting records and supporting documents presented
by a professional, such as a certified public accountant.

 At the completion of the audit program the auditors

provide  Management letter which contain relevant
information about accounting and management issues in
the entity. The review of these letter will help the
management to strengthen its internal control as it
contains identified deficiencies in the system in general,
mainly the avenues of inappropriate access to information
that it to be handled in a restricted way. The
recommendations provide helpful insight over many
issues.

-Read the letter below and match the descriptions 1-7 with the
underlined expressions in the letter :

1-asking for a plan from the management to solve the problems

2-introducing a list of the main problems discovered

3-identifying specific problems and weaknesses

4-explaining the limits to the auditors work

5-a reminder of necessary accounting practice

6-making recommendations

7-the purpose of the letter

  RBT Partners

Auditing Division

Dear Sirs,

Following the completion of our audit on November22, we

are writing to inform you 7 of the first results of our checks
on your company.

We must point out that for reasons of time and

resources we may not have identified 2 every failure in
your systems.

We would like to draw your attention to 2 the following

weaknesses identified in your systems.

Invoices

1- During our checks on your Sales Ledger we

discovered six examples in which sales had been
recorded in the ledger without corresponding paper
invoices or documents. 5We must remind you that
all sales records must be matched by real physical
ducuments.

Credits :

2- We also found three cases where credit was given

 to customers who were already more than 60 days
late in their payments. This showed a serious failure
by staff to comply with the rules as stated in your
company handbook. We would advise you to make
one manager responsible for checking that all rules
are followed by staff.

3- Salaries :

Our investigations showed that there were a number

of examples in which extra wages were paid to
employees without any proof in the time sheet that
these hours had really been worked by the
employee during the period. We recommend that in
future a department manager should check and sign
all salary claims before payment is made.

Could you please inform us of the steps you intend

to take to solve these problems before our next
meeting on December 16 ?

Yours faithfully,

Jan Houten

Audit Team Manager