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Problem 1
Problem 1
In obtaining evidential matter in support of financial statement assertions, the auditor develops
specific audit objectives in light of those assertions. Audit procedures are then selected to accomplish
audit objectives.
Your client is QCU, a retail department store that does no production. For each specific
inventory audit objective listed (Audit Objectives tab) select the most closely related financial statement
assertion and the most appropriate audit procedure. Financial statement assertions and audit
procedures may be selected once, more than once, or not at all.
Assertions Audit procedures
C. Presentation and Disclosure c Select a sample of items during the physical inventory count and
determine that they have been included on count sheets.
D. Rights and Obligations d Select a sample of recorded items and examine supporting
vendors’ invoices and contracts.
E. Valuation or Allocation e Select a sample of recorded items on count sheets during the
physical inventory count and determine that items are on hand.
A B C D E a b c d e f
Items A through G represent audit objectives for the investments and accounts receivable. To the right
of each set of audit objectives is a listing of possible audit procedures for that account. For each audit
objective, select the audit procedure that would primarily respond to the objective. Select only one
procedure for each audit objective. A procedure may be selected only once, or not at all
Audit procedures for investments
A. Trace opening balances in the subsidiary ledger to prior year’s audit working papers.
B. Determine that employees who are authorized to sell investments do not have access to cash.
D. Determine that any impairments in the price of investments have been properly recorded.
E. Verify that transfers from the current to the noncurrent investment portfolio have been properly
recorded.
F. Obtain positive confirmations as of the balance sheet date of investments held by independent
custodians.
G. Trace investment transactions to minutes of the Board of Directors meetings to determine that
transactions were properly authorized.
A B C D E F G
Part 2
Audit procedures for accounts receivable
A. Analyze the relationship of accounts receivable and sales and compare it with relationships for
preceding periods.
B. Perform sales cutoff tests to obtain assurance that sales transactions and corresponding entries for
inventories and cost of goods sold are recorded in the same and proper period.
C. Review the aged trial balance for significant past due accounts.
E. Review loan agreements for indications of whether accounts receivable have been factored or
pledged.
F. Review the accounts receivable trial balance for amounts due from officers and employees.
G. Analyze unusual relationships between monthly accounts receivable balances and monthly
accounts payable balances.
A B C D E F G
2. The entity has legal right to all accounts receivable at the balance /
sheet date
Part 3
Your client has suggested to you that his previous auditor did not confirm accounts receivable. Search
the Professional Standards to determine whether there are any circumstances in which an auditor need
not request the confirmation of accounts receivable.
PROBLEM 3
In the following simulation you are asked to reply to various statements concerning situations that may
arise in an audit.
Part 1
In applying audit procedures and evaluating the results of those procedures, auditors may encounter
specific information that may raise a question concerning the existence of illegal acts and related-party
transactions. Indicate whether each of the following is more likely related to an illegal act (IA) or a
related-party transaction (RP)
Statement IA RP
1. A note payable has an interest rate well below the market rate at the time at which /
the loan was obtained.
2. The company has a properly documented loan but the loan has no scheduled /
repayment terms
4. The company exchanged certain real estate property for similar real estate property. /
5. Large cash receipts near year-end have been received based on cash sales for which /
there is no documentation.
Part 2
An auditor may use confirmations of accounts receivable. Reply as to whether the following statements
are correct or incorrect with respect to the confirmation process when applied to accounts receivable.
Statement Correct Incorrect
3. Second requests are ordinarily sent for positive form confirmations requests /
when the first request is not returned.
7. Auditors should always confirm the total balances of accounts rather than
individual portions (e.g., if the balance is made up of three sales, all three /
should be confirmed).
9. The best way to evaluate the results of the confirmation process is to total
the misstatements identified and to compare that total to the account’s /
tolerable error amounts.
Part 3
Auditors often observe the counting of their clients’ inventories. Reply as to whether the following
statements are correct or incorrect with respect to the inventory observation.
Statement Correct Incorrect
1. With strong internal control, the inventory count may be at the end of /
the year or at other times.
2. When a client has many inventory locations, auditors ordinarily need not be /
present at each location.
8. Auditor recording of test counts ordinarily replaces the need for client /
“tagging” of inventory.
10. At the completion of the count, an auditor will ordinarily provide the client
with copies of his or her inventory test counts to help assure inventory /
accuracy.