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

A. Completeness a Examine current vendors’ price lists.

B. Existence of Occurrence b Review drafts of the financial statements.

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.

f Test reasonableness of direct labor rates.

Specific audit objective Assertions Audit procedures

A B C D E a b c d e f

1.The entity has legal title to inventories. / / /

2.Recorded inventory quantities include all products on hand / / / / /

3.Inventories are reduced, when appropriate, to / / / /

replacement costs or net realizable value

4.Cost of inventories is properly calculated. / / / / /

5.The major categories of inventories and their basis of

valuation are adequately reported in the financial / / / / /
statements
PROBLEM 2
Part 1
To support financial statement assertions, an auditor develops specific audit objectives. The auditor
then designs substantive tests to satisfy or accomplish each objective.

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.

C. Examine supporting documents for a sample of investment transactions to verify that

prenumbered documents are used.

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.

Specific audit objective Audit procedure

A B C D E F G

1. Investments are properly described and classified in the /

financial statements.

2. Recorded investments represent investments actually owned at the /

balance sheet date

3. Trading investments are properly valued at fair market value at the /

balance sheet date.

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.

D. Obtain an understanding of the business purpose of transactions that resulted in accounts

receivable balances.

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.

Specific audit objective Audit procedure

A B C D E F G

1. Accounts receivable represent all amounts owed to the entity at /

the balance sheet date.

2. The entity has legal right to all accounts receivable at the balance /
sheet date

3. Accounts receivable are stated at net realizable value. /

4. Accounts receivable are properly described and presented in the /

financial statements.

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

3. Unexplained payments have been made to government officials. /

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

1. The confirmation requests should be mailed to respondents by the CPAs. /

2. A combination of positive and negative request forms must be used if /

receivables are significant.

3. Second requests are ordinarily sent for positive form confirmations requests /
when the first request is not returned.

4. Confirmations address existence more than they address completeness. /

5. Confirmation of accounts receivable is a generally accepted auditing /

standard

6. Absent a few circumstances, there is a presumption that the auditor will /

confirm accounts receivable.

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).

8. Auditors may ignore individually immaterial accounts when confirming /

 accounts receivable

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.

10. Accounts receivable are ordinarily confirmed on a standard form developed /

by the Philippine Institute of Certified Public Accountants

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.

3. All auditor test counts must be documented in the working papers. /

4. Auditors’ observation of the counting of their clients’ inventories addresses /

the existence of inventory, and not the completeness of the count.

5. When the client manufactures a product, direct labor and overhead /

ordinarily become a part of inventory item costs.

6. Inventory is ordinarily valued at the lower of standard cost or market. /

7. Inventory items present as “consigned in” should not be included in the /

clients’ inventory value.

8. Auditor recording of test counts ordinarily replaces the need for client /
“tagging” of inventory.

9. Ordinarily, an auditor need not count all items in the 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.