21.A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the

a. Meter department records to the billing (sales) register.

b. Billing (sales) register to the meter department records.

c. Accounts receivable ledger to the billing (sales) register.

d. Billing (sales) register to the accounts receivable ledger.

22. Which of the following statements is correct regarding internal control?

a. A well-designed internal control environment ensures the achievement of an entity's control objectives.

b. An inherent limitation to internal control is the fact that controls can be circumvented by management override.

c. A well-designed and well-operated internal control environment should detect collusion perpetrated by two people.

d. Internal control is a necessary business function and should be designed and operated to detect all errors and fraud.

From Surgent's CPA Review Try Area 2

23. Which of the following procedures is considered a test of controls?

a. An auditor reviews the entity's check register for unrecorded liabilities.

b. An auditor evaluates whether a general journal entry was recorded in the proper amount.

c. An auditor interviews and observes appropriate personal to determine segregation of duties.

d. An auditor reviews the audit workpapers to ensure proper sign-off.

I. Conceptually, management makes assertions about the financial statements. (1) Define, or explain, what is meant by management assertions. (2) How does the concept of management assertions help the auditor in auditing an entity's financial statements? Discuss.

II. Indicate the most applicable Assertion for each of the Items shown below [in the form of an assertion]. Use only ONE letter for each item.

Assertions about Classes of Transactions and Events and Related Disclosures, for the period under audit:

A. Occurrence D. Cutoff

B. Completeness E. Classification

C. Accuracy F. Presentation

Assertions about Account Balances and Related Disclosures, at the period end.

G. Existence J. Accuracy, Valuation and Allocation

H. Rights and Obligations K. Classification

I. Completeness L. Presentation

Items:

1. Items on the inventory listing can be found in the company's warehouse.

2. The company actually owns inventory found in its warehouse.

3. Purchases in transit at year-end shipped FOB shipping point are properly included in the company's accounts.

4. Recorded sales actually took place.

5. Liabilities due in six months, expected to be refinanced, follow the accounting rules and are shown on the company's balance sheet as long-term liabilities.

Part 2 II. Answers (USE ONLY ONE LETTER)

1. ____ 2. ____ 3. ____ 4. ____ 5. ____

Part 3 Types of Audit Evidence (20 points)

I. Evidence has been defined as relating to the auditors' conclusion. State what the conclusion is about. Discuss.

II. Classify each of the following procedures according to type of audit evidence:

A. Analytical procedures F. Inspection of Assets

B. Confirmation [i.e. Physical examination]

C. Examination of documents G. Recalculation or Records

D. Inquiry H. Reperformance

E. Observation I. Scanning

Procedures:

1. The auditor performs an internal control procedure (i.e. a walkthrough) to gain an understanding of the client's internal control system.

2. Check to see that a newly acquired expensive piece of equipment actually exists, and is in the company's factory.

3. Trace shipping documents to related sales invoices to determine that customers are being billed.

4. Send a letter to the lawyers for the company asking about legal matters.

5. Auditors review vendor balances in the Accounts Payable Subsidiary Ledger to see if any have debit balances which should be reclassified.

6. Compare company regional sales numbers with similar data from previous years in considering the reasonableness of this year's sales amounts.

7. Test the extensions [multiplication] and footings [addition] on a sample of sales invoices. Do not use Examination of documents.

8. Discuss the adequacy of the allowance of doubtful accounts with the credit manager.

Select only ONE letter for each of the procedures. Letters can be used more than once. Select the best answer for each procedure.

Part 3 II Answers

1. ____ 3. ____ 5. ____ 7. ____

2. ____ 4. ____ 6. ____ 8. ____

Part 4 Audit Philosophy and Direction of Tests (30 points)

We considered broad "accounting systems" involving the Sales Cycle AND Inventory Observation to illustrate the direction of testing involving testing for overstatement or understatement.

Requirements:

1. Consider THREE ADJACENT pieces of the sales cycle and DISCUSS the proper direction of testing for Sales for UNDERstatement.

2. In an Inventory Observation, discuss the proper direction for taking test counts to test for OVERstatement of inventory?

3. The double-entry accounting system conceptually can be used to gain audit efficiencies. Use journal entries [showing the debit and credit] and explain how by testing another account [name the account] one can also test (A) Accounts receivable for UNDERstatement; and, how by testing another account[name the account] one can test (B) a liability account (name the account) for OVERstatement.

4. Discuss briefly a type of audit evidence used to test sales for UNDERstatement?

1. Sales for UNDERstatement

2. Physical Inventory testing for OVERstatement

3A. JE & Discussion. Accounts Receivable and another account.

3B. JE & Discussion. A Liability and another account.

4. Sales for Understatement. The type of evidence is _____. Discuss.

Part 5 Appropriateness of Audit Evidence (20 points)

1. An auditor tests sales for completeness by selecting 50 sales invoices and vouches them to shipping documents. Explain FULLY why this evidence is not appropriate.

2. For each item presented below, indicate which means of gathering evidence would be considered more reliable [(1) or (2)] AND indicate a reason from the following list:

A. Independent source of the information (Independence of provider);

B. Auditor's direct knowledge;

C. Knowledgeable source (qualifications of individuals providing the information);

D. Degree of objectivity versus subjectivity; and

E. Functioning system of internal controls.

CHOOSE ONLY ONE LETTER.

DO NOT DISCUSS your answer. READ CAREFULLY.

Answers Item Number more reliable Letter for reason

a. ______ _____

b. ______ _____

c. ______ _____

d. ______ _____

Items

a. In testing assets, (1) the auditor verifies the cost of additions to the "land" account, or (2) the auditor considers the adequacy of the "allowance for doubtful accounts".

b. (1) The auditor relies on an analysis prepared by the controller of gross margin to sales for the current and prior periods; or (2) The auditor calculates gross margin to sales and compares to similar data for prior periods.

c. Auditor tests two segments of the company. (1) In the first segment, control risk is assessed at .80; (2) In the second segment, control risk is assessed at .20.

d. In testing accounts receivable for existence, (1) An accounts receivable confirmation is sent to customers, requesting that the return letter be sent back directly to the auditors; or (2) The auditor looks at customer balances in the company's records.

Part 6 Accounts Receivable Confirmations (25 points)

Two types of accounts receivable confirmations are "positive" and "negative". Explain what is meant by each type. State when an auditor would be inclined to use negative confirmations for accounts receivable. Explain how the Existence assertion is involved in the decision to use POSITIVE rather than NEGATIVE accounts receivable confirmations. When would "alternative procedures" be performed? DISCUSS an [ONE] alternative procedure involving accounts receivable.