exam1 sample.doc

8/9/2019 EXAM1 Sample.doc

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ACC 476/726 - Auditing

Sample Exam #1

Prof. Elder

Name: Ivan D. Auditor

This exam contains 11 pages; please check to make sure you have the entire exam. You ill haveone hour and tenty!five minutes to complete the exam. Total points availa"le on the exam are asfollos:

Question

Points

Possible

Points

Earned

#ultiple choice ! $% at & pts. Each '%

(udit reports 1$

)egal lia"ility and ethics *

(udit o"+ectives and evidence 1$

(nalytical procedures and ,P( services *

Total points 1%%

-f you are unsure as to the nature of any uestion/ please ask. 0ritten responses should "e ascomplete as possi"le to ensure partial credit.

ood luck2


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ultiple C!oi"e -- Points Ea"!. ,hoose the one best response that you "elieve is mostappropriate. 0rite your response in the margin next to the uestion.

1. (n auditor most likely ould analy3e inventory turnover rates to o"tain evidence concerningmanagement4s assertions a"out:

a. Existence or occurrence. ". 5aluation or allocation.c. 6ights and o"ligations.d. Presentation and disclosure.

$. 0hen the financial statements contain a material departure from ((P/ the auditor illgenerally issue a7an8/ dependent on materiality of the item:

Qualified Scope Adverse

and opinion opinion a. Yes No ". No Yesc. Yes Yesd. No No

&. The primary reason for an audit "y an independent/ external ,P( firm is:

a. To guarantee that there are no misstatements in the financial statements. ". To ensure that any fraud ill "e discovered.

c. To lend credi"ility to the financial statements.d. To relieve management of responsi"ility for the financial statements.

9. -n using the ork of a specialist/ an auditor may refer to the ork of the specialist in theauditor4s report if/ as a result of the specialist4s findings/ the auditor:

a. ecomes aare of conditions causing su"stantial dou"t a"out the entity4s a"ility tocontinue as a going concern.

". esires to disclose the specialist4s findings/ hich imply that a more thorough auditas performed.

c. -s a"le to corro"orate another specialist4s earlier findings that ere consistent ithmanagement4s representations.

d. iscovers significant deficiencies in the design of the entity4s internal control structurethat management does not correct.

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a. Evidence o"tained indirectly from outside sources is the most relia"le evidentialmatter.

". (nalytical procedures are the most relia"le form of evidence.c. 6elia"ility of evidential matter refers to the amount of corro"orative evidence

o"tained.d. (n effective internal control structure provides more assurance a"out the relia"ility of

evidential matter.

*. 0hich of the folloing tends to "e most predicta"le for purposes of analytical proceduresused as su"stantive tests of evidence>

a. Expenses su"+ect to non!controlla"le fluctuations. ". Transactions su"+ect to management discretion. c. 6elationships involving income statement accounts.

d. 6elationships involving "alance sheet accounts.

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1&. =nder the C=ltramaresD rule/ to hich of the folloing parties ill an accountant "e lia"le for negligence>

Parties in privity Foreseen parties

a. Yes Yes

". No Noc. No Yesd. Yes No

19. 0hat assurance does the auditor provide that fraud/ direct effect illegal acts/ and indirecteffect illegal acts that are material to the financial statements ill "e detected>

irect !ffect "ndirect !ffectFraud "llegal Acts"llegal Acts

a. 6easona"le 6easona"le None ". 6easona"le 6easona"le 6easona"lec. 6easona"le None Noned. )imited )imited Negative

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1@. 0hich of the folloing ultimately determines the specific audit procedures necessary to provide an independent auditor ith a reasona"le "asis for the expression of an opinion>

a. The audit program.

". enerally (ccepted (uditing ?tandards. c. The time "udget and fee constraints. d. The auditor4s +udgment. e. The auditor4s orking papers.

1*. 0hich of the folloing accounts ould most likely "e revieed "y the auditor to gainreasona"le assurance that additions to the euipment account are not understated>

a. epreciation expense. ". ain on disposal of euipment.

c. (ccounts paya"le.d. 6epairs and maintenance expense.

1A. 0hich of the folloing is least likely to include a reference to the use of a specialist>

a. =nualified opinion. ". (dverse opinion.c. FExcept forF ualified opinion.d. =nualified opinion ith explanatory paragraph.

$%. 0hen the scope of the auditors examination has "een limited/ the auditor may generally issuea7an8: 7dependent on materiality of the item8

isclaimer of Adverse opinion opinion

a. Yes No ". Yes Yesc. No Yesd. No No


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Problem 1 - Audit %eports 7continued8

71 point8&ist A

71 point8&ist , Situation

1. The company is in the airline leasing "usiness. uring the year/ theychanged depreciation methods/ hich resulted in a material increasein depreciation expense. They also extended the useful lives of their planes/ hich significantly decreased depreciation expense. The neteffect of these to changes as not material.

$. (n auditor hires an actuary to assist in corro"orating the client4scomplex pension calculations concerning accrued pensionlia"ilities. The actuary found that the client4s pension accrual ismaterially understated; the client is unilling to increase theaccrual.

&. ( principal auditor is unilling to take full responsi"ility for theork of another ,P( ho audited a holly!oned su"sidiary of the entity and issued an unualified opinion. The total assets andrevenues of the su"sidiary represent 1@G and 1*G/ respectively/ of the total assets and revenues of the entity "eing audited.

9. ( client changes its method of accounting for inventories from-H to )-H. You agree ith the change/ hich is fullydisclosed "ut has a material affect on the compara"ility of thefinancial statements.


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Problem 2 - &egal &iabilit) and Et!i"s 7* points8

Part a - &egal &iabilit) 79 points8 ! You ere negligent in the performance of an audit. -ndicatehether you are likely to "e found lia"le under the folloing lia"ility regimes and level of negligence7add explanation if considered necessary8:

Auditor liable.

egree o* negligen"e 0es o

ross negligence =nder common la/ to a "ank relying on the financialstatements. You ere not aare that the "ank oulduse the financial statements.

Hrdinary negligence To shareholders of a pu"licly traded companyfolloing the ruling em"odied in the Iochfelder casereuiring Fscienter.F

Hrdinary negligence To the original investors in an initial pu"lic offering.The investors did not rely on the misstated financial

statements in their decision to invest.

Hrdinary negligence =nder the Ultramares Doctrine/ to creditors relyingon the financial statements. You kne the financialstatements might "e used "y creditors/ "ut did notkno the specific creditors.

Part b - Et!i"s 79 points8 The folloing uestions represent possi"le violations of either ?E, or (-,P( Professional ?tandards. -ndicate hether these represent violations 79 points8

iolation.

Situation 0es o

1. You have +ust "een hired as a staff auditor in the ?yracuse office of,ostirehouse/ ,P(. You on $%% shares of 0e"?cape/ a high!tech company audited "y the ?an Bose office.

$. lintstone/ ,P( provides the audit and "ookkeeping/ tax andmanagement consulting services to ,ogsell ,ogs/ a privately heldcompany.

&. 6u""le/ ,P( is the auditor for and provides information systems

consulting for ?pacely ?prockets/ a pu"licly held company.9. ?impkins is a staff person on the eneral Electric audit. Ie ons

1% shares of stock in eneral Electric that ere given to him "y hisgrandmother.

Problem - Audit +b3e"ties and Eiden"e 71$ points8

or each specific audit o"+ective 7audit procedure8/ identify the most appropriate audit o"+ective and

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the type of evidence. ?elect a lettered response from the first to columns for the audit o"+ective/and num"ered response from the last column for the type of evidence. -ndicate onl) one responsefor each item. )ettered and num"ered responses may "e used more than once or not at all.

Selected Audit #b$ective

(ransa"tion ob3e"ties ,alan"e ob3e"ties ()pe o* eiden"e

a. Hccurrence g. Existence 1. Physical examination

". ,ompleteness h. ,ompleteness $. ,onfirmation

c. (ccuracy i. (ccuracy &. ocumentation

d. ,lassification +. ,lassification 9. H"servation

e. Timing k. ,utoff


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". (nalytical procedures may "e performed in the planning 7"egin.8/ during the audit/ or at the end of the audit. or each of the folloing procedures/ indicate hen it is most liel) to "e performed "y placing an FLF in the appropriate column. ,hoose only one anser. There is only one correctanser for each uestion/ and ansers may "e used once/ more than once/ or not at all 7& points8.

(ime o* test in audit

Anal)ti"al pro"edure ,egin uring End6evie the financial statement for unusualfluctuations not identified in other testing.

,ompare client ratios to similar firms to learn morea"out the client4s industry.

Test the reasona"leness of depreciation expense "ymultiplying cost times the depreciation rate.

c. The folloing figure indicates services provided "y ,P( firms 7& points8

#atch each letter from the figure ith the folloing terms 71J$ pt each8:

1. KKKKKKKKK (udit services

$. KKKKKKKKK (ssurance services

&. KKKKKKKKK (ccounting and "ookkeeping services

9. KKKKKKKKK (ttestation services

0hich circle is currently increasing in importance> 7circle8 1 point

)eft 6ight

&ast page o* exam

Tax?ervices

d

b

a

Seri"es Proided b) CPA irms

"

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