MIDTERM TEST

Assurance

June 2023 – Time allowed: 90 minutes

Excersise 1:

The following are various activities an auditor does during audit planning.

1. Send an engagement letter to the client.

2. Tour the client’s plant and offices.

3. Compare key ratios for the company to industry competitors.

4. Review management’s risk management controls and procedures.

5. Review accounting principles unique to the client’s industry.

6. Determine the likely users of the financial statements.

7. Identify potential related parties that may require disclosure.

8. Identify whether any specialists are required for the engagement.

For each procedure, indicate which of the first four parts of audit planning the procedure
primarily relates to: (1) accept client and perform initial audit planning; (2) understand the
client’s business and industry; (3) assess client business risk; (4) perform preliminary analytical
procedures

Exercise 2

Choose 1 of following 2 scenarios

Scenario A:
 As part of the analytical procedures of Chu Dau Products, Inc., you perform calculations of the
following ratios:

Require:

For each of the preceding ratios:

a. State whether there is a need to investigate the results further and, if so, the reason for further
investigation.

b. State the approach you would use in the investigation.

c. Explain how the operations of Chu Dau appear to differ from those of the industry.

Scenerio 2:

Following are the auditor’s calculations of several key ratios for CrainStar Products. The
primary purpose of this information is to understand the client’s business and assess the risk of
financial failure, but any other relevant conclusions are also desirable.

Require:

a. What major conclusions can be drawn from this information about the company’s future?
b. What additional information would be helpful in your assessment of this company’s financial
condition?

c. Based on the preceding ratios, which aspects of the company do you believe should receive
special emphasis in the audit?

Exercise 3

The following are misstatements that have occurred in Mainland Accessories Ltd., a trading company
selling handbags and accessories:
1. The order clerk Tom placed purchase orders for accessories items; however, it was discovered that only
purchase orders above $30,000 required authorization. The order clerk regularly placed order for personal
goods up to value of $30,000.
2. When accessories items were received, the warehouse department verified the quantity to the suppliers’
despatch note and checked the quality of the goods received. The warehouse department, however, did
not check against the purchase order as no copy of the purchase order was ever sent to the warehouse
department. It was discovered that three batches of handbags, which the company did not order, were
received and subsequently paid for.
3. Purchase invoices were input daily by the purchase ledger clerk. No application control was ever
applied over the input process. It was discovered that several mistakes were made during the input
process and suppliers were paid incorrectly.
4. The finance director is only provided with the total amount of payments to be made on the payment list
for payment approval. It was then discovered that some of the payees were fictitious suppliers.
5. The sales ledger clerk was having a long holiday during Christmas times. Upon return in January, the
clerk entered all the unrecorded sales during his leave as January’s sales for convenience sake.
6. During the sales ledger clerk’s holiday, one of salespersons, a close friend of the sales ledger
clerk,helped inputting the sales to the accounting system. It was then discovered that two cash sales
transactions marked with “recorded” were not input to the system.
7. When processing orders, the sales clerk entered a discount manually into the invoice. As the sales clerk
was a newly recruited member, it was noted that the employee either forgot to enter the discount or
entered an incorrect level of discount

Required

a. For each misstatement, identify one or more types of controls that were absent.
 b. For each misstatement, identify the transaction-related management assertions that have not been
met.

c. For each misstatement, suggest a control that may have prevented or detected the
misstatement.

d. AUDIT procedures

i. Trace a sample of shipping documents to related duplicate sales invoices and the sales
journal to make sure that the shipment was billed.
ii. Examine a sample of duplicate sales invoices to determine whether each one has a
shipping document attached.
iii. Examine the sales journal for a sample of sales transactions to determine whether each
one has a posting reference in the margin indicating that it has been auto - matically
 compared by the computer with the accounts receivable master file for customer name,
date, and amount.
iv. Examine a sample of shipping documents to determine whether each one has a duplicate
sales invoice number printed on the bottom left corner.
v. Trace a sample of debit entries in the accounts receivable master file to the sales journal
to determine whether the date, customer name, and amount are the same.
vi. Vouch a sample of duplicate sales invoices to related shipping documents filed in the
shipping department to make sure that a shipment was made.

For each issue, identify at least one specific misstatement that could occur.