Auditing Questions and Answers

1.The following items are documented in the audit working papers:

1. Sales transaction included in the year ended December 31, 2016, but evidence from the cut-off procedure suggests that the sale should be dated January 2, 2017 ($1,250,000).

2. Warranty expenses in the trial balance for the year to December 31, 2016, total $150,000; the provision for warranty claims as at December 31, 2015, was $100,000. Evaluation of correspondence suggests that an additional $200,000 in warranty claims could result from ongoing disputes with customers. No provision for these claims has been made. Management has made a warranty provision for 2016 of $120,000.

3. Severance expenses related to reorganization of head office administration were incorrectly charged to rental expenses ($578,920). 4. Management has not recorded an impairment for assets. A drought-induced recession has hurt property values in regional cities where seven branch offices are located. (Head office and two branch offices are located in the capital city.) Total land and buildings in the trial balance is $5.5 million

Required

Independently evaluate each item above and: i. State whether it is an error or a judgemental misstatement and justify your reasoning. 

ii. State the account(s) which would be affected. 

2.Indicate whether you agree or disagree with the following statements and explain your reasoning. 

a) Svetlana Petrova was reviewing the risk profile of Gaz Prom Industries in order to determine detection risk. She concluded: “Both my inherent and control risks are low. I guess I should be willing to accept high detection risk.”

b) Boris Ivanov had performed an assessment of the accounts payable system at Magnitogirsk Iron and Steel Works Operations in the Urals. His focus was on the completeness assertion for accounts payable balances. Inherent risk and control risk were both high. He decided that because the overall risk assessment was high he would have to set his detection risk high.

c) Jana Novotna, the auditor-in-charge of the Mosenergo petroleum giant, was explaining to Valentin Titov the importance of the timing of substantive procedures: “Although we associate examinations of internal controls with interim work and substantive procedures with year-end work, we can perform substantive procedures before yearend if there exists an effective control environment.”

d) Susan Martin, the audit senior at Canadian National Railways, was explaining to the junior auditor how vouching works: “we take a balance or a transaction from the underlying accounting records and agree it to the supporting evidence inside the company.”

3.List the steps involved when the auditor reviews and tests the process used by management to estimate the bad and doubtful debts allowance

4.With regards to control risk assessment for purchase transactions, align the potential misstatements in the following chart with their possible tests of operating effectiveness.

5.Explain the reasoning behind the need for controls over:

a) Hiring employees. 

b) Authorizing payroll changes.

c) Preparing attendance and timekeeping data.

6.Evaluate the following independent statements and state whether they are true or false;

a) In the audit of payroll, one of the key issues is to ensure that the payroll expense has been properly recorded and the associated deductions for income tax, employee benefits, and related liabilities are properly recorded as liabilities.

b) A purchase order is a form issued by the supplier detailing the goods or services supplied and the amount owing. 

c) Even though an employee’s supervisor may initiate a request for payroll change, such as a change in job classification or wage rate increase, all changes should be authorized in writing by the personnel department before being entered into the personnel data master file.

d) A substantive audit procedure for verifying accounts payable should include tracing the opening balance to the previous year’s working papers.