LUCY COLLEGE HARAR CAMPUS

Assignment on Auditing II for all 3rd year

Accounting Students

Part I: Multiple choice

1. The risk of incorrect acceptance has negative impact on
A. Effectiveness of the audit
B. Efficiency of the audit
C. Preliminary estimates of materiality levels
D. Tolerable misstatement
2. An underlying feature of random-based selection of items is that each 
A. Stratum of the accounting population be given equal representation in the sample
B. Item in the accounting population be randomly ordered
C. Item in the accounting population should have an opportunity to be selected
D. Item must be systematically selected using replacement
3. Statistical sampling provides a technique for 
A. Exactly defining materiality
B. Greatly reducing the amount of substantive testing
C. Eliminating judgment in testing
D. Measuring the sufficiency of evidential matter
4. Which of the following risks is positively related to effectiveness of testing? 
A. The risk of incorrect rejection.
B. Inherent risk.
C. The risk of incorrect acceptance.
D. None of the above.
5. Which of the following risks is negatively related to efficiency of testing? 
A. The risk of incorrect rejection.
B. Inherent risk.
C. The risk of incorrect acceptance.
D. None of the above.
6. Audit sampling is commonly used for which type of audit evidence: 

A. Inquiry.
B. Analytical procedures.
C. Re-performance.
D. Observation

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7. Which of the following audit procedures is the most appropriate when internal control over
cash is weak or when a client requests an investigation of cash transactions? 
A. Proof of cash
B. Bank reconciliation
C. Cash confirmation
D. Evaluate ratio of cash to current liabilities
8. An unrecorded check issued during the last week of the year would most likely be discovered
by the auditor when the 
A. Check register for the last month is reviewed
B. Cutoff bank statement is reconciled
C. Bank confirmation is reviewed
D. Search for unrecorded liabilities is performed
9. Which of the following is one of the better auditing techniques that might be used by an
auditor to detect kiting between intercompany banks? 
A. Review the composition of authenticated deposit slips
B. Review subsequent bank statements received directly from the banks
C. Prepare a schedule of bank transfers
D. Prepare year-end bank reconciliations
10. Examining a sample of cancelled checks for an authorized signature tests which of the
following assertions for cash? 
A.  Occurrence C. Cutoff
B.  Completeness D. Accuracy
11. An auditor who is engaged to examine the financial statements of a business enterprise will
request a cutoff bank statement primarily in order to 
A. Verify the cash balance reported on the bank confirmation inquiry form
B. Verify reconciling items on the client's bank reconciliation
C. Detect lapping
D. Detect kiting
12. An auditor should trace interbank transfers for the last part of the audit period and first part
of the subsequent period to detect whether 
A. The cash receipts journal was held open for a few days after the year-end
B. The last checks recorded before the yearend were actually mailed by the year-end
C. Cash balances were overstated because of kiting
D. Any unusual payments to or receipts from related parties occurred
13. Which of the following is wrong regarding a proper internal control of payments,
A. The checks should be serially pre-numbered
B. Unissued pre-numbered checks should be adequately safeguarded against theft or misuse.
C. Voided checks should not be defaced
D. The authorized official should sign the check only after reviewing the supporting
documents

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14. Obtaining or preparing reconciliations of bank accounts as of the balances sheet date and
consider needs to reconcile bank activity for additional months helps the auditor to address
which of the following audit objective?
A. Existence C. Cutoff
B. Completeness D. Accuracy
15. Investigation of any check representing large or unusual payments to related parties address
which of the following audit objective?
A. Existence and right C. Presentation and disclosure
B. Completeness and occurrence D. Accuracy

16. Failure to record inventory in the proper period can affect all of the following accounts
except 

A. Sales
B. Receivables
C.  Cost of Goods Sold
D. Prepaid Expenses

17. The audit of year-end physical inventories should include steps to verify that the client's
purchases and sales cutoffs were adequate. The audit steps should be designed to detect
whether merchandise included in the physical count at year-end was not recorded as a 

A. Sale in the subsequent period

B. Purchase in the current period
C.  Sale in the current period
D. Purchase return in the subsequent
period

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18. For the purpose of determining proper cutoff for inventory, the auditor will select a sample
from which of the following for a few days before and after year-end? 

A. Materials requisitions
B. Production schedules
C. Receiving documents
D. Purchase orders

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19. Which of the following auditing procedures most likely would provide assurance about a
manufacturing entity's inventory valuation? 
A. Vouching the raw materials costs to vendors' invoices
B.  Obtaining confirmation of inventories pledged under loan agreements
C. Reviewing shipping and receiving cutoff activities for inventories
D. Tracing test counts to the entity's inventory listing
20. A client's physical count of inventories was lower than the inventory quantities shown in its
perpetual records. This situation could be the result of the failure to record 
A. Sales
B. Sales returns
C. Purchases
D. Purchase discounts
21. An auditor selected items for test counts while observing a client's physical inventory. The
auditor then traced the test counts to the client's inventory listing. This procedure most likely
obtained evidence concerning management's assertion of 
A. Rights and obligations
B. Completeness
C. Right
D. Valuation
22. An auditor most likely would make inquiries of production and sales personnel concerning
possible obsolete or slow-moving inventory to support management's financial statement
assertion of 
A. Valuation
B. Rights and obligations
C. Existence
D. S Completeness
23. Tracing costs used to price inventory to vendors' invoices tests which of the following
assertions? 
A. Occurrence
B. Cutoff
C. Accuracy

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D. Classification
24. An auditor tests an entity's policy of obtaining credit approval before shipping goods to
customers in support of management's financial statement assertion of 
A. Valuation or allocation
B. Completeness
C.  Existence or occurrence
D.  Rights and obligations
25. Tracing shipping documents to prenumbered sales invoices provides evidence that 
A. No duplicate shipments or billings occurred
B. Shipments to customers were properly billed
C. All goods ordered by customers were shipped
D. All prenumbered sales invoices were accounted for
26. Tests designed to detect credit sales made after the end of the year that have been recorded in
the current year provide assurance about management's assertion of 
A. Classification
B. Cutoff
C. Occurrence
D. Authorization and accuracy
27. An aged trial balance of accounts receivable is usually used by the auditor to 
A. Verify the existence of recorded receivables
B.  Ensure that all accounts are promptly credited
C. Evaluate the results of tests of controls
D. Evaluate the provision for bad debts
28. Which of the following procedures would ordinarily be expected to best reveal improper
cutoff of sales at the balance sheet date? 
A. Compare shipping documents with sales records
B.  Apply gross profit rates to inventory disposed of during the period
C. Trace payments received subsequent to the balance sheet date
D. Send accounts receivable confirmation requests

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29. An auditor most likely would limit substantive tests of sales transactions when control risk is
assessed as low for the existence or occurrence assertion concerning sales transactions and
the auditor has already gathered evidence supporting 
A. Opening and closing inventory balances
B. Cash receipts and accounts receivable
C. Shipping and receiving activities
D. Cutoffs of sales and purchases
30. Confirmation is most likely to be a relevant form of evidence with regard to assertions about
accounts receivable when the auditor has concerns about the receivables' 
A. Valuation
B. Classification
C. Existence
D. Completeness
31. When a sample of sales transactions recorded in the sales journal is traced back to the
customer orders and shipping documents, the auditor is testing the ____________ assertion. 
A. Cutoff
B. Authorization
C. Completeness
D. Occurrence

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Part II: Discussion (16 marks)
1. The XYZ Company billing department has decided to assign one employee to each of its
customers. This employee will be responsible for granting credit to the client and then
handling the billing. XYZ believes this will result in better customer service, because the
client will only have to deal with one person and that one person will be very familiar with
the credit terms. As an auditor, would you agree with XYZ's decision? Why?
2. Explain the importance of observing physical inventory during an audit. 
3. Briefly discuss substantive procedures for fixed assets
4. Briefly discuss internal control relating to purchases
5. Discuss internal control procedure of cash receipt and cash disbursement (8 marks)
6. Discuss fraud triangles (5 marks bonus)

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