St. Vincent de Ferrer College of Camarin, Inc.

SVFC Compound,
San Vicente Ferrer St., Area D, Brgy. 178, Camarin, Caloocan City
Telephone Number: 668-25-75; Email address: st.vincentdeferrercollegeofccc@yahoo.com
Website: www.stvfc.com
Final Examination
Accounting 14 – Applied Auditing
Name: ENZON, KEZIAH ANN I. Year: 5TH YEAR BSA
Date:_____________________

1-5. what are five types of tests auditors use to determine whether financial statements are fairly
stated? Identify which tests are performed to reduce control risk and which tests are performed to
reduce planned detection.

The five types of test auditors use to determine whether financial statements are fairly stated include the
following:

1) risk assessment procedures

2) tests of controls
3) substantive tests of transactions
4) analytical procedures
5) tests of details of balances.

While risk assessment procedures (procedures to gain an understanding of the entity and its environment,
including internal control) help the financial statement auditor obtain information to make an initial
assessment of control risk, tests of controls must be performed as support of an assessment of control risk
that is below maximum. the purpose of the tests of controls is to obtain evidence regarding the
effectiveness of controls, which may allow the auditor to assess control risk below maximum. if controls
are found to be effective and functioning, the substantive evidence may be reduced. substantive evidence is
obtained to reduce detection risk. substantive evidence includes evidence from the subtantive test of
transactions, analytical procedures, and test of details of balances. For audits of internal control over
financial reporting, the auditor only performs the first two types of audit tests: procedures to obtain an
understanding of internal control and test of controls. because a public company auditor must issue a report
on internal control over financial reporting, the extent of the auditor's tests of controls must be sufficient to
issue an opinion about the operating effectiveness of those controls. that generally requires a significant
amount of testing of controls over financial reporting.

6. What is the purpose of tests controls? Identify specific accounts on the financial statements that
are affected by performing tests of controls for the acquisition and payment cycle.

specific accounts affected by performing tests of controls for the acquisition and payment cycle include the
following: cash, accounts payable, purchases, purchase returns and allowances, purchase discounts,
manufacturing expenses, selling expenses, prepaid.

7. Distinguish between a test control and substantive tests of transactions. Give two examples of
each.

Test of controls are audit procedures to test the operating effectiveness of control policies and procedures
in support of a reduced assessed control risk. Examples include:
A. The examination of vendor invoices for indication that they have been clerically tested, compared to a
receiving report and purchase order, and approved for payment.
B. Examination of employee time cards for approval of overtime hours worked.
C. Examination of journal entries for proper approval.
D. Examination of approvals for the write-off bad debts.
Substantive test of transactions are audit procedures testing for monetary misstatements to determine
whether the six transactions-related audit objectives have been satisfied for each class of transactions.
8. A considerable portion of the tests of transactions are performed simultaneously as a matter of
audit convenience. But the substantive tests of transaction procedures and sample size, in part,
depend on the results of the tests controls. How can the auditor resolve this apparent in consistency?

The auditor performs these tests at the same time because he/she ASSUMES about the results of the tests
of controls.Ordinarily, effective system of internal control with few/no exceptions planned is assumed.If
tests of controls are in line with the assumptions made then auditor can be happy with the substantive tests,
unless the substantive tests indicate misstatement.

9. Distinguish between substantive tests of transactions and tests of details of balances. Give one
example of each for the acquisition and payment cycle.

Test of controls: auditors assess control risk based on understanding of internal control (control procedures
effective --> control risk level reflects effectiveness) test of controls is sufficient/appropriate evidence to
support that
1. Observe control-related activities
2. Examine documents, records, reports

Substantive test of transactions: auditors check that all transactions are correctly recorded & posted in
ledger - consider 6 transaction-related audit objectives (monetary misstatements)
1. Verify recording of cash receipt transactions
2. Count of period-end inventory
Testing of internal controls & risk vs. testing transactions

10. Assume that the client’s internal controls over the recording and classifying of fixed asset
additions are considered weak because the individual response for recording new acquisitions has
inadequate technical training and limited experience in accounting. How would this situation affect
the evidence you should accumulate in auditing fixed assets as compared with another audit in which
the controls are excellent? Be as specific as possible.

Each of these procedures has strengths and weaknesses that should be considered in determining the
optimal approach for a client. The auditor looks at the relative weight of evidence from the three basic
phases of the audit, including the test controls, and considers the cost of procedures and the persuasiveness
of evidence needed for a particular account balance and related management assertion(s).

11. The following are three decision factors related to assess control risk: effectiveness of
internal controls, cost-effectiveness of a reduced assessed control risk, and results of tests of
controls. Identify the combination of conditions for these factors that s required before reduced
substantive testing is permitted.

A reduction in substantive testing is permitted when (1) the auditor identifies specific controls he or she
believes have been operating effectively during the period under audit, (2) the auditor believes it will be
cost-effective to test those controls, and (3) the results of tests of controls indicate that the controls have
indeed been operating effectively.

12. For each of the following controls, identify whether the controls leave an audit trail. Also
identify a test of control audit procedure the auditor can use to test the effectiveness of the
control.
a. An accounting clerk accounts for all shipping documents on a monthly basis and initials
the monthly shipping logs.
b. Bank reconciliations are prepared by the controller, who does not have access to cash
receipts.
c. As employees check in daily buy using time clocks a supervisor observes to make certain
that no individual “punches in” more than one time card.
d. Vendor’s invoices are approved by the controller after the examines the purchase order
and receiving report attached to each invoice.
e. The cashier, who has no access to accounting records, prepares the deposit slip and
delivers the deposit directly to the daily.
f. An accounting clerk verifies the price, extensions, and footing of all sales invoices in
excess of P300 and initials the duplicate sales invoice when he has completed the
procedure.
g. All mail is opened and cash is prelisted daily by the president’s secretary, who has no
other responsibility for handling assets or recording accounting data.

Maria Cabrera, CPA, follows the philosophy of performing interim tests of controls and
substantive tests of transactions on every December 31 audit as means of keeping overtime to a
minimum. Typically, the interim tests are performed sometime between August and November.
REQUIRED:
a. Evaluate her decisions to perform interim tests of controls and substantive tests of
transactions.

When the auditor obtains evidence about the operating effectiveness of controls as of or through an interim
date, he or she should determine what additional evidence is necessary concerning the operation of the
controls for the remaining period of reliance.

b. Under what circumstances is it acceptable for her to perform no additional tests of

controls and substantive tests of transactions work as part of the year-end audit tests?

The existence of conditions or circumstances, if any, that create incentives or pressures on management to
misstate the financial statements between the interim test date and the end of the period covered by the
financial statements

c. If she decides to perform no additional testing, what is the effect on other tests performs
during the remainder of the engagement?
Procedures the auditor performs to test operating effectiveness include a mix of inquiry of appropriate
personnel, observation of the company's operations, inspection of relevant documentation, and re-
performance of the control.

13. Following are several decisions that the auditor must make in an audit. Letters indicate
alternative conclusions that could be made:

Decisions Alternative Conclusions

1. Determine whether it is cost-effective to
A. It I cost- effective perform tests of controls
B. It is no cost-effective

2. Perform substantive tests of details of balances

C. Perform reduced tests
D. Perform expanded test

3. Complete initial assessment of control risk

E. Controls are effective
F. Controls are ineffective

4. Perform tests of controls

G. Controls are effective
H. Controls are ineffective

REQUIRED:
a. Identify the sequence in which the auditor should make decisions 1-4 above.
A, C, E, G
b. For the auditor of the sales and collection cycle and accounts receivable an auditor
reached the following conclusions: A, D, E, H. Put the letters in the appropriate sequence
and evaluate whether the auditor’s logic was reasonable. Explain your answer.
Reasonable: E A H D

c. For the audit of inventory and related inventory cost records, an auditor reached the
following conclusions: B, C, E, G. Put the letters in the appropriate sequence and
evaluate whether the auditor used good professional judgment. Explain your answer.
Not Reasonable: E B G C

d. Fort the audit of property, plant and equipment and related acquisition records, an
auditor reached the following conclusions: A, C, F, G. Put the letters in the appropriate
sequence and evaluate whether the auditor used good professional judgment. Explain
your answer.
Not Reasonable – F A G C

e. For the audit of payroll expenses and related liabilities, an auditor recorded the following
conclusions: D, F. Put the letters in the appropriate sequence and evaluate whether the
auditor used good professional judgment. Explain your answer.
Reasonable: F D

14. Hazel Jess, a new staff auditor, is confused by the inconsistency if the three audit partners she
has been assigned on her first three audit engagements. On the first engagement, she spent a
considerable amount of time in the audit of cash disbursements by examining cancelled checks
and supporting documents, but almost no testing was spent in the verification of fixed assets. On
the second engagement, a different partner had her or less intensive tests in the cash
disbursements area and take smaller sample sizes than in the first audit, even though the
company was much larger. On her most recent engagement under a third audit partner, there was
a thorough test of cash disbursement transactions, far beyond that of the other two audits, and an
extensive verification of fixed assets. In fact, this partner insisted on a complete physical
examination of all fixed assets recorded on the books. The total audit time on the most recent
audit was longer than that of either of the first two audits despite the smaller size of the
company. Hazel’s conclusion is that the amount of evidence to accumulate depends on the audit
partner in charge of the engagement.

REQUIRED:
a. State several factor that could explain the difference in the amount of evidence
accumulated in each of the three audit engagements as well as the total time spent.

Factors that can explain the difference in the amount of evidence accumulated are: Internal controls,
materiality of the account balance, size of the company, motivation of the client to misstate the financial
statements, reliance by third parties on audited financial statements.

b. What could the audit partners have done to help Hazel understand the difference in the
audit emphasis on the three audits?

The audit partners could have discussed each audit and their approach and expectations prior to beginning
the audits.

c. Explain how these three audits are useful in developing Hazel’s professional judgment.
How could the quality of her judgment have been improved on the audits?

The three audits are useful in developing Bryan’s professional judgement by showing her that each audit
has different circumstances and therefore, the audit procedures can be revised based on the circumstances
of that particular audit. The quality of her judgement could have been improved if the audit partners would
have discussed the approach to the audit.
15. The following are three situations in which the auditor is required to develop an audit
strategy:
1. The client has inventory at approximately 50 locations in the Philippines. The inventory
is difficult to count and can be observed only by traveling by automobile. The internal
controls over acquisitions, cash disbursements, and perpetual records are considered
effective. This is the fifth year that you have done the audit, and audit results in past years
have always been excellent. The client is in excellent financial condition and is privately held.
2. This is the first year of an audit of a medium-sized company that is considering selling its
business because of severe under financing. A review of the acquisition and payment
cycle indicates that controls over cash disbursements are excellent, but controls over
acquisitions. When you review the general ledger, you observe that there are many large
adjusting entries to correct accounts payable.
3. You are doing the audit of a small loan company with extensive receivables from
customers. Controls over granting loans, collections, and loans outstanding are
considered effective, and there is extensive follow-u of all outstanding loans weekly. You
have recommended a computer system for the past two years, but management believes
the cost is too great, given their low profitability. Collections are an ongoing problem
because many of the customers have severe financial problems. Because of adverse
economic conditions, loans receivable have significantly increased and collections are
less than normal. In previous years, you have had relatively few adjusting entries.
REQUIRED:
a. For audit1, recommended an evidence mix for the five types of tests for the audit of
inventory and cost of goods sold. Justify your answer. Include in your recommendations
both tests of controls and substantive tests.

The auditor should obtain an understanding of the entity and its environment including its internal control.
Thus, the auditor will be able to assess the control risk and overall risk of material misstatements. Ince this
is now the fifth year the auditor is performing the audit this gives him/her a better understanding of the
entity and its internal controls.
The internal controls over acquisitions, cash disbursements and perpetual inventory system are considered
effective. Check whether proper physical controls are placed on the inventory. Check accounting records.
Since the internal controls are effective, a small amount of testing on controls is sufficient. Medium
amount of testing for all four types of tests is sufficient except the substantive analytical procedures. The
substantive analytical procedures are performed because they provide the likelihood of material
misstatements. Test of controls and substantive tests of inventory and cost of goods sold are done. These
tests provide descriptive documentation of understanding of internal controls. These tests are done to
obtain sufficient appropriate audit evidence.

b. For audit 2, recommend an evidence mix for the audit of the acquisition and payment
cycle, including accounts payable. Justify your answer

The auditor should obtain an understanding of the entity and its environment including its internal control.
In case of control risk assessment, the auditor should verify the accounting records- the accounting records
are the important source of audit evidence. The general ledger shows many adjusting entries to correct
accounts payable. Assess the control risk and determine the extent of testing controls to be performed.
Test of controls and substantive test of acquisition and payment cycle should be extensive. This is because
the controls over the acquisition are not effective. Analytical procedures are inexpensive and hence, most
of the auditors perform them on almost all auditors. The test of details of accounts payable balances are
performed extensively.

c. For audit 3, recommend an evidence mix for the audit of outstanding loans. Justify your
answer.

Controls over granting loans, collections and loans outstanding are considered effective, and there is
extensive follow-up of all outstanding loans weekly. Collections are an ongoing problem because many of
the customers have severe financial problems.
16. The following are parts of a typical audit for a company with a fiscal year-end of July 31.
1. Confirm accounts payable
2. Do tests of controls and substantive tests of transactions for the acquisition and payment
and payroll and personnel cycles
3. Do other tests of details of balances for accounts payable.
4. Do tests of review of subsequent events
5. Preplan the audit
6. Issue the audit report’
7. Understand internal control and assess control risk.
8. Do analytical procedures for accounts payable
9. Set applicable audit risk and decide preliminary judgment about materiality and tolerable
misstatement.
REQUIRED:
a. Put parts 1 through 9 of the audits in the sequential order in which you would expect them
to be performed in a typical audit.

Identify the phase of the audit in which each activity occurs.

a. Understanding client and its environmental phase.
-Understand internal control and assess control risk.
b. Pre-planning phase
-Accept the client.
c. Planning Phase
-Perform analytical procedures for accounts payable
-Set acceptable audit risks and decide preliminary judgement about materiality and performance
materiality.
d. Executing the plan phase
-Confirms accounts payable
-Perform test of controls and substantive test of transactions for the acquisition and payment and payroll
and personnel cycles.
- Perform other tests of details of balances for accounts payable

b. Identify those parts that would frequently be done before July 31.

Questions No. 1 through 4 deals with tests of controls. Choose the best response.
1. Which of the following statements about tests of controls is most accurate?
a. Auditing procedures cannot concurrently provide both evidence of the effectiveness of
internal control procedures and evidence required for substantive tests.
b. Tests of controls include observations of the proper segregation of the duties
c. Tests of controls provide direct evidence about monetary misstatements in transactions
d. Tests of controls ordinarily should be performed as of the statement of financial position
date of during the period subsequent to that date.

2. Which of the following would be least likely to be included in an auditor’s tests of controls?
a. Documentation
b. Observation
c. Inquiry
d. Confirmation

3. The two phases of the auditor’s involvement with internal control are sometimes called
“understanding and assessment” and “tests of controls”. In the tests of controls phase, the
auditor attempts to obtain:
a. A reasonable degree of assurance that the client’s internal controls are operating
effectively on a consistent basis throughout the year.
b. Sufficient competent evidential matter to afford a reasonable basis for the auditor’s
opinion.
c. Assurances that informative disclosures in the financial statements are reasonably
adequate.
d. Knowledge and understanding of the client’s prescribed procedures and methods.

4. Which of the following is ordinarily considered a test of control audit procedures?

a. Send confirmation letters to banks.
b. Count and list cash on hand
c. Examine signatures on check
d. Prepare reconciliations of bank accounts as of the statement of financial position date.
Question No. 5 through 7 concern types of audit tests. Choose the best response.

5. Analytical procedures may be classified as being primarily

a. Tests of controls
b. Substantive test
c. Tests of ratios
d. Tests of details of balances

6. To support the auditor’s initial assessment of control risk below maximum, the holder
performs procedures to determine that internal controls are operating effectively. Which of
the following audit procedures is the auditor performing?
a. Tests of details of balances
b. Substantive test of transactions
c. Tests of controls
d. Tests of details of balances

7. The auditor faces risk that the audit will not detect material misstatements that occur in the
accounting process. To minimize this risk, the auditor relies primarily on
a. Substantive test
b. Tests of controls
c. Internal control
d. Statistical analysis.
Questions No. 8 and 9 concern the sequence and timing of audit tests. Choose the best
Response

8. A conceptually logical approach to the auditor’s evaluation of internal control consists of the
following four steps:
I. Determine the internal controls that should prevent or detect errors and fraud
II. Identify weakness to determine their effect of nature, timing or extent of auditing
procedures to be applied and suggestions to be made to the client
III. Determine whether the necessary procedures are prescribed and are being followed
satisfactorily.
IV. Consider the types of errors and fraud that could occur
What should be the order in which these four steps are performed?
a. I, II, III, and IV
b. I, III, IV and II
c. III, IV,I and II
d. IV, I, III and II

9. The sequence of steps in gathering evidence as the basis of the auditors opinion is:
a. Substantive tests, initial assessment of control risk, and test of controls.
b. Initial assessment of control risk, substantive tests, and tests of controls
c. Initial assessment of control risk, tests of controls, and substantive tests.
d. Tests of controls, initial assessment of control risk, and substantive tests.