ANSWER ALL QUESTIONS
QUESTION 1 (23 MARKS:41 MINUTES)
Evidence comes in various types and has different degrees of reliability. Following are some statements that compare various types of evidence.
a. A bank confirmation versus observation of the segregation of duties between cash receipts and recording payment in the accounts receivable subsidiary ledger b. An auditor recalculation of depreciation versus examination of raw material requisitions c. A bank statement included in the entity’s records versus shipping documents d. Physical examination of share certificates versus physical examination of inventory components for a personal computer. REQUIRED:
For each situations, indicate whether the first or second type of evidence/audit procedure is more reliable. Provide a rationale for your choice.
Inspection of records and documents relates to the auditor’s examination of entity accounting data and corroborating audit evidence. One issue that effects the reliability of documentary evidence is whether the documents are internal or external. Following are examples of documentary evidence: 1. Duplicate copies of sales invoice
2. Purchase orders
3. Bank statements
4. Remittance advice from customers
5. Suppliers’ invoice
6. Material requisition forms
7. Overhead cost allocation sheets
8. Shipping documents
9. Supplier’s statement
10. Long term loan agreements
Classify each document as internal or external evidence
Classify each document as to its reliability (high, moderate or low)
QUESTION 2(20 MARKS:36 MINUTES)
Although the auditors can collect appropriate and sufficient audit evidence during the audit work, it does not necessarily support the auditors opinion if it is not documented properly and systematically. Discuss.
List FIVE (5) characteristics and purpose of audit working papers
QUESTION 3 (15 MARKS:27 MINUTES)
Below is the flow of inventory in inventory and warehousing cycle.
RECEIVE RAW MATERIALS
PUT MATERIALS IN STORAGE
PUT MATERIALS IN PRODUCTION
PUT COMPLETED GOODS IN STORAGE
SHIP FINISHED GOODS
Discuss briefly the above figure. Your discussion will be based on business function, documents and record related to the cycle.
Below is the transactions and controls related for cash receipts cycle.
| Transaction related
| Substantive tests of transaction
| Recorded cash receipts are for funds actually received by the company
| Accountant independently reconciles bank account
| Cash receipts is recorded in the cash receipts journal
| Prelisting of cash receipts is checked
| Cash receipts are deposited and recorded at the amout received
| Batch totals of cash receipts are compared with computer summary report
| Cash receipts transaction are properly classified
| Cash receipts transactions are internally verified
| Cash receipts are recorded on the correct dates
| Procedures required recording of cash on a daily basis
State substantive test of transaction for each transaction above.
QUESTION 4 (21 MARKS:38 MINUTES)
| Jati Products
Days to collect receivable
| Days to sell inventory
Purchases divided by accounts receivable
| Inventory divided by current assets
| Operating income divided by tangible assets
| Operating income divided by net sales
| Gross profit percentage
Earnings per share
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