NaimExplain

Describe the three basic steps an auditor should follow when designing tests of controls and substantive tests of transactions. Answer: The three basic steps in designing tests of controls and substantive tests of transactions are: • Determine key internal controls for each audit objective. • Design tests of controls for each control used to support a reduced control risk. • Design substantive tests of transactions to test for monetary misstatements for each objective.

The transaction-related audit objectives and the client’s methods of controlling misstatements are essentially the same for credit memos as for sales with the exception of two differences. What are the two differences from the auditor’s perspective? Answer: The first difference is materiality. In many instances, sales returns and allowances are so immaterial that auditors ignore them. The second difference is the emphasis on the occurrence objective. For sales returns and allowances, auditors usually emphasize testing recorded transactions to uncovering any theft of cash from the collection of accounts receivable that was covered up by fictitious sales returns and allowances.

If sales invoices are automatically calculated and posted by a company’s computer system, can the auditor reduce substantive tests of transactions for the accuracy objective? Answer: If the auditor determines that the computer is programmed accurately and the price list master file is authorized and correct, detailed invoice computations can be reduced or eliminated. The auditor would then focus on determining that effective computer controls exist to ensure that the computer system is properly programmed and has not been altered since it was last tested by the auditor.

For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement. • Recorded sale for which there was no shipment • Sale recorded more than once • Shipment made to nonexistent customers Answer: The potential audit tests include the following: • Recorded sale for which there was no shipment. Vouch selected entries in the sales journal to related copies of shipping and other supporting documents. • Sale recorded more than once. Review a numerically sorted list of recorded sales transactions for duplicate numbers. The auditor may also test for proper cancellation of shipping documents. • Shipment made to nonexistent customers. Trace customer information on sales invoices to the customer master file.

When designing substantive tests of transaction for Sales, the auditor is concerned with several types of misstatements. What are these types of misstatements and are they intentional or unintentional? Answer: The auditor is concerned with sales being included in the journals for which no shipment was made, sales recorded more than once, and shipments being made to non-existent customers and recorded as sales. The first two types of misstatements can be intentional or unintentional, but the third type is always intentional.

Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved. Answer: The four business functions that result in sales transactions, and related documents and records, are: • Processing customer orders. Key documents include customer order and sales order. • Granting credit. Customer order or sales order. • Shipping goods. Shipping document (bill of lading). • Billing customers and recording sales. Sales invoice, sales journal, summary sales report, accounts receivable master file, accounts receivable trial balance, and monthly statements.

Explain what lapping means, and discuss the internal control deficiency that allows it to occur. Also discuss the procedures the auditor can perform to detect lapping. Answer: Lapping, which is a common type of defalcation, is the postponement of entries for the collection of receivables to conceal an existing cash shortage. It involves deferring recording the cash receipts from one customer and covering the shortages with subsequent receipts from another customer. Improper segregation of duties in which a person who handles cash receipts is allowed to enter those receipts into the accounting records allows lapping to occur. The auditor can detect lapping by comparing the name, amount, and dates shown on remittance advices with cash receipts journal entries and related deposit slips.

When testing the occurrence objective for sales, the auditor is concerned with the possibility of three types of misstatements. One type is sales being included in the journal for which no shipment was made. Discuss the other two types of misstatements. Answer: The auditor is also concerned with the possibility of  (1) shipments being made to nonexistent customers and recorded as sales, and (2) sales being recorded more than once.

When assessing planned control risk for sales, the auditor is concerned about proper authorization at three key points. Discuss each of these three points. Answer: Credit should be properly authorized before a sale takes place; goods should be shipped only after proper authorization; and prices, base terms, freight, and discounts must be properly authorized.

Customer billing is a critical process which auditors must understand. What are the most important aspects of billing and what are the related objectives?  Answer: The most important aspects of billing are: • To make sure that all shipments made have been billed (completeness), • That no shipment has been billed more than once (occurrence), and • That each shipment is billed for the proper amount (accuracy).

State the five classes of transactions that comprise the sales and collection cycle. Answer: The five classes of transactions that comprise the sales and collection cycle are: • Sales (cash and sales on account) • Cash receipts • Sales returns and allowances • Charge-off of uncollectible accounts • Bad debt expense.

Explain each of the following types of documents and indicate the class of transactions in which they are commonly used. 1. Customer order 2. Shipping document 3. Remittance advice 4. Sales returns and allowance journal 5. Uncollectible account authorization form Answer: 1. Customer order – request for merchandise by a customer. Appears in the Sales class of transactions. 2. Shipping document – document prepared to initiate shipment of goods, indicating the description of the merchandise, the quantity shipped, and other relevant data. Appears in the Sales class of transactions. 3. Remittance advice – document that accompanies the sales invoice mailed to the customer and can be returned to the seller with payment. Appears in the Cash receipts class of transactions. 4. Sales returns and allowance journal – journal used to record all sales returns and allowances, analogous to the sales journal. Appears in the Sales returns and allowance class of transactions. 5. Uncolle

Discuss the major activities and procedures performed by the auditor in each of the four phases of an audit. Answer: The major activities performed in the planning and design phase (Phase I) are: preplan the engagement; obtain background information about the client; obtain information about the client’s legal obligations; perform preliminary analytical procedures; set materiality, and assess acceptable audit risk and inherent risk; obtain an understanding of internal control, and assess control risk; and develop an overall audit plan and audit program. Phase II involves tests of controls, substantive tests of transactions, and an assessment of the likelihood of misstatements in the financial statements. Phase III involves analytical procedures and tests of details of balances. In Phase IV, the auditor performs the review for contingent liabilities, the review for subsequent events, accumulates final evidence, evaluates results, issues the audit report, and communicates wi

There are seven types of audit evidence: physical examination, confirmation, documentation, observation, inquiries of the client, reperformance, and analytical procedures. For each of the following types of audit tests, indicate the type(s) of evidence that can be obtained through the test: (1) tests of controls, (2) substantive tests of transactions, (3) analytical procedures, and (4) tests of details of balances. Answer: 1. Tests of controls. Documentation, observation, inquiries of the client, reperformance. 2. Substantive tests of transactions. Documentation, inquiries of the client, reperformance. 3. Analytical procedures. Inquiries of the client, analytical procedures. 4. Tests of details of balances. Physical examination, confirmation, documentation, inquiries of the client, reperformance.

Discuss the relationship of each of the following to the extent of planned tests of details of balances: (1) tolerable misstatement, (2) inherent risk, (3) control risk, and (4) acceptable audit risk. Answer: Inherent risk and control risk are directly related to the extent of planned tests of details of balances; that is, as inherent risk and/or control risk increase, the extent of planned tests of details of balances also increases. Tolerable misstatement and acceptable audit risk are inversely related to the extent of planned tests of details of balances; that is, as tolerable misstatement and/or acceptable audit risk increase, the extent of planned tests of details of balances decreases.

What are the four steps auditors follow when they plan to reduce assessed control risk? Answer: The steps are as follows: 1. Apply transaction-related audit objectives to the class of transaction being tested. 2. Identify key controls that should reduce control risk for each transaction-related audit objective. 3. Develop appropriate tests of controls for all internal controls used to reduce the preliminary assessment of control risk below maximum. 4. For potential types of misstatements related to each transaction-related audit objectives, design appropriate substantive tests of transactions, considering deficiencies in internal control and expected results of the tests of controls.

Discuss the major determinants of the extent of tests of details of balances. Answer: Major determinants of the extent of tests of details of balances include: the results of tests of controls, substantive tests of transactions, and analytical procedures; the amount of tolerable misstatement; and the levels of inherent risk and acceptable audit risk.

There are three stages of the audit in which analytical procedures are performed. Identify each of these three stages and, for each stage, discuss the purpose of performing analytical procedures in that stage. Also indicate in which stage(s) analytical procedures are required by current professional auditing standards. Answer: Analytical procedures are performed in the audit planning stage to help the auditor decide the other evidence needed to satisfy sufficient competent evidence requirements. Analytical procedures can also be performed as substantive tests in the testing phase of the audit. Analytical procedures are performed in the audit completion phase as a final test of reasonableness. Auditing standards require that analytical procedures be performed in the planning and completion phases of every audit.

Discuss the purposes of (1) substantive tests of transactions, (2) tests of controls, and (3) tests of details of balances. Give an example of each. Answer: The purpose of substantive tests of transactions is to determine whether all six transaction-related audit objectives have been satisfied for each class of transactions. For example, as part of the auditor’s test of the accuracy objective for sales, the auditor would compare the amount recorded in the sales journal for a sample of sales transactions with the total on the corresponding sales invoices. The purpose of tests of controls is to determine the effectiveness of both the design and operations of specific internal controls. For example, the auditor might observe for a month whether statements are mailed to all customers. The purpose of tests of details of balances is to determine the monetary correctness of the accounts to which they relate. The confirmation of accounts receivable is an example.

Consider the audit risk model and the five types of audit tests. Which tests provide evidence pertinent to the various elements of the audit risk model? Answer: Evidence can be obtained about control risk via procedures to obtain an understanding of internal controls, tests of controls, and substantive tests of transactions. Evidence can be obtained about planned detection risk via substantive tests of transactions, analytical procedures, and tests of details of balances.

Describe the five types of audit tests. Identify which of the five types are substantive tests, and which are used to reduce assessed control risk. Answer: The five types of audit tests used to determine whether financial statements are fairly stated are: procedures to obtain an understanding of internal control, tests of controls, substantive tests of transactions, analytical procedures, and tests of details of balances. Substantive tests of transactions, analytical procedures, and tests of details of balances are substantive tests, whereas procedures to obtain an understanding of internal control and tests of controls are used to reduce assessed control risk.

Must auditors always perform tests of controls? Answer: Auditors only need to perform tests of controls in the audit of a private company if they intend to rely on them. Auditors must always perform tests of controls in the audit of a public company.

List each of the five types of audit tests and list at least two types of evidence that may be obtained from each type of test. Answer: • Procedures to obtain an understanding of internal control - documentation, observation, inquiries of the client, and re-performance. • Tests of controls - documentation, observation, inquiries of the client, and re-performance. • Substantive tests of transactions - documentation, inquiries of the client, and reperformance. • Analytical procedures - inquiries of the client and analytical procedures. • Tests of details of balances - physical examination, confirmation, documentation, inquires of the client, and reperformance.

Three factors the auditor considers when assessing control risk are: the auditor’s belief concerning the effectiveness of internal controls, the results of tests of controls, and the cost-effectiveness of a reduced assessed control risk. Identify the combination of conditions for these three factors that is required before a reduction in substantive testing is permitted. Answer: 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.

Contrast the circumstances in which the auditor would choose not to test controls with those in which he or she would perform tests of controls. Answer: If the auditor believes that controls have not been operating effectively during the period under audit, or that it would not be cost-effective to test controls, then he or she would choose not to test controls. In contrast, if the auditor believes that controls have been operating effectively during the period under audit, and that it would be cost-effective to test controls, the auditor will perform tests of controls.

Difference between formal argument and actual argument? Formal arguments are the arguments available in the function definition. They are preceded by their own data type. Actual arguments are available in the function call. These arguments are given as constants or variables or expressions to pass the values to the function.

What are built in functions? The functions that are predefined and supplied along with the compiler are known as builtin functions. They are also known as library functions. 

What is an argument? An argument is an entity used to pass data from the calling to a called function.

What is a function? A large program is subdivided into a number of smaller programs or subprograms. Each subprogram specifies one or more actions to be performed for the larger program. Such sub programs are called functions.

What modular programming? If a program is large, it is subdivided into a number of smaller programs that are called modules or subprograms. If a complex problem is solved using more modules, this approach is known as modular programming.

Why is it necessary to give the size of an array in an array declaration? When an array is declared, the compiler allocates a base address and reserves enough space in memory for all the elements of the array. The size is required to allocate the required space and hence size must be mentioned. 

 Is it possible to have negative index in an array?  Yes it is possible to index with negative value provided there are data stored in this location. Even if it is illegal to refer to the elements that are out of array bounds, the compiler will not produce error because C has no check on the bounds of an array. 

Difference between linker and linkage? Linker converts an object code into an executable code by linking together the necessary built in functions. The form and place of declaration where the variable is declared in a program determine the linkage of variable

What is an array of pointers?  if the elements of an array are addresses, such an array is called an array of pointers. 

What is pointer to a pointer?  If a pointer variable points another pointer value. Such a situation is known as a pointer to a pointer. Example:  int *p1,**p2,v=10;  P1=&v; p2=&p1;  Here p2 is a pointer to a pointer.

What is the purpose of realloc? It increases or decreases the size of dynamically allocated array. The function realloc (ptr,n) uses two arguments. The first argument ptr is a pointer to a block of memory for which the size is to be altered. The second argument specifies the new size. The size may be increased or decreased. If sufficient space is not available to the old region the function may create a new region

What is dynamic memory allocation? A dynamic memory allocation uses functions such as malloc() or calloc() to get memory dynamically. If these functions are used to get memory dynamically and the values returned by these function are assigned to pointer variables, such a way of allocating memory at run time is known as dynamic memory allocation. 

What is static memory allocation? Compiler allocates memory space for a declared variable. By using the address of operator, the reserved address is obtained and this address is assigned to a pointer variable. This way of assigning pointer value to a pointer variable at compilation time is known as static memory allocation.

How pointer variables are initialized?  Pointer variables are initialized by one of the following ways.  I. Static memory allocation  II. Dynamic memory allocation

What is generic pointer in C? In C void* acts as a generic pointer. When other pointer types are assigned to generic pointer, conversions are applied automatically (implicit conversion). 

What does the error ‘Null Pointer Assignment’ means and what causes this error? As null pointer points to nothing so accessing a uninitialized pointer or invalid location may cause an error.

Are pointers integer? No, pointers are not integers. A pointer is an address. It is a positive number.

 What is a NULL Pointer? Whether it is same as an uninitialized pointer? Null pointer is a pointer which points to nothing but uninitialized pointer may point to anywhere.

In C, why is the void pointer useful? When would you use it? The void pointer is useful because it is a generic pointer that any pointer can be cast into and back again without loss of information.

What is near pointer? A near pointer is 16 bits long. It uses the current content of the CS (code segment) register (if the pointer is pointing to code) or current contents of DS (data segment) register (if the pointer is pointing to data) for the segment part, the offset part is stored in a 16 bit near pointer. Using near pointer limits the data/code to 64kb segment.

What is a normalized pointer, how do we normalize a pointer? It is a 32bit pointer, which has as much of its value in the segment register as possible. Since a segment can start every 16bytes so the offset will have a value from 0 to F. for normalization convert the address into 20bit address then use the 16bit for segment address and 4bit for the offset address. Given a pointer 500D: 9407,we convert it to a 20bitabsolute address 549D7,Which then normalized to 549D:0007.

What is a huge pointer?  Huge pointer is 32bit long containing segment address and offset address. Huge pointers are normalized pointers so for any given memory address there is only one possible huge address segment: offset pair. Huge pointer arithmetic is doe with calls to special subroutines so its arithmetic slower than any other pointers.

 What is a far pointer? Where we use it?  In large data model (compact, large, huge) the address B0008000 is acceptable because in these model all pointers to data are 32bits long. If we use small data model(tiny, small, medium) the above address won’t work since in these model each pointer is 16bits long. If we are working in a small data model and want to access the address B0008000 then we use far pointer. Far pointer is always treated as a 32bit pointer and contains a segment address and offset address both of 16bits each. Thus the address is represented using segment : offset format B000h:8000h. For any given memory address there are many possible far address segment : offset pair. The segment register contains the address where the segment begins and offset register contains the offset of data/code from where segment begins. 

What is the difference between Strings and Arrays? String is a sequence of characters ending with NULL .it can be treated as a one dimensional array of characters terminated by a NULL character. 

What the advantages of using Unions? When the C compiler is allocating memory for unions it will always reserve enough room for the largest member

What is storage class? What are the different storage classes in C? Storage class is an attribute that changes the behavior of a variable. It controls the lifetime, scope and linkage. The storage classes in c are auto, register, and extern, static, typedef. 

 Differentiate between for loop and a while loop? What are it uses? For executing a set of statements fixed number of times we use for loop while when the number of iterations to be performed is not known in advance we use while loop.

What is recursion? A recursion function is one which calls itself either directly or indirectly it must halt at a definite point to avoid infinite recursion. 

Difference between strdup and strcpy? Both copy a string. strcpy wants a buffer to copy into. strdup allocates a buffer using malloc(). Unlike strcpy(), strdup() is not specified by ANSI .

Out of fgets() and gets() which function is safe to use and why? fgets() is safer than gets(), because we can specify a maximum input length. Neither one is completely safe, because the compiler can’t prove that programmer won’t overflow the buffer he pass to fgets ().

Can we specify variable field width in a scanf() format string? If possible how? All field widths are variable with scanf(). You can specify a maximum field width for a given field by placing an integer value between the ‘%’ and the field type specifier. (e.g. %64s). Such a specifier will still accept a narrower field width. The one exception is %#c (where # is an integer). This reads EXACTLY # characters, and it is the only way to specify a fixed field width with scanf().

What is the use of typedef? The typedef help in easier modification when the programs are ported to another machine. A descriptive new name given to the existing data type may be easier to understand the code.

 What are register variables? What are the advantages of using register variables?  If a variable is declared with a register storage class,it is known as register variable.The register variable is stored in the cpu register instead of main memory.Frequently used variables are declared as register variable as it’s access time is faster.

Describe about storage allocation and scope of global, extern, static, local and register variables?  Globals have application-scope. They’re available in any compilation unit that includes an appropriate declaration (usually brought from a header file). They’re stored wherever the linker puts them, usually a place called the “BSS segment.” Extern? This is essentially “global.”  Static : Stored the same place as globals, typically, but only available to the compilation unit that contains them. If they are block-scope global, only available within that block and its subblocks.  Local : Stored on the stack, typically. Only available in that block and its subblocks. (Although pointers to locals can be passed to functions invoked from within a scope where that local is valid.)  Register : See tirade above on “local” vs. “register.” The only difference is that the C compiler will not let you take the address of something you’ve declared as “register.”

 What are enumerations? They are a list of named integer-valued constants. Example:enum color { black , orange=4, yellow, green, blue, violet };This declaration defines the symbols “black”, “orange”, “yellow”, etc. to have the values “1,” “4,” “5,” … etc. The difference between an enumeration and a macro is that the enum actually declares a type, and therefore can be type checked. 

Difference between arrays and linked list? An array is a repeated pattern of variables in contiguous storage. A linked list is a set of structures scattered through memory, held together by pointers in each element that point to the next element. With an array, we can (on most architectures) move from one element to the next by adding a fixed constant to the integer value of the pointer. With a linked list, there is a “next” pointer in each structure which says what element comes next. 

Where does global, static, and local, register variables, free memory and C Program instructions get stored?   Global : Wherever the linker puts them. Typically the “BSS segment” on many platforms. Static : Again, wherever the linker puts them. Often, they’re intermixed with the global. The only difference between globals and statics is whether the linker will resolve the symbols across compilation units. Local : Typically on the stack, unless the variable gets register allocated and never spills. Register : Nowadays, these are equivalent to “Local” variables. They live on the stack unless they get register-allocated.

Where is the auto variables stored? Auto variables can be stored anywhere, so long as recursion works. Practically, they’re stored on the stack. It is not necessary that always a stack exist. You could theoretically allocate function invocation records from the heap.

What is static identifier? A file-scope variable that is declared static is visible only to functions within that file. A  function-scope or block-scope variable that is declared as static is visible only within that scope.  Furthermore, static variables only have a single instance. In the case of function- or block-scope  variables, this means that the variable is not “automatic” and thus retains its value across  function invocations.

Difference between pass by reference and pass by value? Pass by reference passes a pointer to the value. This allows the callee to modify the variable directly.Pass by value gives a copy of the value to the callee. This allows the callee to modify the value without modifying the variable. (In other words, the callee simply cannot modify the variable, since it lacks a reference to it.)

What are macros? What are its advantages and disadvantages? Macros are abbreviations for lengthy and frequently used statements. When a macro is called the entire code is substituted by a single line though the macro definition is of several lines. The advantage of macro is that it reduces the time taken for control transfer as in case of function. The disadvantage of it is here the entire code is substituted so the program becomes lengthy if a macro is called several times.

What are the differences between malloc () and calloc ()?  Malloc Calloc 1-Malloc takes one argument Malloc(a);where a number of bytes 2-memory allocated contains garbage values  1-Calloc takes two arguments Calloc(b,c) where b no of object and c size of object  2-It initializes the contains of block of memory to zerosMalloc takes one argument, memory allocated contains garbage values. It allocates contiguous memory locations. Calloc takes two arguments, memory allocated contains all zeros, and the memory allocated is not contiguous.

In header files whether functions are declared or defined? Functions are declared within header file. That is function prototypes exist in a header file,not function bodies. They are defined in library (lib).

What are the differences between structures and arrays? Structure is a collection of heterogeneous data type but array is a collection of homogeneous data types. Array  1-It is a collection of data items of same data type. 2-It has declaration only 3-.There is no keyword. 4- array name represent the address of the starting element. Structure 1-It is a collection of data items of different data type. 2- It has declaration and definition 3- keyword struct is used 4-Structure name is known as tag it is the short hand notation of the declaration. 

What are the differences between structures and union? A structure variable contains each of the named members, and its size is large enough to hold all the members. Structure elements are of same size. A union contains one of the named members at a given time and is large enough to hold the largest member. Union element can be of different sizes.

 What is a union? Union is a collection of heterogeneous data type but it uses efficient memory utilization technique by allocating enough memory to hold the largest member. Here a single area of memory contains values of different types at different time. A union can never be initialized.

 What is a structure?  Structure constitutes a super data type which represents several different data types in a single unit. A structure can be initialized if it is static or global.

What are the uses of a pointer?  Pointer is used in the following cases i) It is used to access array elements ii) It is used for dynamic memory allocation. iii) It is used in Call by reference iv) It is used in data structures like trees, graph, linked list etc.

 What is a pointer? Pointers are variables which stores the address of another variable. That variable may be a scalar (including another pointer), or an aggregate (array or structure). The pointed-to object may be part of a larger object, such as a field of a structure or an element in an array. 

What does static variable mean? Static variables are the variables which retain their values between the function calls. They are initialized only once their scope is within the function in which they are defined. 

Why are you interested in programming?  What have you done to expose yourself to programming so far? My name is Kelly Ha.  I am interested in programming because I believe I will be a successful programmer.  I am a natural problem-solver and logic-thinker.  As a child, I had an affinity toward puzzles of all varieties, and i taught myself to read Chinese by following Chinese subtitles with Chinese movie dialogue.  I excelled in math when I was in grade school.  I finished Calculus II during my Junior year of high school and passed the AP exam with a score of 5.  I believe programming is a field that plays to my strength.  For the past two years, I’ve been casually self-studying programming.  I’ve finished the Javascript HTML, CSS, and Ruby tracks on Codecademy.  I have also finished most of the beginning and intermediate problems on Coderbyte using the Ruby programming language.  I took a hiatus from my programming studies to focus on my current accounting career, but I have be

What is one audit procedure that may be used to test for proper handling of terminated employees? Answer: A procedure that tests for proper handling of terminated employees is to select several files from the personnel records for employees who were terminated in the current year to determine whether each received termination pay consistent with company policy. Continuing payments to terminated employees can be tested by examining payroll records in the subsequent period to verify that the employee is no longer being paid. Naturally, this procedure is not effective if the personnel department is not informed of terminations.

How do auditors commonly verify sales commission expense? Answer: If all employees receive the same commission rate, then verifying the expense is done by multiplying the commission rate by the amount of the sales. If there are different commission rates, then the auditor will likely select a sample of employees to examine separately on a monthly or annual basis.

Discuss the advantages of using an imprest payroll account. Answer: The advantages of an imprest account are that it limits the client’s exposure to payroll fraud, allows the delegation of payroll check-signing duties, separates routine payroll expenditures from irregular expenditures, and facilitates cash management. It also simplifies the reconciliation of the payroll bank account.

Discuss each of the following primary documents and records used in the personnel and employment function in the payroll and personnel cycle: personnel records, deduction authorization form, and the rate authorization form. Answer: • Personnel records. These records include employees’ date of employment, personnel investigations, rates of pay, authorized deductions, performance evaluations, and termination of employment. • Deduction authorization form. This form authorizes payroll deductions, including the number of exemptions for withholding of income taxes, U.S. savings bonds, and union dues. • Rate authorization form. This form authorizes employees’ rate of pay.

What key separation of duties should the auditor expect to find within the payroll and personnel cycle? Answer: The human resources department should be independent of the payroll function and should be responsible for hiring and terminating employees, as well as changes in pay rates and deductions. In additional payroll processing should be separate from the custody of signed payroll checks.

Discuss three important differences between the payroll and personnel cycle and other cycles in a typical audit. Answer: Three important differences between the payroll and personnel cycle and other cycles in a typical audit are: • There is only one class of transactions for payroll, whereas most cycles include at least two classes of transactions. • In the payroll cycle, transactions are far more significant than related balance sheet accounts. • Internal controls over payroll are effective for almost all companies, even small ones. This is primarily due to severe federal and state penalties for errors in withholding and paying payroll taxes and employee morale problems if employees are not paid or are underpaid.

Discuss the procedures involved in, and the purpose of, a surprise payroll pay off. Answer: A surprise payroll pay off is a procedure in which each employee must pick up and sign for his or her check in the presence of a supervisor and the auditor. Any checks that are not claimed are subject to an extensive investigation to determine whether an unclaimed check is fraudulent. The purpose is to test for nonexistent employees; that is, the issuance of payroll checks to individuals who do not work for the company.

What types of audit procedures are typically emphasized during the audit of the payroll cycle? Answer: Auditors typically emphasize tests of controls, tests of transactions and analytical procedures.

What events initiate and terminate the payroll and personnel cycle? Answer: The hiring of an employee initiates the cycle and the payments to employees, governments, and other organizations terminate the cycle.

What are two possible reasons that internal controls over payroll are effective for most companies? Answer: Harsh federal and state penalties encourage effective controls for withholding and paying payroll taxes. Also, employee morale problems can occur if employees are not paid or are underpaid.

What are the major factors affecting sample size for confirming accounts receivable? Answer: The factors include: • tolerable misstatement, • inherent risk (e.g., relative size of accounts receivable and number of accounts), • control risk, • achieved detection risk form other substantive tests, and • the type of confirmation (e.g., negative normally requires a larger sample size).

Describe each of the following types of confirmations: • Positive confirmation • Blank confirmation form • Invoice confirmation • Negative confirmation Answer: • Positive confirmations are communications addressed to a debtor requesting the recipient to confirm whether the balance as stated on the confirmation is correct or incorrect. • Blank confirmation forms do not state the amount, but requests the recipient to fill in the balance or furnish other information. • Invoice confirmations request a recipient to confirm an individual invoice rather than an entire balance. • Negative confirmations are addressed to debtor, but request responses only if the information is incorrect.

Briefly describe the circumstances in which it is acceptable to use negative confirmation requests. Answer: It is acceptable to use negative confirmation requests only when all of the following circumstances are present: • Accounts receivable is made up of a large number of small accounts. • Combined assessed control risk and inherent risk is low. • There is no reason to believe that the recipients of the confirmations are unlikely to give them consideration.

Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations. Answer: The primary advantage of negative confirmations is that they are less expensive than positive confirmations because there are no second requests and no follow-up of nonresponses. The primary disadvantage of negative confirmations is that they are less reliable than positive confirmations because a nonresponse must be regarded as a correct response, even though the debtor may have ignored the confirmation request.

Describe how the auditor tests the rights objective for accounts receivable. Answer: The auditor can test the rights objective for accounts receivable through reviewing the client’s minutes, discussions with the client, confirmation with banks, and the examination of correspondence files to determine whether receivables may have been pledged as collateral, assigned to someone else, factored, or sold.

Assuming the client’s internal controls are adequate, describe how the auditor can verify proper cutoff of sales transactions. Answer: Assuming the client’s internal controls are adequate, the auditor can verify proper cutoff of sales transactions by obtaining the shipping document number for the last shipment made at the end of the period and comparing this number with current and subsequent period recorded sales.

Discuss the audit procedures performed when testing the detail tie-in objective for accounts receivable, and explain why this objective is ordinarily tested before any other objectives for accounts receivable. Answer: When testing the detail tie-in objective for accounts receivable, the total column and the columns depicting the aging on the aged trial balance are footed, and the total is compared to the general ledger. In addition, a sample of individual balances on the aged trial balance should be traced to supporting documents to verify the customer’s name, balance, and proper aging. These tests are ordinarily done before any other tests to assure the auditor that the population being tested agrees with the general ledger and accounts receivable master file.

Describe how the auditor tests the classification objective for accounts receivable. Answer: Normally, auditors can evaluate the classification of accounts receivable relatively easily, by reviewing the aged trial balance for material receivables from affiliates, officers, directors, or other related parties. Auditors should verify that notes receivable or accounts that should be classified as noncurrent assets are separated from regular accounts, and significant credit balances in accounts receivable are reclassified as accounts payable.

Describe how the auditor tests the accuracy objective for accounts receivable. Answer: Confirmation of accounts selected from the trial balance is the most common test of details of balances for the accuracy of accounts receivable. When customers do not respond to confirmation requests, auditors examine supporting documents in the same way as described for the existence objective. Auditors perform tests of the debits and credits to individual customers’ balances by examining supporting documentation for shipments and cash receipts.

Discuss the alternative procedures an auditor can perform to test the existence objective for accounts receivable when customers do not respond to confirmation requests. Answer: For any positive confirmation not returned, the auditor can examine the following to verify the existence of individual sales transactions making up the ending balance in accounts receivable: • Subsequent cash receipts—evidence of the receipt of cash after the confirmation date includes                       examining remittance advices and entries in the cash receipts records. • Duplicate sales invoices. • Shipping documents. • Correspondence between the customer and the client.

A threefold approach is typically followed when determining the reasonableness of cutoff. Briefly describe the threefold approach. Answer: First, auditors should decide on the appropriate cutoff criteria. Second, they must evaluate whether the client has established adequate procedures to ensure a reasonable cutoff. Finally, auditors must test whether a reasonable cutoff was obtained.

Describe the differences between positive and negative confirmations. Which type is generally viewed as more reliable? Answer: A positive confirmation requests the recipient to respond regardless of whether the balance as stated on the confirmation is correct or incorrect. In contrast, a negative confirmation requests the recipient to respond only if the balance as stated on the confirmation is incorrect. Positive confirmations are more reliable because the auditor can perform follow-up procedures if a response is not received from the customer.

Auditing standards require the confirmation of accounts receivable in normal circumstances. What are the three exceptions to this requirement? Answer: The three exceptions are: 1.  Accounts receivable are immaterial. 2.  The auditor considers confirmations ineffective evidence because response rates will likely be inadequate or unreliable. 3.  The combined level of inherent risk and control risk is low and other substantive evidence can be accumulated to provide sufficient evidence.