Final Exam Essay Questions
Chapter 11 #2. Functions that should be segregated to provide for effective internal control over sales transactions include: Authorization of sales, credit approval, billing of accounts, and finally shipping of merchandise. Other internal controls over sale transactions include: verification of invoices as well as mailing of monthly customer statements.
Chapter 12 #1. Auditors are concerned about detecting damaged and obsolete inventory because the recorded cost of goods sold may be greater then their realized value. Auditors test for damaged goods by inquiry of client personnel and observation during the client’s physical inventory. The auditors test for obsolete goods by reviewing of perpetual inventory records, analytical procedures such as calculating ratios and finally inquiry of client personnel. #2. The auditors should review the client’s planning of the physical inventory and make suggestions as to how to improve. During inventory observations auditors evaluate whether the inventory procedures are followed, be aware of broken goods, make test counts and record them in their papers just to name a few. The auditors document their test counts in the working papers to later test the accuracy of the final inventory listing.
Chapter 13 #1. The principal purpose of internal controls relating to plant and equipment is to obtain maximum efficiency from the dollars invested in plant assets. The following are major controls applicable to plant and equipment. Use of a plant budget to forecast and control retirements, maintaining subsidiary ledger of property, periodic physical inventories, and a system of retirement procedures including serially numbered retirement work orders.
Chapter 14 #2. The auditors are concerned about completeness of accounts payable because the company financial standing is exaggerated by an understatement of liabilities. Procedures used to establish the completeness of recorded accounts payable include: Confirmation of accounts payable, Reconciliation of liabilities with vendor statements, and investigation of unmatched invoices and unbilled receiving reports.
Chapter 15 #1. The audit objectives for substantive tests of interest-bearing debt are obtaining an understanding of internal control over owner’s equity, establishing the completeness of recorded debt, verifying the cutoff of transactions affecting debt. 7 Substantive tests for interest bearing debt include: obtain analysis of interesting bearing debt and related accounts, examine copies of notes payable and supporting documents, confirm interest-bearing debt, perform analytical procedures, evaluate whether or not debt provisions have been met, and finally verify authority for issuance of debt to corporate minutes.
#2. The stock registrar controls the corporation’s issuance of stock to avoid overussage. The stock transfer agent maintains the detail stockholder records and