Question 1

According to auditing standards,specific relevant aspects of an internal control system for making estimates include:
• Management communication of the need for proper accounting estimates.
• Accumulation of relevant,sufficient,and reliable data for estimates.
• Preparation of estimates by qualified personnel.
• Adequate review and approval by appropriate levels of authority.
• Comparison of prior estimates with subsequent results to assess the reliability of the estimation outcomes.
• Consideration by management of whether particular accounting estimates are consistent with the company's operational plans.
Required:
a.How would the auditor test these control activities over the production of estimates?
b.What substantive audit procedures would the auditor use to test the accounting estimates?

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Question 2

Red Corporation had a temporary cash squeeze near its balance-sheet date.It needed cash badly for a seasonal dip in sales.However,a loan covenant requiring a certain debt/equity ratio would be violated if any additional money were borrowed.To remedy this,the top two officers of the Corporation set up another corporation,Pink Inc.,Red made a large sale of inventory to Pink at cost.Pink used the inventory as collateral for a three-month loan from a local bank.The money from the loan was used to pay Red for the accounts receivable resulting from the "sale." The officers intended to have Red buy back the inventory from Pink at the end of the three-month period at a price that would allow Pink to pay off the loan plus interest.
Required:
a.How would this transaction designed by the two officers enable Red to maintain its required debt/equity ratio while obtaining the cash it needed?
b.What tests of controls and substantive tests would enable an auditor to detect this scheme?

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Question 3

When circumstances call for extended procedures,information on outstanding stock may be ________________________________________________.
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Question 4

__________________________________ of securities can prevent the use of company securities as _____________________________ for personal loans.
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Question 5

Investment accounting may be on the _____________________________ method,_____________________________ method,or _____________________________ method.
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Question 6

What are "off-balance-sheet" financing transactions? Explain and provide two or more examples.

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Question 7

The primary audit concern with the verification of long-term liabilities is that all _________________ are recorded and that the ___________________ is properly paid or ____________.
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Question 8

XYZ Company has investment securities held by a broker.An auditor is reviewing the last broker's statement for the year.For each of the tests 1-5,select the ASB balance assertions listed in A-D that the auditor is testing. . Verified the name on the account was the company's  name.                    A. Rights and obligations
_____ 2. Vouched items listed on the statement to the                                           B. Completeness investment account.
______3. Vouched purchases listed on the statement authorization by senior management or the board of directors. to                                         C. Valuation or Accuracy 
______4. The auditor has received a letter of  directly from the broker for investments listed on the statement.confirmation                               D. Existence
______5. The auditor compared the price of the securities listed on the broker's statement with the price listed on that day in The Wall Street Journal to the price used to record the investment on the balance sheet.

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Question 9

For each of the internal control questions for notes payable,indicate by letter the related ASB transaction assertion.Answers may be used more than once.

$\begin{array}{lccc}
\text {--- } & \text {1. Are paid notes canceled, stamped PAID, and } &  \
\text {---} & \text { filed? } & \text { A. Valuation or allocation }  \
\text {--- } & \text { 2. Are bank due notices compared with records} &\
\text { ---} & \text { of unpaid liabilities? } &  \text { B. Oecurrence }  \
\text { ---} & \text { 3. Are notes payable kept by someone who cannot } &  \
\text { ---} & \text { sign notes or checks?} & \text { C. Completeness  }  \
\text { ---} & \text { 4. Is all borrowing authorization by the directors } &  \
\text { ---} & \text { checked to determine whether all notes payable } & \
\text { ---} & \text { are recorded?} & \text {D. Rights  }  \
\end{array}$

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Question 10

The ASB balance assertion of _____________________________ is paramount in the verification of long-term liabilities and determination that all liabilities are recorded.
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Question 11

The confirmation of notes payable to banks may use the _____________________________________ confirmation.
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Question 12

An ___________________________________ is an approximation of a financial statement element,item,or account.
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Question 13

Interest expense related to interest-bearing liabilities could be audited using analytical procedures.Describe how this might be done and how the results would be used.

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Question 14

_______________________________ is responsible for making estimates and should have a _____________________________ and _____________________________ designed to reduce the likelihood of material misstatements in them.
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Question 15

Mike is the controller at Huskie Supply Company. Huskie Supply has an investment account with DT National Brokerage. Mike is authorized to call the broker and initiate trades on behalf of the company. Mike's son goes to MEU (Most Expensive University) and Mike has a CD with the money for this year's tuition. MEU changed the tuition due date such that the tuition came due 30 days before Mike's CD matured. Mike would lose a large amount of interest if he cashed in the CD early, and a loan from the bank was not possible (Mike is already over extended), and interest on a credit card advance would be 28%.
Mike authorized DT National Brokerage to sell one of the company's investments and send the check to his attention at the company. Mike paid the tuition and 30 days later, when the CD came due Mike repurchased the investment with the broker. In fact, the stock had dropped $3 and mike made a profit of $900.
A) Define the internal control weakness that allowed the situation to exist - if any;
B) One (and only one) specific internal controls that should be in place to prevent or detect the problem; and.
C) One (and only one) test of control audit procedure.
D) One (and only one) substantive audit procedure that may detect the situation described.
Consider each item separately - no credit will be given for generic controls (e.g. policies and procedures; separation of duties (without specifics); discuss with management.)

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Question 16

What is a compensating control? Describe what type of compensating controls might be implemented in the finance and investment cycle.

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Quiz 10: Finance and Investment Cycle

When circumstances call for extended procedures,information on outstanding stock may be ________________________________________________. Question also found in study guide

______ of securities can prevent the use of company securities as _ for personal loans. Question also found in study guide

Investment accounting may be on the _______________ method,_ method,or _______________ method. Question also found in study guide

What are "off-balance-sheet" financing transactions? Explain and provide two or more examples.

The primary audit concern with the verification of long-term liabilities is that all _______ are recorded and that the _ is properly paid or ____. Question also found in study guide

The ASB balance assertion of _____________________________ is paramount in the verification of long-term liabilities and determination that all liabilities are recorded. Question also found in study guide

The confirmation of notes payable to banks may use the _____________________________________ confirmation. Question also found in study guide

An ___________________________________ is an approximation of a financial statement element,item,or account. Question also found in study guide

Interest expense related to interest-bearing liabilities could be audited using analytical procedures.Describe how this might be done and how the results would be used.

_________________ is responsible for making estimates and should have a _ and _______________ designed to reduce the likelihood of material misstatements in them. Question also found in study guide

What is a compensating control? Describe what type of compensating controls might be implemented in the finance and investment cycle.

Quiz 10: Finance and Investment Cycle

When circumstances call for extended procedures,information on outstanding stock may be ________________________________________________. Question also found in study guide

__________________________________ of securities can prevent the use of company securities as _____________________________ for personal loans. Question also found in study guide

Investment accounting may be on the _____________________________ method,_____________________________ method,or _____________________________ method. Question also found in study guide

What are "off-balance-sheet" financing transactions? Explain and provide two or more examples.

The primary audit concern with the verification of long-term liabilities is that all _________________ are recorded and that the ___________________ is properly paid or ____________. Question also found in study guide

The ASB balance assertion of _____________________________ is paramount in the verification of long-term liabilities and determination that all liabilities are recorded. Question also found in study guide

The confirmation of notes payable to banks may use the _____________________________________ confirmation. Question also found in study guide

An ___________________________________ is an approximation of a financial statement element,item,or account. Question also found in study guide

Interest expense related to interest-bearing liabilities could be audited using analytical procedures.Describe how this might be done and how the results would be used.

_______________________________ is responsible for making estimates and should have a _____________________________ and _____________________________ designed to reduce the likelihood of material misstatements in them. Question also found in study guide

What is a compensating control? Describe what type of compensating controls might be implemented in the finance and investment cycle.

______ of securities can prevent the use of company securities as _ for personal loans. Question also found in study guide

Investment accounting may be on the _______________ method,_ method,or _______________ method. Question also found in study guide

The primary audit concern with the verification of long-term liabilities is that all _______ are recorded and that the _ is properly paid or ____. Question also found in study guide

_________________ is responsible for making estimates and should have a _ and _______________ designed to reduce the likelihood of material misstatements in them. Question also found in study guide