The primary objective of auditing is to add credibility to the financial statements prepared by management

ACCOUNTING

AUDITING - True or False / Multiple Choice / Matching Type

1. The primary objective of auditing is to add credibility to the financial statements prepared by management. True or False

2. Auditing is not possible in the absence of verifiable data. True or False

3. Compliance with “Statements on Auditing Standards” is mandatory for all auditors. True or False

4. The training called for by the first general standard comes solely from practical experience. True or False

5. The second general standard likens the auditor’s role in an audit to the role of an attorney in a legal case. True or False

6. The susceptibility of an assertion to a material misstatement, assuming that there are no controls, is: (Multiple Choice)

7. The risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated is: (Multiple Choice)

8. The risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by the entity’s internal controls is: (Multiple Choice)

9. The least costly form of testing is usually: (Multiple Choice)

10. In practice, the use of analytical procedures has proven to be: (Multiple Choice)

11. Assume the preliminary audit strategy was based on a planned assessed level of control risk at a low level. Based on the final assessed level of control risk, the auditor would need to move substantive tests from interim to year-end and increase the extent of tests of details in order to accommodate a lower acceptable level of detection risk if: (Multiple Choice)

12. Tests of details of transactions generally use evidence from: (Multiple Choice)

13. The auditor would prepare a bank reconciliation using the bank statement obtained from the client and verify major reconciling items and mathematical accuracy when detection risk is: (Multiple Choice)

REQUIRED: For the following specific audit procedures, indicate the assertion that is being tested. Use the following letters, placing your response in the space provided.
A. Existence or occurrence
B. Completeness
C. Valuation or allocation
D. Rights and obligations
E. Presentation and disclosure

14. Examine consignment agreements.

15. Examine check register for the month following year end for disbursements relating to the audit period.
16. Select high dollar items from the perpetual inventory records for inspection/counting during the physical inventory.

17. Select vendor accounts with high activity during the year, and low balance at year-end for confirmation.

18. Examine vehicle registration forms to determine the registered owner.

19. Measuring the amount of monetary errors in transactions and balances is a primary purpose of substantive tests. True or False

20. The extent of substantive tests, in practice means the length of time during which substantive tests are to be performed. True or False

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Selected balances from a company's financial statements are shown below. Calculate the following ratios for 2012

ACCOUNTING

Selected balances from a company's financial statements are shown below. Calculate the following ratios for 2012:

(a) accounts receivable turnover
(b) inventory turnover
(c) days' sales uncollected
(d) days' sales in inventory
(e) profit margin.
(f) return on total assets.

December 31 December 31
For the 2012 2011 Year 2012
Accounts receivable……………………. $ 27,000 $ 24,000
Merchandise inventory………………. 25,000 20,000
Total assets…………………………………. 296,000 244,000
Accounts payable………………………… 26,000 32,000
Salaries payable…………………………… 3,000 4,400
Sales (all on credit)………………………. $312,000
Cost of goods sold……………………….. 165,600
Salaries expenses………………………… 48,000
Other expenses…………………………… 75,000
Net income………………………………….. 24,000

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Sepracor, Inc., a U.S. drug company, reported the following information

ACCOUNTING

International Reporting Case

Sepracor, Inc., a U.S. drug company, reported the following information. The company prepares its financial statements in accordance with U.S. GAAP.

2007 (,000)
Current Liabilities $ 554,114
Convertible Subordinated Debt 648,020
Total Liabilities 1,228,313
Stockholders’ Equity 176,413
Net Income 58,333

Analysts attempting to compare Sepracor to international drug companies may face a challenge due to differences in accounting for convertible debt under iGAAP. Under IAS 32, Financial Instruments, convertible bonds, at issuance, must be classified separately into their debt and equity components based on estimated fair value.

INSTRUCTIONS:

(a) Compute the following rations for Sepracor, Inc. (assume that year-end balances approximate annual averages.)

(1) Return on assets.
(2) Return on stockholders equity
(3) Debt to asset ratio

(b) Briefly discuss the operating performance and financial position of Sepracor. Industry averages for these ratios in 2007were: ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis would you make an investment in the company's 5% convertible bonds? Explain.

(c) Assume you want to compare Sepracor to an international company, like Bayer (which prepares its financial statements in accordance with iGAAP). Assuming that the fair value of the equity components of Sepracor's convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Sepracor and Bayer

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