Get premium membership and access revision papers, questions with answers as well as video lessons.
Got a question or eager to learn? Discover limitless learning on WhatsApp now -
Start Now!
Cms 303 Computer Auditing-(Saturday) Question Paper
Cms 303 Computer Auditing-(Saturday)
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
1
UNIVERSITY EXAMINATIONS: 2010/2011
EXAMINATION FOR THE BACHELOR OF COMMERCE
CMS 303 COMPUTER AUDITING-(SATURDAY)
DATE: DECEMBER 2011 TIME: 2 HOURS
INSTRUCTIONS: Answer Question ONE and any other TWO Questions
QUESTION ONE
a) CPAs may audit “around” or “through” computers in the examination of financial
statements of clients who utilize computers to process accounting data.
Required:
1. Describe the auditing approach referred to as auditing “around” the computer.
(3 marks)
2. Under what conditions does the CPA decide to audit “through” the computer
instead of “around” the computer? (3 marks)
3. In auditing “through” the computer, the CPA may use test data. (4 marks)
i. What is the test data test of controls approach?
ii. Why does the CPA use the test data approach?
4. How can the CPA be satisfied the client is actually using the computer program
tested to process its accounting data? (3 marks)
b) Explain the most likely use of computer-assisted audit tools and techniques (CAATTs) by
an auditor (3 marks)
c) Discuss the “sample audit review file (SARF)”and “systems control audit review file
(SCARF” (3 marks)
2
d) Assume an auditor estimates that 10,000 cash disbursement checks were issued during the
accounting period. If a computer application control, which performs a limit check for each
check request, is to be subjected to the auditor’s test data approach, what should the sample
include? (3 marks)
e) The tools and techniques applicable to auditing in a complex computer environment can be
classified as those that:
1. Operate online on a real-time basis with live data
2. Utilize simulated or dummy data
3. Operate on historical data
4. Utilize program analysis
Briefly, explain each tool or techniques shown above
(8 marks)
QUESTION TWO
The following are brief stories of actual employee thefts and embezzlements perpetrated using
computers.
Required:
What kind of control procedures were missing or inoperative that might have prevented or detected
the fraud?
a) An accounts payable terminal operator at a subsidiary company fabricated false invoices
from a fictitious vendor, and entered them in the parent company’s central accounts
payable/cash disbursement system. Five checks totaling ksh155,000 were issued to the
“vendor” (5 marks)
b) A bank provided custodial and recordkeeping services for several mutual funds. A proofand-
control department employee substituted his own name and account number for those
of the actual purchases of some shares. He used the computerized recordkeeping and
correction system to conceal and shift balances from his name and account to names and
accounts of the real investors when he needed to avoid detection because of missing
amounts in the investors’ accounts (5 marks)
c) The university computer system was entered. Vandals changed many students’ first name
to “Susan,” student telephone numbers were changed to the number of the university
3
president, grade point averages were modified, and some academic files were deleted
completely (5 marks)
d) A computer operator at a state-run horse race betting agency set the computer clock back
three minutes. After the race was won, he quickly telephoned bets to his girlfriend, an input
clerk at the agency, gave her the winning horse and the bet amount, and won every time!
(5 marks)
QUESTION THREE
Given the use of personal computers by many businesses, auditors must know about the potential
internal control weaknesses inherent in such an environment. Such knowledge is crucial if the
auditor is to make a proper assessment of the related control risk and to plan an effective and
efficient audit approach.
Required:
In the following case study, assume you are participating in the audit of Nairobi Appliance
Company and that the background information below has been obtained during the planning phase.
You have been asked to:
1) Consider the potential effects on internal control that have been introduced by the local
area network application (10 marks)
2) Assess how those internal control effects may alter the audit plan for the current year.
(10 marks)
Background information
Nairobi Appliance is a wholesale distributor of electric appliances. The company’s sales in each of
the last two years have been approximately $40 million. All accounting applications are handled at
the company’s corporate office.
Information-processing operations have historically centered on an on-site mainframe computer.
The computer applications include accounts payable and cash disbursements, payroll, inventory,
and general ledger. Accounts receivable and fixed asset records have been prepared manually in
the past. Internal controls in all areas have been considered strong in the last few years.
During the past year, financial management decided to automate the processing of sales, accounts
receivable, and fixed asset transactions and accounting. Management also concluded that
purchasing a personal computer and related available software was more cost effective than
increasing the mainframe computer capacity and hiring a second computer operator. The controller
4
and accounting clerks have been encouraged to find additional uses for the personal computer and
to” experiment” with it when they are not too busy.
The accounts receivable clerk is enthusiastic about the personal computer (PC), but the fixed asset
clerk seems somewhat apprehensive about it because he has no prior experience with computers.
The accounts receivable clerk explained that the controller had purchased a “very easy to use”
accounts receivable software application program for the PC, which enables her to input the daily
information regarding billing and receipts quickly and easily. The controller has added some
programming of his own to the software to give it better report-writing features.
During a recent demonstration, the accounts receivable clerk explained that the program required
her to input only the customer’s name and invoice amount in the case of billing, or the customer’s
name and check amount in the case of receipts. The computer then automatically updates the
respective customer’s account balance. At the end of every month, the accounts receivable trial
balance is printed and reconciled by the clerk to the general ledger balance, and the controller
reviews the reconciliation.
The fixed asset program also was purchased from an outside vendor. The controller indicated that
the software package had just recently been put on the market and that it was programmed to
compute tax depreciation based on recent changes in the tax laws. He also stated that, because of
the fixed asset clerk’s reluctance to use the computer, he had input all the information from the
fixed asset manual records. He indicated, however, that the fixed asset clerk would be responsible
for the future processing related to the fixed assets files and for generating the month-end and
year-end reports used to prepare related accounting entries.
The various accounts receivable and fixed asset disks are all adequately labeled by the type of
program or data file. They are arranged in an organized manner in a disk holder located near the
personal computer.
QUESTION FOUR
Clint Walker was examining the accounts receivable of Country Music, Ltd. Country Music’s
accounts receivable were recorded at ksh1,500,000. Based on past audits, Clint established
tolerable error at 10 percent of the recorded account balance and anticipated a very small level of
misstatement in Country Music’s accounts receivable (ksh50,000). Through his previous
assessments of audit risk, inherent risk, control risk, and analytical procedures risk, Clint
established a necessary risk of incorrect acceptance of 10 percent.
Required:
a) Calculate the sampling interval and sample size that would be used by Clint Walker in the
audit of Country Music (3 marks)
5
b) Reperform the calculations in a) above if Clint had established a risk of incorrect
acceptance of 1) 5 percent and 2) 20 percent. Based on your calculations, describe the
relationship between the necessary level of the risk of incorrect acceptance and the sample
size and sampling interval. (3 marks)
c) Note: Requirement c) is unrelated to requirements a) and b). If Clint Walker detected the
following four overstatements, determine the projected misstatement (4 marks)
RECORDED AUDITED SAMPLE
BALANCE BALANCE INTERVAL
3,500 1,750 8,000
1,000 200 8,000
12,000 10,000 8,000
5,000 4,000 8,000
d) Based on the results in c) above and using a 10 percent risk of incorrect acceptance,
calculate the upper error limit. (3 marks)
e) Reperform the calculation in d) above using a risk of incorrect acceptance of 1) 5 percent
and 2) 20 percent. Based on your calculation, describe the relationship between the
necessary level of the risk of incorrect acceptance and the upper error limit (3 marks)
f) Using a risk of incorrect acceptance of 1) 5 percent, 2) 10 percent, and 3) 20 percent, what
would Clint Walker’s conclusion be with respect to Country Music’s accounts receivable?
How do different levels of risk of incorrect acceptance influence the likelihood of
concluding that the account balance is fairly stated? (4 marks)
QUESTION FIVE
a) Why do you need know about CAATTs in relation to auditing a computerized accounting
system? What are the essential advantages of CAATTs? (5 marks)
b) Weyman Z. Wannamaker is the Chief Financial Officer (CFO) of Cogburn Company. He
prides himself on being able to manage the cash resources of the company to maximize the
interest expense. Consequently, on the second business day of each month, Weyman pays
6
down or draws cash on the company’s revolving line of credit at Barclays Bank in
accordance with his cash requirements forecast.
You are the auditor. You find the general ledger of notes payable on this line of credit as
shown below. You inquired at Barclays Bank and learned that Cogburn Company’s loan
agreement specifies payment on the first day of each month for the interest due on the
previous month’s outstanding balance at the rate of “prime plus 1.5 percent.” The bank
gave you a report that showed the prime rate of interest was 8.5 percent for the first six
months of the year and 8.0 percent for the last six months.
COGBURN COMPANY NOTES PAYABLE BALANCES
DATE BALANCE
Jan-01 150,000
Feb-01 20,000
Apr-01 225,000
May-01 285,000
Jun-01 375,000
Aug-01 430,000
Sep-01 290,000
Oct-01 210,000
Nov-01 172,000
Dec-01 95,000
Required:
a) Prepare an audit estimate of the amount of interest expense you expect to find as the
balance of the interest expense account related to these notes payable (3 marks)
b) Which of the types of analytical procedures did you use to determine this estimate?
(3 marks)
c) Suppose that you find that the interest expense account shows expense of ksh23,650 related
to these notes. What could be wrong? (3 marks)
d) Suppose that you find that the interest expense account shows expense of ksh24,400 related
to these notes. What could be wrong? (3 marks)
e) Suppose that you find that the interest expense account shows expense of ksh25,200 related
to these notes. What could be wrong? (3 marks)
More Question Papers
Popular Exams
Return to Question Papers