Among specific procedures that contribute to good internal control over the business processes related to accounts receivable are (a) the approval of uncollectible account write-offs and credit memoranda by an executive and (b) the sending of monthly statements to all customers. State three other procedures conducive to strong internal control.
> Select the best answer for each of the questions below and explain fully the reason for your selection. a. To assure accountability for fixed-asset retirements, management should implement an internal control that includes: (1) Continuous analysis of mis
> Andy Watson, CPA, is a senior auditor on the audit of Carlson, Inc. Andy is reviewing the results of analytical procedures related to inventory. For results (a), (b), and (c), select the explanation that is most likely to be consistent with the change de
> This simulation, also available online, presents an Analytical Procedures/Risk Assessment Analysis document prepared by two members of your audit team—your responsibility is to evaluate various statements included in that document. Back
> a. An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete inventory to address: (1) Valuation. (2) Rights. (3) Existence. (4) Presentation. b. An auditor selects items from the client’s inventory listi
> Auditors often observe the counting of their clients’ inventories. You are working in the area of inventory with a new assistant on the audit of Jilco Inc. The assistant has a number of questions concerning inventory and the observation of inventory. Ple
> The nonpublic company attestation standards provide guidance for three basic types of engagements. Required: a. Describe these three types of engagements. b. Describe the types of procedures performed for each of these three types of engagements. c. Dis
> Other types of assurance services provided by CPAs have developed as a natural extension of the audit function. a. Explain what is meant by the term assurance services. b. Describe the forces that have caused a demand for other types of assurance service
> Andrew Wilson, CPA, has assembled the financial statements of Texas Mirror Co., a small nonpublic company. He has not performed an audit of the financial statements in accordance with generally accepted auditing standards. Wilson is confused about the st
> In connection with a public offering of first-mortgage bonds by Guizzetti Corporation, the bond underwriter has asked Guizzetti’s CPAs to furnish it with a comfort letter giving as much assurance as possible on Guizzetti’s unaudited financial statements
> You have been engaged by the management of Pippin, Inc., a nonpublic company, to review the company’s financial statements for the year ended December 31, 20XX. To prepare for the engagement, you consult the Statements on Standards for Accounting and Rev
> Occasionally, public accounting firms are engaged to report on specified elements, accounts, and items of financial statements. Required: a. Discuss types of reports that may be provided for a nonpublic company for specified elements, accounts, and item
> Schmich and Schmich, CPAs, in Minneapolis, Minnesota, has completed the audit of XYM Co. for the year ended December 31, 20X1. The financial statements for this nonpublic client are prepared following the cash basis of accounting. Note 7 to the financial
> For each of the independent situations described below select the appropriate inherent risk factor described and the effect of the inherent risk factor on the company’s net income using the following: Inherent Risk Factor Effect o
> You have been asked by Ambassador Hardware Co., a small nonpublic company, to submit a proposal for the audit of the company. After performing an investigation of the company, including its management and accounting system, you advise the president of Am
> The CPA firm of Webster, Warren, & Webb LLP issued an adverse opinion on the internal control of Alexandria Financial, a public company, due to a material weakness. The weakness involved the lack of sufficient accounting expertise to evaluate and adopt a
> Tests of controls are ordinarily performed for both financial statement audits and internal control audits. a. What is the objective of tests of controls when performed for internal control audits? b. What is the objective of tests of controls when perfo
> The CPA firm of Carson & Boggs LLP is performing an internal control audit in accordance with PCAOB AS 2201. The partner in charge of the engagement has asked you to explain the process of determining which controls to test. Describe the process, present
> While performing your audit of Williams Paper Company, you discover evidence that indicates that Williams may not have the ability to continue as a going concern. a. Discuss types of information that may indicate substantial doubt about a client’s abilit
> Lando Corporation is a domestic company with two wholly owned domestic subsidiaries. Michaels, CPA, has been engaged to audit the financial statements of the parent company and one of the subsidiaries and to act as the group auditors. Thomas, CPA, has au
> Rowe & Myers audits the financial statements of Dunbar Electronics. During the audit, Ross & Myers engaged Jones & Abbot, a Canadian public accounting firm, as a component auditor to audit Dunbar’s wholly owned Canadian subsidiary. Required: a. Should R
> An accountant of an audit client made the following statement: It is important to read the notes to financial statements, even though they are presented in technical language and are incomprehensible. Auditors may reduce their exposure to third-party lia
> Linda Tanner, CPA, is auditing the Carson Company. For the current year, Carson is presenting December 31, 20X5, financial statements with comparative financial statements for the year ended December 31, 20X4. In the prior year audit, Linda identified an
> On July 27, 20X0, Arthur Ward, CPA, issued an unqualified audit report on the financial statements of Dexter Company for the year ended June 30, 20X0. Two weeks later, Dexter Company mailed annual reports, including the June 30 financial statements and W
> During the year 1 audit of Cellenting Co., the auditor performed various procedures relating to inventory. Match each of the following procedures with the description below: Audit procedures ∙∙ Analytical procedure &ac
> Nolan Manufacturing Company retains you on April 1 to perform an audit for the fiscal year ending June 30. During the month of May, you make extensive studies of internal control over inventories. All goods purchased pass through a receiving department u
> What documentary evidence is usually available to the auditors in the client’s office to substantiate the legal ownership of property, plant, and equipment?
> The auditors’ verification of plant and equipment is facilitated by several factors not applicable to audit work on current assets. What are these factors?
> Once the auditors have completed their test counts of the physical inventory, will they have any reason to make later reference to the inventory tags used by the client’s employees in the counting process? Explain.
> For what purposes do the auditors make and record test counts of inventory quantities during their observation of the taking of the physical inventory? Discuss.
> What are the purposes of the auditors’ observation of the taking of the physical inventory? (Do not discuss the procedures or techniques involved in making the observation.)
> What part, if any, do the independent auditors play in the planning for a client’s physical inventory?
> The client’s cost accounting system is often an important part of the CPAs’ audit of the financial statements of a manufacturing company. For what purposes do the auditors consider the cost accounting system?
> Do you believe that the normal review of purchase transactions by the auditors should include examination of receiving reports? Explain.
> What segregation of duties would you recommend to attain maximum internal control over purchasing activities in a manufacturing concern?
> Enumerate specific steps to be taken by the auditors to ascertain that a client’s inventories have not been pledged or subjected to a lien of any kind.
> What are the three major factors that determine the sample size for an attributes sampling plan?
> Explain the significance of the purchase order to adequate internal control over purchase transactions.
> The controller of a new client company informs you that most of the inventories are stored in bonded public warehouses. He presents warehouse receipts to account for the inventories. Will careful examination of these warehouse receipts constitute adequat
> How do the independent auditors use the client’s backlog of unfilled sales orders in the examination of inventories?
> “If the auditors can determine that all goods in the physical inventory have been accurately counted and properly priced, they will have discharged fully their responsibility with respect to inventory.” Evaluate this statement.
> Darnell Equipment Company uses the LIFO method of valuation for part of its inventories and weighted-average cost for another portion. Would you be willing to issue an unqualified opinion under these circumstances? Explain.
> “A well-prepared balance sheet usually includes a statement that the inventories are valued at cost.” Evaluate this quotation.
> Hana Ranch Company, which has never been audited, is asked on October 1 by its bank to arrange for a year-end audit. The company retains you to make this audit and asks what measures, if any, it should take to ensure a satisfactory year-end physical inve
> A client company wishes to conduct its physical inventory on a sampling basis. Many items will not be counted. Under what general conditions will this method of taking inventory be acceptable to the auditors?
> What charges and credits may be disclosed in the auditors’ analysis of the Cost of Goods Sold account of a manufacturing concern?
> What is meant by a “bill and hold” scheme?
> An auditor is sampling with replacement and, by chance, a particular account has been selected twice. Should it be included two times in the sample?
> When perpetual inventory records are maintained, is it necessary for a physical inventory to be taken at the balance sheet date? Explain.
> Many auditors consider the substantiation of the figure for inventory to be a more difficult and challenging task than the verification of most other items on the balance sheet. List several specific factors that support this view.
> The accounts receivable section of the accounting department in Wind Power, Inc., maintains subsidiary ledgers that are posted from copies of the sales invoices transmitted daily from the billing department. How may the accounts receivable section be sur
> Comment on the following: “Any voided prenumbered shipping documents should be properly canceled and disposed of to eliminate any possibility of improper shipment of goods.”
> The controller of a new client operating a medium-size manufacturing business complains to you that he believes the company has sustained significant losses on several occasions because certain sales invoices were misplaced and never recorded as accounts
> Criticize the following statement: “Because the sales department maintains relationships with customers, personnel from that department should grant credit and decide when accounts should be written off as uncollectible.”
> State briefly the objective of the billing process. What important document is created by the billing department?
> An inexperienced clerk assigned to the preparation of sales invoices in a manufacturing company became confused as to the nature of certain articles being shipped, with the result that the prices used on the invoices were far less than called for in the
> Describe a retrospective review of an accounting estimate. With respect to the audit of revenue, what is the purpose of performing this review?
> Which technique results in a smaller sample size, sampling with or without replacement?
> Give an example of a type of receivable originating without arm’s-length bargaining. Comment on the presentation of such receivables in the balance sheet.
> Cite various procedures auditors employ that might lead to the detection of an inadequate allowance for doubtful accounts receivable.
> In the examination of credit memoranda covering allowances to customers for goods returned, how can the auditors ascertain whether the customer actually did return merchandise in each case in which accounts receivable were reduced?
> In connection with an audit, what are the purposes of a review of sales returns and allowances subsequent to the balance sheet date?
> Explain why the audit of revenue and receivables may present the auditors with significant audit risk.
> In your first audit of Hydro Manufacturing Company, a manufacturer of outboard motors, you discover that an unusually large number of sales transactions were recorded just before the end of the fiscal year. What significance would you attach to this unus
> A CPA firm wishes to test the client’s sales cutoff at June 30, 20X0. Describe the steps that the auditors should include in this test.
> What alternative auditing procedures may be undertaken in connection with the confirmation of accounts receivable where customers having substantial balances fail to reply after second request forms have been mailed directly to them?
> Several accounts receivable confirmations have been returned with the notation, “Verification of vendors’ statements are no longer possible because of our data processing system.” What alternative auditing procedures could be used to verify these account
> In selecting accounts receivable for confirmation, the auditors discover that the client company’s records show the addresses of many individual customers to be post office boxes. What should be the auditors’ reaction to this situation?
> Explain the meaning of sampling without replacement and sampling with replacement.
> State briefly the audit objectives that are addressed by the following audit procedure: “Confirm accounts receivable and notes receivable by direct communication with debtors.”
> The confirmation of accounts receivable is an important auditing procedure. Should the formal request for confirmation be made by the client or by the auditors? Should the return envelope be addressed to the client, to the auditors in care of the client,
> What auditing procedures, if any, are necessary for notes receivable but not required for accounts receivable?
> Your review of notes receivable from officers, directors, stockholders, and affiliated companies discloses that several notes of small amounts were written off to the allowance for uncollectible notes during the year. Have these transactions any special
> In the audit of an automobile agency, you find that installment notes received from the purchasers of automobiles are promptly discounted with a bank. Would you consider it necessary to confirm these notes by a communication with the bank? With the maker
> Explain the difference between a customer’s order and a sales order, as these terms might be used by a manufacturing company making sales on credit.
> Describe the audit implications of the Check Clearing for the 21st Century Act.
> Among the departments of J-R Company are a purchasing department, receiving department, accounting department, and finance department. If you were preparing a flowchart of a voucher system to be installed by the company, in which department would you sho
> State one broad general objective of internal control over each of the following: cash receipts, cash disbursements, and cash balances.
> The auditors’ work on cash may include preparing a description of controls and performing tests of controls. Which of these two steps should be performed first? What is the purpose of tests of controls?
> Explain briefly the term systematic selection as used in auditing and indicate the precautions to be taken if a random sample is to be obtained. Is systematic selection applicable to unnumbered documents? Explain.
> Explain how a lockbox system contributes to internal control over cash receipts.
> It is sometimes said that audit work on cash is facilitated by the existence of two independent records of the client’s cash transactions, which are available for comparison by the auditors. Identify these two independent records.
> “If the auditors discover any evidence of employee fraud during their work on cash, they should extend their investigation as far as necessary to develop a complete set of facts, regardless of whether the amounts involved are or are not material.” Do you
> If a security or derivative is not marketable, how do the auditors typically obtain evidence about the fair value of the instrument?
> How can the auditors determine that all dividends applicable to marketable securities owned by the client have been received and recorded?
> In what ways can the audit of financial investments present special risks requiring specialized skill and knowledge?
> Salvador Corporation made an investment in Letter.com, Inc., in exchange for 100,000 options to purchase Letter.com’s stock at $20 per share. Since the stock options are not marketable, Salvador’s management has this derivative valued by a security appra
> Keystone Computers & Networks, Inc. (KCN), has 933 accounts receivable, with a total book value of $10,235,457. From that population, Adams, Barnes & Co. (ABC), CPAs, selected a sample of 260 accounts (142 unique accounts) for confirmation for the year e
> Assume that you have been assigned to the audit of Keystone after audit planning has occurred. Review the planning information in Appendix 6C of Chapter 6 and the audit plan for the accounts receivable and revenue (Schedule B-6). The manager on the engag
> What information should be noted by the auditors during their inspection of securities on hand?
> In Part III (Appendix 11B) of the audit case, the audit staff of Adams, Barnes & Co. identified specific revenue risks on Schedule RA-12. However, the “Summary of Audit Approach” section is incomplete (in process) for risks 2 and 3. Required: Review the
> Bill Pei, CPA, is about to begin his audit of the accuracy of his client’s accounts receivable. Based on experience, he expects that approximately 1 percent of the client’s 40,000 accounts have errors. The total book v
> Edwards has decided to use monetary unit sampling (MUS) in the audit of a client’s accounts receivable balance. Few, if any, misstatements of the account balance are expected. Edwards plans to use the following MUS table: Required: a.
> The following is a computer printout generated by audit software using monetary unit sampling: The software uses factors from the following MUS table: Answer the following questions relating to the above worksheet: WINZ CORPORATION Receivable S
> Reply as to whether you believe the following statements are correct (C) or incorrect (I) concerning monetary unit sampling. a. The size of a monetary unit sample is not based on the estimated variation of audited amounts. b. MUS results in a stratified
> As indicated on Schedule IC-15, the auditors decided to apply audit sampling to three controls for the revenue and cash receipts cycle. Required: a. Describe the characteristic that a control must possess in order to be tested with audit sampling. b. As
> As indicated on the control risk assessment working paper Schedule IC-20 (its last section prior to the Assessed Level of Control Risk), the auditors identified two weaknesses in internal control over the revenue cycle of KCN. Describe the implications o
> A summary of the controls for the revenue and cash receipts cycle of Keystone Computers & Networks, Inc., appears in this appendix. a. For the following three controls over sales, indicate one type of error or fraud that the control serves to prevent
> The auditors wish to test the valuation of accounts receivable in the audit of Desert Enterprises of Bullhead City. The client has $500,000 of total recorded receivables, composed of 850 accounts. The auditors have determined the following: (1) Project
> The auditors of Dunbar Electronics want to limit the risk of material misstatement in the valuation of inventories to 2 percent. They believe that there exists a 50 percent risk that a material misstatement could have bypassed the client’s internal contr
> A well-financed audit client of your CPA firm invests large amounts in marketable securities. As part of its internal control, the company uses a monthly report of securities transactions. The report is prepared by the controller and presented to the inv
