Question: Explain the difference between a customer’s

> 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.

> 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 sta

> 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

> 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

> Chris York, CPA, is considering the use of monetary unit sampling in examining the sales transactions and accounts receivable of Carter Wholesale Company. Required: a. How does the definition of the items in an accounts receivable population vary betwee

> In a monetary unit sample with a sampling interval of $20,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $2,000. Calculate the projected misstatement for this one item.

> The reliability factor table provides factors for as many as three computations when planning and evaluating the results of a monetary unit sample. Describe in general terms each of these computations.

> A monetary unit sample with a sampling interval of $2,000 includes an item with an audited value of $90. This value was $30 lower than the account’s book value. Calculate the tainting percentage for this account.

> “When no misstatements are found in MUS, the upper limit on misstatement is equal to zero.” Is this statement correct? Explain.

> A company has an inventory with a book value of $4,583,231, which includes 116 product lines and a total of 326,432 units. How many items compose this population for purposes of applying a monetary unit sampling plan? Explain.

> When using MUS, do auditors select sample items based on individual dollars, audit individual dollars, or both?

> “When using a systematic sample selection technique with monetary unit sampling, every account larger than the sampling interval will automatically be included in the sample.” Do you agree? Explain.

> List the factors affecting sample size in a MUS.

> Today you had lunch with your friend Sarah Teasdale. Sarah has worked with Zaird & Associates, CPAs, for about two years. You’ve been with Zaird for only nine months. You discussed with her your difficulties in getting jobs done in the budgeted number of

> Give two reasons audit work on cash is likely to be more extensive than might appear to be justified by the relative amount of the balance sheet figure for cash.

> In selecting items for examination, an auditor considered three alternatives: (a) random number table selection, (b) systematic selection, and (c) random number generator selection. Which, if any, of these methods would lead to a random sample if properl

> On October 21, Rand & Brink, a CPA firm, was retained by Suncraft Appliance Corporation to perform an audit for the year ended December 31. A month later, James Minor, president of the corporation, invited the CPA firm’s partners, George Rand and Alice B

> You have worked with Zaird & Associates, CPAs, for a little more than a year and are beginning your second audit of Universal Air (UA). This year you even have an assistant reporting to you—Jane McClain. Jane has come to you with a concern. She noticed t

> You are an assistant auditor with Zaird & Associates, CPAs. Universal Air (UA), your fifth audit client in your eight months with Zaird, is a national airline based in your hometown. UA has continued to grow while remaining healthy financially over the e

> Baker, CPA, was engaged to audit Mill Company’s financial statements for the year ended December 31, 200X. After obtaining an understanding of Mill’s internal control, Baker decided to obtain audit evidence about the effectiveness of both the design and

> An improper cutoff of transactions around year-end occurs when journal entries are recorded in the wrong year. In this case, you are to determine the effects of various cutoff misstatements relating to recording cash receipts received on accounts receiva

> Listed below are eight interbank cash transfers for Steven Smith Co., indicated by the letters a through h, for late December 20X1 and early January 20X2. For each of the transfers a through h, (1) indicate whether cash is understated, overstated, or

> Ming, CPA, is engaged to audit the financial statements of Wellington Sales, Inc., for the year ended December 31, 20X0. Ming obtained and documented an understanding of the client’s business and environment, including internal control

> The July 31, 20X0, general ledger trial balance of Aerospace Contractors, Inc., reflects the following accounts associated with receivables. Balances of the accounts are after all adjusting journal entries proposed by the auditors and accepted by the cli

> You are conducting an annual audit of Granite Corporation, which has total assets of approximately $1 million and operates a wholesale merchandising business. The corporation is in good financial condition and maintains an adequate accounting system. Gra

> During your examination of the financial statements of Martin Mfg. Co., a new client, for the year ended March 31, 20X0, you note the following entry in the general journal dated March 31, 20X0: Your review of the contract for sale between Martin and A

> An audit client that has never before invested in securities recently acquired more than a million dollars in cash from the sale of real estate no longer used in operations. The president intends to invest this money in marketable securities until such t

> The following are typical questions that might appear on an internal control questionnaire for accounts receivable: 1. Are sales invoices checked for proper pricing, terms, and clerical accuracy? 2. Are shipping documents prenumbered and all numbers acco

> Halston Toy Manufacturing Co. introduced a number of new products in the last quarter of the year. The company has a liberal return policy allowing retail customers to return products within 120 days of purchase. a. Describe the audit problem indicated b