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Question: For each of the following misstatements in


For each of the following misstatements in property, plant, and equipment accounts, state an internal control that the client can implement to prevent the misstatement from occurring and a substantive audit procedure that the auditor can use to discover the misstatement:
1. Capitalizable assets are routinely expensed as repairs and maintenance, perishable tools, or supplies expense.
2. Acquisitions of property are recorded at incorrect amounts.
3. A loan against existing equipment is not recorded in the accounting records. The cash receipts from the loan never reached the company because they were used for the down payment on a piece of equipment now being used as an operating asset. The equipment is also not recorded in the records.
4. Tools necessary for the maintenance of equipment are stolen by company employees for their personal use.
5. Computer equipment that is abandoned or traded for replacement equipment is not removed from the accounting records.
6. Depreciation expense for manufacturing operations is charged to administrative expenses.
7. The asset lives used to depreciate equipment are less than reasonable, expected useful lives.
8. The value of equipment is impaired but has not been written down to fair value.



> 1. Points represent: A. 2% of the amount of the loan B. Monthly payments C. An additional cost of receiving the mortgage D. 3% up-front payment E. None of these 2. Ben Brown bought a home for $225,000. He put down 20%. The mortgage is at 6½ % for 30 yea

> Your client, EKB, Inc., prepared the following schedule for long-term debt for the audit of financial statements for the year ended December 31, 2019: Required: a. What type of evidence would you examine to support the beginning balances in the account

> In the audit of the Regional Transport Company, a large branch that maintains its own bank account, cash is periodically transferred to the central account in Cedar Rapids. On the branch account’s records, bank transfers are recorded as

> In March 2018, Toys R Us confirmed that it would close all of its U.S. stores after its plans to survive Chapter 11 bankruptcy proceedings failed. Visit the SEC’s Edgar database to locate the company’s (1) Form 10-K filing for the fiscal year ended Janu

> As a part of the audit of Ren Gold Manufacturing Company, a nonpublic company, management requests basic financial statements and separately, the same basic financial statements accompanied by additional information. Management informs you that the inten

> Callie Peters is completing the audit of MakingNewFriends.com for the year ended December 31, 2019. Callie has been the audit manager on this engagement for the past three years. MakingNewFriends.com issued stock two years ago but has had difficulty esta

> The field work for the June 30, 2019, audit of Tracy Brewing Company was finished August 19, 2019, and the completed financial statements, accompanied by the signed audit reports, were mailed September 6, 2019. In each of the highly material independent

> The amount of subjectivity involved in establishing fair value estimates can be complex for management responsible for making the fair value measurements and disclosures contained in financial statements. This is particularly true for fair value measurem

> In an audit of the Marco Corporation as of December 31, 2019, the following situations exist. No entries have been made in the accounting records in relation to these items. 1. During the year 2019, the Marco Corporation was named as a defendant in a sui

> Latner Shoe Distributor Company maintains a large portion of the shoe merchandise in 10 warehouses throughout the eastern United States. This ensures swift delivery service for its chain of stores. You are assigned alone to the Boston warehouse to observ

> Chen, CPA, is auditing the financial statements of a manufacturing company with a significant amount of trade accounts receivable. Chen is satisfied that the accounts are correctly summarized and classified and that allocations, reclassifications, and va

> Describe what is meant by the term “non-GAAP measure” and summarize requirements regarding the inclusion of non-GAAP measures in financial statements filed with the SEC.

> Before a company can begin trading on an exchange, it must meet certain initial requirements. The exchanges set their own standards for initial listing, which include minimum thresholds for the number of publicly traded shares, total market value, stock

> E-Antiques, Inc., is an Internet-based market for buyers and sellers of antique furniture and jewelry. The company allows sellers of antique items to list descriptions of those items on the E-Antiques website. Interested buyers review the website for ant

> The table below is an excerpt from Apple Inc.’s Statement of Shareholders’ Equity for its fiscal year ended September 30, 2017: Required: a. How would the auditor verify the balances as of September 24, 2016? b. What

> In an annual audit at December 31, 2019, you find the following transactions near the closing date: 1. Merchandise costing $625 was received on December 28, 2019, and the invoice was not recorded. You located it in the hands of the purchasing agent; it w

> McNeil Company, a medium-sized manufacturer of microwave ovens, has been an audit client for the past five years. McNeil Co. has been steadily growing and recently hired a new CEO, who has decided to increase the level of investments in financial instrum

> The following are sales, cost of sales, and inventory data for Aladdin Products Supply Company, a wholesale distributor of cleaning supplies. Dollar amounts are in millions. Required: a. Use a spreadsheet to calculate the following ratios: (1) Gross ma

> The Redford Corporation took out a 20-year mortgage on June 15, 2019, for $2,600,000 and pledged its only manufacturing building and the land on which the building stands as collateral. Each month subsequent to the issue of the mortgage, a payment of $17

> The ending general ledger balance of $568,000 in notes payable for the Kolman Production Company is made up of 20 notes to nine different payees. The notes vary in duration anywhere from 30 days to two years, and in amounts from $10,000 to $50,000. In so

> Auditors are required to understand the client’s industry and business but may not be experts in identifying the quantity and value of certain inventory items. For example, consider observing a physical inventory and testing inventory valuation for a cli

> Items 1 through 7 are questions typically found in a standard internal control questionnaire used by auditors to obtain an understanding of internal control for notes payable. In using the questionnaire for a client, a “yes” response indicates a possible

> Assume that a sample of 100 units was obtained in sampling the inventory in Question 17-10. Assume further that the following three misstatements were found: Calculate the overstatement bound for the population. Draw audit conclusions based on the resu

> Following are audit procedures commonly performed in the inventory and warehousing cycle for a manufacturing company: 1. Account for a sequence of raw material requisitions and examine each requisition for an authorized approval. 2. Trace the recorded ad

> The following are audit procedures in the sales and collection cycle: 1. Foot the aged trial balance using audit software and compare the total with the general ledger. 2. Match sales invoices with subsequent cash receipts using audit software. 3. Examin

> You have been engaged for the audit of the Y Company for the year ended December 31, 2019. The Y Company is in the wholesale chemical business and makes all sales at 25 percent over cost. Following are portions of the client’s sales and

> As a part of your clerical tests of inventory for Martin Manufacturing, you have tested about 20 percent of the dollar items and have found the following exceptions: 1. Pricing errors: 2. Differences located in comparing last year’s c

> Below are four independent client scenarios: 1. Food Giant is a regional grocery store chain located in the Pacific Northwest. Rather than operate a company-owned distribution center, Food Giant uses five different independent storage warehouse companies

> Your client, Ridgewood Heating and Cooling, specializes in residential air conditioning and heating installations. The company maintains an inventory of air conditioning units, furnaces, and air handling ductwork. The client has provided the following se

> The following audit procedures are typical of those found in auditing the payroll and personnel cycle: 1. Examine owner approval of rates of pay and withholdings. 2. Examine evidence that payroll hours and wage rates are verified by an independent person

> The following misstatements are included in the inventory and related records of Westbox Manufacturing Company: 1. When raw material acquisitions were recorded, the improper unit price was included in the perpetual inventory master file. Therefore, the i

> You are part of the engagement team for the audit of Suzuki Manufacturing for the year ended December 31, 2019, and are responsible for auditing the acquisition cycle. Download the Excel file for the problem from the textbook website, which contains a wo

> As part of the June 30, 2019, audit of accounts payable of Milner Products Company, the auditor sent 22 confirmations of accounts payable to vendors in the form of requests for statements. Four of the statements were not returned by the vendors, and five

> What type of report might a service organization use as a marketing tool to provide potential customers information about the internal controls related to security at the service organization?

> Chief executive officer compensation can be a material amount and is often scrutinized by regulators, analysts, competitors, and investors. For CEOs of publicly traded companies, compensation can consist of salary, bonus, stock option grants, or other st

> You are auditing the financial statements of Austin Software Company, which is a fast-growing software development company. As part of the company’s strategy, management has been aggressively pursuing acquisitions of other companies. Some of the prior ac

> The following are various audit procedures performed in the audit of the acquisition and payment cycle and accounts payable: 1. Foot the acquisitions journal for the month of August and trace postings to general ledger and accounts payable master file. 2

> The following are steps in the methodology for designing tests of controls, substantive tests of transactions, and tests of details of balances for the payroll and personnel cycle: 1. Design tests of details of balances for the payroll and personnel cycl

> Tanvi Ghose is auditing payroll accruals for a manufacturing company. The client has accrued payroll taxes, accrued vacation pay, and accrued bonuses for salespersons as of the end of the fiscal year. Ghose performed the following audit procedures: 1. Co

> The following misstatements are included in the accounting records of Newcomb & Company: 1. Direct labor was unintentionally charged to job 620 instead of job 602 by the payroll clerk when he key-entered the labor distribution sheets. Job 602 was complet

> Following are some of the tests of controls and substantive tests of transactions procedures often performed in the payroll and personnel cycle. (Each procedure is to be done on a sample basis or using audit software.) 1. Examine the time card for the ap

> Items 1 through 9 are selected questions typically found in internal control questionnaires used by auditors to obtain an understanding of internal control in the payroll and personnel cycle. In using the questionnaire for a client, a “yes” response to a

> This problem requires you to research the disclosure requirements for fixed assets using the FASB Codification at www.fasb.org. Access to the FASB Codification requires that your educational institution be enrolled in the FASB academic access program or

> The following auditing procedures were performed in the audit of accounts payable: 1. Obtain a list of accounts payable. Re-add and compare with the general ledger. 2. Trace from the general ledger trial balance and supporting documentation to determine

> Describe the key difference between a Type 1 and Type 2 SOC 1 report.

> Your client, Schroeder Manufacturing Co., provided the following schedule of property, plant, and equipment for the year ended June 30, 2019. Balances have been agreed to the general ledger. As part of the audit, the in-charge has asked you to perform pr

> Your client, Edgartown Corporation, provided the following schedule of land, buildings, and equipment for the audit of financial statements for the year ended December 31, 2019: Required: a. What type of evidence would you examine to support the beginn

> The following audit procedures were planned by Jack Kaguri, CPA, in the audit of the acquisition and payment cycle for DeWitt Products, Inc.: 1. Review the acquisitions journal for large and unusual transactions. 2. Examine invoices and related shipping

> The following types of internal controls are commonly used by organizations for property, plant, and equipment: 1. Written policies exist and are known by accounting personnel to differentiate between capitalizable additions, freight, installation costs,

> Assume you performed sampling for an accounts receivable population with a recorded population amount of $2,000,000. Tolerable misstatement is set at $100,000 for the test, and there are no individually significant accounts greater than $100,000. Several

> The Broughton Cap Company requires that prenumbered receiving reports be completed when purchased inventory items arrive in the receiving department. At the time of receipt, the receiving clerk writes the date of receipt on the receiving document. The la

> The following audit procedures are included in the audit program for the audit of the financial statements of Golden State Overnight Express: 1. Select a sample of acquisitions from the acquisitions journal and perform the following: a. Vouch the transac

> Questions 1 through 9 are typically found in questionnaires used by auditors to obtain an understanding of internal control in the acquisition and payment cycle. In using the questionnaire for a client, a “yes” response to a question indicates a possible

> Makoto Auto Parts sells new parts for foreign automobiles to auto dealers. Company policy requires that a prenumbered shipping document be issued for each sale. At the time of pickup or shipment, the shipping clerk records the date on the shipping docume

> Describe the five Trust Services categories.

> The following are the nine balance-related audit objectives, seven tests of details of balances for accounts receivable, and six tests of controls or substantive tests of transactions for the sales and collection cycle: Test of Details of Balances, Tes

> You are evaluating the results of a nonstatistical sample of 85 accounts receivable confirmations for the Bohrer Company. Information on the sample and population are included below. Tolerable misstatement for accounts receivable confirmation sampling is

> You are planning to use nonstatistical sampling to evaluate the results of accounts receivable confirmation for the Meridian Company. You have already performed tests of controls for sales, sales returns and allowances, and cash receipts, and they are co

> The following are common tests of details of balances or substantive analytical procedures for the audit of accounts receivable: 1. Select 20 customer accounts from the accounts receivable master file and trace to the aged accounts receivable listing to

> The Salah Company sells electronics equipment and has grown rapidly in the last year by adding new customers. The audit partner has asked you to evaluate the allowance for doubtful accounts at December 31, 2019. Comparative information on sales and accou

> Describe the purpose of obtaining a cutoff bank statement or obtaining online access to the client’s bank activity after year end.

> Describe how electronic confirmation of cash balances through third-party intermediaries can improve the cash confirmation process.

> How would an auditor test the realizable value audit objective for a financial instrument classified as a level 3 fair value estimate?

> State the most important factors affecting the sample size in confirmations of accounts receivable.

> Explain how expense account analysis relates to the tests of controls and substantive tests of transactions that the auditor has already completed for the acquisition and payment cycle.

> You have been asked to provide assurance on information contained in New Dominion’s Corporate Sustainability Report. What standards would you use to perform this engagement?

> Five months after issuing an unqualified audit opinion and an unqualified opinion on internal controls for the audit of the year ended December 31, 2019, for a large publicly traded client, the client and the auditor become aware of a material misstateme

> Identify three tests of controls or substantive tests of transactions in the payroll and personnel cycle that an auditor may perform using audit software.

> Identify and describe the transaction-related and balance-related presentation audit objectives. Explain how many of the procedures to test presentation objectives are integrated with tests performed in earlier stages of the audit.

> Explain how unacceptable results from tests of controls and substantive tests of transactions might impact the auditor’s planned reliance on tests of details of balances.

> Why do CPA firms sometimes use a combination of positive and negative confirmations on the same audit?

> Included in the December 31, 2019, inventory of the Wholeridge Supply Company are 2,600 deluxe ring binders in the amount of $5,902. An examination of the most recent acquisitions of binders showed the following costs: January 26, 2020, 2,300 at $2.42 ea

> Identify three asset accounts, three expense accounts, and three liability accounts typically associated with acquisition and payment cycle transactions.

> What is the importance of cash discounts to the client and how can the auditor verify whether they are being taken in accordance with company policy?

> Describe factors the auditor should consider in developing an expectation for depreciation while performing a substantive analytical procedure for depreciation expense.

> Explain why asset impairments are difficult to identify and audit. How might a client or auditor use a valuation specialist in determining the fair value of property and equipment?

> Explain the purpose of an attestation engagement and provide an example of an assertion a CPA could attest to.

> List the factors that should affect the auditor’s decision whether to analyze an account balance.

> Explain the difference between probabilistic and non-probabilistic sample selection.

> Which documents will be used to verify accrued property taxes and the related expense accounts?

> Describe why the use of MUS sampling provides little, if any, evidence related to the completeness balance-related audit objective.

> Describe two major changes a client may make to its supply-chain management system and discuss how those changes might increase or decrease the risk of material misstatement in specific accounts.

> Identify the nine accounts receivable balance-related audit objectives. For each objective, list one audit procedure.

> Explain why you agree or disagree with the following statement: “In most audits, it is more important to test carefully the cutoff for sales than for cash receipts.” Describe how you perform each type of test, assuming documents are prenumbered.

> Define the following terms: a. Acceptable risk of overreliance (ARO) b. Computed upper exception rate (CUER) c. Estimated population exception rate (EPER) d. Sample exception rate (SER) e. Tolerable exception rate (TER)

> The CPA examines all unrecorded invoices on hand as of February 28, 2020, the last day of the audit. Which of the following misstatements is most likely to be uncovered by this procedure? Explain. a. Accounts payable are overstated at December 31, 2019.

> Describe what is meant by an operational audit.

> Identify the key required reports of the Single Audit Act and OMB Uniform Guidance.

> Evaluate the necessity of following the practice described by an auditor: “In confirming bank accounts, I insist upon a response from every bank the client has done business with in the past 2 years, even though the account may be closed at the balance s

> What is the relationship between ARIA for tests of details of balances and ARO for tests of controls?

> How does stratifying an account balance population for sampling differ from using data analytics to audit the entire balance?

> What are the major differences between (a) audit sampling for tests of controls and substantive tests of transactions and (b) audit sampling for tests of details of balances?

> What is meant by the term level of assurance? How does the level of assurance differ for an audit of historical financial statements, a review, a compilation, and a preparation engagement?

> The following misstatements are sometimes found in the sales and collection cycle’s account balances: 1. Several cash receipts were posted to the incorrect customer accounts. 2. A shipment made in the subsequent period is recorded as a current period sal

> With advances in technology, an increasing number of data analysis techniques are being used on audit engagements to increase both efficiency and effectiveness. In an article titled “Introduction to Data Analysis for Auditors and Accountants,” published

> You are responsible for designing the audit of notes receivable for Hickory Appliance Retailers, which sells appliances and electronics to consumers for their homes or small businesses. Hickory Appliance has eight store locations in different cities loca

> Identify two types of substantive analytical procedures an auditor may perform in testing purchases.

> List three audit procedures that are primarily for the detection of fraud and state the type of fraud the procedure is meant to uncover.

> This problem is based on the JA Tires data that was introduced in early chapters. In problem 14-32 you used audit software to test the entire population of transactions for certain attributes. However, assume the following attributes will be tested for a

> The sampling data sheet below is missing selected information for six attributes involving tests of transactions for the sales and collection cycle. Required: a. Use Table 15-8 (p. 519) and Table 15-9 (p. 521) to complete the missing information for ea

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