Question: This simulation, also available online, presents an
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. Background financial and other information on Keystone is included in Appendix 6C of Chapter 6. You are working on the audit of Keystone Computers & Networks, Inc. (Keystone), a calendar year-end nonissuer. The two associates assigned to the engagement provided a document with a number of observations relating to analytical procedures/risk assessment for the audit of year 5. As the audit senior for this engagement, it is your responsibility to review the document and exhibits. // CALLOUT LIST #1 Choose an option below: a. [Original text] indicates that the allowance for doubtful accounts seems adequate as of year-end and that no adjusting entry is necessary. b. [Delete text] (entire sentence) c. should be written off as of year-end with a debit to the allowance for doubtful accounts and a credit to accounts receivable and we should perform further procedures on the adequacy of the allowance for doubtful accounts. d. should be written off as of year-end with a debit to bad debt expense and a credit to the allowance for doubtful accounts and we should perform further procedures on the adequacy of the allowance for doubtful accounts. e. should be written off as of year-end with a debit to bad debt expense and a credit to accounts receivable and we should perform further procedures on the adequacy of the allowance for doubtful accounts. f. indicates that Keystone should never sell to the customers that compose that balance. CALLOUT LIST #2 Choose an option below: a. [Original text] Cash—First National Bank. b. Software development cost. c. Long-term debt. d. Accounts receivable—trade. e. Line of credit. CALLOUT LIST #3 Choose an option below: a. [Original text] exceed current market values of the items. b. equal the most recent purchase price of the items. c. equal or are less than current market prices of the items. d. are less than extended values of comparable items. e. exceed costs calculated using the FIFO method. CALLOUT LIST #4 Choose an option below: a. [Original text] we should determine that all “slow moving†items are valued at zero. b. [Delete text] (replace semicolon with a period). c. we should calculate turnover ratios of inventory items. d. we must test every extension of quantity on hand times cost. e. we should combine our procedures here with those relating to leasehold improvements. f. the increase in software development cost is inconsistent with this change. CALLOUT LIST #5 Choose an option below: a. [Original text]. We should carefully inspect items for pledging status during the count of inventory. b. (Delete text] c. We should ask the president whether any inventory items are pledged. d. We should examine cash confirmations and debt agreements. e. We should emphasize subsequent event procedures. CALLOUT LIST #6 Choose an option below: a. [Original text] analyze the client’s aging of receivables. b. calculate inventory turnover rates for items sold to accounts now past due. c. confirm all accounts that are not overdue as of year-end. d. vouch sales shortly before year-end. e. vouch sales shortly after year-end. CALLOUT LIST #7 Choose an option below: a. [Original text] vouch the cash disbursement. b. [Delete text] c. add to client representations letter that he guarantees repayment of the loan according to its terms. d. determine that the loan was approved by all shareholders. e. determine that the loan’s stated rate exceeds the expected prime rate during the period of the loan. f. vouch the cash receipt. CALLOUT LIST #8 Choose an option below: a. [Original text] It would seem that the client has a policy of making no depreciation entries related to acquisitions or disposals during the year and we should consider the propriety of this policy. b. [Delete text] c. It is likely that the client extended the lives of assets and arrived at this amount of depreciation expense. d. The client must depreciate acquisitions items as per GAAP guidelines, ignoring salvage values, for estimated asset lives. e. We should inquire of the client as to details of this year’s depreciation calculation and entry. f. We should pass on this as any difference is clearly immaterial and inconsequential. CALLOUT LIST #9 Choose an option below: a. [Original text] Vouch invoices in support of the change in leasehold improvements. b. [Delete text] c. Compare amortization period of leasehold improvements with accounts receivable aging. d. Consider the reasonableness of amortization of leasehold improvements during the year. e. Send confirmation requests on the leasehold improvements account total. CALLOUT LIST #10 Choose an option below: a. [Original text] no changes in shareholders occurred during the year. b. no dividends were paid during the year. c. no stock was issued or repurchased by Keystone during the year. d. all preferred stock issued during the year was properly included within the line of credit. e. cash disbursements for the year include no payments to shareholders. EXHIBITS 1. Working Trial Balance 2. Ratios 3. CPA Firm Summary of several key Keystone accounting policies 4. Email to CFO from Controller 5. Memo from Audit Partner to Audit Files // ![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. Background financial and other information on Keystone is included in Appendix 6C of Chapter 6.
You are working on the audit of Keystone Computers & Networks, Inc. (Keystone), a calendar year-end nonissuer. The two associates assigned to the engagement provided a document with a number of observations relating to analytical procedures/risk assessment for the audit of year 5. As the audit senior for this engagement, it is your responsibility to review the document and exhibits.
//
CALLOUT LIST #1
Choose an option below:
a. [Original text] indicates that the allowance for doubtful accounts seems adequate as of year-end and
that no adjusting entry is necessary.
b. [Delete text] (entire sentence)
c. should be written off as of year-end with a debit to the allowance for doubtful accounts and a credit
to accounts receivable and we should perform further procedures on the adequacy of the allowance
for doubtful accounts.
d. should be written off as of year-end with a debit to bad debt expense and a credit to the allowance for
doubtful accounts and we should perform further procedures on the adequacy of the allowance for
doubtful accounts.
e. should be written off as of year-end with a debit to bad debt expense and a credit to accounts receivable
and we should perform further procedures on the adequacy of the allowance for doubtful
accounts.
f. indicates that Keystone should never sell to the customers that compose that balance.
CALLOUT LIST #2
Choose an option below:
a. [Original text] Cash—First National Bank.
b. Software development cost.
c. Long-term debt.
d. Accounts receivable—trade.
e. Line of credit.
CALLOUT LIST #3
Choose an option below:
a. [Original text] exceed current market values of the items.
b. equal the most recent purchase price of the items.
c. equal or are less than current market prices of the items.
d. are less than extended values of comparable items.
e. exceed costs calculated using the FIFO method.
CALLOUT LIST #4
Choose an option below:
a. [Original text] we should determine that all “slow moving” items are valued at zero.
b. [Delete text] (replace semicolon with a period).
c. we should calculate turnover ratios of inventory items.
d. we must test every extension of quantity on hand times cost.
e. we should combine our procedures here with those relating to leasehold improvements.
f. the increase in software development cost is inconsistent with this change.
CALLOUT LIST #5
Choose an option below:
a. [Original text]. We should carefully inspect items for pledging status during the count of inventory.
b. (Delete text]
c. We should ask the president whether any inventory items are pledged.
d. We should examine cash confirmations and debt agreements.
e. We should emphasize subsequent event procedures.
CALLOUT LIST #6
Choose an option below:
a. [Original text] analyze the client’s aging of receivables.
b. calculate inventory turnover rates for items sold to accounts now past due.
c. confirm all accounts that are not overdue as of year-end.
d. vouch sales shortly before year-end.
e. vouch sales shortly after year-end.
CALLOUT LIST #7
Choose an option below:
a. [Original text] vouch the cash disbursement.
b. [Delete text]
c. add to client representations letter that he guarantees repayment of the loan according to its terms.
d. determine that the loan was approved by all shareholders.
e. determine that the loan’s stated rate exceeds the expected prime rate during the period of the loan.
f. vouch the cash receipt.
CALLOUT LIST #8
Choose an option below:
a. [Original text] It would seem that the client has a policy of making no depreciation entries related to
acquisitions or disposals during the year and we should consider the propriety of this policy.
b. [Delete text]
c. It is likely that the client extended the lives of assets and arrived at this amount of depreciation
expense.
d. The client must depreciate acquisitions items as per GAAP guidelines, ignoring salvage values, for
estimated asset lives.
e. We should inquire of the client as to details of this year’s depreciation calculation and entry.
f. We should pass on this as any difference is clearly immaterial and inconsequential.
CALLOUT LIST #9
Choose an option below:
a. [Original text] Vouch invoices in support of the change in leasehold improvements.
b. [Delete text]
c. Compare amortization period of leasehold improvements with accounts receivable aging.
d. Consider the reasonableness of amortization of leasehold improvements during the year.
e. Send confirmation requests on the leasehold improvements account total.
CALLOUT LIST #10
Choose an option below:
a. [Original text] no changes in shareholders occurred during the year.
b. no dividends were paid during the year.
c. no stock was issued or repurchased by Keystone during the year.
d. all preferred stock issued during the year was properly included within the line of credit.
e. cash disbursements for the year include no payments to shareholders.
EXHIBITS
1. Working Trial Balance
2. Ratios
3. CPA Firm Summary of several key Keystone accounting policies
4. Email to CFO from Controller
5. Memo from Audit Partner to Audit Files
//](../images/this-simulation-also-available-online-presents-an-analytical-procedures-121650-1.jpg)
![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. Background financial and other information on Keystone is included in Appendix 6C of Chapter 6.
You are working on the audit of Keystone Computers & Networks, Inc. (Keystone), a calendar year-end nonissuer. The two associates assigned to the engagement provided a document with a number of observations relating to analytical procedures/risk assessment for the audit of year 5. As the audit senior for this engagement, it is your responsibility to review the document and exhibits.
//
CALLOUT LIST #1
Choose an option below:
a. [Original text] indicates that the allowance for doubtful accounts seems adequate as of year-end and
that no adjusting entry is necessary.
b. [Delete text] (entire sentence)
c. should be written off as of year-end with a debit to the allowance for doubtful accounts and a credit
to accounts receivable and we should perform further procedures on the adequacy of the allowance
for doubtful accounts.
d. should be written off as of year-end with a debit to bad debt expense and a credit to the allowance for
doubtful accounts and we should perform further procedures on the adequacy of the allowance for
doubtful accounts.
e. should be written off as of year-end with a debit to bad debt expense and a credit to accounts receivable
and we should perform further procedures on the adequacy of the allowance for doubtful
accounts.
f. indicates that Keystone should never sell to the customers that compose that balance.
CALLOUT LIST #2
Choose an option below:
a. [Original text] Cash—First National Bank.
b. Software development cost.
c. Long-term debt.
d. Accounts receivable—trade.
e. Line of credit.
CALLOUT LIST #3
Choose an option below:
a. [Original text] exceed current market values of the items.
b. equal the most recent purchase price of the items.
c. equal or are less than current market prices of the items.
d. are less than extended values of comparable items.
e. exceed costs calculated using the FIFO method.
CALLOUT LIST #4
Choose an option below:
a. [Original text] we should determine that all “slow moving” items are valued at zero.
b. [Delete text] (replace semicolon with a period).
c. we should calculate turnover ratios of inventory items.
d. we must test every extension of quantity on hand times cost.
e. we should combine our procedures here with those relating to leasehold improvements.
f. the increase in software development cost is inconsistent with this change.
CALLOUT LIST #5
Choose an option below:
a. [Original text]. We should carefully inspect items for pledging status during the count of inventory.
b. (Delete text]
c. We should ask the president whether any inventory items are pledged.
d. We should examine cash confirmations and debt agreements.
e. We should emphasize subsequent event procedures.
CALLOUT LIST #6
Choose an option below:
a. [Original text] analyze the client’s aging of receivables.
b. calculate inventory turnover rates for items sold to accounts now past due.
c. confirm all accounts that are not overdue as of year-end.
d. vouch sales shortly before year-end.
e. vouch sales shortly after year-end.
CALLOUT LIST #7
Choose an option below:
a. [Original text] vouch the cash disbursement.
b. [Delete text]
c. add to client representations letter that he guarantees repayment of the loan according to its terms.
d. determine that the loan was approved by all shareholders.
e. determine that the loan’s stated rate exceeds the expected prime rate during the period of the loan.
f. vouch the cash receipt.
CALLOUT LIST #8
Choose an option below:
a. [Original text] It would seem that the client has a policy of making no depreciation entries related to
acquisitions or disposals during the year and we should consider the propriety of this policy.
b. [Delete text]
c. It is likely that the client extended the lives of assets and arrived at this amount of depreciation
expense.
d. The client must depreciate acquisitions items as per GAAP guidelines, ignoring salvage values, for
estimated asset lives.
e. We should inquire of the client as to details of this year’s depreciation calculation and entry.
f. We should pass on this as any difference is clearly immaterial and inconsequential.
CALLOUT LIST #9
Choose an option below:
a. [Original text] Vouch invoices in support of the change in leasehold improvements.
b. [Delete text]
c. Compare amortization period of leasehold improvements with accounts receivable aging.
d. Consider the reasonableness of amortization of leasehold improvements during the year.
e. Send confirmation requests on the leasehold improvements account total.
CALLOUT LIST #10
Choose an option below:
a. [Original text] no changes in shareholders occurred during the year.
b. no dividends were paid during the year.
c. no stock was issued or repurchased by Keystone during the year.
d. all preferred stock issued during the year was properly included within the line of credit.
e. cash disbursements for the year include no payments to shareholders.
EXHIBITS
1. Working Trial Balance
2. Ratios
3. CPA Firm Summary of several key Keystone accounting policies
4. Email to CFO from Controller
5. Memo from Audit Partner to Audit Files
//](../images/this-simulation-also-available-online-presents-an-analytical-procedures-121650-2.jpg)
![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. Background financial and other information on Keystone is included in Appendix 6C of Chapter 6.
You are working on the audit of Keystone Computers & Networks, Inc. (Keystone), a calendar year-end nonissuer. The two associates assigned to the engagement provided a document with a number of observations relating to analytical procedures/risk assessment for the audit of year 5. As the audit senior for this engagement, it is your responsibility to review the document and exhibits.
//
CALLOUT LIST #1
Choose an option below:
a. [Original text] indicates that the allowance for doubtful accounts seems adequate as of year-end and
that no adjusting entry is necessary.
b. [Delete text] (entire sentence)
c. should be written off as of year-end with a debit to the allowance for doubtful accounts and a credit
to accounts receivable and we should perform further procedures on the adequacy of the allowance
for doubtful accounts.
d. should be written off as of year-end with a debit to bad debt expense and a credit to the allowance for
doubtful accounts and we should perform further procedures on the adequacy of the allowance for
doubtful accounts.
e. should be written off as of year-end with a debit to bad debt expense and a credit to accounts receivable
and we should perform further procedures on the adequacy of the allowance for doubtful
accounts.
f. indicates that Keystone should never sell to the customers that compose that balance.
CALLOUT LIST #2
Choose an option below:
a. [Original text] Cash—First National Bank.
b. Software development cost.
c. Long-term debt.
d. Accounts receivable—trade.
e. Line of credit.
CALLOUT LIST #3
Choose an option below:
a. [Original text] exceed current market values of the items.
b. equal the most recent purchase price of the items.
c. equal or are less than current market prices of the items.
d. are less than extended values of comparable items.
e. exceed costs calculated using the FIFO method.
CALLOUT LIST #4
Choose an option below:
a. [Original text] we should determine that all “slow moving” items are valued at zero.
b. [Delete text] (replace semicolon with a period).
c. we should calculate turnover ratios of inventory items.
d. we must test every extension of quantity on hand times cost.
e. we should combine our procedures here with those relating to leasehold improvements.
f. the increase in software development cost is inconsistent with this change.
CALLOUT LIST #5
Choose an option below:
a. [Original text]. We should carefully inspect items for pledging status during the count of inventory.
b. (Delete text]
c. We should ask the president whether any inventory items are pledged.
d. We should examine cash confirmations and debt agreements.
e. We should emphasize subsequent event procedures.
CALLOUT LIST #6
Choose an option below:
a. [Original text] analyze the client’s aging of receivables.
b. calculate inventory turnover rates for items sold to accounts now past due.
c. confirm all accounts that are not overdue as of year-end.
d. vouch sales shortly before year-end.
e. vouch sales shortly after year-end.
CALLOUT LIST #7
Choose an option below:
a. [Original text] vouch the cash disbursement.
b. [Delete text]
c. add to client representations letter that he guarantees repayment of the loan according to its terms.
d. determine that the loan was approved by all shareholders.
e. determine that the loan’s stated rate exceeds the expected prime rate during the period of the loan.
f. vouch the cash receipt.
CALLOUT LIST #8
Choose an option below:
a. [Original text] It would seem that the client has a policy of making no depreciation entries related to
acquisitions or disposals during the year and we should consider the propriety of this policy.
b. [Delete text]
c. It is likely that the client extended the lives of assets and arrived at this amount of depreciation
expense.
d. The client must depreciate acquisitions items as per GAAP guidelines, ignoring salvage values, for
estimated asset lives.
e. We should inquire of the client as to details of this year’s depreciation calculation and entry.
f. We should pass on this as any difference is clearly immaterial and inconsequential.
CALLOUT LIST #9
Choose an option below:
a. [Original text] Vouch invoices in support of the change in leasehold improvements.
b. [Delete text]
c. Compare amortization period of leasehold improvements with accounts receivable aging.
d. Consider the reasonableness of amortization of leasehold improvements during the year.
e. Send confirmation requests on the leasehold improvements account total.
CALLOUT LIST #10
Choose an option below:
a. [Original text] no changes in shareholders occurred during the year.
b. no dividends were paid during the year.
c. no stock was issued or repurchased by Keystone during the year.
d. all preferred stock issued during the year was properly included within the line of credit.
e. cash disbursements for the year include no payments to shareholders.
EXHIBITS
1. Working Trial Balance
2. Ratios
3. CPA Firm Summary of several key Keystone accounting policies
4. Email to CFO from Controller
5. Memo from Audit Partner to Audit Files
//](../images/this-simulation-also-available-online-presents-an-analytical-procedures-121650-3.jpg)
![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. Background financial and other information on Keystone is included in Appendix 6C of Chapter 6.
You are working on the audit of Keystone Computers & Networks, Inc. (Keystone), a calendar year-end nonissuer. The two associates assigned to the engagement provided a document with a number of observations relating to analytical procedures/risk assessment for the audit of year 5. As the audit senior for this engagement, it is your responsibility to review the document and exhibits.
//
CALLOUT LIST #1
Choose an option below:
a. [Original text] indicates that the allowance for doubtful accounts seems adequate as of year-end and
that no adjusting entry is necessary.
b. [Delete text] (entire sentence)
c. should be written off as of year-end with a debit to the allowance for doubtful accounts and a credit
to accounts receivable and we should perform further procedures on the adequacy of the allowance
for doubtful accounts.
d. should be written off as of year-end with a debit to bad debt expense and a credit to the allowance for
doubtful accounts and we should perform further procedures on the adequacy of the allowance for
doubtful accounts.
e. should be written off as of year-end with a debit to bad debt expense and a credit to accounts receivable
and we should perform further procedures on the adequacy of the allowance for doubtful
accounts.
f. indicates that Keystone should never sell to the customers that compose that balance.
CALLOUT LIST #2
Choose an option below:
a. [Original text] Cash—First National Bank.
b. Software development cost.
c. Long-term debt.
d. Accounts receivable—trade.
e. Line of credit.
CALLOUT LIST #3
Choose an option below:
a. [Original text] exceed current market values of the items.
b. equal the most recent purchase price of the items.
c. equal or are less than current market prices of the items.
d. are less than extended values of comparable items.
e. exceed costs calculated using the FIFO method.
CALLOUT LIST #4
Choose an option below:
a. [Original text] we should determine that all “slow moving” items are valued at zero.
b. [Delete text] (replace semicolon with a period).
c. we should calculate turnover ratios of inventory items.
d. we must test every extension of quantity on hand times cost.
e. we should combine our procedures here with those relating to leasehold improvements.
f. the increase in software development cost is inconsistent with this change.
CALLOUT LIST #5
Choose an option below:
a. [Original text]. We should carefully inspect items for pledging status during the count of inventory.
b. (Delete text]
c. We should ask the president whether any inventory items are pledged.
d. We should examine cash confirmations and debt agreements.
e. We should emphasize subsequent event procedures.
CALLOUT LIST #6
Choose an option below:
a. [Original text] analyze the client’s aging of receivables.
b. calculate inventory turnover rates for items sold to accounts now past due.
c. confirm all accounts that are not overdue as of year-end.
d. vouch sales shortly before year-end.
e. vouch sales shortly after year-end.
CALLOUT LIST #7
Choose an option below:
a. [Original text] vouch the cash disbursement.
b. [Delete text]
c. add to client representations letter that he guarantees repayment of the loan according to its terms.
d. determine that the loan was approved by all shareholders.
e. determine that the loan’s stated rate exceeds the expected prime rate during the period of the loan.
f. vouch the cash receipt.
CALLOUT LIST #8
Choose an option below:
a. [Original text] It would seem that the client has a policy of making no depreciation entries related to
acquisitions or disposals during the year and we should consider the propriety of this policy.
b. [Delete text]
c. It is likely that the client extended the lives of assets and arrived at this amount of depreciation
expense.
d. The client must depreciate acquisitions items as per GAAP guidelines, ignoring salvage values, for
estimated asset lives.
e. We should inquire of the client as to details of this year’s depreciation calculation and entry.
f. We should pass on this as any difference is clearly immaterial and inconsequential.
CALLOUT LIST #9
Choose an option below:
a. [Original text] Vouch invoices in support of the change in leasehold improvements.
b. [Delete text]
c. Compare amortization period of leasehold improvements with accounts receivable aging.
d. Consider the reasonableness of amortization of leasehold improvements during the year.
e. Send confirmation requests on the leasehold improvements account total.
CALLOUT LIST #10
Choose an option below:
a. [Original text] no changes in shareholders occurred during the year.
b. no dividends were paid during the year.
c. no stock was issued or repurchased by Keystone during the year.
d. all preferred stock issued during the year was properly included within the line of credit.
e. cash disbursements for the year include no payments to shareholders.
EXHIBITS
1. Working Trial Balance
2. Ratios
3. CPA Firm Summary of several key Keystone accounting policies
4. Email to CFO from Controller
5. Memo from Audit Partner to Audit Files
//](../images/this-simulation-also-available-online-presents-an-analytical-procedures-121650-4.jpg)
![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. Background financial and other information on Keystone is included in Appendix 6C of Chapter 6.
You are working on the audit of Keystone Computers & Networks, Inc. (Keystone), a calendar year-end nonissuer. The two associates assigned to the engagement provided a document with a number of observations relating to analytical procedures/risk assessment for the audit of year 5. As the audit senior for this engagement, it is your responsibility to review the document and exhibits.
//
CALLOUT LIST #1
Choose an option below:
a. [Original text] indicates that the allowance for doubtful accounts seems adequate as of year-end and
that no adjusting entry is necessary.
b. [Delete text] (entire sentence)
c. should be written off as of year-end with a debit to the allowance for doubtful accounts and a credit
to accounts receivable and we should perform further procedures on the adequacy of the allowance
for doubtful accounts.
d. should be written off as of year-end with a debit to bad debt expense and a credit to the allowance for
doubtful accounts and we should perform further procedures on the adequacy of the allowance for
doubtful accounts.
e. should be written off as of year-end with a debit to bad debt expense and a credit to accounts receivable
and we should perform further procedures on the adequacy of the allowance for doubtful
accounts.
f. indicates that Keystone should never sell to the customers that compose that balance.
CALLOUT LIST #2
Choose an option below:
a. [Original text] Cash—First National Bank.
b. Software development cost.
c. Long-term debt.
d. Accounts receivable—trade.
e. Line of credit.
CALLOUT LIST #3
Choose an option below:
a. [Original text] exceed current market values of the items.
b. equal the most recent purchase price of the items.
c. equal or are less than current market prices of the items.
d. are less than extended values of comparable items.
e. exceed costs calculated using the FIFO method.
CALLOUT LIST #4
Choose an option below:
a. [Original text] we should determine that all “slow moving” items are valued at zero.
b. [Delete text] (replace semicolon with a period).
c. we should calculate turnover ratios of inventory items.
d. we must test every extension of quantity on hand times cost.
e. we should combine our procedures here with those relating to leasehold improvements.
f. the increase in software development cost is inconsistent with this change.
CALLOUT LIST #5
Choose an option below:
a. [Original text]. We should carefully inspect items for pledging status during the count of inventory.
b. (Delete text]
c. We should ask the president whether any inventory items are pledged.
d. We should examine cash confirmations and debt agreements.
e. We should emphasize subsequent event procedures.
CALLOUT LIST #6
Choose an option below:
a. [Original text] analyze the client’s aging of receivables.
b. calculate inventory turnover rates for items sold to accounts now past due.
c. confirm all accounts that are not overdue as of year-end.
d. vouch sales shortly before year-end.
e. vouch sales shortly after year-end.
CALLOUT LIST #7
Choose an option below:
a. [Original text] vouch the cash disbursement.
b. [Delete text]
c. add to client representations letter that he guarantees repayment of the loan according to its terms.
d. determine that the loan was approved by all shareholders.
e. determine that the loan’s stated rate exceeds the expected prime rate during the period of the loan.
f. vouch the cash receipt.
CALLOUT LIST #8
Choose an option below:
a. [Original text] It would seem that the client has a policy of making no depreciation entries related to
acquisitions or disposals during the year and we should consider the propriety of this policy.
b. [Delete text]
c. It is likely that the client extended the lives of assets and arrived at this amount of depreciation
expense.
d. The client must depreciate acquisitions items as per GAAP guidelines, ignoring salvage values, for
estimated asset lives.
e. We should inquire of the client as to details of this year’s depreciation calculation and entry.
f. We should pass on this as any difference is clearly immaterial and inconsequential.
CALLOUT LIST #9
Choose an option below:
a. [Original text] Vouch invoices in support of the change in leasehold improvements.
b. [Delete text]
c. Compare amortization period of leasehold improvements with accounts receivable aging.
d. Consider the reasonableness of amortization of leasehold improvements during the year.
e. Send confirmation requests on the leasehold improvements account total.
CALLOUT LIST #10
Choose an option below:
a. [Original text] no changes in shareholders occurred during the year.
b. no dividends were paid during the year.
c. no stock was issued or repurchased by Keystone during the year.
d. all preferred stock issued during the year was properly included within the line of credit.
e. cash disbursements for the year include no payments to shareholders.
EXHIBITS
1. Working Trial Balance
2. Ratios
3. CPA Firm Summary of several key Keystone accounting policies
4. Email to CFO from Controller
5. Memo from Audit Partner to Audit Files
//](../images/this-simulation-also-available-online-presents-an-analytical-procedures-121650-5.jpg)
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DOCUMENT TO: Audit Senior FROM: Audit Associates RE: Analytical Procedures/Risk Assessment Analysis DATE: January 7, year 6 We downloaded the year 4 audited and year 5 unaudited Keystone working trial balances into our macro (Exhibit 1). The program also calculated various ratios (Exhibit 2). Note that Exhibit 3 summarizes several of Keystone Company's key accounting policies. Following are areas we believe include significant changes between years and our tentative conclusions: • Overall, Keystone reports income decreasing from $989,275 to $229,877. • The allowance for doubtful accounts increased by 8,000 from year 4 to year 5. The company cur- rently has $104,000 in the allowance for doubtful accounts, and per the controller has $31,701.54 in uncollectible accounts in receivables (Exhibit 4). The total of $31,701.54 indicates that the allow- ance for doubtful accounts seems adequate as of year-end and that no adjusting entry is necessary. (Callout #) See also the third bullet under suggested audit procedures. The current ratio decreased a bit, from 1.2 to 1.1. The input with the largest effect decreasing the cur- rent ratio is Cash-First National Bank. (Callout #2) • The inventories, valued using the LIFO method, increased. To test proper use of the lower of cost or market rule relating to the LIFO method, we should perform tests to determine that inventory recorded values exceed current market values of the items. (Callout #3) In addition, we suggest the following specific audit procedures: • Relating to inventories, we should be aware of possible obsolete items; we should determine that all "slow moving" items are valued at zero. (Callout #4) The president indicates that no inventory items (or proceeds upon sale) have been pledged (Exhibit 5). We should carefully inspect items for pledging status during the count of inventory. (Callout #5) • Relating to doubtful accounts receivable (see second bullet above), we should be aware of potential other accounts that might need to be written off as of year-end and should test and analyze the cli- ent's aging of receivables. (Callout #6) Examine Board of Director approval of increased receivables from officers. Also, vouch the cash disbursement. (Callout #7) Although there were increases in fixed assets, the accumulated depreciation went up by a much larger percentage. It would seem that the client has a policy of making no depreciation entries related to acquisitions or disposals during the year and we should consider the propriety of this policy. (Callout #8) Vouch invoices in support of the change in leasehold improvements. (Callout #9) The capital stock and paid-in capital accounts did not change during the year. We should obtain evidence that no changes in shareholders occurred during the year. (Callout #10) EXHIBIT 1: Keystone Working Trial Balance KEYSTONE COMPUTERS & NETWORKS, INC. Year 5 Changes Spreadsheet For the Year Ended December 31, 20X5 Ref. No. WTB-1 Prep'd by WL Date 1/10/X6 Year 4 Year 5 Increase Percentage Change Acct. No. Account Name Adjusted Unadjusted (Decrease) 1000.10 Cash-General account 42,754 66,034 23,280 35.3% 1000.20 Cash-Speclal account 9,960 10,150 190 1.9% 1000.30 Cash In register 1,200 1,200 0.0% 1,000.40 Petty cash 1050.10 Accounts 50 50 0.0% 16.6% 8,534,524 10,235,457 1,700,933 recelvable-trade 1050.40 Accounts 57,643 84,670 27,027 31.9% recelvable-officers 1050.90 Allowance for bad debts (96,000) (104,000) (8,000) 7.7% 1100.10 Inventorles 1,234,589 1,375,835 141,246 19,556 10.3% 1300.10 Prepald expenses 156,900 176,456 11.1% 2050.10 Furniture & fixtures 300,980 344,900 43,920 12.7% 2050.30 Equlpment 789,654 974,676 185,022 19.0% 2050.80 Leasehold Improvements 2050.90 Accumulated depreclation 98,900 91,230 (7,670) 153,573 -8.4% (250,987) (404,560) 38.0% 2100.00 Software development 178,000 178,000 100.0% cost 2200.00 Intanglble assets 1,000,000 800,000 (200,000) -25.0% 3050.10 Accounts payable-trade (1,349,839) (1,429,033) 79,194 5.5% 3100.00 Capltal lease (43,200) (45,675) 2,475 5.4% oblig.-current 3200.10 Accrued llabllitles (178,900) (203,450) 24,550 12.1% 3300.30 Unearned service revenue (42,300) 42,300 100.0% (8,632,105) 2,019,555 (423,680) 3400.50 Line of credit (6,612,550) (456,700) 23.4% 4400.10 Capital lease (33,020) -7.8% oblig.-noncurr. 5050.10 Capital stock (200,000) (200,000) 0.0% (423,500) (2,615,478) 415,000 5100.10 Pald-lIn capltal (423,500) (1,626,203) 0.0% 5700.10 Retalned earnings 989,275 415,000 37.8% 5900.00 Dividends 100.0% Totals 989,275 229,877 (759,398) -330.3% 6000.10 Sales of computers (44,890,788) (42,345,675) (2,545,113) -6.0% 6010.10 Software licenses (248,900) (236,700) (4,325,777) (12,200) (242,111) -5.2% 6020.10 Service revenue (4,567,888) (46,751,990) (45,677,899) (1,074,091) -5.6% 6030.10 Consulting revenue 7020.10 Cost of sales-prod. & serv. -2.4% 74,122,435 3,167,889 913,456 72,134,566 (1,987,869) (402,212) -2.8% 7070.10 Salarles-sales 2,765,677 -14.5% 7070.50 Payroll benefits-sales 857,368 (56,088) -6.5% 7075.10 Advertising & promotlon 1,200,786 1,567,889 445,600 367,103 23.4% 7080.10 Travel & entertalnment 609,788 (164,188) -36.8% 7080.30 Miscellaneous exp.-sales (56,234) (334,040) (288,564) (7,779ק (76,455) 334,890 278,656 -20.2% 7090.10 Operating salarles 4,878,900 4,234,234 4,544,860 -7.3% 7090.30 Administrative salarles 3,945,670 -7.3% 7090.50 Payroll benefits-admin. 1,812,344 1,734,565 -4.5% 7100.10 Rent 797,800 721,345 -10.6% EXHIBIT 1: (Continued) KEYSTONE COMPUTERS & NETWORKS, INC. Year 5 Changes Spreadsheet For the Year Ended December 31, 20X5 Ref. No. WTB-1 Prep'd by WL Date 1/10/X6 Year 4 Year 5 Increase Percentage Change Acct. No. Account Name Adjusted Unadjusted (Decrease) 7140.10 Utilitles 210,495 234,839 24,344 10.4% 7200.10 Insurance 356,890 378,677 21,787 5.8% 7260.30 Legal and accounting 457,577 234,500 485,767 28,190 5.8% 7320.10 Bad debt expense 256,678 22,178 8.6% 7410.10 Supplles 556,345 478,900 (77,445) -16.2% 367,867 345,645 334,565 7600.10 Depreclation and amort. 7650.10 Software development 33,302 9.1% 289,100 56,545 16.4% 7700.10 Miscellaneous exp.-admin. 234,556 245,456 10,900 4.4% 7800.10 Interest expense 421,344 476,899 55,555 11.6% (176,665) (36,482) (759,398) (759,398) 7900.10 Current Income taxes 256,765 80,100 -220.6% 7900.70 Deferred Income taxes 45,632 9,150 -398.7% 9000.00 P&L Summary 989,275 229,877 -330.3% Total Balance Sheet 989,275 229,877 -330.3% Total Income Statement (989,275) (229,877) 759,398 -330.3% Out-of-balance
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> For each of the account balances and associated assertions below, select the audit procedure from the list provided that provides the most appropriate audit evidence for the account assertion. //
> Match the following terms to the appropriate definition (or partial definition). Each definition is used once. Term Definition (or Partial Definition) a. Commitment b. Contingent llablity c. General risk 1. A contractual obligation to carry out a tr
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> In connection with your audit of the financial statements of Hollis Mfg. Corporation for the year ended December 31, 20X3, your review of subsequent events disclosed the following items: a. January 7, 20X4: The mineral content of a shipment of ore en rou
> The following situations represent excerpts from the responses to audit inquiries of external legal counsel of XYZ Co. during the annual audit of year 1 (“legal response”). For each excerpt, select the most appropriate
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> Select the best answer choice for each of the following, and justify your selection in a brief statement. a. Which of the following is least likely to be an audit objective for debt? (1) Determine the existence of recorded debt. (2) Establish the complet
> This simulation, available online, presents an audit request list document for materials requested of management that has been prepared by an audit team staff member for the Keystone audit. Because this simulation addresses material presented in Chapters
> In applying audit procedures and evaluating the results of those procedures, auditors may encounter specific information that may raise a question concerning the existence of noncompliance with laws and related party transactions. Indicate whether each o
> The auditors of SSC Company, a nonpublic company, are working on both audit objectives for the various accounts and documentation requirements. Parts (a) through (d) of this question relate to objectives, while part (e) addresses documentation. The audit
> The following flowchart depicts the activities relating to the purchasing, receiving, and accounts payable departments of Model Company, Inc. Assume that you are a supervising assistant assigned to the Model Company audit. Joe Werell, a beginning assis
> Select the best answer for each of the following and explain the reason for your selection. a. Which of the following procedures is least likely to be completed before the balance sheet date? (1) Confirmation of receivables. (2) Search for unrecorded lia
> a. Analysis of which account is least likely to reveal evidence relating to recorded retirement of equipment? (1) Accumulated depreciation. (2) Insurance expense. (3) Property, plant, and equipment. (4) Purchase returns and allowances. b. Which of the f
> Hwang Corporation has engaged in a number of expenditures relating to a land acquisition for a future plant. For each of the following, indicate whether you as the auditor of Hwang Corporation would propose an adjusting entry. Assume all transactions are
> 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
> 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
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> 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.
> 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.”
