Problem $1$

Denise Ondeyko, CPA, is drafting an audit program to test controls over the Purdue Corporation's cost records:

Required:

$1.$Explain the importance of determining the disposition of overapplied and underapplied overhead. In your explanation, describe how overhead should be treated.

$2.$ List and explain some items that should be included in overhead. What should not be included?

Problem $2$

Alicin Nagle, an in$-$charge auditor, is reviewing the inventory controls for the City of Carlton's vehicle maintenance facility. Nagle has learned the following:

a$.$ Vehicle maintenance records indicate that, even though the total number of trucks is decreasing, the number of inoperative trucks waiting for spare parts is increasing.

b$.$ Stockroom employees have been unable to find some parts, even though the perpetual inventory system shows the parts on hand.

c$.$ The investment in spare parts inventory has remained at about the same level in each of the last three years.

d$.$ Many of the spare parts can be used for passenger cars.

e$.$ A clerk in the parts warehouse office maintains the perpetual inventory records.

Required: Design tests of controls for each item listed.

Problem $3$

Following are errors, frauds, or other circumstances that an auditor might encounter as a result of applying year$-$end substantive tests of details to inventory as of December $31,$

a$.$ Perpetual inventory records for selected products are not accurate.

b$.$ A material amount of inventory is held in several public warehouses throughout the Midwest.

c$.$ Unit prices for selected products on the final priced inventory appear low; the

client uses the first$-$in$,$ first$-$out cost flow assumption.

d$.$ The final priced inventory reflects quantities from the perpetual inventory

records.

e$.$ Goods were received on December $31,$ but not recorded until January $2,2008.$

f$.$ The client has begun to lag behind competitors in market share; the client is in the computer industry.

Required: For each of the above items, indicate $($a$)$ a specific substantive test or tests that might address the error, fraud, or circumstance and $($b$)$ the financial statement assertion addressed by each test.

Answer rating: 100% (QA)

Problem 1 Importance of Overapplied and Underapplied Overhead 1 Explanation Overapplied and underapplied overhead occur when the actual overhead costs incurred differ from the overhead costs applied t... View the full answer