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auditing

Principles of Auditing and Other Assurance Services 19th edition Ray Whittington, Kurt Pany - Solutions

What part, if any, do the independent auditors play in the planning for a client’s physical inventory?
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.)
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.
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.
When perpetual inventory records are maintained, is it necessary for a physical inventory to be taken at the balance sheet date? Explain.
What is meant by a “bill and hold” scheme?
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 adequate verification of these inventories? Explain.
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 under the direction of the chief purchasing
Many companies employ outside service companies that specialize in counting, pricing, extending, and footing inventories. These service companies usually furnish a certificate attesting to the value of the physical inventory.Assuming that the service company took the client company’s inventory on
The observation of a client’s physical inventory is a mandatory auditing procedure when possible for the auditors to carry out and when inventories are material.a. Why is the observation of physical inventory a mandatory auditing procedure? Explain.b. Under what circumstances is observation of
During your observation of the November 30, 20X0, physical inventory of Jay Company, you note the following unusual items:a. Electric motors in finished goods storeroom not tagged. Upon inquiry, you are informed that the motors are on consignment to Jay Company.b. A cutting machine (one of Jay’s
One of the problems faced by the auditors in their verification of inventory is the risk that slow-moving and obsolete items may be included in the goods on hand at the balance sheet date. In the event that such items are identified in the physical inventory, their carrying value should be written
You are engaged in the audit of Reed Company, a new client, at the end of its first fiscal year, June 30, 20X1. During your work on inventories, you discover that all of the merchandise remaining in stock on June 30, 20X1, had been acquired July 1, 20X0, from Andrew Reed, the sole shareholder and
Many CPAs are sharing information over the Internet. Auditnet is an Internet site that contains audit programs donated by various CPAs. Auditnet’s address is www.auditnet.org . You can get to the audit programs by registering for the free material.a. Select the inventory program, and summarize
Grandview Manufacturing Company employs standard costs in its cost accounting system. List the audit procedures that you would apply to ascertain that Grandview’s standard costs and related variance amounts are acceptable and have not distorted the financial statements.
Multiple Choice QuestionsSelect the best answer for each of the following and explain fully the reason for your selection.a. Which of the following is least likely to be among the auditors’ objectives in the audit of inventories and cost of goods sold?(1) Determine that the valuation of
During 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€¢ External confirmation€¢ Inquiry€¢ Inspection of
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 described. Explanations may Be used once, more
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. Please reply “yes” or “no” to answer
Described below are potential financial statement misstatements that are encountered by auditors.a. Inventory is understated because warehouse personnel overlooked several racks of parts in taking the physical inventory.b. Inventory is overstated because warehouse personnel included inventory items
Williams Pharmaceutical Company produces a number of drugs that are regulated by various agencies, including, in the United States, the federal Food and Drug Administration (FDA). These agencies issue licenses that approve drugs for sale and establish specific regulations regarding production
Described below are potential financial statement misstatements that are encountered by auditors in the audit of inventory and cost of goods sold.a. Management of a chain of discount department stores systematically overstates inventory quantities at selected locations.b. Accounting personnel of a
The following are typical questions that might appear on an internal control questionnaire for inventory:1. Are written procedures prepared by the client for the taking of the physical inventory?2. Do the client’s inventory-taking procedures include a requirement to identify damaged inventory
You are involved in your CPA firm’s first audit of Zorostria, a retailer of artwork, primarily paintings and photographs purchased from artists in Southeast Asia (particularly Vietnam, Cambodia, and Laos). Zorostria has stores in seven cities throughout the United States, Mexico, and
You are an audit manager of the rapidly growing CPA firm of Raye and Coye. You have been placed in charge of three new audit clients, which have the following inventory features:1. Canyon Cattle Co., which maintains 15,000 head of cattle on a 1,000-square-mile ranch, mostly unfenced, near the south
Smith is the partner in charge of the audit of Blue Distributing Corporation, a wholesaler that owns one warehouse containing 80 percent of its inventory. Smith is reviewing the working papers that were prepared to support the firm’s opinion on Blue’s financial statements, and Smith wants to be
Hovington, CPA, knows that while audit objectives relating to inventories may be stated in terms of the assertions as presented in this chapter, they may also be subdivided and stated more specifically. He has chosen to do so and has prepared the second column of the following table.Required:Assume
You have been with Zaird & Associates for approximately three months and are completing your work on the BizCaz audit. BizCaz produces pullover knit shirts to address the business casual market for both men and women. Although your experience has been limited, an unexpected staff resignation has
Western Trading Company is a sole proprietorship engaged in the grain brokerage business. On December 31, 20X0, the entire grain inventory of the company was stored in outside bonded warehouses. The company’s procedure of pricing inventories in these warehouses includes comparing the actual cost
Explain the significance of the purchase order to adequate internal control over purchase transactions.
What charges and credits may be disclosed in the auditors’ analysis of the Cost of Goods Sold account of a manufacturing concern?
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?
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 inventory. Perpetual inventories are not
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.
“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.
How do the independent auditors use the client’s backlog of unfilled sales orders in the examination of inventories?
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.
Multiple Choice Questionsa. 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 listing and identifies the
The auditors’ verification of plant and equipment is facilitated by several factors not applicable to audit work on current assets. What are these factors?
K-J Corporation has current assets of $5 million and approximately the same amount of plant and equipment. Should the two groups of assets require about the same amount of audit time? Give reasons.
Identify at least three elements of strong internal control over property, plant, and equipment.
The auditors’ verification of current assets such as cash, securities, and inventories emphasizes observation, inspection, and confirmation to determine the physical existence of these assets. Should the auditors take a similar approach to establish the existence of the recorded plant assets?
You are making your first audit of Clarke Manufacturing Company. The Plant and Equipment account represents a very substantial portion of the total assets. What verification, if any, will you make of the balances of the ledger accounts for Plant and Equipment as of the beginning of the period under
In response to threats from a terrorist organization, Technology International installed protective measures consisting of chainlink fences, concrete road barriers, electronic gates, and underground parking at its manufacturing facilities. The costs of these installations were debited to the Land
Hamlin Metals Company has sales representatives covering several states and provides auto-mobiles for them and for its executives. Describe any substantive procedures you would consider appropriate for the company’s fleet of more than 100 automobiles, other than the verification procedures
Gibson Manufacturing Company acquired new factory machinery this year and ceased using the old machinery. The old equipment was retained, however, and is capable of being used if the demand for the company’s products warrants additional production. How should the old machinery be handled in the
List three substantive procedures the auditors could use to detect unrecorded retirements of property, plant, and equipment.
Explain why the auditors may need to use the work of a specialist in the audit of goodwill.
Suggest several comparisons to be made as part of the auditors’ analytical procedures for:a. Plant and Equipment.b. Depreciation.
Assume that a continuing audit client has recorded Accounts Receivable and Equipment both in the amount of $1,000,000. In a typical audit, which account would take more time to audit?
Gruen Corporation is a large diversified company with a large amount of property, plant, and equipment and intangible assets, including goodwill. In the past year the company has experienced a significant decline in a number of its lines of business.a. What risk of material misstatement is
Kadex Corporation, a small manufacturing company, did not use the services of independent auditors during the first two years of its existence. Near the end of the third year, Kadex retained Jones & Scranton, CPAs, to perform an audit for the year ended December 31. Officials of the company
Allen Fraser was president of three corporations: Missouri Metals Corporation, Kansas Metals Corporation, and Iowa Metals Corporation. Each of the three corporations owned land and buildings acquired for approximately $500,000. An appraiser retained by Fraser in 20X1 estimated the current value of
Your new client, Ross Products, Inc., completed its first fiscal year March 31, 20X4. During the course of your audit you discover the following entry in the general journal, dated April 1, 20X3.Under these circumstances, what steps should the auditors take to verify the $2,400,000 recorded cost of
Shortly after you were retained to audit the financial statements of Case Corporation, you learned from a preliminary discussion with management that the corporation had recently acquired a competing business, the Mall Company. In your study of the terms of the acquisition, you find that the total
List and state the purpose of all audit procedures that might reasonably be applied by the auditors to determine that all property and equipment retirements have been recorded in the accounting records.
Girard Corporation has just completed the acquisition of Williams, Inc., at a purchase price significantly higher than the fair values of the identifiable assets. Describe the audit issues caused by the acquisition and how the auditors would likely resolve the issues.
You are part of the audit team that is auditing Happy Chicken, Inc., a company that franchises Happy Chicken family restaurants. During the current year, management of Happy Chicken purchased for $2 million one of its franchised locations, a store that was having financial difficulties. In
Multiple Choice QuestionsSelect 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 miscellaneous revenue to
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 material.Yes€”indicates a
Multiple Choice Questionsa. 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 following explanations
The following are typical questions that might appear on an internal control questionnaire relating to plant and equipment:1. Has a dollar minimum been established for expenditures to be capitalized?2. Are subsidiary ledgers for plant and equipment regularly reconciled with general ledger
Assume that you are auditing the financial statements of Agee Corporation. During the course of the audit, you discover the following circumstances.1. Management of Agee has decided to discontinue the production of consumer electronics, which represents a moderately large line of business for the
You are engaged in the audit of the financial statements of Holman Corporation for the year ended December 31, 20X6. The accompanying analyses of the Property, Plant, and Equipment and related accumulated depreciation accounts have been prepared by the chief accountant of the client. You have
You are the senior accountant in the audit of Granger Grain Corporation, whose business primarily involves the purchase, storage, and sale of grain products. The corporation owns several elevators located along navigable water routes and transports its grain by barge and rail. Your staff assistant
You are reviewing the property, plant, and equipment working papers of Mandville Corporation, a company that publishes travel guides. The lead schedule for the account is included in the chapter as Figure 13.1. The following are among the findings relating to changes in the account:1. Land: The
What are the objectives of establishing internal control over plant and equipment?
Explain the use of a system of authorizations for additions to plant and equipment.
Moultrie Company discovered recently that a number of its property and equipment assets had been retired from use several years ago without any entries being made in the accounting records. The company asks you to suggest procedures that will prevent unrecorded retirement of assets.
What documentary evidence is usually available to the auditors in the client’s office to substantiate the legal ownership of property, plant, and equipment?
Should the auditors examine public records to determine the legal title of property apparently owned by the client?
Should the independent auditors observe a physical inventory of property and equipment in every audit engagement? Discuss.
Explain how the existence of lease agreements may result in understated plant and equipment.
An executive of a manufacturing company informs you that no formal procedures have been followed to control the retirement of machinery and equipment. A physical inventory of plant assets has just been completed. It revealed that 25 percent of the assets carried in the ledger were not on hand and
Chem-Lite, Inc., maintains its accounts on the basis of a fiscal year ending March 31. At March 31, 20X1, the Equipment account in the general ledger appeared as shown below. The company uses straight-line depreciation, a 10-year life, and 10 percent salvage value for all its equipment. It is the
If a corporation overstates its earnings, are its liabilities more likely to be overstated or under-stated? Explain.
Lawsuits against CPA firms are most likely to allege that the auditors were negligent in not detecting which of the following? (a) Overstatement of liabilities and earnings, (b) Understatement of assets and earnings, or (c) Overstatement of owners’ equity. Explain the reasoning underlying your
Assume that a highly placed employee has stolen company assets and is now planning to conceal the fraud by failing to make an accounting entry for a large transaction. Would the omission probably be for a transaction creating an asset or a liability? Explain.
Suggest two reasons why the adjustments proposed by independent auditors more often than not call for reducing recorded earnings.
Which do you consider the more significant step in establishing strong internal control over accounts payable transactions: the approval of an invoice for payment, or the issuance of a check in payment of an invoice? Explain.
During the verification of the individual invoices composing the total of accounts payable at the balance sheet date, the auditors discovered some receiving reports indicating that the merchandise covered by several of these invoices was not received until after the balance sheet date. What
Is the confirmation of accounts payable by direct communication with vendors as useful and important an audit procedure as such confirmation of accounts receivable? Explain.
Explain how the auditors coordinate the year-end cutoff of accounts payable with their observation of the year-end physical inventory.
Auditors usually send confirmations to obtain evidence about accounts receivable and accounts payable.a. Is confirmation presumptively required for accounts receivable, accounts payable, or both?b. Are accounts receivable requests, accounts payable requests, or both mailed by the auditors (as
In the course of your initial audit of the financial statements of Sylvan Company, you determine that of the substantial amount of accounts payable outstanding at the close of the period, approximately 75 percent is owed to six creditors. You have requested that you be permitted to confirm the
The subsequent period in an audit is the time extending from the balance sheet date to the date of the auditors’ report. Discuss the importance of the subsequent period in the audit of trade accounts payable.
Early in your first audit of Star Corporation, you notice that sales and year-end inventory are almost unchanged from the prior year. However, cost of goods sold is less than in the preceding year, and accounts payable also are down substantially. Gross profit has increased, but this increase has
During the course of any audit, the auditors are always alert for unrecorded accounts payable or other unrecorded liabilities.For each of the following audit areas, (1) describe an unrecorded liability that might be discovered and (2) state what auditing procedure or procedures might bring it to
Describe the audit steps that generally would be followed in establishing the propriety of the recorded liability for federal income taxes of a corporation you are auditing for the first time.Consideration should be given to the status of (a) the liability for prior years and (b) the liability
Multiple Choice QuestionsSelect 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 liabilities.(3)
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 assistant, analyzed the flowchart and has
The auditors of SSC 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 auditors have established the objectives listed below as a part of the
The following are typical questions that might appear on an internal control questionnaire for accounts payable.1. Are monthly statements from vendors reconciled with the accounts payable listing?2. Are vendors’ invoices matched with receiving reports before they are approved for payment?a.
As part of your first audit of the financial statements of Marina del Rey, Inc., you have decided to confirm some of the accounts payable. You are now in the process of selecting the individual companies to whom you will send accounts payable confirmation requests. Among the accounts payable
Taylor, CPA, is engaged in the audit of Rex Wholesaling for the year ended December 31. Taylor obtained an understanding of internal control relating to the purchasing, receiving, trade accounts payable, and cash disbursement cycles and has decided not to proceed with tests of controls. Based upon
Nancy Howe, your staff assistant on the April 30, 20X2, audit of Wilcox Company, was transferred to another audit engagement before she could complete the audit of unrecorded accounts payable. Her working paper, which you have reviewed and are satisfied is complete, appears below.Prepare a proposed
Your client, Software and Stuff (Software), has developed a new electronic game. One part of the game uses software developed by another company, Component of Yuma (Component). Software signed an agreement with Component that provides that Software will pay Component a royalty of $1.00 per game
You have just been assigned as a member of the audit team of Bozarkana Company (a new client) and are considering accounts payable. Bozarkana Company uses a computerized voucher system for payables. As a starting point, you asked Bill Bozarkana, the controller, for a summary of payables and
Compare the auditors’ approach to the verification of liabilities with their approach to the verification of assets.
The operating procedures of a well-managed accounts payable department will provide for the verification of several specific points before a vendor’s invoice is recorded as an approved liability. What are the points requiring verification?

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