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Auditing and Assurance services an integrated approach 14th Edition Alvin a. arens, Randal j. elder, Mark s. Beasley - Solutions

Explain the importance of proper credit approval for sales. What effect do adequate controls in the credit function have on the auditor's evidence accumulation?
Distinguish between the sales journal and the accounts receivable master file. What type of information is recorded in each and how do these accounting records relate?
BestSellers.com sells fiction and nonfiction books to customers through the company's Web site. Customers place orders for books via the Web site by providing their name, address, credit card number, and expiration date. What internal controls could BestSellers.com implement to ensure that
List the transaction-related audit objectives for the audit of sales transactions. For each objective, state one internal control that the client can use to reduce the likelihood of misstatements.
State one test of control and one substantive test of transactions that the auditor can use to verify the following sales transaction-related audit objective:Recorded sales are stated at the proper amounts.
List the most important duties that should be segregated in the sales and collection cycle. Explain why it is desirable that each duty be segregated.
Explain how prenumbered shipping documents and sales invoices can be useful controls for preventing misstatements in sales.
What three types of authorizations are commonly used as internal controls for sales? For each authorization, state a substantive test that the auditor could use to verify whether the control was effective in preventing misstatements.
Explain the purpose of footing and cross-footing the sales journal and tracing the totals to the general ledger.
What is the difference between the auditor's approach in verifying sales returns and allowances and that for sales? Explain the reasons for the difference.
Explain why auditors usually emphasize the detection of fraud in the audit of cash receipts. Is this consistent or inconsistent with the auditor's responsibility in the audit? Explain.
List the transaction-related audit objectives for the verification of cash receipts. For each objective, state one internal control that the client can use to reduce the likelihood of misstatements.
List several audit procedures that the auditor can use to determine whether all cash received was recorded.
Explain what is meant by a proof of cash receipts and state its purpose.
Explain what is meant by lapping and discuss how the auditor can un cover it. Under what circumstances should the auditor make a special effort to uncover lapping?
What audit procedures are most likely to be used to verify accounts receivable written off as uncollectible? State the purpose of each of these procedures.
State the relationship between the confirmation of accounts receivable and the results of the tests of controls and substantive tests of transactions.
Under what circumstances is it acceptable to perform tests of controls and substantive tests of transactions for sales and cash receipts at an interim date?
Diane Smith, CPA, performed tests of controls and substantive tests of transactions for sales for the month of March in an audit of the financial statements for the year ended December 31, 2011. Based on the excellent results of both the tests of controls and the substantive tests of transactions,
Multiple Choice QuestionsThe following questions deal with internal controls in the sales and collection cycle. Choose the best response.a. The accounting system will not post a sales transaction to the sales journal without a valid bill of lading number. This control is most relevant to which
Multiple Choice QuestionsFor each of the following types of misstatements (parts a through d), select the control that should have prevented the misstatement:a. A manufacturing company received a substantial sales return in the last month of the year, but the credit memorandum for the return was
Multiple Choice QuestionsThe following questions deal with audit evidence for the sales and collection cycle. Choose the best response.a. An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable master file
Items 1 through 9 are selected questions of the type generally found in internal control questionnaires used by auditors to obtain an understanding of internal control in the sales and collection cycle. In using the questionnaire for a client, a "yes" response to a question indicates a possible
The following are commonly performed tests of controls and substantive tests of transactions audit procedures in the sales and collection cycle:1. Account for a sequence of shipping documents and examine each one to make sure that a duplicate sales invoice is attached.2. Account for a sequence of
The following are selected transaction-related audit objectives and audit procedures for sales transactions:Transaction-Related Audit Objectives1. Recorded sales exist.2. Existing sales are recorded.3. Sales transactions are correctly included in the accounts receivable master file and are
The following sales procedures were encountered during the annual audit of Marvel Wholesale Distributing Company: Customer orders are received by the sales order department. A clerk computes the approximate dollar amount of the order and sends it to the credit department for approval. Credit
The following are common audit procedures for tests of sales and cash receipts:1. Compare the quantity and description of items on duplicate sales invoices with related shipping documents.2. Trace recorded cash receipts in the accounts receivable master file to the cash receipts journal and
The following are a list of possible errors or fraud (1 through 5) involving cash receipts and controls (a through g) that may prevent or detect the errors or fraud:Possible Errors or Fraud1. Customer checks are properly credited to customer accounts and are properly deposited, but errors are made
You have been asked by the board of trustees of a local church to review its accounting procedures. As part of this review you have prepared the following comments about the collections made at weekly services and record keeping for members' pledges and contributions:1. The church's board of
Items 1 through 10 present various internal control strengths or internal control deficiencies.1. Credit is granted by a credit department.2. Once shipment occurs and is recorded in the sales journal, all shipping documents are marked "recorded" by the accounting staff.3. Sales returns are
YourTeam.com is an online retailer of college and professional sports team memorabilia, such as hats, shirts, pennants and other sports logo products. Consumers select the college or professional team from a pull-down menu on the company's Web site.For each listed team, the Web site provides a
The Meyers Pharmaceutical Company, a drug manufacturer, has the following internal controls for billing and recording accounts receivable:1. An incoming customer's purchase order is received in the order department by a clerk who prepares a prenumbered company sales order form on which is inserted
In Part III of this case study, you obtained an understanding of internal control and made an initial assessment of control risk for each transaction-related audit objective for acquisition and cash disbursement transactions. The purpose of Part V is to continue the assessment of control risk by
This problem requires the use of ACL software, which is included in the CD attached to the text. Information about installing and using ACL and solving this problem can be found in Appendix, pages 838-842. You should read all of the reference material preceding the instructions for "Quick Sort"
The Securities and Exchange Commission (SEC) found that Bally Total Fitness Holding Corporation, a nationwide commercial operator of fitness centers, fraudulently accounted for three types of revenues it received from members. The SEC also charged the audit firm and six partners for their roles in
State what is meant by a representative sample and explain its importance in sampling audit populations.
Explain the major difference between statistical and nonstatistical sampling. What are the three main parts of statistical and nonstatistical methods?
Explain the difference between replacement sampling and nonreplacement sampling. Which method do auditors usually follow? Why?
What are the two types of simple random sample selection methods? Which of the two methods is used most often by auditors and why?
Describe systematic sample selection and explain how an auditor will select 40 numbers from a population of 2,800 items using this approach. What are the advantages and disadvantages of systematic sample selection?
What is the purpose of using nonstatistical sampling for tests of controls and substantive tests of transactions?
Explain what is meant by block sample selection and describe how an auditor can obtain five blocks of 20 sales invoices from a sales journal.
Define each of the following terms:a. Acceptable risk of assessing control risk too low (ARACR)b. Computed upper exception rate (CUER)c. Estimated population exception rate (EPER)d. Sample exception rate (SER)e. Tolerable exception rate (TER)
Describe what is meant by a sampling unit. Explain why the sampling unit for verifying the occurrence of recorded sales differs from the sampling unit for testing for the possibility of omitted sales.
Distinguish between the TER and the CUER. How is each determined?
Distinguish between a sampling error and a nonsampling error.How can each be reduced?
What is meant by an attribute in sampling for tests of controls and substantive tests of transactions? What is the source of the attributes that the auditor selects?
Explain the difference between an attribute and an exception condition. State the exception condition for the audit procedure: The duplicate sales invoice has been initialed indicating the performance of internal verification.
Identify the factors an auditor uses to decide the appropriate TER. Compare the sample size for a TER of 7% with that of 4%, all other factors being equal.
Identify the factors an auditor uses to decide the appropriate ARACR. Compare the sample size for an ARACR of 10% with that of 5%, all other factors being equal.
State the relationship between the following:a. ARACR and sample sizeb. Population size and sample sizec. TER and sample sized. EPER and sample size
Assume that the auditor has selected 100 sales invoices from a population of 100,000 to test for an indication of internal verification of pricing and extensions. Determine the CUER at a 10% ARACR if four exceptions are found in the sample using attributes sampling. Explain the meaning of the
Explain what is meant by analysis of exceptions and discuss its importance.
When the CUER exceeds the TER, what courses of action are available to the auditor? Under what circumstances should each of these be followed?
Distinguish between probabilistic selection and statistical measurement. State the circumstances under which one can be used without the other.
List the major decisions that the auditor must make in using attributes sampling. State the most important considerations involved in making each decision.
Multiple Choice QuestionsThe following items apply to determining sample sizes using random sampling from large populations for attributes sampling. Select the most appropriate response for each question.a. If all other factors specified in a sampling plan remain constant, changing the ARACR from
Multiple Choice QuestionsThe following items concern determining exception rates using random sampling from large populations using attributes sampling. Select the best response.a. From a random sample of items listed from a client's inventory count, an auditor estimates with a 90% confidence level
Multiple Choice QuestionsThe following questions concern sampling for attributes.Choose the best response.a. An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor (1) Minimize the failure to detect errors and fraud.(2) Eliminate the risk of
a. In each of the following independent problems, design an unbiased random sampling plan, using an electronic spreadsheet or a random number generator program. The plan should include defining the sampling unit and establishing a numbering system for the population. After the plan has been
Lenter Supply Company is a medium-sized distributor of wholesale hardware supplies in the central Ohio area. It has been a client of yours for several years and has instituted excellent internal controls for sales at your recommendation. In providing control over shipments, the client has
The following is a partial audit program for the audit of sales transactions.1. Foot the sales journal for one month and trace the postings to the general ledger.2. Vouch entries in sales journal to sales invoice and shipping document.3. Review the sales journal for any large or unusual
The following questions concern the determination of the proper sample size in audit sampling using the following table:Requireda. Assume that the initial sample size for column 1 using nonstatistical sampling is 90 items. For each of columns 2 through 7, use your judgment to decide the appropriate
The questions below relate to determining the CUER in audit sampling for tests of controls, using the following table:Requireda. Using nonstatistical sampling, calculate TER €“ SER for each of columns 1 through 8 and evaluate whether or not sampling error is large enough to accept the
The following are auditor judgments and attributes sampling results for six populations. Assume large population sizes..:.Requireda. For each population, did the auditor select a smaller sample size than is indicated by using the attributes sampling tables in Table 15-8 (p. 504) for determining
The questions below relate to determining the CUER in audit sampling for tests of controls, using the following table:Requireda. Calculate SER for each of columns 1 through 4 and use this to calculate the actual allowance for sampling risk.b. Explain why the CUER is higher for the attribute in
For the audit of the financial statements of Mercury Fifo Company, Stella Mason, CPA, has decided to apply nonstatistical audit sampling in the tests of controls and substantive tests of transactions for sales transactions. Based on her knowledge of Mercury's operations in the area of sales, she
The sampling data sheet below is missing selected information for six attributes involving tests of transactions for the sales and collection cycle.a. Use Table 15-8 (p. 504) and Table 15-9 (p. 505) to complete the missing information for each attribute.b. For which attributes are the sample
For the audit of Carbald Supply Company, Carole Wever, CPA, is conducting a test of sales for 9 months of the year ended December 31, 2011.Included among her audit procedures are the following:1. Foot and cross-foot the sales journal and trace the balance to the general ledger.2. Review all sales
In Part V of the Pinnacle Manufacturing case, you prepared a performance format audit program. In Part VI, sample sizes will be determined by using nonstatistical or attributes sampling, and the results of the tests will be evaluated. You should use nonstatistical sampling unless your professor
Auditors have used samples to conduct audit tests for decades. Despite the frequent use of sampling, auditors often use nonstatistical sampling rather than statistical sampling. Visit the website for The CPA Journal (www.cpajournal.com) and use the search function to locate the article "Statistical
Distinguish among tests of details of balances, tests of controls, and substantive tests of transactions for the sales and collection cycle. Explain how the tests of controls and substantive tests of transactions affect the tests of details of balances.
Cynthia Roberts, CPA, expresses the following viewpoint: "I do not believe in performing tests of controls and substantive tests of transactions for the sales and collection cycle. As an alternative, I send a lot of negative confirmations on every audit at an interim date. If I find a lot of
List five analytical procedures for the sales and collection cycle. For each test, describe a misstatement that could be identified.
Identify the eight accounts receivable balance-related audit objectives. For each objective, list one audit procedure.
Which of the eight accounts receivable balance-related audit objectives can be partially satisfied by confirmations with customers?
State the purpose of footing the total column in the client's accounts receivable trial balance, tracing individual customer names and amounts to the accounts receivable master file, and tracing the total to the general ledger. Is it necessary to trace each amount to the master file? Why?
Distinguish between accuracy tests of gross accounts receivable and tests of the realizable value of receivables.
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.
Evaluate the following statement: "In many audits in which accounts receivable is material, the requirement of confirming customer balances is a waste of time and would not be performed by competent auditors if it were not required by auditing standards. When internal controls are excellent and
Distinguish between a positive and a negative confirmation and state the circumstances in which each should be used. Why do CPA firms sometimes use a combination of positive and negative confirmations on the same audit?
Under what circumstances is it acceptable to confirm accounts receivable before the balance sheet date?
State the most important factors affecting the sample size in confirmations of accounts receivable.
Discuss whether email responses and oral responses are confirmations. How can an auditor verify the addresses for confirmations sent by mail, and confirmations sent electronically?
In Chapter 15, one of the points brought out was the need to obtain a representative sample of the population. How can this concept be reconciled with the statement in this chapter that the emphasis should be on confirming larger and older balances because these are most likely to contain
Define what is meant by alternative procedures in the confirmation of accounts receivable and explain their purpose. Which alternative procedures are the most reliable? Why?
Explain why the analysis of differences is important in the confirmation of accounts receivable, even if the misstatements in the sample are not material.
State three types of differences that might be observed in the confirmation of accounts receivable that do not constitute misstatements. For each, state an audit procedure that will verify the difference.
What is the relationship of each of the following to the sales and collection cycle: flowcharts, assessing control risk, tests of controls, and tests of details of balances?
Describe accounting requirements for proper recording of sales returns and allowances.
Multiple Choice QuestionsThe following questions concern analytical procedures in the sales and collection cycle. Choose the best response.a. As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the
Multiple Choice QuestionsThe following questions deal with confirmation of accounts receivable. Choose the best response.a. The negative form of accounts receivable confirmation request is useful except when (1) Internal control surrounding accounts receivable is considered to be effective.(2) A
Multiple Choice QuestionsThe following questions concern audit objectives and management assertions for accounts receivable. Choose the best response.a. When evaluating the adequacy of the allowance for uncollectible accounts, an auditor reviews the entity's aging of receivables to support
The following are common tests of details of balances for the audit of accounts receivable:1. Obtain a list of aged accounts receivable, foot the list, and trace the total to the general ledger.2. Trace 35 accounts to the accounts receivable master file for name, amount, and age categories.3.
The following misstatements are sometimes found in the sales and collection cycle's account balances:1. The accounts receivable trial balance total does not equal the amount in the general ledger.2. Several accounts receivable in the accounts receivable master file are not included in the aged
The following are audit procedures in the sales and collection cycle:1. Add the columns on the aged trial balance and compare the total with the general ledger.2. Examine a sample of shipping documents to determine whether each has a sales invoice number included on it.3. Examine a sample of
The following are the eight balance-related audit objectives, six tests of details of balances for accounts receivable, and seven tests of controls or substantive tests of transactions for the sales and collection cycle:Balance-Related Audit ObjectiveDetail tie-in ......... ClassificationExistence
Niosoki 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 writes the date on the shipping document. The last shipment made in the fiscal year
Dodge, CPA, is auditing the financial statements of a manufacturing company with a significant amount of trade accounts receivable. Dodge is satisfied that the accounts are correctly summarized and classified and that allocations, reclassifications, and valuations are made in accordance with
The Albring 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, 2011. Comparative information on sales and accounts receivable is included

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