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auditing
Auditing An International Approach 6th edition Wally J. Smieliauskas, Kathryn Bewley - Solutions
What is cheque kiting? How might auditors detect kiting?
In the Audit 11.2 case, what information might have been obtained from each of the following: enquiries, detail test of controls procedures, observations, and confirmations?
Why is controlled access to computer programs and master files (such as credit files and price lists) important in a control environment?
Why is it a control weakness if the same employee can authorize inventory transfers and record accounts receivable entries? Is it easier to send the cash and cheques to the accountants so that they can enter accurately the credits to customers’ accounts?
What accounting records and files could an auditor examine to find evidence of unrecorded sales, inadequate credit checks, and incorrect product unit prices?
What account balances are included in the revenues, receivables, and receipts process?
What are the two important characteristics of a control test? What actions are typically used to perform control tests?
Distinguish between confirmation response rate and confirmation detection rate.
What are some of the justifications for not using confirmations of accounts receivable on a particular audit?
In the Audit 11.1 case, name one bank reconciliation control procedure that could have revealed signs of embezzlement.
What feature(s) of a cash receipts internal control system would be expected to prevent the cash receipts journal and recorded cash sales from reflecting more than the amount shown on the daily deposit slip?
With reference to the Audit 11.3 case, how would an understanding of the business and management reporting system have contributed to discovery of the open cash receipts journal cutoff error?
Prepare a table similar to Exhibit 11–4 on (internal control objectives) for cashreceipts.
The following auditee-prepared bank reconciliation is being examined by you during an audit of the financial statements of Cynthia Company:Required:Indicate one or more audit procedures that should be performed in gathering evidence in support of each of the items (a) through (f)above.
a. You wish to test Houston Corporation’s sales cutoff at June 30. Describe the steps you should include in this test.b. You obtain a July 10 bank statement directly from the bank. Explain how this cutoff bank statement should be used:1. In your review of the June 30 bank reconciliation, and2. To
Several accounts receivable confirmations have been returned with the notation “verification of vendor statements is no longer possible because our data processing system does not accumulate each vendor’s invoices.”Required:What alternative auditing procedures could be used to audit these
During the audit of the December 31, 20X5, financial statements, the auditor identifies cash amounts received subsequent to December 31, 20X5, and traces these amounts to the cash account in the general ledger and to the accounts receivable sub-ledger balances at December 31, 20X5.Required:a. What
The auditor is considering confirming zero-balance accounts from the auditee’s accounts receivable sub-ledger to provide evidence concerning the completeness assertion for accounts receivables and sales.Required:a. What are the advantages and limitations of this procedure?b. How would the
a. Complete the following continuity schedule indicating how the movements in the allowance for doubtful accounts tie into other amounts in the financial statements.b. Prepare an audit program listing the procedures that can be used to audit the accounts in this system. Demonstrate how your audit
Velma Inc. is a very modern company that strives to be paperless in all its administrative functions.Velma has arranged with its bank to receive all its banking transaction information online, through the bank’s online banking website. Velma’s auditor wants to get a cutoff bank statement as of
Taylor, a PA, has been engaged to audit the financial statements of University Books Incorporated. University Books maintains a large, revolving cash fund exclusively for the purpose of buying used books from students for cash. The cash fund is active all year because the nearby university offers
You are the in-charge auditor examining the financial statements of the Gutzler Company for the year ended December 31. During late October, with the help of Gutzler’s controller, you completed an internal control questionnaire and prepared the appropriate memoranda describing Gutzler’s
The Pottstown Art League operates a museum for the benefit and enjoyment of the community. During hours when the museum is open to the public, two volunteer clerks positioned at the entrance collect a $5 admission fee from each nonmember patron. Members of the Art League are permitted to enter free
Ajax Inc. recently implemented a new accounting system to process the shipping, billing, and accounts receivable records more efficiently. During the interim work of Ajax’s auditors, an assistant completed the review of the accounting system and the internal controls. The assistant determined the
The Patrick Company had poor internal control over its cash transactions. Facts about its cash position at November 30 were the following:The cash books showed a balance of $18,901.62, which included un-deposited receipts. A credit of $100 on the bank statement did not appear on the books of the
The ABC Appliance Company, a manufacturer of small electrical appliances, deals exclusively with 20 distributors situated throughout the country. At December 31 (the balance sheet date), receivables from these distributors aggregated $875,000. Total current assets were $1.3 million.With respect to
You were engaged to conduct an audit of the financial statements of Clayton Realty Corporation for the year ending January 31.The examination of the annual rent reconciliation is a vital portion of the audit. The following rent reconciliation was prepared by the controller of Clayton Realty
Rosella is the senior in charge of the current-year audit of Harrier Limited, a company that designs and manufactures highly sophisticated machines used to make precision plastic parts and instruments. The machines have a high dollar value (ranging from $500,000 to over $1,000,000) and there is a
The auditor of a stock brokerage company, Roller Securities Inc., sends out negative confirmations of account details for a sample of about 50% of the stock brokerage’s customers, selected at random.Historically, 2–5% of the confirmations have been returned, and the majority of the
Parts Inc. sells electrical components to large department stores and also has a few cash sales to electricians.Sales invoices are prepared for all sales. Cash sales are recorded to the cash receipts journal and cash is deposited to the bank each day. All sales to large stores are credit sales and
Case Description:In the audit of a municipal government, the auditors discovered that receivables for property taxes were overstated because the tax assessor stole some taxpayers’ payments.J. R. Shelstad had been the tax assessor–collector for 15 years in the Ridge Municipal District, a large
It is Monday, September 13, 2010. You, a PA, work at Fife & Richardson LLP, a PA firm. Ken Simpson, one of the partners, approaches you mid-morning regarding Brennan & Sons Limited (BSL), a private company client for which you performed the August 31, 20X9, year-end audit.“It seems there have
What is a purchase requisition?
What assertion is affected if duplicate payments are made from the same supporting documents? How can this type of error be prevented?
Where could an auditor look to find evidence of losses on purchase commitments? On unrecorded liabilities to suppliers?
List the main supporting source documents used in a purchases, payables, and payments process.
What are the functions that should be segregated in the purchases, payables, and payments process?
Describe the two general characteristics of a control test.
What information would be included in a continuity schedule for an accrued liability?
What key items on the continuity schedule would be vouched to supporting documentation?
What procedures are followed to audit inventory when the physical inventory is taken on a cyclical basis or on a statistical plan but never as a complete count on a single date?
What is the purpose of a continuity schedule for PPE and intangibles in audit working papers?
Give some examples of receiving departments in the audit application cases above.
Why is professional skepticism important for auditors? Give two case examples.
What evidence could the verbal enquiry audit procedure produce in Audits 12.1, 12.2, and 12.3?
List the management reports that can be used for audit evidence. What information in them can be useful to auditors?
What are some controls that might prevent the embezzling of cash by creation of fictitious supplier invoices?
How could an auditor determine if the purchasing agent had practiced purchase order splitting?
How is the information from the shipping department, receiving department, and warehouse used to update perpetual inventory records?
In fixed asset management and accounting, which functional responsibilities should be delegated to separate departments or management levels?
In what situations would auditors send confirmation letters to creditors to audit accounts payable?
List key substantive audit procedures used to address the inventory valuation assertion.
How is information collected during the auditor’s attendance at the physical inventory count used in the audit of the inventory balance?
What cutoff misstatements can arise if the FOB terms for sales shipped are not properly accounted for? What about for inventory received?
Describe the purpose of and give examples of audit procedures in the search for unrecorded liabilities.
Explain the difference in approach between confirmation of accounts receivable and confirmation of accounts payable.
In substantive auditing, why is the emphasis on the completeness assertion for liabilities instead of on the existence assertion as in the audit of assets?
In the review of an auditee’s inventory-taking instructions, what characteristics are the auditors looking for?
Explain dual-direction sampling in the context of inventory test counts.
Explain why the valuation assertion often has a high risk of misstatement for PPE and intangible assets.
In Audits 12.1 and 12.3, frauds involving fictitious people, businesses, and locations occurred. Where can auditors obtain information showing whether people, businesses, and locations are real or not?
The essential characteristic of the liabilities control system is to separate the authorization and approval to initiate a transaction from the responsibility for recordkeeping.Required:What would constitute the authorization for accounts payable recording? What documentary evidence could auditors
The use of pre-numbered documents is an important feature for control to ensure that all valid transactions are recorded and none are omitted.Required:How could auditors gather evidence that the control for completeness of cash disbursements was being used properly by a company?
Two “automatic transactions” can be produced in a computerized accounting system: (1) Cheque printing and signature and (2) Purchase order at a preprogrammed stock reorder point. Required: Assume management is uncomfortable with the computer creating transactions. How could management delay
Why should auditors be concerned with the adequacy of casualty insurance coverage of an auditee’s physical property?
What evidence regarding inventories and cost of sales can the auditor typically obtain from enquiry?
Auditors plan their audit procedures to gather evidence about management’s assertions in the financial statements. In addition to the broad assertions, such as existence and completeness, specific assertions are made for each major account area. Required: List 9 or 10 examples of such specific
Why the repairs and maintenance expense account should be audited at the same time as the fixed asset accounts?
Describe how each procedure may be used to gather evidence on fixed assets and which broad financial statement assertion(s) (existence, completeness, ownership [rights], valuation [allocation], and presentation and disclosure), are being addressed by the use of the procedure.Required:Audit
Listed below is a selection of items from the internal control questionnaire on payables shown in Appendix 12A.1. Are invoices, receiving reports, and purchase orders reviewed by the cheque signer?2. Are cheques dated in the cheque register with the date of the cheque?3. Are quantity and quality of
Li was assigned to work on the audit of A1 Clothing Ltd., because she has been auditing similar companies for three years and is considered to be knowledgeable about the clothing retailing industry in Canada. Her employer, Bing PAs, audited A1 in 20X5 for the first time and had difficulty verifying
You are performing the audit of the XX Limited (CXX) financial statements for its year ended September 30, 20X0.CXX is a private company and operates a grocery distribution business in the Greater Toronto Area. CXX’s audited financial statements are used mainly by its bank, which has made a
Alvin is auditing Demure Fashions Inc., a chain of women’s clothing stores. Demure operates six stores in shopping malls across the Toronto area and has been an audit client of Alvin’s firm for several years. Alvin has been assigned the audit of Demure’s store fixtures account. This year the
Consider the following examples of inventories in various businesses:1. Pharmaceuticals in a drug company2. Fine chemical compounds in a biotechnology company3. Software in an information technology development company4. New condominium office units in a commercial real estate developer5. Fine art
Long, PA, has been engaged to examine and report on the financial statements of Maylou Corporation. During the review phase of the study of Maylou€™s system of internal control over purchases, Long was given the following document flowchart for purchases (see Exhibit DC12-1
The Runge Controls Corporation manufactures and markets electrical control systems: temperature controls, machine controls, burglar alarms, and the like. Electrical and semiconductor parts are acquired from outside vendors, and systems are assembled in Runge€™s plant. The company incurs
You were in the final stages of your audit of the financial statements of Ozine Corporation for the year ended December 31, 20X2, when you were consulted by the corporation’s president. The president believes there is no point in your examining the 20X3 accounts payable records and testing data
Clark and his partner, Kent, both PAs, are planning their audit program for the audit of accounts payable on the LeClair Corporation’s annual audit. Saturday afternoon, they reviewed the thick file of last year’s working papers, and both of them remembered all too well the six days they spent
Cindy Li is the partner in charge of the audit of Blue Distributing Corporation, a wholesaler that owns one warehouse containing 80% of its inventory. Cindy is reviewing the working papers that were prepared to support the firm’s opinion on Blue’s financial statements. Cindy wants to be certain
Your auditee took a complete physical inventory count under your observation as of December 15 and adjusted the inventory control account (perpetual inventory method) to agree with the physical inventory. Based on the count adjustments as of December 15, and after review of the transactions
Ace Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse but, instead, uses statistical sampling to estimate the year-end inventory. Ace maintains a perpetual inventory record of parts and supplies. Management believes that
You are conducting an audit of the financial statements of a wholesale cosmetics distributor with an inventory consisting of thousands of individual items. The distributor keeps its inventory in its own distribution centre and in two public warehouses. A perpetual inventory database is maintained
In connection with a recurring examination of the financial statements of the Louis Manufacturing Company for the year ended December 31, you have been assigned the audit of the fixed assets accounts (Manufacturing Equipment, Manufacturing Equipment—Accumulated Depreciation, and Repairs to
Peacock Company is a wholesaler of soft goods. The inventory is composed of approximately 3500 different items. The company employs a computerized batch processing system to maintain its perpetual inventory records. The system is run each weekend so that inventory reports are available on Monday
During the audit of Mason Company Inc., for the calendar year 20X2, you noticed that the company produces aluminum cans at the rate of about 40 million units annually. On the plant tour, you noticed a large stockpile of raw aluminum in storage. Your inventory observation and pricing procedures
Deake Corporation is a medium-sized, diversified manufacturing company. Recently, Jack Richards was promoted to manager of the property accounting section. Richards is having difficulty responding to some of the requests from individuals in other departments for information about the company’s
On January 11, at the beginning of your annual audit of the Grover Manufacturing Company’s financial statements for the year just ended December 31, the company president confides to you that an employee is living on a scale in excess of that which his salary would support.The employee has been
You are the auditor of Bittern Inc. Bittern’s long standing policy is to capitalize all repairs and maintenance payments that exceed $10,000, without assessing the nature of the expenditure. Many of Bittern’s buildings and equipment are aging and repairs are becoming frequent and more
White Ice Mines Inc. is a mining company. During 20X4, White Ice acquired a diamond mine located in the far north for $800 million from Albatross Inc. The purchase price is based on the mine’s inventory of extracted diamonds, with an appraised value of $300 million, plus diamond reserves
TheShoppingMall.com (TSM) is an Internet business that provides a website with links to a variety of online shopping sites with which TSM has established “marketing partnerships.” TSM also provides advertising, promotions, and discount coupons for its partner shopping sites. TSM was
On The Road Inc. (OTR) is a tour company owned by Joy Kerouak. OTR offers organized tours three weeks to six-months long, targeted to early retirees 55-years old and over. OTR is in its third year of operations. Joy is not actively involved in the business and has hired a team of skilled managers
Case Description Beta Magnetic, a large company, experienced a fraud in the cash payments processed for employees’ supplementary medical benefit claims. Fictitious benefit claims were paid by the company, which self-insured up to $50,000 per employee for supplementary benefits costs (such as
Integrated Measurement Systems Inc. (IMS) is a Canadian public company that manufactures high-end measuring devices used primarily in the oil and natural gas industries. In 20X3, it had sales of $100 million and earnings before income tax of $5 million. The company has a December 31 year-end.Ted
a. What is your assessment the risk of material misstatement at the assertion level for the BSL inventory? Make reference to case facts to support your conclusions.b. Describe the substantive procedures you would include in your audit program for verifying the quantity and the pricing of BSL’s
List the main risks auditors will be concerned with in assessing risk in the production and payroll processes of a typical manufacturing business.
What are the functions normally associated with the production process? Why is an understanding of the production process, including the related data processing and cost accounting, important to auditors evaluating the control structure as part of their assessment of control risk?
Describe a walk-through of a production transaction from production orders to entry in the finished goods perpetual inventory records. What document copies would be collected? What controls noted? What duties separated?
Describe how the separation of (1) authorization of production transactions, (2) recording of these transactions, and (3) physical custody of inventories can be specified among the production, inventory, and cost accounting departments.
What features of the cost accounting system would be expected to prevent the omission of recording materials used in production? Discuss.
When auditors want to use an auditee’s sales forecast for general familiarity with the production process or for evaluation of slow-moving inventory, what kind of work should be done on the forecast?
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