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auditing 12th
Modern Auditing 5th Edition Walter Gerry Kell, William C. Boynton, Richard E. Ziegler - Solutions
The use of statistical sampling techniques in an examination of financial statements does not eliminate judgmental decisions.Required:a. Identify and explain four areas where judgment may be exercised by a CPA in planning a statistical sampling test.b. Assume that a CPA's sample shows an
An audit of inventory records disclosed that the population comprises 20,000 items of inventory. Units within the items vary from 30 to 750 . The values of the units vary from \(20 otin\) to \(\$ 1,500\). The auditor had estimated the error rate at not over 5 percent, and since a confidence level
In the development of an audit program it is determined that to achieve specified precision and confidence a sample of 436 items from a population of 10,000 is adequate on a statistical basis.Required:a. Briefly define each of the following terms used in the above statement:1. Population.2.
Mavis Stores had two billing clerks during the year. Snow worked three months and White worked nine months. As the auditor for Mavis Stores, Jones, CPA, uses attributes sampling to test clerical accuracy for the entire year, but due to the lack of internal verification, the system depends heavily
In the Leo Company, 18,000 checks were issued during a designated period of time. Concern exists within management that some of these checks may be forgeries. As part of your regular audit engagement, you agree to use discovery sampling to test for such occurrences.\section*{Required:}a. Assuming
The Tomlin Company's principal activity is buying milk from dairy farmers, processing the milk and delivering the milk to retail customers. You are engaged in auditing the sales transactions of the company and determine the following:SAMPLING FOR ATTRIBUTES 1. The company has 50 retail routes; each
In an attribute sampling plan for the Mid-East Sales Co., you examine 200 sales invoices. In your working papers, you make the following listing of possible exceptions to prescribed control procedures in the execution of the transactions:STUDY AND EVALUATION OF INTERNAL CONTROLRequired:a. List the
You are now conducting your third annual audit of the financial statement of Elite Corporation for the year ended December 31, 19X1. You decide to employ unrestricted random number statistical sampling techniques in testing the effectiveness of the company's internal control procedures relating to
You have made a review and preliminary evaluation of the Morgan Company's system of internal conirol, and based on this, you have designed a tentative audit program. Your next step is to perform compliance tests in order to confirm or challenge your evaluation.A major area of compliance testing is
You have completed your review and preliminary evaluation of internal accounting controls over the purchasing, accounts payable, and cash disbursements system of Riley Corporation, which has been your client for several years. You are now beginning to design an attribute sampling plan to test the
What elements are generally included in an EDP system?
Distinguish between computer hardware and software.
a. Why is documentation important to (1) management and (2) the auditor?b. Distinguish between a computer run and a run manual.
Distinguish between a master file and a transaction file in an EDP system and indicate the counterpart of each in a manual system.
What are the primary characteristics of (a) sequential and (b) random processing?
What procedure(s) may be used to (a) prevent unauthorized use of data files and (b) have adequate replacement capability for lost or damaged files?
Distinguish between general and application controls and indicate the relative importance of each category.
Indicate the procedures that are helpful in assuring proper systems development and documentation controls.
Hardware controls relate to access to computer equipment. Do you agree? Why or why not?
What role does a data control group play in an EDP system?
What specific aspects of data processing are included in input controls?
Identify and briefly describe the principal types of (a) processing controls and (b) output controls.
Discuss the applicability of GAAS in an EDP system and the extent of knowledge needed by a general audit staff member to meet the first genera! standard.
What are the basic audit differences between an E.DP and a manual system?
Contrast the different steps that are required in reviewing internal controls under the second standard of field work between a manual and an EDP system.
Contrast the purposes of (a) the preliminary review, (b) the preliminary review assessment, (c) completion of the review, and (d) the completion of review assessment.
What methods are used in (a) the preliminary review and (b) the completion of the review.
What factors may cause an auditor to discontinue the review after the preliminary phase?
What circumstances in an EDP system may lead to (a) similar and (b) different forms of compliance testing than in a manual system?
What are the advantages and disadvantages of auditing without the computer?
Contrast testing by (a) parallel simulation, (b) test data, and (c) integrated test facility.
Identify and briefly explain the major differences in EDP controls in an online realtime system.
Describe the primary techniques for testing OLRT systems.
Briefly discuss the auditing implications of using computer service centers.
Identify the major uses of the computer in substantive testing.
Eight categories of EDP accounting control procedures are identified in the chapter. Listed below are a number of specific control procedures:1. EDP manager reports to chief financial officer.2. Backup files.3. Written approval of all program changes.4. Physical controls for data files and
The plan of organization is an important aspect of an EDP activity.Required:a. Diagram an appropriate structure for an EDP department.b. Briefly describe the primary responsibilities of each individual or group identified in the diagram.c. Indicate the conditions in an EDP structure that would
When auditing an EDP accounting system, the independent auditor should have a general familiarity with the effects of the use of EDP on the various characteristics of accounting control and on the auditor's study and evaluation of such control. The independent auditor must be aware of those control
A well-designed management information system using EDP equipment will include methods of assuring that the data are appropriate to the situation and are accurate.Required:a. Describe procedures that should exist in order to assure that the input data are accurate and appropriate.b. Describe
The following five topics are part of the relevant body of knowledge for CPAs having field work or immediate supervisory responsibility in audits involving a computer:1. EDP equipment and its capabilities.2. Organization and management of the data processing function.3. Characteristics of
The requirement to make a study and evaluation of internal control applies regardless of the method of data processing used by a company. However, the methodology of complying with this standard may be affected by the form of the data processing system.Required:a. Describe the nature, purpose, and
You are performing an audit of the EDP function of a chemical company with about \(\$ 150\) million in annual sales. Your preliminary review discloses the following points:1. The EDP manager reports to the director of accounting, who, in turn, reports to the controller. The controller reports to
To test the effectiveness of general controls in an EDP system, the auditor may perform the following procedures:1. Trace selected program changes to supporting documentation.2. Review and evaluate the hardware controls included in the operating system.3. Observe and make inquiries concerning
Listed below are a number of errors or irregularities pertaining to application controls in an EDP system:1. An incorrect file is updated.2. Output is distributed to unauthorized users.3. Input data are duplicated during handling.4. Processing errors are made on valid input data.5. Valid data are
CPAs may audit "around" or "through" computers in examining financial statements of clients who use computers to process accounting data.Required:a. Describe the auditing approach referred to as auditing "around" the computer.b. Under what conditions does the CPA decide to audit "through" the
You have been engaged by Central Savings and Loan Association to examine its financial statements for the year ended December 31, 19X1. The CPA who examined the financial statements at December 31, 19X0 rendered an unqualified opinion.In January 19X1, the Association installed an online realtime
The independent auditor must evaluate a client's system of internal control to determine the extent to which various auditing procedures must be employed. A client who uses a computer should provide the CPA with a flowchart of the information processing system so the CPA can evaluate the control
George Beemster, CPA, is examining the financial statements of the Louisville Sales Corporation, which recently installed an off-line electronic computer. The following comments have been extracted from Mr. Beemster's notes on computer operations and the processing and control of shipping notices
"The EDP function ran in a mode that courted disaster but left the EDP staff apparently isolated from knowledge of the fraud. An open shop functioned where a central staff developed and ran the primary programs for the business, but programmers in other departments such as actuarial could also
"In late March, a programmer made a minor change in the program that was used to update the New York City Department of Social Services' master file. Because the revision was "trivial," the program was not tested. In the ensuing months, welfare recipients died, moved away, or lost their eligibility
You have been assigned to the annual audit of Explosives, Inc. You contact the senior, Bob Good, as instructed and arrange a date to discuss the client and the current year's audit.At your meeting with Good, the company and the current year's audit were discussed. During the discussion, Good
Describe the nature of the revenue cycle and identify the three classes of transactions that are part of this cycle.
Identify the departments that report to the (a) vice-president of sales, (b) vice-president of finance, and (c) controller.
State the framework of internal control objectives for revenue cycle transactions.
Indicate (a) the functions and (b) the internal accounting control principles that pertain to the executing and recording of sales transactions and custody of assets.
How important are sales transactions in the typical audit engagement?
a. What are the specific accounting control objectives for each of the functions involved in executing sales transactions?b. Indicate an appropriate segregation of duties among the departments involved in executing sales transactions.
a. When are authorizations required in existing sales transactions?b. What errors and irregularities may occur when sales transactions are not authorized?
a. Identify the specific internal accounting control objectives for each function associated with the recording of sales transactions.b. Indicate an appropriate segregation of duties for these functions.
Indicate the flow of sales orders and sales invoices in the manual execution of sales transactions.
a. What internal accounting control principles are applicable to the custody of assets in the revenue cycle?b. Indicate two applications of each principle.
a. What are the purposes of making a preliminary evaluation of accounting controls over sales transactions?b. How are these objectives met?
Does the overstatement or understatement of sales represent the greater audit risk? Why?
Identify five errors and irregularities that may occur in (a) executing and (b) recording sales transactions.
State the steps in the audit program for testing sales transactions in a manual system that pertain to the use of a random sample.
Identify other steps in the audit program that apply to the recording of transactions and the custody of assets.
a. What sampling units may be used when the audit objective is (1) proper executing and (2) proper recording of sales transactions?b. When is it preferable to use (a) shipping documents and (b) sales invoices in an attribute sampling plan?
Why does the form of an occurrence affect the auditor's interpretation of sample results?
What are the uses of a random sample of punched cards in testing application controls over sales transactions in an EDP system?
How may test data and generalized audit software be used in testing EDP application controls over sales transactions?
The internal control questionnaire in Figure 7-4 includes the following questions:1. Are all credit sales approved by credit department?2. Are all sales orders authorized as to prices and terms?3. Are goods compared to sales order before shipment?4. Are prenumbered shipping documents prepared and
The following control procedures over sales transactions are prescribed by the Harlan Company:1. Credit department approval of credit sales.2. Sales invoice for each shipping document.3. Internal verification of prices, terms, and accuracy of sales invoice.4. Prenumbered sales invoices.5. Agreement
Assume the following exceptions to prescribed control procedures over sales transactions occurred in the Lane Company:1. A shipment to a bona fide customer was not billed.2. A sales invoice was correctly journalized but was not posted to the customer's account in the subsidiary ledger.3. Sales were
In your interim work on the sales transactions of the Carlean Company, you elect to use the attributes shown in Figure 7-7. Assume, however, the following:The population consists of 7,000 prenumbered invoices beginning with A14260. You plan to use computer generated random number tables in
A partially completed charge sales systems flowchart. The flowchart depicts the charge sales activities of the Bottom Manufacturing Corporation.A customer's purchase order is received and a six-part sales order is prepared, therefrom. The six copies are initially distributed as follows:1. Copy 1:
The customer billing function of the Robinson Company, a small paint manufacturer, is attended to by a receptionist, an accounts receivable clerk and a cashier who also serves as a secretary. The company's paint products are sold to whulesalers and retail stores.The following describes all of the
Your examination of the financial statements of General Department Store, Inc. disclosed the following:1. The store has 30,000 retail accounts which are billed monthly on a cycle basis. There are twenty billing cycle divisions of the subsidiary accounts receivable ledger, and accounts are
The Meyers Pharmaceutical Company, a drug manufacturer, has the following system 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 in which is inserted the
Huron Company manufactures and sells eight major product lines with fifteen to twenty-five items in each product line. All sales are on credit, and orders are received by mail or telephone. Huron has a computer-based system that employs magnetic tape as a file medium.All sales orders received
John Carr, controller for the General Corporation, provides you with the following information relative to the company's sales system:The sales department prepares a six-part sales invoice form from the customer's order and files the order alphabetically by customer. Part 2 is sent to the credit
The Joppa Corporation's sales department receives all sales order (mail or phone), prepares the sales order form, and forwards a copy to the credit manager for credit approval. On indicating approval, the sales order copy is returned to the sales department, where the shipping order copy is sent to
The Alpha Company is a medium-sized company which assembles robots from parts and subassemblies ordered to specification. All work done by outside processors is completed prior to the time the Alpha Company receives the component parts and/or sub-assemblies. These robots are sold to steel mills,
Indicate the scope of cash receipts and sales adjustments transactions in the revenue cycle.
What are the functions in executing and recording these two classes of transactions and custody of related assets?
Discuss the personnel and sound practices aspects of an internal control environment that relate to cash receipts transactions.
Contrast the relative importance of cash receipts and sales adjustments transactions in the typical audit engagement.
Identify the specific internal accounting control objective and appropriate division of duties for each function involved in executing cash receipts transactions.
What authorizations are required in executing (a) cash receipts and (b) sales adjustments transactions?
Describe the activities of each department that participates in the execution of cash receipts transactions.
Briefly discuss the use of cash registers, prelists, and daily cash summaries in controlling cash receipts.
Diagram the flow of data within the cashier's department when a company has both over-the-counter and mail receipts.
Identify the control procedures that offer reasonable assurance that cash receipts are deposited intact daily.
What accounting control principles are applicable to the recording of cash receipts and sales adjustments transactions?
Diagram the flow of data within general accounting in recording cash receipts transactions.
How does a lockbox system contribute to internal control over cash receipts.
a. What is lapping?b. What internal control principles will prevent or detect this irregularity?c. What test of transactions may detect lapping?
Contrast the objectives of comparing (a) totals of deposit slips with cash summaries and (b) details of deposit slips with individual entries in the cash receipts journal?
State the steps in the audit program for testing cash receipts transactions in a manual system that involves the use of a random sample.
Contrast the testing of sales adjustments for (a) overstatement and (b) understatement.
What sampling units may be used in attribute sampling of cash receipts transactions?
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