Upon completion of substantive audit testing, the auditor should post all audit adjustments and reclassification entries to
Question:
Upon completion of substantive audit testing, the auditor should post all audit adjustments and reclassification entries to the working trial balance and extend the audited balances. The extended balances then form the nucleus for the audited financial statements. (See AU 500.02.)
Selected analytical procedures also should be applied at the conclusion of the audit. (See AU 520.03.) The results may be compared with those developed during the audit planning phase. This approach provides added support for audit conclusions contained in the documentation.
Derick has asked you to post the adjustments and reclassifications and to perform the review phase analytical procedures.
Requirements
1. Excel file labeled “20X9AJE sol.xlxs” (adjusting journal entries). This file contains all of the journal entries that you should have proposed during the Brony audit. Review the adjustments, which will be presented to the client as proposed audit adjustments. Remember that the auditor can only propose that adjustments and reclassifications be recorded on Brony’s Bikes’ books. That is because Brony’s Bikes’ management is responsible for the financial statements. The auditor is responsible for obtaining sufficient appropriate evidence that the financial statements are presented fairly and then to render a report on those financial statements, including the auditor’s opinion or, if necessary, the auditor’s disclaimer of issuing an opinion.
Derick has set the following materiality thresholds. These figures are not rounded to the nearest thousand dollars as are the financial statement amounts:
Income statement $ 435,000
Balance sheet $1,542,270
Given these thresholds and referring to the proposed audit adjustments and reclassifications, determine whether the potential adjustments equal or exceed the income statement or balance sheet materiality threshold in the aggregate. Do not net understatements against overstatements. That is, if aggregate overstatements are $600,000 and aggregate understatements are $500,000, the adjustments should be proposed to Brony’s Bikes’ management, inasmuch as both exceed the income statement materiality threshold.
2. Retrieve the Excel file labeled “20X9 WTB.xlxs.” Post the adjustments and reclassifications to the working trial balance. Observe the following rules in making your postings:
a. Post account increases as positive amounts, and post account decreases as negative amounts;
b. Postings are in “thousands of dollars,” whereas the adjustments and reclassifications are rounded to the nearest dollar. Therefore, in posting the adjustments and reclassifications, round to the nearest $1,000.
c. Enter AJE numbers as text by typing a single quote before the number “1” so that Excel does not include the AJE numbers in the final balances.
d. Your worksheet includes formulas to determine the sum of each column.
3. Retrieve the Excel file labeled “20X9 AUDBS.xlxs.” Enter the amounts from the audited column in the 20X9 balance sheet. Calculate the percentages of individual balance sheet items and components relative to totals for 20X9.
4. Calculate the new ratios for 20X9 based on the audited financial statements.
What is the purpose of applying analytical procedures in the evaluation and review phase of the audit? Why is it important to develop expectations as part of performing final analytical procedures?
Auditing Cases An Interactive Learning Approach
ISBN: 9780134421827
7th Edition
Authors: Mark S Beasley, Frank A. Buckless, Steven M. Glover, Douglas F Prawitt