Chapter
7
7-27
(Objective 7-4) The
following are examples of documentation typically obtained by auditors:
Vendors’
invoices
General
ledger files
Bank
statements
Cancelled
payroll checks
Payroll
time records
Purchase
requisitions
Receiving
reports (documents prepared when merchandise is received)
Minutes
of the board of directors
Remittance
advices
Signed
W-4s (Employee’s Withholding Exemption Certificates)
Signed
lease agreements
Duplicate
copies of bills of lading
Subsidiary
accounts receivable records
Cancelled
notes payable
Duplicate
sales invoices
Articles
of incorporation
Title
insurance policies for real estate
Notes
receivable
Required
Classify
each of the preceding items according to type of documentation: (1) internal or
(2) external.
Explain
why external evidence is more reliable than internal evidence.
.
7-30
(Objective 7-4) Eight
different types of evidence were discussed. The following questions concern the
reliability of that evidence:
Required
Explain
why confirmations are normally more reliable evidence than inquiries of the
client.
.
Describe
a situation in which confirmation will be considered highly reliable and
another in which it will not be reliable.
.
Under
what circumstances is the physical observation of inventory considered
relatively unreliable evidence?
.
Explain
why recalculation tests are highly reliable but of relatively limited use.
.
Give
three examples of relatively reliable documentation and three examples of less
reliable documentation. What characteristics distinguish the two?
Give
several examples in which the qualifications of the respondent or the
qualifications of the auditor affect the reliability of the evidence.
Explain
why analytical procedures are important evidence even though they are
relatively unreliable by themselves.
.
7-31
(Objective 7-4) As
auditor of the Star Manufacturing Company, you have obtained
A
trial balance taken from the books of Star one month before year-end:
There
are no inventories consigned either in or out.
All
notes receivable are due from outsiders and held by Star.
Required
Which
accounts should be confirmed with outside sources? Briefly describe from whom
they should be confirmed and the information that should be confirmed. Organize
your answer in the following format:
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Chapter
8
8-22
(Objective 8-7) Gale Gordon, CPA, has found ratio and trend analysis relatively
useless as a tool in conducting audits. For several engagements, he computed
the industry ratios included in publications by Standard and Poor’s and
compared them with industry standards. For most engagements, the client’s
business was significantly different from the industry data in the publication
and the client automatically explained away any discrepancies by attributing
them to the unique nature of its operations. In cases in which the client had
more than one branch in different industries, Gordon found the ratio analysis
no help at all. How can Gordon improve the quality of his analytical
procedures?
8-33
(Objectives 8-3, 8-7, 8-8) Your comparison of the gross
margin percent for Jones Drugs for the years 2008 through 2011 indicates a
significant decline. This is shown by the following information:
A
discussion with Marilyn Adams, the controller, brings to light two possible
explanations. She informs you that the industry gross profit percent in the
retail drug industry declined fairly steadily for 3 years, which accounts for
part of the decline. A second factor was the declining percent of the total
volume resulting from the pharmacy part of the business. The pharmacy sales
represent the most profitable portion of the business, yet the competition from
discount drugstores prevents it from expanding as fast as the nondrug items
such as magazines, candy, and many other items sold. Adams feels strongly that
these two factors are the cause of the decline.
The
following additional information is obtained from independent sources and the
client’s records as a means of investigating the controller’s explanations:
Required
Evaluate
the explanation provided by Adams. Show calculations to support your
conclusions.
.
Which
specific aspects of the client’s financial statements require intensive
investigation in this audit?
.
Chapter
9
9-33
(Objectives 9-6) Below
are ten independent risk factors:
The
client lacks sufficient working capital to continue operations.
The
client fails to detect employee theft of inventory from the warehouse because
there are no restrictions on warehouse access and the client does not reconcile
inventory on hand to recorded amounts on a timely basis.
The
company is publicly traded.
The
auditor has identified numerous material misstatements during prior year audit
engagements.
The
assigned staff on the audit engagement lack the necessary skills to identify
actual errors in an account balance when examining audit evidence accumulated.
The
client is one of the industry’s largest based on its size and market share.
The
client engages in several material transactions with entities owned by family
members of several of the client’s senior executives.
The
allowance for doubtful accounts is based on significant assumptions made by
management.
The
audit plan omits several necessary audit procedures.
The
client fails to reconcile bank accounts to recorded cash balances.
Required
Identify
which of the following audit risk model components relates most directly to
each of the ten risk factors:
Acceptable
audit risk
Inherent
risk
Control
risk
Planned
detection risk
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