ACCT 444 Week 1 to 5 Homework and Course Project

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ACCT 444 Week 1 to 5 Homework and Course Project Click Link Below To Buy: http://hwcampus.com/shop/acct-444-week-1-to-5-homework-and-course-project/ Contact Us: [email protected] Chapter 1 1-18 (Objectives 1-3, 1-4, 1-5) Consumers Union is a nonprofit organization that provides information and counsel on consumer goods and services. A major part of its function is the testing of different brands of consumer products that are purchased on the open market and then the reporting of the results of the tests in Consumer Reports, a monthly publication. Examples of the types of products it tests are middle-sized automobiles, residential dehumidifiers, flat-screen TVs, and boys’ jeans. Required 1. In what ways are the services provided by Consumers Union similar to assurance services provided by CPA firms? 2. Compare the concept of information risk introduced in this chapter with the information risk problem faced by a buyer of an automobile. 3. Compare the four causes of information risk faced by users of financial statements as discussed in this chapter with those faced by a buyer of an automobile. 4. Compare the three ways users of financial statements can reduce information risk with those available to a buyer of an automobile. Chapter 2 2-19 (Objective 2-7) For each of the following procedures taken from the quality control manual of a CPA firm, identify the applicable element of quality control from Table 2-4 on page 38. 1. Appropriate accounting and auditing research requires adequate technical reference materials. Each firm professional has online password access through the firm’s Internet Web site to electronic reference materials on accounting, auditing, tax, SEC, and other technical information, including industry data. 2. Each office of the firm shall be visited at least annually by review persons selected by the director of accounting and auditing. Procedures to be undertaken by the reviewers are illustrated by the office review program. 3. All potential new clients are reviewed before acceptance. The review includes consultation with predecessor auditors, and background checks. All new clients are approved by the firm management committee, including assessing whether the firm has the technical competence to complete the engagement. 4. Each audit engagement must include a concurring partner review of critical audit decisions. 5. Audit engagement team members enter their electronic signatures in the firm’s engagement management software to indicate the completion of specific audit program steps. At the end of the audit engagement, the engagement management software will not allow archiving of the engagement file until all audit program steps have been electronically signed. 6. At all stages of any engagement, an effort is made to involve professional staff at appropriate levels in the accounting and auditing decisions. Various approvals of the manager or senior accountant are obtained throughout the audit. 7. No employee will have any direct or indirect financial interest, association, or relationship (for example, a close relative serving a client in a decision-making capacity) not otherwise disclosed that might be adverse to the firm’s best interest. 8. Individual partners submit the nominations of those persons whom they wish to be considered for partner. To become a partner, an individual must have exhibited a high degree of technical competence; must possess integrity, motivation, and judgment; and must have a desire to help the firm progress through the efficient dispatch of the job responsibilities to which he or she is assigned. 9. Through our continuing employee evaluation and counseling program and through the quality control review procedures as established by the firm, educational needs are reviewed and formal staff training programs modified to accommodate changing needs. At the conclusion of practice office reviews, apparent accounting and auditing deficiencies are summarized and reported to the firm’s director of personnel. 10. The firm’s mission statement indicates its commitment to quality, and this commitment is emphasized in all staff training programs Chapter 4 4-22 (Objectives 4-6, 4-7) Each of the following situations involves possible violations of the AICPA’s Code of Professional Conduct. For each situation, state whether it is a violation of the Code. In those cases in which it is a violation, explain the nature of the violation and the rationale for the existing rule. 1. The audit firm of Miller and Yancy, CPAs has joined an association of other CPA firms across the country to enhance the types of professional services the firm can provide. Miller and Yancy share resources with other firms in the association, including audit methodologies and audit manuals, and common IT systems for billing and time reporting. One of the partners in Miller and Yancy has a direct financial interest in the audit client of another firm in the association. . 1. Bruce Sullivan, CPA, is the audit partner on the engagement of Xylium Corporation, which is a public company. In structuring the agreement with the audit committee for the audit of Xylium’s financial statements, Sullivan included a clause that limits the liability of Sullivan’s firm so that shareholders of Xylium are prohibited from suing Sullivan and the firm for performance issues related to the audit. 1. Jennifer Crowe’s audit client has a material investment in Polex, Inc. Jennifer’s nondependent parents also own shares in Polex and Polex is not an attest client of Jennifer’s firm. The amount of her parent’s ownership in Polex is not significant to Jennifer’s net worth. . 1. Joe Stokely is a former partner in Bass and Sims, CPAs. Recently, Joe left the firm to become the chief operating officer of Lacy Foods, Inc., which is an audit client of Bass and Sims. In his new role, Joe has no responsibilities for financial reporting. Bass and Sims made significant changes to the audit plan for the upcoming audit. . 1. Odonnel Incorporated has struggled financially and has been unable to pay the audit fee to its auditor, Seale and Seale, CPAs, for the 2009 and 2010 audits. Seale and Seale is currently planning the 2011 audit. 1. Connor Bradley is the partner in charge of the audit of Southern Pinnacle Bank. Bradley is in the process of purchasing a beach condo and has obtained mortgage financing from Southern Pinnacle. . 1. Jessica Alma has been serving as the senior auditor on the audit of Carolina BioHealth, Inc. Because of her outstanding work, the head of internal audit at Carolina BioHealth extended her an offer of employment to join the internal audit department as an audit manager. When the discussions with Carolina BioHealth began, Jessica informed her office’s managing partner and was removed from the audit engagement. . 1. Lorraine Wilcox is a CPA and professor of accounting at a major state university. One of her former students recently sat for the Audit section of the CPA exam. One day, the student dropped by Lorraine’s office and told her about many of the questions and simulation content on the exam. Lorraine was grateful for the information, which will be helpful as she prepares the course syllabus for the next semester. 1. Audrey Glover is a financial analyst in the financial reporting department of Technologies International, a privately held corporation. Audrey was asked to prepare several journal entries for Technologies International related to transactions that have not yet occurred. The entries are reflected in financial statements that the company recently provided to the bank in connection with a loan outstanding due to the bank. 1. Austin and Houston, CPAs, is performing consulting services to help management of McAlister Global Services streamline it production operations. Austin and Houston structured the fee for this engagement to be a fixed percentage of costs savings that result once the new processes are implemented. Austin and Houston perform no other services for McAlister Global. . Chapter 26 26-25 (Objectives 26-25, 26-1, 26-4) Weston Corporation has an internal audit department operating out of the corporate headquarters. Various types of audit assignments are performed by the department for the eight divisions of the company. The following findings resulted from recent audits of Weston Corporation’s White Division: 1. One of the departments in the division appeared to have an excessive turnover rate. Upon investigation, the personnel department seemed to be unable to find enough workers with the specified skills for this department. Some workers are trained on the job. The departmental supervisor is held accountable for labor efficiency variances but does not have qualified staff or sufficient time to train the workers properly. The supervisor holds individual workers responsible for meeting predetermined standards from the day they report to work. This has resulted in a rapid turnover of workers who are trainable but not yet able to meet standards. 2. The internal audit department recently participated in a computer feasibility study for this division. It advised and concurred on the purchase and installation of a specific computer system. Although the system is up and operating, the results are less than desirable. The software and hardware meet the specifications of the feasibility study, but there are several functions unique to this division that the system has been unable to accomplish. Linking of files has been a problem. For example, several vendors have been paid for materials not meeting company specifications. A revision of the existing software is probably not possible, and a permanent solution probably requires replacing the existing computer system with a new one. 3. One of the products manufactured by this division was recently redesigned to eliminate a potential safety defect. This defect was discovered after several users were injured. At present, there are no pending lawsuits because none of the injured parties has identified a defect in the product as a cause of the injury. There is insufficient information to determine whether the defect was a contributing factor. The director of internal auditing and assistant controller is in charge of the internal audit department and reports to the controller in corporate headquarters. Copies of internal audit reports are sent routinely to Weston’s board of directors. Required 1. Explain the additional steps in terms of field work, preparation of recommendations, and operating management review that ordinarily should be taken by Weston Corporation’s internal auditors as a consequence of the audit findings in the first situation (excessive turnover). . 1. Discuss whether there are any objectivity problems with Weston Corporation’s internal audit department as revealed by the audit findings. Include in your discussion any recommendations to eliminate or reduce an objectivity problem, if one exists. . 1. The internal audit department is part of the corporate controllership function, and copies of the internal audit reports are sent to the board of directors. • Evaluate the appropriateness of the location of the internal audit department within Weston’s organizational structure. . • Discuss who within Weston should receive the reports of the internal audit department. ACCT 444 Week 2 Homework Chapter 5 5-23 (Objectives 5-4, 5-5, 5-7) Chen, CPA, is the auditor for Greenleaf Manufacturing Corporation, a privately owned company that has a June 30 fiscal year. Greenleaf arranged for a substantial bank loan that was dependent on the bank’s receiving, by September 30, audited financial statements that showed a current ratio of at least 2 to 1. On September 25, just before the audit report was to be issued, Chen received an anonymous letter on Greenleaf’s stationery indicating that a 5-year lease by Greenleaf, as lessee, of a factory building accounted for in the financial statements as an operating lease was, in fact, a capital lease. The letter stated that there was a secret written agreement with the lessor modifying the lease and creating a capital lease. Chen confronted the president of Greenleaf, who admitted that a secret agreement existed but said it was necessary to treat the lease as an operating lease to meet the current ratio requirement of the pending loan and that nobody would ever discover the secret agreement with the lessor. The president said that if Chen did not issue his report by September 30, Greenleaf would sue Chen for substantial damages that would result from not getting the loan. Under this pressure and because the audit files contained a copy of the 5-year lease agreement that supported the operating lease treatment, Chen issued his report with an unqualified opinion on September 29. Despite the fact that the loan was received, Greenleaf went bankrupt within 2 years. The bank is suing Chen to recover its losses on the loan, and the lessor is suing Chen to recover uncollected rents. Required Answer the following questions, setting forth reasons for any conclusions stated: 1. Is Chen liable to the bank? 1. Is Chen liable to the lessor? 1. Is there potential for criminal action against Chen? 5-24 (Objective 5-6) Under Section 11 of the Securities Act of 1933 and Section 10(b), Rule 10b-5, of the Securities Exchange Act of 1934, a CPA may be sued by a purchaser of registered securities. The following items relate to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. The plaintiff security purchaser must allege or prove: 1. Material misstatements were included in a filed document. 2. A monetary loss occurred. 3. Lack of due diligence by the CPA. 4. Privity with the CPA. 5. Reliance on the financial statements. 6. The CPA had scienter (knowledge and intent to deceive). Required For each of the items 1 through 6 listed above, indicate whether the statement must be proven under 1. Section 11 of the Securities Act of 1933 only. 1. Section 10(b) of the Securities Exchange Act of 1934 only. 1934. Both Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. 1934. Neither Section 11 of the Securities Act of 1933 nor Section 10(b) of the Securities Exchange Act of 1934.* Chapter 6 6-23 (Objectives 6-1, 6-3) Auditors provide “reasonable assurance” that the financial statements are “fairly stated, in all material respects.” Questions are often raised as to the responsibility of the auditor to detect material misstatements, including misappropriation of assets and fraudulent financial reporting. Required 1. Discuss the concept of “reasonable assurance” and the degree of confidence that financial statement users should have in the financial statements. 1. What are the responsibilities of the independent auditor in the audit of financial statements? Discuss fully, but in this part do not include fraud in the discussion. . 1. What are the responsibilities of the independent auditor for the detection of fraud involving misappropriation of assets and fraudulent financial reporting? Discuss fully, including your assessment of whether the auditor’s responsibility for the detection of fraud is appropriate. . 6-27 (Objectives 6-6, 6-7) The following are specific transaction-related audit objectives applied to the audit of cash disbursement transactions (a through f), management assertions about classes of transactions (1 through 5), and general transaction-related audit objectives (6 through 11). Specific Transaction-Related Audit Objective 1. Recorded cash disbursement transactions are for the amount of goods or services received and are correctly recorded. 2. Cash disbursement transactions are properly included in the accounts payable master file and are correctly summarized. 3. Recorded cash disbursements are for goods and services actually received. 4. Cash disbursement transactions are properly classified. 5. Existing cash disbursement transactions are recorded. 6. Cash disbursement transactions are recorded on the correct dates. Required 1. Explain the differences among management assertions about classes of transactions and events, general transaction-related audit objectives, and specific transaction-related audit objectives and their relationships to each other. 1. For each specific transaction-related audit objective, identify the appropriate management assertion. 2. For each specific transaction-related audit objective, identify the appropriate general transaction-related audit objective. Chapter 11 11-30 (Objective 11-1) The following are activities that occurred at Franklin Manufacturing, a nonpublic company. 1. Franklin’s accountant did not record checks written in the last few days of the year until the next accounting period to avoid a negative cash balance in the financial statements. 2. Franklin’s controller prepared and mailed a check to a vendor for a carload of material that was not received. The vendor’s chief accountant, who is a friend of Franklin’s controller, mailed a vendor’s invoice to Franklin, and the controller prepared a receiving report. The vendor’s chief accountant deposited the check in an account he had set up with a name almost identical to the vendor’s. 3. The accountant recorded cash received in the first few days of the next accounting period in the current accounting period to avoid a negative cash balance. 4. Discounts on checks to Franklin’s largest vendor are never taken, even though the bills are paid before the discount period expires. The president of the vendor’s company provides free use of his ski lodge to the accountant who processes the checks in exchange for the lost discounts. 5. Franklin shipped and billed goods to a customer in New York on December 23, and the sale was recorded on December 24, with the understanding that the goods will be returned on January 31 for a full refund plus a 5 percent handling fee. 6. Franklin’s factory superintendent routinely takes scrap metal home in his pickup and sells it to a scrap dealer to make a few extra dollars. 7. Franklin’s management decided not to include a footnote about a material uninsured lawsuit against the company on the grounds that the primary user of the statements, a small local bank, will probably not understand the footnote anyway. Required 1. Identify which of these activities are frauds. 1. For each fraud, state whether it is a misappropriation of assets or fraudulent financial reporting. ACCT 444 Week 3 Homework Chapter 7 7-27 (Objective 7-4) The following are examples of documentation typically obtained by auditors: 1. Vendors’ invoices 2. General ledger files 3. Bank statements 4. Cancelled payroll checks 5. Payroll time records 6. Purchase requisitions 7. Receiving reports (documents prepared when merchandise is received) 8. Minutes of the board of directors 9. Remittance advices 10. Signed W-4s (Employee’s Withholding Exemption Certificates) 11. Signed lease agreements 12. Duplicate copies of bills of lading 13. Subsidiary accounts receivable records 14. Cancelled notes payable 15. Duplicate sales invoices 16. Articles of incorporation 17. Title insurance policies for real estate 18. Notes receivable Required 1. Classify each of the preceding items according to type of documentation: (1) internal or (2) external. 1. 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 1. Explain why confirmations are normally more reliable evidence than inquiries of the client. . 1. Describe a situation in which confirmation will be considered highly reliable and another in which it will not be reliable. . 1. Under what circumstances is the physical observation of inventory considered relatively unreliable evidence? . 1. Explain why recalculation tests are highly reliable but of relatively limited use. . 1. Give three examples of relatively reliable documentation and three examples of less reliable documentation. What characteristics distinguish the two? 1. Give several examples in which the qualifications of the respondent or the qualifications of the auditor affect the reliability of the evidence. 1. 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 1. A trial balance taken from the books of Star one month before year-end: 2. There are no inventories consigned either in or out. 3. 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:* 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 1. Evaluate the explanation provided by Adams. Show calculations to support your conclusions. . 1. 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: 1. The client lacks sufficient working capital to continue operations. 2. 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. 3. The company is publicly traded. 4. The auditor has identified numerous material misstatements during prior year audit engagements. 5. The assigned staff on the audit engagement lack the necessary skills to identify actual errors in an account balance when examining audit evidence accumulated. 6. The client is one of the industry’s largest based on its size and market share. 7. The client engages in several material transactions with entities owned by family members of several of the client’s senior executives. 8. The allowance for doubtful accounts is based on significant assumptions made by management. 9. The audit plan omits several necessary audit procedures. 10. 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 ACCT 444 Week 4 Homework Chapter 10 10-33 (Objective 10-3) Following are descriptions of ten internal controls. 1. The company’s computer systems track individual transactions and automatically accumulate transactions to create a trial balance. 2. The company must receive university transcripts documenting all college degrees earned before an individual can begin their first day of employment with the company. 3. Senior management obtains data about external events that might affect the entity and evaluates the impact of that information on its existing accounting processes. 4. Each quarter, department managers are required to perform a self-assessment of the department’s compliance with company policies. Reports summarizing the results are to be submitted to the senior executive overseeing that department. 5. Before a cash disbursement can be processed, all payee information must be verified by matching the payee to the company’s approved vendor listing. 6. The system automatically reconciles the detailed accounts receivable subsidiary ledger to the accounts receivable general ledger account on daily basis. 7. The company has developed a detailed series of accounting policy and procedures manuals to help provide detailed instructions to employees about how controls are to be performed. 8. The company has an organizational chart that establishes the formal lines of reporting and authorization protocols. 9. The compensation committee reviews compensation plans for senior executives to determine if those plans create unintended pressures that might lead to distorted financial statements. 10. On a monthly basis, department heads review a budget to actual performance report and investigate unusual differences. Required Indicate which of the five COSO internal control components is best represented by each internal control. 1. Control environment 2. Risk assessment 3. Control activities 4. Information and communication 5. Monitoring 10-41 (Objective 10-7) The following are independent situations for which you will recommend an appropriate audit report on internal control over financial reporting as required by PCAOB auditing standards: 1. The auditor identified a material misstatement in the financial statements that was not detected by management of the company. 2. The auditor was unable to obtain any evidence about the operating effectiveness of internal control over financial reporting. 3. The auditor determined that a deficiency in internal control exists that will not prevent or detect a material misstatement in the financial statements. 4. During interim testing, the auditor identified and communicated to management a significant control deficiency. Management immediately corrected the deficiency and the auditor was able to sufficiently test the newly-instituted internal control before the end of the fiscal period. 5. As a result of performing tests of controls, the auditor identified a significant deficiency in internal control over financial reporting; however, the auditor does not believe that it represents a material weakness in internal control. Required For each situation, state the appropriate audit report from the following alternatives: • Unqualified opinion on internal control over financial reporting • Qualified or disclaimer of opinion on internal control over financial reporting • Adverse opinion on internal control over financial reporting Chapter 12 12-19 (Objectives 12-2, 12-3) The following are misstatements that can occur in the sales and collection cycle: 1. A customer number on a sales invoice was transposed and, as a result, charged to the wrong customer. By the time the error was found, the original customer was no longer in business. 2. A former computer operator, who is now a programmer, entered information for a fictitious sales return and ran it through the computer system at night. When the money came in, he took it and deposited it in his own account. 3. A nonexistent part number was included in the description of goods on a shipping document. Therefore, no charge was made for those goods. 4. A customer order was filled and shipped to a former customer that had already filed for bankruptcy. 5. The sales manager approved the price of goods ordered by a customer, but he wrote down the wrong price. 6. A computer operator picked up a computer-based data file for sales of the wrong week and processed them through the system a second time. 7. For a sale, a data entry operator erroneously failed to enter the information for the salesman’s department. As a result, the salesman received no commission for that sale. 8. Several remittance advices were batched together for inputting. The cash receipts clerk stopped for coffee, set them on a box, and failed to deliver them to the data input personnel. Required 1. Identify the transaction-related audit objective(s) to which the misstatement pertains. 2. Identify one automated control that would have likely prevented each misstatement. 12-26 (Objective 12-4) Following are 10 key internal controls in the payroll cycle for Gilman Stores, Inc. Key Controls 1. To input hours worked, payroll accounting personnel input the employee’s Social Security number. The system does not allow input of hours worked for invalid employee numbers. 2. The payroll application is programmed so that only human resource personnel are able to add employee names to the employee master files. 3. Input menus distinguish executive payroll, administrative payroll, and factory payroll. 4. The system automatically computes pay at time and a half once hours worked exceed 80 in a 2-week pay period. 5. The system accumulates totals each pay period of employee checks processed and debits the payroll expense general ledger account for the total amount. 6. Each pay period, payroll accounting clerks count the number of time cards submitted by department heads for processing and compare that total with the number of checks printed by the system to ensure that each time card has a check. 7. For factory personnel, the payroll system matches employee ID numbers with ID numbers listed on job costing tickets as direct labor per the cost accounting system. The purpose of the reconciliation is to verify that the amount paid to each employee matches the amount charged to production during the time period. 8. The system generates a listing by employee name of checks processed. Department heads review these listings to ensure that each employee actually worked during the pay period. 9. On a test basis, payroll accounting personnel obtain a listing of pay rates and withholding information for a sample of employees from human resources to recalculate gross and net pay. 10. The system automatically rejects processing an employee’s pay if inputted hours exceed 160 hours for a 2-week pay period. Required For each control: 1. Identify whether the control is an automated application control (AC) or a manual control done by Gilman employees (MC). 2. Identify the transaction-related audit objective that is affected by the control. 3. Identify which controls, if tested within the last two prior year audits, would not have to be retested in the current year, assuming there are effective IT general controls and no changes to the noted control have been made since auditor testing was completed. ACCT 444 Week 5 Homework Chapter 13 13-26 (Objectives 13-1, 13-2, 13-3, 13-6) The following are audit procedures from different transaction cycles: 1. Use audit software to foot and cross-foot the cash disbursements journal and trace the balance to the general ledger. 2. Select a sample of entries in the acquisitions journal and trace each one to a related vendor’s invoice to determine whether one exists. 3. Examine documentation for acquisition transactions before and after the balance sheet date to determine whether they are recorded in the proper period. 4. Inquire of the credit manager whether each account receivable on the aged trial balance is collectible. 5. Compute inventory turnover for each major product and compare with previous years. 6. Confirm a sample of notes payable balances, interest rates, and collateral with lenders. 7. Use audit software to foot the accounts receivable trial balance and compare the balance with the general ledger. Required 1. For each audit procedure, identify the transaction cycle being audited. 2. For each audit procedure, identify the type of evidence. 3. For each audit procedure, identify whether it is a test of control or a substantive test. 4. For each substantive audit procedure, identify whether it is a substantive test of transactions, a test of details of balances, or an analytical procedure. 5. For each test of control or substantive test of transactions procedure, identify the transaction-related audit objective or objectives being satisfied. 6. For each analytical procedure or test of details of balances procedure, identify the balance-related audit objective or objectives being satisfied. 13-30 (Objectives 13-5, 13-7) Following are evidence decisions for the three audits described in Figure 13-3 on page 411: Evidence Decisions 1. The auditor performed extensive positive confirmations at the balance sheet date. 2. The auditor performed extensive tests of controls and minimal substantive tests. 3. The auditor decided it was possible to assess control risk below the maximum. 4. The auditor performed substantive tests. 5. This audit was likely the least expensive to conduct. 6. The auditor confirmed receivables at an interim date. 7. The auditor identified effective controls and also identified some deficiencies in controls. 8. The auditor performed tests of controls. Required 1. Explain why Audit B represents the maximum amount of reliance that can be placed on internal control. Why can’t all the audit assurance be obtained by tests of controls? . 1. Explain why the auditor may not place the maximum extent of reliance on controls in Audit B and Audit C. 1. For each of the eight evidence decisions, indicate whether the evidence decision relates to each of the audits described above. Every evidence decision relates to at least one of the audits, and some may relate to two or all three audits. 13-33 (Objective 13-4) Kim Bryan, a new staff auditor, is confused by the inconsistency of the three audit partners she has been assigned to on her first three audit engagements. On the first engagement, she spent a considerable amount of time in the audit of cash disbursements by examining cancelled checks, electronic payments, and supporting documentation, but almost no testing was spent in the verification of fixed assets. On the second engagement, a different partner had her do less intensive tests in the cash disbursements area and take smaller sample sizes than in the first audit, even though the company was much larger. On her most recent engagement under a third audit partner, there was a 435436thorough test of cash disbursement transactions, far beyond that of the other two audits, and an extensive verification of fixed assets. In fact, this partner insisted on a complete physical examination of all fixed assets recorded on the books. The total audit time on the most recent audit was longer than that of either of the first two audits despite the smaller size of the company. Bryan’s conclusion is that the amount of evidence to accumulate depends on the audit partner in charge of the engagement. Required 1. State several factors that can explain the difference in the amount of evidence accumulated in each of the three audit engagements as well as the total time spent. 1. What could the audit partners have done to help Bryan understand the difference in the audit emphasis on the three audits? 1. Explain how these three audits are useful in developing Bryan’s professional judgment. How could the quality of her judgment have been improved on the audits? 1. Which audit most likely represents an integrated audit of a public company’s financial statements and internal control over financial reporting? Chapter 14 14-25 (Objectives 14-3, 14-4, 14-5) 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 sales invoices and examine each one to make sure that a duplicate copy of the shipping document is attached. 3. Compare the quantity and description of items on shipping documents with the related duplicate sales invoices. 4. Trace recorded sales in the sales journal to the related accounts receivable master file and compare the customer name, date, and amount for each one. 5. Examine sales returns for approval by an authorized official. 6. Review the prelisting of cash receipts to determine whether cash is prelisted daily. 7. Reconcile the recorded cash receipts on the prelisting with the cash receipts journal and the bank statement for a 1-month period. Required 1. Identify whether each audit procedure is a test of control or a substantive test of transactions. 2. State which of the six transaction-related audit objectives each of the audit procedures fulfills. 3. Identify the type of evidence used for each audit procedure, such as documentation and observation. 14-26 (Objective 14-3) The following are selected transaction-related audit objectives and audit procedures for sales transactions: Transaction-Related Audit Objectives 1. Recorded sales exist. 2. Existing sales are recorded. 3. Sales transactions are correctly included in the accounts receivable master file and are correctly summarized. Procedures 1. Trace a sample of shipping documents to related duplicate sales invoices and the sales journal to make sure that the shipment was billed. 2. Examine a sample of duplicate sales invoices to determine whether each one has a shipping document attached. 3. Examine the sales journal for a sample of sales transactions to determine whether each one has a posting reference in the margin indicating that it has been automatically compared by the computer with the accounts receivable master file for customer name, date, and amount. 4. Examine a sample of shipping documents to determine whether each one has a duplicate sales invoice number printed on the bottom left corner. 5. Trace a sample of debit entries in the accounts receivable master file to the sales journal to determine whether the date, customer name, and amount are the same. 6. Vouch a sample of duplicate sales invoices to related shipping documents filed in the shipping department to make sure that a shipment was made. Required 1. For each objective, identify at least one specific misstatement that could occur. 1. Describe the differences between the purposes of the first and second objectives. . 1. For each audit procedure, identify it as a test of control or substantive test of transactions. (There are three of each.) 1. For each objective, identify one test of control and one substantive test of transactions. 2. For each test of control, state the internal control that is being tested. Also, identify or describe a misstatement that the client is trying to prevent by use of the control.

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ACCT 444 Week 1 to 5 Homework and Course Project Click Link Below To Buy: http://hwcampus.com/shop/acct-444-week-1-to-5-homework-and-course-project/ Contact Us: [email protected] Chapter 1 1-18 (Objectives 1-3, 1-4, 1-5) Consumers Union is a nonprofit organization that provides information and counsel on consumer goods and services. A major part of its function is the testing of different brands of consumer products that are purchased on the open market and then the reporting of the results of the tests in Consumer Reports, a monthly publication. Examples of the types of products it tests are middle-sized automobiles, residential dehumidifiers, flat-screen TVs, and boys’ jeans. Required 1. In what ways are the services provided by Consumers Union similar to assurance services provided by CPA firms? 2. Compare the concept of information risk introduced in this chapter with the information risk problem faced by a buyer of an automobile. 3. Compare the four causes of information risk faced by users of financial statements as discussed in this chapter with those faced by a buyer of an automobile. 4. Compare the three ways users of financial statements can reduce information risk with those available to a buyer of an automobile. Chapter 2 2-19 (Objective 2-7) For each of the following procedures taken from the quality control manual of a CPA firm, identify the applicable element of quality control from Table 2-4 on page 38. 1. Appropriate accounting and auditing research requires adequate technical reference materials. Each firm professional has online password access through the firm’s Internet Web site to electronic reference materials on accounting, auditing, tax, SEC, and other technical information, including industry data. 2. Each office of the firm shall be visited at least annually by review persons selected by the director of accounting and auditing. Procedures to be undertaken by the reviewers are illustrated by the office review program. 3. All potential new clients are reviewed before acceptance. The review includes consultation with predecessor auditors, and background checks. All new clients are approved by the firm management committee, including assessing whether the firm has the technical competence to complete the engagement. 4. Each audit engagement must include a concurring partner review of critical audit decisions. 5. Audit engagement team members enter their electronic signatures in the firm’s engagement management software to indicate the completion of specific audit program steps. At the end of the audit engagement, the engagement management software will not allow archiving of the engagement file until all audit program steps have been electronically signed. 6. At all stages of any engagement, an effort is made to involve professional staff at appropriate levels in the accounting and auditing decisions. Various approvals of the manager or senior accountant are obtained throughout the audit. 7. No employee will have any direct or indirect financial interest, association, or relationship (for example, a close relative serving a client in a decision-making capacity) not otherwise disclosed that might be adverse to the firm’s best interest. 8. Individual partners submit the nominations of those persons whom they wish to be considered for partner. To become a partner, an individual must have exhibited a high degree of technical competence; must possess integrity, motivation, and judgment; and must have a desire to help the firm progress through the efficient dispatch of the job responsibilities to which he or she is assigned. 9. Through our continuing employee evaluation and counseling program and through the quality control review procedures as established by the firm, educational needs are reviewed and formal staff training programs modified to accommodate changing needs. At the conclusion of practice office reviews, apparent accounting and auditing deficiencies are summarized and reported to the firm’s director of personnel. 10. The firm’s mission statement indicates its commitment to quality, and this commitment is emphasized in all staff training programs Chapter 4 4-22 (Objectives 4-6, 4-7) Each of the following situations involves possible violations of the AICPA’s Code of Professional Conduct. For each situation, state whether it is a violation of the Code. In those cases in which it is a violation, explain the nature of the violation and the rationale for the existing rule. 1. The audit firm of Miller and Yancy, CPAs has joined an association of other CPA firms across the country to enhance the types of professional services the firm can provide. Miller and Yancy share resources with other firms in the association, including audit methodologies and audit manuals, and common IT systems for billing and time reporting. One of the partners in Miller and Yancy has a direct financial interest in the audit client of another firm in the association. . 1. Bruce Sullivan, CPA, is the audit partner on the engagement of Xylium Corporation, which is a public company. In structuring the agreement with the audit committee for the audit of Xylium’s financial statements, Sullivan included a clause that limits the liability of Sullivan’s firm so that shareholders of Xylium are prohibited from suing Sullivan and the firm for performance issues related to the audit. 1. Jennifer Crowe’s audit client has a material investment in Polex, Inc. Jennifer’s nondependent parents also own shares in Polex and Polex is not an attest client of Jennifer’s firm. The amount of her parent’s ownership in Polex is not significant to Jennifer’s net worth. . 1. Joe Stokely is a former partner in Bass and Sims, CPAs. Recently, Joe left the firm to become the chief operating officer of Lacy Foods, Inc., which is an audit client of Bass and Sims. In his new role, Joe has no responsibilities for financial reporting. Bass and Sims made significant changes to the audit plan for the upcoming audit. . 1. Odonnel Incorporated has struggled financially and has been unable to pay the audit fee to its auditor, Seale and Seale, CPAs, for the 2009 and 2010 audits. Seale and Seale is currently planning the 2011 audit. 1. Connor Bradley is the partner in charge of the audit of Southern Pinnacle Bank. Bradley is in the process of purchasing a beach condo and has obtained mortgage financing from Southern Pinnacle. . 1. Jessica Alma has been serving as the senior auditor on the audit of Carolina BioHealth, Inc. Because of her outstanding work, the head of internal audit at Carolina BioHealth extended her an offer of employment to join the internal audit department as an audit manager. When the discussions with Carolina BioHealth began, Jessica informed her office’s managing partner and was removed from the audit engagement. . 1. Lorraine Wilcox is a CPA and professor of accounting at a major state university. One of her former students recently sat for the Audit section of the CPA exam. One day, the student dropped by Lorraine’s office and told her about many of the questions and simulation content on the exam. Lorraine was grateful for the information, which will be helpful as she prepares the course syllabus for the next semester. 1. Audrey Glover is a financial analyst in the financial reporting department of Technologies International, a privately held corporation. Audrey was asked to prepare several journal entries for Technologies International related to transactions that have not yet occurred. The entries are reflected in financial statements that the company recently provided to the bank in connection with a loan outstanding due to the bank. 1. Austin and Houston, CPAs, is performing consulting services to help management of McAlister Global Services streamline it production operations. Austin and Houston structured the fee for this engagement to be a fixed percentage of costs savings that result once the new processes are implemented. Austin and Houston perform no other services for McAlister Global. . Chapter 26 26-25 (Objectives 26-25, 26-1, 26-4) Weston Corporation has an internal audit department operating out of the corporate headquarters. Various types of audit assignments are performed by the department for the eight divisions of the company. The following findings resulted from recent audits of Weston Corporation’s White Division: 1. One of the departments in the division appeared to have an excessive turnover rate. Upon investigation, the personnel department seemed to be unable to find enough workers with the specified skills for this department. Some workers are trained on the job. The departmental supervisor is held accountable for labor efficiency variances but does not have qualified staff or sufficient time to train the workers properly. The supervisor holds individual workers responsible for meeting predetermined standards from the day they report to work. This has resulted in a rapid turnover of workers who are trainable but not yet able to meet standards. 2. The internal audit department recently participated in a computer feasibility study for this division. It advised and concurred on the purchase and installation of a specific computer system. Although the system is up and operating, the results are less than desirable. The software and hardware meet the specifications of the feasibility study, but there are several functions unique to this division that the system has been unable to accomplish. Linking of files has been a problem. For example, several vendors have been paid for materials not meeting company specifications. A revision of the existing software is probably not possible, and a permanent solution probably requires replacing the existing computer system with a new one. 3. One of the products manufactured by this division was recently redesigned to eliminate a potential safety defect. This defect was discovered after several users were injured. At present, there are no pending lawsuits because none of the injured parties has identified a defect in the product as a cause of the injury. There is insufficient information to determine whether the defect was a contributing factor. The director of internal auditing and assistant controller is in charge of the internal audit department and reports to the controller in corporate headquarters. Copies of internal audit reports are sent routinely to Weston’s board of directors. Required 1. Explain the additional steps in terms of field work, preparation of recommendations, and operating management review that ordinarily should be taken by Weston Corporation’s internal auditors as a consequence of the audit findings in the first situation (excessive turnover). . 1. Discuss whether there are any objectivity problems with Weston Corporation’s internal audit department as revealed by the audit findings. Include in your discussion any recommendations to eliminate or reduce an objectivity problem, if one exists. . 1. The internal audit department is part of the corporate controllership function, and copies of the internal audit reports are sent to the board of directors. • Evaluate the appropriateness of the location of the internal audit department within Weston’s organizational structure. . • Discuss who within Weston should receive the reports of the internal audit department. ACCT 444 Week 2 Homework Chapter 5 5-23 (Objectives 5-4, 5-5, 5-7) Chen, CPA, is the auditor for Greenleaf Manufacturing Corporation, a privately owned company that has a June 30 fiscal year. Greenleaf arranged for a substantial bank loan that was dependent on the bank’s receiving, by September 30, audited financial statements that showed a current ratio of at least 2 to 1. On September 25, just before the audit report was to be issued, Chen received an anonymous letter on Greenleaf’s stationery indicating that a 5-year lease by Greenleaf, as lessee, of a factory building accounted for in the financial statements as an operating lease was, in fact, a capital lease. The letter stated that there was a secret written agreement with the lessor modifying the lease and creating a capital lease. Chen confronted the president of Greenleaf, who admitted that a secret agreement existed but said it was necessary to treat the lease as an operating lease to meet the current ratio requirement of the pending loan and that nobody would ever discover the secret agreement with the lessor. The president said that if Chen did not issue his report by September 30, Greenleaf would sue Chen for substantial damages that would result from not getting the loan. Under this pressure and because the audit files contained a copy of the 5-year lease agreement that supported the operating lease treatment, Chen issued his report with an unqualified opinion on September 29. Despite the fact that the loan was received, Greenleaf went bankrupt within 2 years. The bank is suing Chen to recover its losses on the loan, and the lessor is suing Chen to recover uncollected rents. Required Answer the following questions, setting forth reasons for any conclusions stated: 1. Is Chen liable to the bank? 1. Is Chen liable to the lessor? 1. Is there potential for criminal action against Chen? 5-24 (Objective 5-6) Under Section 11 of the Securities Act of 1933 and Section 10(b), Rule 10b-5, of the Securities Exchange Act of 1934, a CPA may be sued by a purchaser of registered securities. The following items relate to what a plaintiff who purchased securities must prove in a civil liability suit against a CPA. The plaintiff security purchaser must allege or prove: 1. Material misstatements were included in a filed document. 2. A monetary loss occurred. 3. Lack of due diligence by the CPA. 4. Privity with the CPA. 5. Reliance on the financial statements. 6. The CPA had scienter (knowledge and intent to deceive). Required For each of the items 1 through 6 listed above, indicate whether the statement must be proven under 1. Section 11 of the Securities Act of 1933 only. 1. Section 10(b) of the Securities Exchange Act of 1934 only. 1934. Both Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. 1934. Neither Section 11 of the Securities Act of 1933 nor Section 10(b) of the Securities Exchange Act of 1934.* Chapter 6 6-23 (Objectives 6-1, 6-3) Auditors provide “reasonable assurance” that the financial statements are “fairly stated, in all material respects.” Questions are often raised as to the responsibility of the auditor to detect material misstatements, including misappropriation of assets and fraudulent financial reporting. Required 1. Discuss the concept of “reasonable assurance” and the degree of confidence that financial statement users should have in the financial statements. 1. What are the responsibilities of the independent auditor in the audit of financial statements? Discuss fully, but in this part do not include fraud in the discussion. . 1. What are the responsibilities of the independent auditor for the detection of fraud involving misappropriation of assets and fraudulent financial reporting? Discuss fully, including your assessment of whether the auditor’s responsibility for the detection of fraud is appropriate. . 6-27 (Objectives 6-6, 6-7) The following are specific transaction-related audit objectives applied to the audit of cash disbursement transactions (a through f), management assertions about classes of transactions (1 through 5), and general transaction-related audit objectives (6 through 11). Specific Transaction-Related Audit Objective 1. Recorded cash disbursement transactions are for the amount of goods or services received and are correctly recorded. 2. Cash disbursement transactions are properly included in the accounts payable master file and are correctly summarized. 3. Recorded cash disbursements are for goods and services actually received. 4. Cash disbursement transactions are properly classified. 5. Existing cash disbursement transactions are recorded. 6. Cash disbursement transactions are recorded on the correct dates. Required 1. Explain the differences among management assertions about classes of transactions and events, general transaction-related audit objectives, and specific transaction-related audit objectives and their relationships to each other. 1. For each specific transaction-related audit objective, identify the appropriate management assertion. 2. For each specific transaction-related audit objective, identify the appropriate general transaction-related audit objective. Chapter 11 11-30 (Objective 11-1) The following are activities that occurred at Franklin Manufacturing, a nonpublic company. 1. Franklin’s accountant did not record checks written in the last few days of the year until the next accounting period to avoid a negative cash balance in the financial statements. 2. Franklin’s controller prepared and mailed a check to a vendor for a carload of material that was not received. The vendor’s chief accountant, who is a friend of Franklin’s controller, mailed a vendor’s invoice to Franklin, and the controller prepared a receiving report. The vendor’s chief accountant deposited the check in an account he had set up with a name almost identical to the vendor’s. 3. The accountant recorded cash received in the first few days of the next accounting period in the current accounting period to avoid a negative cash balance. 4. Discounts on checks to Franklin’s largest vendor are never taken, even though the bills are paid before the discount period expires. The president of the vendor’s company provides free use of his ski lodge to the accountant who processes the checks in exchange for the lost discounts. 5. Franklin shipped and billed goods to a customer in New York on December 23, and the sale was recorded on December 24, with the understanding that the goods will be returned on January 31 for a full refund plus a 5 percent handling fee. 6. Franklin’s factory superintendent routinely takes scrap metal home in his pickup and sells it to a scrap dealer to make a few extra dollars. 7. Franklin’s management decided not to include a footnote about a material uninsured lawsuit against the company on the grounds that the primary user of the statements, a small local bank, will probably not understand the footnote anyway. Required 1. Identify which of these activities are frauds. 1. For each fraud, state whether it is a misappropriation of assets or fraudulent financial reporting. ACCT 444 Week 3 Homework Chapter 7 7-27 (Objective 7-4) The following are examples of documentation typically obtained by auditors: 1. Vendors’ invoices 2. General ledger files 3. Bank statements 4. Cancelled payroll checks 5. Payroll time records 6. Purchase requisitions 7. Receiving reports (documents prepared when merchandise is received) 8. Minutes of the board of directors 9. Remittance advices 10. Signed W-4s (Employee’s Withholding Exemption Certificates) 11. Signed lease agreements 12. Duplicate copies of bills of lading 13. Subsidiary accounts receivable records 14. Cancelled notes payable 15. Duplicate sales invoices 16. Articles of incorporation 17. Title insurance policies for real estate 18. Notes receivable Required 1. Classify each of the preceding items according to type of documentation: (1) internal or (2) external. 1. 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 1. Explain why confirmations are normally more reliable evidence than inquiries of the client. . 1. Describe a situation in which confirmation will be considered highly reliable and another in which it will not be reliable. . 1. Under what circumstances is the physical observation of inventory considered relatively unreliable evidence? . 1. Explain why recalculation tests are highly reliable but of relatively limited use. . 1. Give three examples of relatively reliable documentation and three examples of less reliable documentation. What characteristics distinguish the two? 1. Give several examples in which the qualifications of the respondent or the qualifications of the auditor affect the reliability of the evidence. 1. 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 1. A trial balance taken from the books of Star one month before year-end: 2. There are no inventories consigned either in or out. 3. 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:* 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 1. Evaluate the explanation provided by Adams. Show calculations to support your conclusions. . 1. 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: 1. The client lacks sufficient working capital to continue operations. 2. 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. 3. The company is publicly traded. 4. The auditor has identified numerous material misstatements during prior year audit engagements. 5. The assigned staff on the audit engagement lack the necessary skills to identify actual errors in an account balance when examining audit evidence accumulated. 6. The client is one of the industry’s largest based on its size and market share. 7. The client engages in several material transactions with entities owned by family members of several of the client’s senior executives. 8. The allowance for doubtful accounts is based on significant assumptions made by management. 9. The audit plan omits several necessary audit procedures. 10. 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 ACCT 444 Week 4 Homework Chapter 10 10-33 (Objective 10-3) Following are descriptions of ten internal controls. 1. The company’s computer systems track individual transactions and automatically accumulate transactions to create a trial balance. 2. The company must receive university transcripts documenting all college degrees earned before an individual can begin their first day of employment with the company. 3. Senior management obtains data about external events that might affect the entity and evaluates the impact of that information on its existing accounting processes. 4. Each quarter, department managers are required to perform a self-assessment of the department’s compliance with company policies. Reports summarizing the results are to be submitted to the senior executive overseeing that department. 5. Before a cash disbursement can be processed, all payee information must be verified by matching the payee to the company’s approved vendor listing. 6. The system automatically reconciles the detailed accounts receivable subsidiary ledger to the accounts receivable general ledger account on daily basis. 7. The company has developed a detailed series of accounting policy and procedures manuals to help provide detailed instructions to employees about how controls are to be performed. 8. The company has an organizational chart that establishes the formal lines of reporting and authorization protocols. 9. The compensation committee reviews compensation plans for senior executives to determine if those plans create unintended pressures that might lead to distorted financial statements. 10. On a monthly basis, department heads review a budget to actual performance report and investigate unusual differences. Required Indicate which of the five COSO internal control components is best represented by each internal control. 1. Control environment 2. Risk assessment 3. Control activities 4. Information and communication 5. Monitoring 10-41 (Objective 10-7) The following are independent situations for which you will recommend an appropriate audit report on internal control over financial reporting as required by PCAOB auditing standards: 1. The auditor identified a material misstatement in the financial statements that was not detected by management of the company. 2. The auditor was unable to obtain any evidence about the operating effectiveness of internal control over financial reporting. 3. The auditor determined that a deficiency in internal control exists that will not prevent or detect a material misstatement in the financial statements. 4. During interim testing, the auditor identified and communicated to management a significant control deficiency. Management immediately corrected the deficiency and the auditor was able to sufficiently test the newly-instituted internal control before the end of the fiscal period. 5. As a result of performing tests of controls, the auditor identified a significant deficiency in internal control over financial reporting; however, the auditor does not believe that it represents a material weakness in internal control. Required For each situation, state the appropriate audit report from the following alternatives: • Unqualified opinion on internal control over financial reporting • Qualified or disclaimer of opinion on internal control over financial reporting • Adverse opinion on internal control over financial reporting Chapter 12 12-19 (Objectives 12-2, 12-3) The following are misstatements that can occur in the sales and collection cycle: 1. A customer number on a sales invoice was transposed and, as a result, charged to the wrong customer. By the time the error was found, the original customer was no longer in business. 2. A former computer operator, who is now a programmer, entered information for a fictitious sales return and ran it through the computer system at night. When the money came in, he took it and deposited it in his own account. 3. A nonexistent part number was included in the description of goods on a shipping document. Therefore, no charge was made for those goods. 4. A customer order was filled and shipped to a former customer that had already filed for bankruptcy. 5. The sales manager approved the price of goods ordered by a customer, but he wrote down the wrong price. 6. A computer operator picked up a computer-based data file for sales of the wrong week and processed them through the system a second time. 7. For a sale, a data entry operator erroneously failed to enter the information for the salesman’s department. As a result, the salesman received no commission for that sale. 8. Several remittance advices were batched together for inputting. The cash receipts clerk stopped for coffee, set them on a box, and failed to deliver them to the data input personnel. Required 1. Identify the transaction-related audit objective(s) to which the misstatement pertains. 2. Identify one automated control that would have likely prevented each misstatement. 12-26 (Objective 12-4) Following are 10 key internal controls in the payroll cycle for Gilman Stores, Inc. Key Controls 1. To input hours worked, payroll accounting personnel input the employee’s Social Security number. The system does not allow input of hours worked for invalid employee numbers. 2. The payroll application is programmed so that only human resource personnel are able to add employee names to the employee master files. 3. Input menus distinguish executive payroll, administrative payroll, and factory payroll. 4. The system automatically computes pay at time and a half once hours worked exceed 80 in a 2-week pay period. 5. The system accumulates totals each pay period of employee checks processed and debits the payroll expense general ledger account for the total amount. 6. Each pay period, payroll accounting clerks count the number of time cards submitted by department heads for processing and compare that total with the number of checks printed by the system to ensure that each time card has a check. 7. For factory personnel, the payroll system matches employee ID numbers with ID numbers listed on job costing tickets as direct labor per the cost accounting system. The purpose of the reconciliation is to verify that the amount paid to each employee matches the amount charged to production during the time period. 8. The system generates a listing by employee name of checks processed. Department heads review these listings to ensure that each employee actually worked during the pay period. 9. On a test basis, payroll accounting personnel obtain a listing of pay rates and withholding information for a sample of employees from human resources to recalculate gross and net pay. 10. The system automatically rejects processing an employee’s pay if inputted hours exceed 160 hours for a 2-week pay period. Required For each control: 1. Identify whether the control is an automated application control (AC) or a manual control done by Gilman employees (MC). 2. Identify the transaction-related audit objective that is affected by the control. 3. Identify which controls, if tested within the last two prior year audits, would not have to be retested in the current year, assuming there are effective IT general controls and no changes to the noted control have been made since auditor testing was completed. ACCT 444 Week 5 Homework Chapter 13 13-26 (Objectives 13-1, 13-2, 13-3, 13-6) The following are audit procedures from different transaction cycles: 1. Use audit software to foot and cross-foot the cash disbursements journal and trace the balance to the general ledger. 2. Select a sample of entries in the acquisitions journal and trace each one to a related vendor’s invoice to determine whether one exists. 3. Examine documentation for acquisition transactions before and after the balance sheet date to determine whether they are recorded in the proper period. 4. Inquire of the credit manager whether each account receivable on the aged trial balance is collectible. 5. Compute inventory turnover for each major product and compare with previous years. 6. Confirm a sample of notes payable balances, interest rates, and collateral with lenders. 7. Use audit software to foot the accounts receivable trial balance and compare the balance with the general ledger. Required 1. For each audit procedure, identify the transaction cycle being audited. 2. For each audit procedure, identify the type of evidence. 3. For each audit procedure, identify whether it is a test of control or a substantive test. 4. For each substantive audit procedure, identify whether it is a substantive test of transactions, a test of details of balances, or an analytical procedure. 5. For each test of control or substantive test of transactions procedure, identify the transaction-related audit objective or objectives being satisfied. 6. For each analytical procedure or test of details of balances procedure, identify the balance-related audit objective or objectives being satisfied. 13-30 (Objectives 13-5, 13-7) Following are evidence decisions for the three audits described in Figure 13-3 on page 411: Evidence Decisions 1. The auditor performed extensive positive confirmations at the balance sheet date. 2. The auditor performed extensive tests of controls and minimal substantive tests. 3. The auditor decided it was possible to assess control risk below the maximum. 4. The auditor performed substantive tests. 5. This audit was likely the least expensive to conduct. 6. The auditor confirmed receivables at an interim date. 7. The auditor identified effective controls and also identified some deficiencies in controls. 8. The auditor performed tests of controls. Required 1. Explain why Audit B represents the maximum amount of reliance that can be placed on internal control. Why can’t all the audit assurance be obtained by tests of controls? . 1. Explain why the auditor may not place the maximum extent of reliance on controls in Audit B and Audit C. 1. For each of the eight evidence decisions, indicate whether the evidence decision relates to each of the audits described above. Every evidence decision relates to at least one of the audits, and some may relate to two or all three audits. 13-33 (Objective 13-4) Kim Bryan, a new staff auditor, is confused by the inconsistency of the three audit partners she has been assigned to on her first three audit engagements. On the first engagement, she spent a considerable amount of time in the audit of cash disbursements by examining cancelled checks, electronic payments, and supporting documentation, but almost no testing was spent in the verification of fixed assets. On the second engagement, a different partner had her do less intensive tests in the cash disbursements area and take smaller sample sizes than in the first audit, even though the company was much larger. On her most recent engagement under a third audit partner, there was a 435436thorough test of cash disbursement transactions, far beyond that of the other two audits, and an extensive verification of fixed assets. In fact, this partner insisted on a complete physical examination of all fixed assets recorded on the books. The total audit time on the most recent audit was longer than that of either of the first two audits despite the smaller size of the company. Bryan’s conclusion is that the amount of evidence to accumulate depends on the audit partner in charge of the engagement. Required 1. State several factors that can explain the difference in the amount of evidence accumulated in each of the three audit engagements as well as the total time spent. 1. What could the audit partners have done to help Bryan understand the difference in the audit emphasis on the three audits? 1. Explain how these three audits are useful in developing Bryan’s professional judgment. How could the quality of her judgment have been improved on the audits? 1. Which audit most likely represents an integrated audit of a public company’s financial statements and internal control over financial reporting? Chapter 14 14-25 (Objectives 14-3, 14-4, 14-5) 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 sales invoices and examine each one to make sure that a duplicate copy of the shipping document is attached. 3. Compare the quantity and description of items on shipping documents with the related duplicate sales invoices. 4. Trace recorded sales in the sales journal to the related accounts receivable master file and compare the customer name, date, and amount for each one. 5. Examine sales returns for approval by an authorized official. 6. Review the prelisting of cash receipts to determine whether cash is prelisted daily. 7. Reconcile the recorded cash receipts on the prelisting with the cash receipts journal and the bank statement for a 1-month period. Required 1. Identify whether each audit procedure is a test of control or a substantive test of transactions. 2. State which of the six transaction-related audit objectives each of the audit procedures fulfills. 3. Identify the type of evidence used for each audit procedure, such as documentation and observation. 14-26 (Objective 14-3) The following are selected transaction-related audit objectives and audit procedures for sales transactions: Transaction-Related Audit Objectives 1. Recorded sales exist. 2. Existing sales are recorded. 3. Sales transactions are correctly included in the accounts receivable master file and are correctly summarized. Procedures 1. Trace a sample of shipping documents to related duplicate sales invoices and the sales journal to make sure that the shipment was billed. 2. Examine a sample of duplicate sales invoices to determine whether each one has a shipping document attached. 3. Examine the sales journal for a sample of sales transactions to determine whether each one has a posting reference in the margin indicating that it has been automatically compared by the computer with the accounts receivable master file for customer name, date, and amount. 4. Examine a sample of shipping documents to determine whether each one has a duplicate sales invoice number printed on the bottom left corner. 5. Trace a sample of debit entries in the accounts receivable master file to the sales journal to determine whether the date, customer name, and amount are the same. 6. Vouch a sample of duplicate sales invoices to related shipping documents filed in the shipping department to make sure that a shipment was made. Required 1. For each objective, identify at least one specific misstatement that could occur. 1. Describe the differences between the purposes of the first and second objectives. . 1. For each audit procedure, identify it as a test of control or substantive test of transactions. (There are three of each.) 1. For each objective, identify one test of control and one substantive test of transactions. 2. For each test of control, state the internal control that is being tested. Also, identify or describe a misstatement that the client is trying to prevent by use of the control.

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