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Beasley November Judy 22, 2011 AC503-02 Textbook Assignments Comprehensive Questions Chapter 14 14-26 Analytical Procedures 1) A) Sales to Total Assets Sales / Average Total Assets 20X7 = $21,200 / 15,700 1.35 20X8 = $27,500 / 19,500 1.41 20X9 = $35,200 / 23,000 1.53 B) Sales to Production Sales / Production in Units 20X7 = $21,200 / 300,000 0.07 20X8 = $27,500 / 400,000 0.07 20X9 = $35,200 / 450,000 0.08 C) Revenue per Unit Sold Revenues / Inventory in Units 20X7 = $21,200 / 21,000 1.01 20X8 = $27,500 / 28,000 0.98 20X9 = $35,200 / 32,000 1.1 D) Accounts Receivable growth to Sales Growth ((Accounts Receivable t / Accounts Receivable t-1) -1) / ((Sales t / Sales t-1) -1) 1. Accounts Receivable Growth 20X7 = N/A N/A 2. Sales Growth 20X7 = N/A N/A 20X8 = 400 / 4300 0.09 20X9 = 1600 / 5900 0.27 20X8 = 6300 / 27500 0.23 20X9 = 3500 / 23000 0.15 Accounts Receivable Growth to Sales Growth 20X7 = N/A N/A 20X8 = 0.09 / 0.23 0.39 20X9 = 0.27 / 0.15 1.80 E) Uncollectable Accounts expense to Net credit Sales Uncollectable Accounts Expense / Net Sales 20X7 = $105 / 21,200 0.005 20X8 = $135 / 27,500 0.005 20X9 = $175 / 35,200 0.005 F) Uncollectable Accounts Expense to Accounts Receivable Written Off Uncollectable Accounts Expense / Actual Accounts Receivable write offs 20X7 = $105 / 100 1.05 20X8 = $135 / 125 1.08 20X9 = $175 / 165 1.06 G) Accounts Receivable turn days Average Accounts Receivable / Sales *365 1. Calculate the Average Sales per Day Credit Sales or Net Sales / 365 20X7 = 21,200 / 365 58.08 20X8 = 27,500 / 365 75.34 20X9 = 35,200 / 365 96.44 2. Calculate the Average Collection Period Accounts Receivable / Average Sales per day 20X7 = 3900 / 58.08 67.15 20X8 = 4300 / 75.34 57.07 20X9 = 5900 / 96.44 61.18 3. Accounts Receivable turnover The number of days a year / the average collection period 20X7 = 365 / 67.15 5.44 20X8 = 365 / 57.07 6.40 20X9 = 365 / 61.18 5.97 2a) The implications of the resulting ratios for the auditors audit strategy for year 20X9 are so the auditor will be able to assess the reasonableness of the different accounts. This is also so the auditor would have a sufficient understanding to be able to (1) identify the types of potential misstatements, (2) consider the factors that affect the risks of material misstatements, and (3) design the substantive test that need to be done. b) The specific audit objectives that are likely to be misstated would be the 20X9 Accounts Receivable Growth to Sales Growth it is larger than 1.08 that indicates that receivables are growing faster than sales, therefore larger ratios also indicate possible collection problems. Even with the turnover rate for Accounts Receivable in 20X8 may also indicate collection problems. Even in the Uncollectable Ratio smaller ratios will indicate an inadequate provision for the uncollectable accounts. c) The auditor should respond in terms of potential audit tests by and so the auditor will usually proceed to identify whether effective control activities have been placed in operation. If the auditor seess significant weaknesses in the control environment, than the auditor might choose to plan a primarily substantive approach. 14-28 Controls over cash receipts processing at a church Weakness 1. Cash is not deposited intact daily. Recommended Improvements Recommend that cash should get deposited right after the church service in a night drop box. Management does not follow up the cash procedures. Just because a person has done the same thing for the last fifteen years, how would one knows if the persons is honest. I recommend having someone else do the deposits of cash. Cash and checks received for deposit may not agree with the cash count sheets and pre lists. I recommended having more than one p person involved in counting money and doing the deposits. 2. Collection take by a team of ushers. Recommend watching them carefully as they are passing the collection plate around. Head usher counting money himself. Recommend having someone else in the room with him/her, because just because they are in church it does not mean they would steal. Financial secretary withholding $100 from the collection every week. I would recommend setting up a petty cash fund, and on Sunday or Monday replenished the fund and deposit the rest of the cash. 14-29 Flow charting and evaluating on-line computer processing of each cash receipts. A) The systems flowchart for the companys new on-line cash receipts procedures. Documentary Key Reports Computer Program Files Audit Trail Computer B) The only control structure problems that I see for the company would how do they know that someone down the line of how a customer gets their order if they did not reserve a number or send out the wrong item or even say that the customer only sent a lower amount of money as the payment. The auditor might use test data to determine whether expected results appear on the exception reports by looking for a missing or invalid customer code, an invalid product code. The auditor might also use generalized audit software or a utility program to perform sequence checks and print list of sales orders, shipping documents, or sales invoices whose numbers are missing in designated computer files. Comprehensive Questions Chapter 15 15-23 Analytical Procedures A) Calculate the following information and ratios for years 2,3, 4, and 5 Purchases Year 5 = COGS = $1,650,000: Inventory beg. = $460,000 Inventory end. $525,000 COGS = $1,650,000 + $65,000 = $1,715,000 Purchases Year 4 = COGS = $1,225,000: Inventory Beg. $390,000 Inventory End. $460,000 COGS = $1,225,000 + 70,000 = $1,295,000 Purchases Year 3 = COGS = $1,025,000: Inventory Beg. $310,000 Inventory End. $390,000 COGS = $1,025,000 + 80,000 = $1,105,000 Purchases Year 2 = COGS = $850,000: Inventory Beg. $225,000 Inventory End. $310,000 COGS = $850,000 + 85,000 = 935,000 Purchases Accounts payable turn days Average Accounts Payable / Purchases * 365 Year 5 = $115,000 / 1,715,000 * 365 = 24.5 days Year 4 = $113,000 / 1,295,000 * 365 = 31.8 days Year 3 = $97,500 / 1,105,000 * 365 = 32.2 days Year 2 = $850,000 / 935,000 * 365 = 331.8 days Cost of goods sold to accounts payable Cost of Goods Sold / Accounts Payable Year 5 = $1,650,000 / 115,000 = 14.3 Year 4 = $1,225,000 / 113,000 = 10.8 Year 3 = $1,025,000 / 97,500 = 10.5 Year 2 = $850,000 / 850,000 = 1.0 Current Ratio Current Assets / Current Liabilities Year 5 = $1,350,000 / 545,000 = 2.48Year 4 = $1,175,000 / 535,000 = 2.20 Year 3 = $950,000 / 440,000 = 2.16 Year 2 = $750,000 / 320,000 = 2.34 B) The key information the auditor should understand is: How purchases, payments, are initiated, How purchases transactions are accounted for as goods and services are received, What accounting records, documents, accounts, and computer files are involved in accounting for the various stages of each payment for goods and services. Some of the specific audit objectives that are likely to be misstated are among the control activities and are considered a segregation of duties, physical controls, management controls, and computer application controls. 15-25 Internal control evaluation receiving function A) The adequacy of internal control is questionable whenever quantities are not blocked out on the copy of the purchase order which is sent to the receiving department because this practice may cause the receiving clerk to bypass the counting and inspection procedures. The receiving clerk may only compare the purchase order and packing slip (or other document accompanying the shipment) and prepare a receiving report based upon these documents. As a result of this weakness, merchandise which is incorrect with respect to quantity or unacceptable with respect quality to may be receive and accepted. 2 - Sheet-metal: I believe that this part is inadequate because the company that you have received the sheet metal did not include the weight with the shipment so how do they know that they have sent the correct amount of metal, only the railroad that brings the metal to the receiver weights the sheet-metal and reports that to the receiving company, the receiving department. On the other hand the receiving clerk only checks the weight on the waybill to the purchase order; they do not weight the sheet-metal to vary the weight. 3 - Screws: I believe that this part is also inadequate because no two screws weight the same, so unless the receiving clerk sits there and count each and every screw they do not have a correct count of the number screws that they have ordered. 4 Camera lenses: I believe that this part is also inadequate because the receiving clerk does count each carton to make sure that there is the correct amount of cartons that were order are there, but the receiving clerk does no open them up to see if any of them are damaged. A) I would have to say the inadequacies in the internal controls would make misstatements in the financial statements because of the fact that not every screw, sheet-metal, or camera lenses weight the same. You may have one month where the weight of these shows that you a certain amount of each, and the following month it will show a less amount but the same weight. The last thing would be the fact that the receiving clerk does not open things open to see of any of the items that were sent are damaged. 15-27 Internal control evaluation-cash disbursements Consistent / Inconsistent Strengthens or Weakness 1. Consistent Purchase requisitions provide the authorization for purchasing to order. 2. Consistent Purchase orders should be pre-numbered and accounted for. 3. Inconsistent 4. Consistent Receiving may accept goods that were not ordered or authorized. The receiving report supports the existence of occurrence assertion for purchases transactions and the information on the report is forward on to accounts payable. 5. Consistent Discrepancies should be addressed by responding to error messages at the terminal or through exception reports. 6. Consistent Discrepancies should be addressed by responding to error messages at the terminal or through exception reports. 7. Inconsistent The cash disbursements transaction file created when checks are prepared is used to update the accounts payable master file and general ledger accounts. 8. Inconsistent Checks below a certain dollar amount may be computer signed, while larger checks requiring a manual signature from an authorized individual. Authorized personnel in the treasures department should be responsible for signing larger checks. 9. Consistent A copy of each check should be filed with the supporting voucher in the paid voucher file. 15-29 Search for unrecorded liabilities A) The fact that the client made a journal entry to record vendors' invoices which were received late should simplify the CPA's test for unrecorded liabilities and reduce the possibility of a need for a further adjustment, but the CPA's test is nevertheless required. If the client has not journalized late invoices, the CPA is compelled in his testing to substantiate what will ultimately be recorded as an adjusting entry. B) No. The CPA should obtain a letter in which responsible executives of the client's organization represent that to the best of their knowledge all liabilities have been recognized. However, this is done as a normal audit procedure to afford additional assurance to the CPA and it does not relieve him of the responsibility for making his own tests. C) Even if the CPA is justified in relying on work done by an internal auditor, he should curtail not eliminate his own audit work. In this case the CPA should have ascertained early in his examination that Ozine's internal auditor is qualified by being both technically competent and reasonably independent. D) Work done by an auditor for a federal agency will normally have no effect on the scope of the CPA's audit, since the concern of government auditors is usually limited to matters which are unrelated to the financial statements. Government auditors are usually interested primarily in substantiating as valid and allowable those costs which a company has allocated against specific government contracts or sales to the government, and consequently there is little likelihood that the auditor for a federal agency at Ozine would check for unrecorded liabilities. E) In addition to the 20X1 voucher register, the CPA should consider the following sources for possible unrecorded liabilities: Un-entered vendors' invoice file. Status of tax returns for prior years still open. Discussions with employees. Representations from management. Comparison of account balances with preceding year. Examination of individual accounts during the audit. Existing contracts and agreements. Minutes. Attorney's bills and letter of representation. Status of renegotiable business. Correspondence with principal suppliers. Audit testing of cutoff date for reciprocal accounts, e.g., inventory and fixed assets. Comprehensive Questions Chapter 16 16-24 Analytical procedures A) Purchases = Gross Margin = Inventory Turn days = Year 2 = $2993 Year 3 = $2171 Year 4 = $1827 Year 5 = $1883 Year 2 = 52.3% Year 3 = 48.1% Year 4 = 52.2% Year 5 = 52.4% Year 2 = 160 Year 3 = 185 Year 4 = 199 Year 5 = 199 A/R turn days = A/P turn days = Year 2 = 70 Year 3 = 97 Year 4 = 95 Year 5 = 83 Year 2 = 33 Year 3 = 51 Year 4 = 43 Year 5 = 36 B) Gross Operating Cycle = Year 2 = 230 Year 3 = 282 Year 4 = 294 Year 5 = 283 Net Operating Cycle = Year 2 = 197 Year 3 = 231 Year 4 = 294 Year 5 = 246 Important trends identified might include the significant increase in inventory turn days, the increase in gross margin to the best result in the four year period, and the improved collection period. C) In order to turn tolerable misstatement into inventory turn days I would use the formula for calculating inventory turn days as follows: Tolerable Misstatement / Cost of Goods Sold * 365. D) I see the most significant changes in 20x5 are the combined decrease in purchases and increase in gross margin, increasing to 52.4%, while inventory turn days also increases significantly, increasing to 199 days. This is potential evidence of an overstatement of inventory that might be due to either an error in counting or calculating inventory or due to fraudulent financial reporting. 16-33 Control activities in payroll processing A) There are only three shortcomings in the payroll procedures currently used at the Galena plant that I see: Actual payroll hours are not approved by production management. There is inadequate segregation of duties within the payroll department. Personnel department should not have access to payroll checks on a regular basis. B) These are the weaknesses that I believe are material at the Galena Plant: All incoming time cards should be signed by both the employee and supervisor. The payroll clerk who prepares the input for data processing should not do the reconciliation but, rather, a second clerk should reconcile the payroll register to the time cards. An employee of supervisory level should authorize voiding of computergenerated checks and the subsequent preparation of a manual replacement check. Replacement checks should be processed following good internal control procedures. All payroll checks, including unsigned replacement checks, should then be given to the accounting department rather than to the personnel department for storage in a secure location until payday. ... View Full Document

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