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.