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Unformatted text preview: Auditing Chapter 14 Homework 14-1 If a corporation overstates its earnings, are its liabilities morel likely to be overstated or understated? Explain. Overstating an asset account usually requires an improper entry in the account records, as by the recording of a fictitious transaction. This improper entry can be detected by the auditors through verification of the individual entries making up the balance of an asset account. Understating a liability account generally can mean merely that failing to make an entry for a transaction creating a liability. The omission of this entry is less susceptible to detection than is a fictitious entry and will result in the earnings being overstated and the liabilities understated. Overstating earnings will result in an overstatement in owner’s equity which will be linked to either an understatement of liabilities or an overstatement of assets causing the balance sheet to be out of balance. 14-5 Compare the auditors’ approach to the verification of liabilities with their approach to the verification of assets . Auditors are concerned with failure to detect an overstatement of earnings and the fear of a lawsuit makes them even more cautious in their analysis approach. In the overstatement of assets which will exaggerate the earnings is also a concern. In the audit of liabilities the auditors are primarily concerned with the possibility of understatement, or omission, of liabilities. In the audit work of liabilities there is very little that is placed on valuation, but in the audit of assets much of the audit work is tied to valuation which is a great area of concern. 14-6 The auditors usually find in the client’s possession documentary evidence, such as invoices, supporting both accounts receivable and accounts payable. Is there any difference in the quality of such evidence for accounts receivable and for accounts payable? Explain. The evidence utilized for account payable is typically tied to external documentation that has been generated and created by outside vendors such as invoices or purchase orders which are generated with each transaction and also tied into a monthly statement provided by the vendor. With accounts receivable the evidence it typically generated from internal documentation. 14-7 Describe briefly an internal control activity that would prevent a paid disbursement voucher from being presented for payment a second time. The authorized personnel responsible for signing the checks should date and stamp the voucher so that it reflects payment made against it and prevents it from being submitted again for double payment....
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This note was uploaded on 07/27/2011 for the course ACCT 102 taught by Professor Huxhold during the Spring '11 term at UCSD.
- Spring '11