Chapter14 - answer - CHAPTER 14 14-1 SUBSTANTIVE TESTS OF...

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14-1. a. Accounts receivable – the auditor’s objective is to test the existence of accounts receivable. Accounts payable – the auditor’s objective is to test the completeness of accounts payable. b. Accounts receivable – In selecting accounts for confirmation, auditors focus on a variety of characteristics, including high-volume vendors. high-value accounts. accounts significantly smaller than in a previous period. small or zero-balance accounts. Accounts payable – In selecting accounts for confirmation, auditors focus on large, small, or dormant accounts and on vendors the client starts using around year end. c. Basic information included on the confirmation requests is the same for accounts receivable and for accounts payable. d. Procedures for mailing are substantially the same for accounts receivable and for accounts payable. e. For accounts receivable, an auditor examines documentary evidence that indicates the customer was shipped goods and ultimately paid for them. For accounts payable, if the objective of the confirmation process is to test the existence of a payable and the vendor does not respond, the auditor should attempt to verify existence of the liability by performing tests such as examining the purchase order, the receiving report, and the vendor’s invoice for the transaction. If the objective is to test completeness, the auditor should reconcile accounts payable or reconcile to subsequent payments. 14-2. a. The auditor should perform the following procedures: Trace balance per confirmation request to confirmation of the supplier / creditor. Trace balance per general ledger to subsidiary ledger. CHAPTER 14 SUBSTANTIVE TESTS OF LIABILITIES
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14-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition Trace payments made to cash payments journal and paid checks. For invoices not received at December 31, 2006, determine invoice date. For goods shipped FOB destination, examine invoice to determine terms. For goods shipped FOB shipping point, examine shipping document. Ask client to explain unlocated differences, and then follow up to determine that the client’s explanation was valid. b. For accounts not confirmed, the auditor should substantiate that a shipment was received by examining the receiving report, the invoice copy, and subsequent payment if possible. c. The accounts payable clerk should not routinely perform the reconciliation of monthly statements to the listing of accounts or vouchers payable. Whether the accounts payable clerk or another employee performs the activity, the auditor must substantiate the validity of the explanations. 14-3. a. The accounts payable audit procedures should be directed toward searching for proper inclusion of all accounts payable (completeness) and ascertaining that recorded amounts are reasonably stated (valuation), because the primary audit purpose is to reveal any possible material understatements. The principal objectives of the accounts payable examination are
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