Midterm #2 with solutions

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# Assertion Tested Internal Control Test of Details 1 Accuracy, completeness Independent verification of bank reconciliation. Employee should review and sign off on bank rec. This includes ensuring it reconciles. Recalculation of bank reconciliation, including footing o/s cheque listing. 2 Allocation, Classification Periodic review of capital assets accounts to ensure everything has been included. This should be done by manager working with assets. For example, Factory Manager. Review equipment and maintenance related accounts for capital items. Test a sample of items. 3 Allocation, Cut-off The client should follow a policy of holding open the books to record any returns in the subsequent period that apply to goods shipped and sales recorded in the current period. Review returns recorded in the subsequent period to determine if they apply to goods shipped and sales recorded prior to year- end. Perform an analytical test to determine whether or not returns in the first month of the next year are similar in magnitude to those experienced in the same period of previous years. 4 Existence Periodic review of employee listing. Periodic review of terminated employees listing to ensure it is complete. Select a sample of payroll payments and employees, and agree information to employee file. Look for termination notices, or end dates of contracts. Trace employee to organization chart. 5 Valuation Periodic review of items in inventory. Periodic review of last time a product sold. Periodic valuation (cost vs NRV) Discussion with client. Inquiry regarding slow moving inventory. Review of inventory listing and determining last time a product was sold. Cost vs NRV analysis. 6 Existence Periodic review of vendor listing to make sure all vendors exist. By purchasing department. Review for duplicate information for example address as employee. Segregation of duties in the set up and payment of vendors. Review cancelled cheques to ensure payment is going to real vendor. Review invoices to ensure a valid company exists. Other tests are possible.
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Question #3 – 5 marks The following are selected account balances for Banana Inc. Account 2015 2014 Sales 26,784,500 25,892,150 Cost of Goods Sold 20,446,985 19,563,200 Gross Margin 6,337,515 6,328,950 Accounts Receivable 3,668,920 2,169,850 Allowance for Doubtful Accounts 500,000 475,000 Part A – Provide 3 analytical procedures applicable to the revenue and accounts receivable related balances above. They may be for the same account(s), however, each procedure must be different (cannot be the same ratio or comparison applied to each account). Do not calculate. – 3 marks Compare any of the above accounts to prior year Compare any of the above accounts to industry standards or averages
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