6-25 (continued) 3. Auditors may be inclined to accept client representations because of a natural bias to want to trust the client. In addition, if these allowances had been used in the past, the auditor may have been more inclined to accept them as a regular business practice. 4. The following are example of three probing questions related to the vendor allowances: Are there written agreements or other corroborating evidence that would support the amount of these allowances? Can specific payments or credits be matched to specific vendor allowances? Why are the allowances greater this year compared to the prior year? 6-26 a. CYCLE BALANCE SHEETACCOUNTS INCOME STATEMENT ACCOUNTS SALES AND COLLECTION Accounts receivable Allowance for doubtful accounts Cash Notes receivable—trade Bad debt expense Sales ACQUISITION AND PAYMENT Accounts payable Accumulated depreciation— furniture and equipment Cash Furniture and equipment Income tax payable Inventory Prepaid insurance Property tax payable Advertising expense Depreciation expense— furniture and equipment Income tax expense Insurance expense Property tax expense Purchases Rent expense Telecommunications expense PAYROLL AND PERSONNEL Cash Accrued sales salaries Salaries, office and general Sales salaries expense INVENTORY AND WAREHOUSING Inventory Purchases CAPITAL ACQUISITION AND REPAYMENT Accrued interest expense Cash Common stock Loans payable Notes payable Retained earnings Interest expense 6-8
6-26 (continued) b. The general ledger accounts are not likely to differ much between a retail and a wholesale company unless there are departments for which there are various categories. There would be large differences for a hospital or governmental unit. A governmental unit would use the fund accounting system and would have entirely different titles. Hospitals are likely to have several different kinds of revenue accounts, rather than sales. They are also likely to have such things as drug expense, laboratory supplies, etc. At the same time, even a governmental unit or a hospital will have certain accounts suchas cash, insurance expense, interest income, rent expense, and so forth. 6-27 a. Management assertions about transactions relate to transactionsand other events that are reflected in the accounting records. Incontrast, assertions about account balances relate to the ending account balances that are included in the financial statements, and assertions about presentation and disclosure relate to how those balances are reflected and disclosed in the financial statements. MANAGEMENT ASSERTION b. CATEGORY OF MANAGEMENT ASSERTION c. NAME OF ASSERTION a. Recorded sales transactions have occurred. Classes of transactions Occurrence b. There are no liens or other restrictions on accounts receivable. Account balances Rights and obligations c. All sales transactions have been recorded.
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