Midterm #2 with solutions

Compare to last year or to industry standards o gross

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Compare to last year or to industry standards: o Gross Margin % o AR turnover o ADA as a % of AR o AR as a % of sales o Other Part B – What are the potential implications of the changes in the balances? What is the risk? – 1 mark The risk above is as follows: o Large increase in AR while revenues remain stable o This means that there is trouble collecting o There has not been an adjustment in the allowance account to reflect the difficulty in collections o Potential overstatement of AR Part C – Identify one audit procedures that you would perform to address the risk identified in part B. – 1 mark Inquire or discuss with management collectability problems Discuss what would be reasonable for allowance for doubtful accounts Review AR aging summary to see how long the AR has been outstanding Other
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Question #4 – 9 marks LifeGood Gym is an athletic club that offers its members a wide variety of workout equipment and classes, and is owned and managed by Brian Builder. The company employs 50 employees, all paid on an hourly basis. A bonus of $100 is paid to personal trainers for every new member they bring to the gym. Both personal trainers and class instructors fill in time sheets and hand them in every Monday to the payroll clerk, Ashley. New employees are hired by Brian, who decides their pay rate based on experience. Ashley enters new employees into the accounting system, Gymtron. Every Wednesday, Ashley calculates employee’s pay based on timesheets. She prints out a listing of new members for the week, and asks trainers to identify which members they recruited. She then adds bonuses to the respective employees. Ashley calculates payroll deductions, prepares the cheques, and files the timesheets in a secure cabinet. Finally, she gives the cheques to Brian for signing. Ashley enters the payroll transaction into Gymtron. The payroll transaction is taken out of the company’s payroll bank account. Brian reviews and approves the bank reconciliation monthly. Identify 3 control weaknesses, describe the implication, and provide a recommendation. – 1 mark each Weakness Implication Recommendation
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W: Segregation of duties: Ashely enters new employees and prepares payroll information I: Ashley can create fictitious employees and use fake timesheets to pay them R: One person should enter new employees, and another should calculate payroll information W: Brian does not review timesheets I: Employees may overstate their time, and get paid for hours not actually worked R: Brian should review timesheets before signing cheques. He should be comparing hours on the timesheet to a schedule. Assessing for reasonableness. o A punch in/out system could also be implemented where employees must punch in at the beginning of a shift, and punch out when they are done. This would still need review W: Brian does not review Ashely’s calculations I: Ashley could make mistakes that could result in the employees being paid for more hours than actually worked. Ashley could also purposely overstate hours. R: Brian, or another employee should be reviewing calculations prepared o This could also be done by a system This would still need review W: There is no tracking mechanism for bonuses. Ashely simply asks which trainer brought in a new customer I: Trainers can take advantage by claiming they brought in new members when the bonus should belong to another individual R: Implement a new member tracking system where a trainer bring forward proof of their new member, and this is approved by Brian. o This could also be done through a potential system. Others are possible.
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Question #5 – 5 marks Part A – Explain the difference between a positive and a negative confirmation. – 2 marks Positive – Letter to the debtor requesting confirmation as to whether the balance as stated on the confirmation request is correct or incorrect Negative – Letter to the debtor requesting a response only when the debtor disagrees with the stated amount Part B – Which one is better for audit purposes? Explain why. – 2 marks Positive Failure to reply must be regarded as a correct response. This means auditor must assume all who did not reply agree with the balance. This may be false, as some may just not reply, not know how to reply ‘False positive’ Part C – Control must be maintained over confirmations. What is the most important step in the confirmations process which allows the auditor maintains this control. Explain why. – 2 marks Third party to send the confirmation directly back to the auditor Cannot go through the client This would allow the client to potentially manipulate the response.
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Question #6 – 6 marks The following is a sales revenue listing for Banana Inc. Materiality has been set at $50,000. Populatio n Item Invoice Numbe r Invoice Amoun t Cumulativ e Amount Populatio n Item Invoice Numbe r Invoice Amoun t Cumulativ e Amount 1 537 5,438 5,438 16 552 526 214,511 2 538 66,529 71,967 17 553 9,845 224,356 3 539 45,120 117,087 18 554 21,445 245,801 4 540 256 117,343 19 555 7,489 253,290 5 541 3,502 120,845 20 556 56,201 309,491 6 542 36,750 157,595 21 557 652 310,143 7 543 15,896 173,491 22 558 1,304 311,447 8 544 1,956 175,447 23 559 1,498 312,945 9 545 23,541 198,988 24 560 25,156 338,101 10 546 896 199,884 25 561 1,745 339,846 11 547 1,012 200,896 26 562 4,600 344,446 12 548 223 201,119 27 563 5,802 350,248 13 549 5,263 206,382 28 564 55,029 405,277 14 550 478 206,860 29 565 2,300 407,577 15 551 7,125 213,985 30 566 1,257 408,834 Select a sample of invoices to test using the following techniques. List the population items selected.
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