Identification of Balance sheet related audit objective fully or partially met. Part b. The order in which the auditor performs the procedure.
1.Balance sheet completeness objective. The procedure is the 04 th
2.Detail tie-in. This procedure is ranked 03rd
3.Detail tie- in. The procure is the 02 nd to be performed
4.Detail tie-in. This objective is met on the 01 st procedure.
5.Existence realizable value. The task is ranked 07 th
6.Existence accuracy. The procedure is ranked 05 th
7. Existence accuracy. The procedure is ranked 06 th
Chapter 16: Problems 16-26 (a-c),
What does audit by exception mean and how does it differ from traditional approach using statistical sampling? How does an auditor identify the exceptions?
Delegate your assignment to our experts and they will do the rest.
Under audit by exception approach (ABE), the auditor focuses attention on the transactions likely to have problems. The techniques enable the auditor to identify questionable transactions in an effective way. The ABE approach is scientific unlike the random sampling used by the traditional approach. It is difficult to pick problematic transaction under the traditional approach, a weakness overcome by ABE. ABE tests the whole data population whereas traditional approach tests the sample obtained.
Describe how data visualization could be used in the audit of sales and collection cycle.
Exploratory data analysis involves the use of visualization tools such as excel or tableau that enable auditors to determine areas of focus and what to test. The analysis tools can be used to set audit expectations which are then compared with the actual sales data. Any significant deviations between the actual and benchmark figures are then investigated.
Choose one of the methods identified as emerging trend and discuss how the auditor can use it to test accounts receivable
Deep learning tools can be used to test for details tie in for the computation of provision for doubtful debts. The approach uses historical data combined with human knowledge to devise protocols that can be used to determine the accuracy of the provisions prepared by the management.
Chapter 16: Problems 16-35 (a-i),
Audit circumstance matched with the likely details of balance responses;
Matched to balance response a.
Matched to g
Matched to h
Matched to f
Matched to c
Matched to d
Matched to b
Matched to e
Matched to I
Chapter 17: Problems 17-24 (a-c),
The following questions relate to non-statistical and monetary unit sampling. Choose the best response.
4. Small measure of tolerable assessment would lead to a larger sample size
The risk of incorrect acceptance relates to 2. Substantive tests and affects audit effectiveness.
The true statement is 1only
Chapter 17: Problems 17-26 (a-c),
Evaluate each of the confirmation
Acc. No. 147. Pricing error
Acc. No. 228 Cut-off error
Acc. No. 278 Timing difference
Acc. No. 497. The cut-off errors
Acc No.564. Error in the quantity shipped
Acc No. 653 The cut-off error
Acc No. 830 Timing difference
Estimate the total amount of the misstatement
Acc. No. 147. Amount is $1095
Acc. No. 228 Amount is $26003
Acc. No. 278 Amount is $0
Acc. No. 497. Amount is $15319
Acc No.564. Misstatement amount is $539
Acc No. 653 Misstatements amount is $13359
Acc No. 830 Misstatement amounts is $0
Is the population acceptable?
The projected misstatement is $127320 whereas the tolerable misstatement is $100000. Therefore, there is a $27320 gap between the tolerable misstatement and the projected misstatement meaning the population should not be accepted and must be reviewed.
Chapter 17: Problems 17-27 (a-e),
For each of the sampling results 1 through 6, recommend the appropriate response(s) from the options listed below. Explain the reason for your decision.
Accept the population as fairly stated
Number 5 because it is an isolated occurrence and appears it only happened once without customer lodging complaints
Request the client to record an adjustment for the actual misstatements
Number 1 because the correct pricing happened once and an adjustment to the accounts is enough to rectify the misstatement.
Also, number 4 where the auditor is required to minimize the mistakes when translating the foreign accounts. Number 6 also require and adjustment to the correct the only two errors.
Expand the sample size.
The sample size in number 4 as to be increased to test the population because the errors can be corrected via an adjustment entry.
Request the client to fix the population
Fixing is required in numbers 2 and 3. Number 2 has a lot of quantity and pricing errors while number 3 has shown to contain several audit errors
Treat the misstatement as an anomaly that is an isolated occurrence that should not be projected to the population
Number 5 because of the assumptions held that it’s an isolated occurrence and there is no indication of customer complaint.
Chapter 21: Problems 21-16 (a-d),
For each of the questions state the purpose of the internal control
To ensure inventory is recorded once received and payment correspond to the quantity of goods received
It is to ensure that there is a proper and correct valuation of the inventory
To ensure the shipments are all recorded as sales
This is a pilferage control measure as well as ensuring that shipped inventory is recorded
This measure is to ensure that inventory and cost of sales valuation is reasonable
The reason of the control is to ensure a correct classification of obsolete inventory
The control measure is meant to confirm the accuracy of the inventory physical count
It is meant to verify and confirm the accuracy of the inventory listing
For each list a control to test its effectiveness
Confirm the serial number sequence and match the invoices received from suppliers
Inspect requisition books and receiving files
Confirm all series in the shipping inventory orders
Confirm if all shipping documentation is prepared as required
Conduct a thorough review of the laid-out procedures for determination of standard costs
Conduct an evaluation of the obsolescence policy and check correspondences with client
Witness storekeepers as they conduct a physical count
Witness the task of inventory verification
Nature of potential financial misstatement
Inventory amount is understated
Inventory amount is misstated
The sales figure is understated
Inventory overstated
Inventory could be misstated
Inventory is misstated
Inventory is misstated
Misstated inventory
Substantive Audit Procedure to determine misstatement
Match goods description and quantity on the supplier’s invoice to the receiving goods book
Do a comparison of the inventory software balance and the physical check results
Verify all the goods description and quantity on the bill of lading and the sales recorded
Do a comparison of physical count and the inventory system’s inventory balances
Confirm the costing data from the support documentation
Perform inventory analytical procedures
Do a comparison of physical count and inventory system
Conduct a random test on the clerical accuracy of the confirmation calculations
Chapter 21: Problems 21-19 (a-b),
Identify whether each of the procedures is primarily a test of control or a substantive test
Test of control
Test of control
Test of control
Substantive test
Test of control
Substantive test
Substantive test
Control test
State the purpose of each procedure
To ensure raw materials ordered correspond to the receipt materials file and payments are made to the right vendors
To confirm the accuracy of the count on the finished goods
To confirm the accuracy of the inventory count
To confirm accuracy of the manual turnover calculation
To confirm whether the laid out internal control procedures are followed
To confirm accuracy of the inventory physical count
To test the effectiveness of the internal control procedures on inventory
To confirm correct valuation of the inventory
Chapter 21: Problems 21-27 (a-b),
On annual audit, the following transactions are found near the closing date.
State whether they should be included in the client’s inventory
Give a reason for your decision
Merchandise should be excluded in the inventory because the goods have not yet reached consignee address. Consignee has not taken possession of the goods.
The products should be included because a product’s ownership is passed to the customer once it is shipped
Merchandise should be included because all items under FOB, the title to the goods passes to the customer once the goods are delivered to the shipping agency.
Exclude the item from the inventory because in FOB based shipment, the title passes to the customer once the goods are delivered.
Machine should be excluded because the buyer has not taken possession of the machine in his premises.
Chapter 24: Problems 24-24 (a-d),
Distinguish between contingent liabilities and commitments and explain why both are important in an audit.
A contingent liability is a probable future liability to an external party emanating from past events and depends on the outcome of a specific event in the future. There is likelihood an obligation may or may not arise which depends on the outcome of the future event. A contingent liability should be recorded once a fair estimate is established and if it is materials, it is disclosed as a footnote. A contingent liability must meet the following criteria; a possible obligation in the future, uncertainty on the amount of impairment or obligation and the result is known after occurrence of an event or series of events in the future. Product warranties and a law suit is an example of contingent liability.
On the other hand, a commitment involves situations whereby the is a pledge or an engagement where the management of a company pledge or oblige the company to execute a certain agreement in future based on predetermined conditions. Such pledges bind the firm irrespective of the financial conditions of the company or the general economy. Ideally companies engage in commitments in the best interests of the company but prevailing conditions in the future may change leaving the company at a disadvantages position. Commitments are disclosed as a separate footnote just like material contingent liabilities. An example of commitment includes a pledge by a firm to purchase inputs at a predetermined price or pension plans.
The role of audit is to ensure the financial information reflects the true and fair view of the company and on contingent liabilities and commitments, the primary role of the audit is to determine if they exist. Auditors pay attention to undisclosed contingent liabilities, which is difficult to uncover but if the information presented is confirmed to be reasonable, it is validated for presentation to the stockholders. Where the contingent liabilities are not properly disclosed, the auditor has a responsibility to notify the management and other authorities for tax related contingencies.
Identify three useful audit procedures for uncovering contingent liabilities that Johnson will likely perform in the normal conduct of the audit, even if she had no responsibility for uncovering contingencies.
The first step in the audit of contingent liabilities is ascertaining if the liabilities exist because it is easier to verify existence of a disclosed transaction than undisclosed ones.
After determining the existence of the contingent liabilities, the second procedure is to determine the materiality of the liabilities disclosed.
The third procedures are to determine if the footnote provided are sufficient to disclose the liabilities declared reported by the management.
Identify three other procedures Johnson is likely to perform specifically for the purpose of identifying undisclosed contingencies to help her obtain evidence about the presentation of the audit objective.
The first step is to obtain a management’s position on the possibility of unrecorded contingent liabilities through a letter of inquiry.
The auditor assesses the income tax reports and files for the current year and the previous periods to determine presence of unsettled taxes or any tax disputes. Also reviewed are the board minutes to identify possible contingencies not disclosed.
The third procure involves an analysis of the legal expenditures in the current and previous periods for any pending law suits, notices of tax assessment from the authorities and other legal disputes. Obtaining a letter of attorney also helps in determining the presence of litigations and any other potential contingencies.
Identify three useful audit procedures for uncovering commitments that Johnson will likely perform as part of the audit in other accounts.
Audit procedures on commitment is carried out as part of the ordinary audit tests of other areas. Audit of purchases and inventory can help uncover commitments on the prices of raw materials.
The auditor can pick commitments from the board minutes, contract and related correspondence documents.
Chapter 24 Problems 24 -26 (a-b)
Evaluate Little’s approach to sending the attorney letters and her follow up responses
Auditors depend on the knowledge and expertise of attorneys to provide an opinion on any legal issues related to the client. The attorney letters are important because they provide information on any pending or continuing litigation in which the attorney is involved.
The letter provides an opportunity for the attorney to state the status of each litigation, in terms of more information and progress of continuing litigations. Besides, the letter confirms all the existing litigations by providing a comprehensive list of all litigations as well as an opportunity for the management to receive information on litigations requiring disclosure in the financial reports.
Follow up responses are informed of requests for progress reports and requests for provision of additional information on the litigations indicated on the litigation list.
What should Little do about each of the letters?
Little should assess all the item listed in the letter especially the litigation list. He should ensure he has attained an understanding of the effects and impacts of the items stated in the letter. Little evaluates the contents of the letters and compares with what was requested to determine the position on scope of limitation and determine whether or not to qualify the opinion.
Little should verify the information on the litigations list, status and litigation assessment reports. Also, the auditor should evaluate the amount of legal expenses claimed by the lawyers and their proper reporting in the financial statements.
Chapter 24 Problems 24-27 (a- h)
Alternative actions
Declaration of bankruptcy on a debtor
Recall the financial statements for revision because the information affects fair presentation of account receivables in the books as at the balance sheet date. The bankruptcy happened within the field work time line and ought to have been noted.
Bankruptcy after expiry of the subsequent period
Do nothing because the bankruptcy happened after the field work and results showed otherwise.
Bankruptcy
Recall the financial statements for revision because the bankruptcy occurred during expiry of the fieldwork. Accounts should be revised.
Contingent liability
The settlement should be disclosed in the June 30 financial statements.
Law suit
Recall the books for revision to provide for the case obligations
Law suit
Recall the accounts for revision to provide for contingent liabilities
Uninsured law suit
Do nothing since it ought to be factored in the June ,30 financial statements and formed part of the information subjected to audit.
Bankruptcy
Disclose as a footnote because it’s a subsequent event and occurred during the duration of the field work.
