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business
auditing

Questions and Answers of Auditing

You have been given the following information for Patty-Cake's Athletic Wear Corp. for the year 2018:a. Net sales = $38,250,000.b. Cost of goods sold = $22,070,000.c. Other operating expenses =
Rebecky's Flowers 4U, Inc., had free cash flows during 2018 of $43 million, NOPAT of $85 million, and depreciation of $14 million. Using this information, fill in the blanks on Rebecky's balance
Vinny's Overhead Construction had free cash flow during 2018 of $25.4 million. The change in gross fixed assets on Vinny's balance sheet during 2018 was $7.0 million and the change in net
The Fitness Studio, Inc.'s 2018 income statement lists the following income and expenses: EBIT = $773,500, interest expense = $100,000, and taxes = $234,500. The firm has no preferred stock
Oakdale Fashions, Inc., had $245,000 in 2018 taxable income. Using the tax schedule in Table 2.3, calculate the company's 2018income taxes. What is the average tax rate? What is the marginal tax
Hunt Taxidermy, Inc., is concerned about the taxes paid by the company in 2018. In addition to $42.4 million of taxable income, the firm received $2,975,000 of interest on state-issued bonds and
Ramakrishnan Inc. reported 2018 net income of $15 million and depreciation of $2,650,000. The top part of Ramakrishnan, Inc.'s 2018 and 2017 balance sheets is listed below (in millions of
Shown below are partial financial statements for Garners' Platoon Mental Health Care, Inc. Fill in the blanks on the four financial statements.Garners' Platoon Mental Health Care, Inc.Statement of
Tiggie's Dog Toys, Inc., reported a debt-to-equity ratio of 1.75 times at the end of 2018. If the firm's total assets at year-end were $25 million, how much of their assets are financed with debt and
The top part of Ramakrishnan, Inc,'s 2018 and 2017 balance sheets is listed below (in millions of dollars).Calculate Ramakrishnan, Inc.'s current ratio, quick ratio, and cash ratio for 2018 and 2017?
You are thinking of investing in Nikki T's, Inc. You have only the following information on the firm at year-end 2018: net income is $250,000, total debt is $2.5 million, and debt ratio is 55
Spread the balance sheets and income statements of Lake of Egypt Marina, Inc. for 2018 and 2017?Use the above financial statements for Lake of Egypt Marina, Inc.
Tater and Pepper Corp. reported sales for 2018 of $23 million. Tater and Pepper listed $5.6 million of inventory on its balance sheet. Using a 365 day year, how many days did Tater and Pepper's
Calculate the following ratios for Lake of Egypt Marina, Inc. as of year-end 2018?Use the following financial statements for Lake of Egypt Marina, Inc.Calculate the following ratios for Lake of
Mr. Husker's Tuxedos Corp. ended the year 2018 with an average collection period of 32 days. The firm's credit sales for 2018 were $56.1 million. What is the year-end 2018 balance in accounts
Maggie's Skunk Removal Corp.'s 2018 income statement listed net sales = $12.5 million, gross profit of $6.9 million, EBIT = $5.6 million, net income available to common stockholders = $3.2 million,
In 2018, Jake's Jamming Music, Inc. announced an ROA of 8.56 percent, ROE of 14.5 percent, and profit margin of 20.5 percent. The firm had total assets of $9.5 million at year-end 2018. Calculate the
Listed below are the 2018 financial statements for Garners' Platoon Mental Health Care, Inc. Spread the balance sheet and income statement. Calculate the financial ratios for the firm, including
Oil prices have increased a great deal in the last decade. The table below shows the average oil price for each year since 1949. Many companies use oil products as a resource in their own business
Consider that you are the marketing manager of a firm. You need to have approximately 1 additional salesperson for every $10 million in sales. You currently have $50 million in sales and have 5
People have had a fascination with gold for thousands of years. Archaeologists have discovered gold jewelry in Southern Iraq dating to 3000 BC and gold ornaments in Peru dating to 1200 BC. The
When you discount multiple cash flows, how does the future period that a cash flow is paid affect its present value and its contribution to the value of all the cash flows?
Explain why you use the same adjustment factor, (1 + i), when you adjust annuity due payments for both future value and present value.
Would you rather pay $10,000 for a 5-year $2,500 annuity or a 10-year $1,250 annuity? Why?
When paying off a home mortgage, extra principle payments can have a dramatic impact on the time needed to pay off the mortgage.(a) Create an amortization schedule for a $200,000, 3-year mortgage
Say that in June of this year, a company issued bonds that are scheduled to mature in three years in June. The coupon rate is 5.75 percent and is paid semiannually. The bond issue was rated AAA.a.
You have a portfolio of three bonds. The Long Bond will mature in 19 years and has a 5.5% coupon rate. The Midterm Bond matures in 9 years and has a 6.6% coupon rate. The Short Bond matures in only 2
Under what conditions would the constant growth rate model not be appropriate?
Describe how being a residual claimant can be very valuable.
Annual dividends of ATTA Corp grew from $0.96 in 2005 to $1.76 in 2017. What was the annual growth rate?
Annual dividends of Generic Electrical grew from $0.66 in 2012 to $1.03 in 2017. What was the annual growth rate?
Campbell Supper Co. paid a $0.632 dividend per share in 2013, which grew to $0.76 in 2016. This growth is expected to continue. What is the value of this stock at the beginning of 2017 when the
Design a spreadsheet similar to the one below to compute the value of a variable growth rate firm over a five-year horizon.A. What is the value of the stock if the current dividend is $1.30, the
Carnival Corp. (CCL) provides cruises to major vacation destinations. Carnival operates 99 cruise ships in North America, Europe, Australia, and Asia. The company also operates hotels, sightseeing
Investors can choose from many thousands of stocks. The large number to choose from can be quite daunting to new investors. Fortunately, some good stock screeners are available for free on the
What's the source of firm-specific risk? What's the source of market risk?
Below are the monthly returns for March 2011 to February 2016 of three international stock indices; All Ordinaries of Australia, Nikkei 225 of Japan, and FTSE 100 of England. A. Compute and compare
Create the spreadsheet below. The spreadsheet should use the returns for assets A and B to form a portfolio return using the weights for each asset shown in cells E1 and E2. The average portfolio
Following stocks in a portfolio is easier than ever. Many financial Websites have the capability to follow the stocks in your portfolio over time. Just enter your stocks, the number of shares, your
How should you handle a case where required return computations from CAPM and the constant growth rate model are very different?
Cisco Systems has a beta of 1.25. Does this mean that you should expect Cisco to earn a return 25 percent higher than the S&P 500 Index return? Explain.
Build a spreadsheet that automatically computes the expected market return and risk for different assumptions about the state of the economy.a. First, create the following spreadsheet and compute the
Using beta as a risk measure has been fully integrated into corporate finance and the investment industry. You can obtain a beta for most companies at many financial Web sites. Sites that list a beta
Could you calculate the component cost of equity for a stock with non constant expected growth rates in dividends if you didn't have the information necessary to compute the component cost using
LilyMac Studios, a national chain of photography studios, is considering opening up a chain of coffee shop/art galleries. While the existing operations of the firm have a beta of 1.17, the new chain
Everything else held constant, would you rather depreciate a project with DDB depreciation or deduct it under a Section 179 deduction?
In a cost-cutting proposal, what might cause you to sometimes have negative EBIT?
How many TVM formulas do you use every time you calculate EAC for a project?
Your company is contemplating replacing their current fleet of delivery vehicles with Nissan NV vans. You will be replacing 5 fully-depreciated vans, which you think you can sell for $3,000 apiece
Would it be possible for a decision to deny credit to your customers be value maximizing? How?
Your bank offers you a $140,000 line of credit with an interest rate of 2.30 percent per quarter. The loan agreement also requires that 7 percent of the unused portion of the credit line be
Go to the SEC's Edgar site at www.sec.gov/edgar.shtml and download the latest annual ("10-K") report for the firm of your choice. Use the financial statements in the report to calculate the firm's
Explain why we need to use the iterative calculation approach described in the text to get a complete solution for AFN.
Can the procedure described in this chapter for adjusting for seasonality apply to periods longer than a year? How?
John's Bait and Fish shop has had the monthly sales amounts listed as follows for the last four years. Assuming that there is both seasonality and a trend, estimate monthly sales for each month of
Sara's Ice Cream Shop is closed for six months out of the year, but has had the monthly sales amounts listed as follows for the last four years. Assuming that there is both seasonality and a trend,
Suppose that the 2016 actual and 2017 projected financial statements for Comfy Corners Catbeds are initially shown as follows. In these tables, sales are projected to rise by 22 percent in the
Suppose that the 2016 actual and 2017 projected financial statements for AFS are initially shown as follows. In these tables, sales are projected to rise by 14 percent in the coming year, and the
Suppose a firm has had the historic sales figures shown as follows. What would be the forecast for next year's sales using regression to estimate a trend?
Suppose a firm has had the historic sales figures shown as follows. What would be the forecast for next year's sales using regression to estimate a trend?
Suppose that the 2016 actual and 2017 projected financial statements for your firm are initially shown as follows. In these tables, sales are projected to rise by 18 percent in the coming year, and
Why does allowing for the existence of corporate taxation cause firms to prefer the maximum amount of debt possible?
Go to the Yahoo! Industry Center at biz.yahoo.com/ic/, choose an industry from amongst the "Top Industries" listed in the left column, and choose three of the leading firms for that industry:What are
Why might a firm announce a reverse stock split?
If a firm follows the modified residual dividend model discussed in this chapter, are extraordinary dividends paid out of residual net income?
What is the difference between a fixed-rate and a floating-rate loan?
What do global organizations like the World Trade Organization and the International Monetary Fund do?
What is a credit-scoring model?
You own $25,000 in subordinated debt of Local Crossings, Inc. which declared bankruptcy on May 15, 2018. Local Crossings' balance sheet at the time of the bankruptcy filing is listed below.The
WorldGone, Inc. declared bankruptcy on September 25, 2018 through a Chapter 7 filing. WorldGone's balance sheet at the time of the bankruptcy filing is listed below.The accrued wages were earned
Use the following financial statements for Lake of Egypt Marina to calculate and interpret the Altman's Z-score for this firm as of 2018
Use the following financial statements for Garners' Platoon Mental Health Care, Inc., to calculate and interpret the Altman's Z-score for this firm.
Disaster Airlines is a firm in severe financial distress. The firm can no longer pay its bills on time and it is far behind on payments to its banks and long-term debt holders. The firm has decided
What are the three broad types of governmental audits described by the GAGAS issued by the GAO?
Define what is meant by compliance auditing?
Identify and then briefly explain the eight general audit procedures used to gather evidence. Next, please provide an example for each of the eight procedures?
What are the documentation retention requirements of AS 1215?
What is meant by the nature of the company, and why is it important to inherent risk assessment?
What is the auditor's responsibility regarding fraud risk?
This question consists of a number of items pertaining to an auditor's risk analysis for a company. Your task is to tell how each item affects overall audit risk-that is, the probability of issuing
What is the auditor's responsibility regarding fraud risk? Discuss.
Identify three different categories of fraud risk factors. Next, for each category, what are some of the conditions that can help contribute to a higher likelihood of financial statement fraud?
Why is it important for an auditor to carefully assess inherent risk on each audit engagement?
What is the Committee of Sponsoring Organizations (COSO)? Briefly describe the original COSO framework from 1992 and the improvements made in the updated COSO framework from 2013.
What is meant by the information and communications component of an effective internal control system? How can an auditor evaluate whether a client's internal control system is functioning properly
What is the concept of reasonable assurance? What are the key limitations of an internal control system?
Sorrell, CPA, is auditing the financial statements of Van Dyke as of December 31, 2017. Sorrell's substantive procedures and other tests indicated that Van Dyke's financial statements were prepared
What might two endorsements on a canceled check indicate?
You can use the computer-based Electronic Work-papers on the textbook website to prepare the schedule of interbank transfers required in this problem.Ever-Ready Corporation is in the home building
The case below tells the actual story of a cash embezzlement scheme. The case has two major parts:(1) Problem(2) Audit approach. For the case, please consider how the auditor may have discovered the
The case below tells the actual story of a cash embezzlement scheme. The case has two major parts:(1) Problem(2) Audit approach. For the case, please consider how the auditor may have discovered the
Which three events should generally have occurred prior to the recognition of sales revenue?
What effect do entity level controls have on the control risk assessments of an auditor?
What purpose is served by pre numbering sales orders, shipping documents, and sales invoices?
What makes an account significant or an assertion relevant?
Why do auditors focus on revenue as a significant account and the occurrence of revenue as a relevant assertion in the revenue cycle?
The following four questions are taken from an internal control questionnaire. For each question, state(a) One test of controls procedure you could use to find out whether the control technique was
The following article was published in Newsday on February 9, 2009:Call for Probe of Ticket SalesBruce Springsteen fans were victims of a "classic bait and switch" scam by the nation's largest
For this exercise, your client, Bright IDEAs Inc., has provided you with data for two related files, a listing of sales invoices, and a listing of customers with credit limits. To test whether credit
You have identified relevant controls for several assertions within the revenue cycle, and you must use IDEA to perform several tests of controls.Required:a. ELM has a policy of using pre numbered

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