1. "indicates that the allowance for doubtful accounts seems adequate as of year-end and that no adjusting entry is necessary."

a) retain the original text. b) delete the text. c) replace with "should be written off as of year-end with a debit to the allowance for doubtful accounts and a credit to accounts receivable and we should perform further procedures on the adequacy of the allowance for doubtful accounts." d) replace with "should be written off as of year-end with a debit to bad debt expense and a credit to the allowance for doubtful accounts and we should perform further procedures on the adequacy of the allowance for doubtful accounts." e) replace with "should be written off as of year-end with a debit to bad debt expense and a credit to accounts receivable and we should perform further procedures on the adequacy of the allowance for doubtful accounts." f) replace with "indicates that Keystone should never sell to the customers that compose that balance."

2. "Cash- First National Bank."

a) retain the original text. b) replace with "software development cost." c) replace with "long-term debt." d) replace with "accounts receivable-trade." e) replace with "line of credit."

3. "exceed current market values of the items."

a) retain the original text. b) replace with "equal the most recent purchase price of the items." c) replace with "equal or less than current market prices of the items." d) replace with "are less than extended values of comparable items." e) replace with "exceed costs calculated using FIFO method."

4. "we should determine that all "slow moving" items are valued at zero."

a) retain the original text. b) delete the text. c) replace with "we should calculate turnover ratios of inventory items." d) replace with "we must test every extension of quantity on hand times cost." e) replace with "we should combine our procedures here with those relating to leasehold improvements." f) replace with "the increase in software development cost is inconsistent with this change."

5. "We should carefully inspect items for pledging status during the count of inventory."

a) retain the original text. b) delete the text. c) replace with "We should ask the president whether any inventory items are pledged." d) replace with "We should examine cash confirmations and debt agreements." e) replace with "We should emphasize subsequent event procedures."

6. "analyze the client's aging of receivables."

a) retain the original text. b) replace with "calculate inventory turnover rates for items sold to accounts now past due." c) replace with "confirm all accounts that are not overdue as of year-end." d) replace with "vouch sales shortly before year-end." e) replace with "vouch sales shortly after year-end."

7. "vouch the cash disbursement."

a) retain the original text. b) delete the text. c) replacement with "add to client representations letter that he guarantees repayment of the loan according to its terms." d) replace with "determine that the loan was approved by all shareholders." e) replace with "determine that the loan's stated rate exceeds the expected prime rate during the period of the loan." f) replace with "vouch the cash receipt."

8. "It would seem that the client has a policy of making no depreciation entries related to acquisitions or disposals during the year and we should consider the propriety of this policy."

a) retain the original text. b) delete the text. c) replace with "It is likely that the client extended the lives of assets and arrived at this amount of depreciation expense." d) replace with "The client must depreciate acquisitions items as per GAAP guidelines, ignoring salvage values, for estimated asset lives." e) replace with "We should inquire of the client as to details of this year's depreciation calculation and entry." f) replace with "We should pass on this as any difference is clearly immaterial and inconsequential."

9. "Vouch invoices in support of the change in leasehold improvements."

a) retain the original text. b) delete the text. c) replace with "compare amortization period of leasehold improvements with accounts receivable aging." d) replace with "Consider the reasonableness of amortization of leasehold improvements during the year." e) replace with "Send confirmation requests on the leasehold improvements account total."

10. "no changes in shareholders occurred during the year."

a) retain the original text. b) replace with "no dividends were paid during the year." c) replace with "no stock was issued or repurchased by Keystone during the year." d) replace with "all preferred stock issued during the year was properly included within the line of credit." e) replace with "cash disbursements for the year include no payments to shareholders."

orking on the audit of Keystone Computers & Networks, Inc. (Keystone), a calendar year-end nonissuer. The two associates igned to the engagement provided a document with a number of observations relating to analytical procedures/risk assessment for the audit of year 5. Required Your job as senior on the engagement is to review the various points m each of the sentences called out in the points on the document, determine if the current language is appropriate as is, should be removed altogether, or replaced with any of the provided alternatives. Links to each of the exhibits are provided in the document, but are available in the list below for convenience. ade by the assistant, including consideration of the exhibits. For Exhibit 1- Working Trial Balance Exhibit 2 -Ratios Exhibit 3 - CPA Firm Summary of Several key Keystone accounting policies Exhibit 4- Email to CFO from Controller Exhibit 5 - Memo from Audit Partner to Aud dit Files Document TO: Audit Senior FROM: Audit Associates RE: Analytical Procedures/Risk Assessment Analysis DATE: January 7, year 6 We downloaded the year 4 audited and year 5 unaudited Keystone working trial balances into our macro (Exhibit 1). The program also calculated various ratios (Exhibit 2). Note that Exhibit 3 summarizes several of Keystone Company's key accounting policies Following are areas we believe include significant changes between years and our tentative conclusions: Overall, Keystone reports income decreasing from $989,275 to $229,877 calculated various ratios (Exhibit 2). Note that Exhibit 3 summarizes several of Keystone Company's key accounting policies Following are areas we believe include significant changes between years and our tentative conclusions: . Overall, Keystone reports income decreasing from $989,275 to $229,877 The allowance for doubtful accounts increased by 8,000 from year 4 to year 5. The company currenty has $104,000 in the allowance for doubtful accounts, and per the controller has $80,200 in uncollectible accounts in receivables (Exhibit 4). The total of $80,200 indicates that the allowance for doubtful accounts seems adequate as of year-end and that no adjusting entry is necessary, (Callout #1) See also the third bullet under suggested audit procedures. . The current ratio decreased a bit, from 1.2 to 11. The input with the largest effect decreasing the current ratio is Cash-First National Bank. (Callout #2) . The inventories, valued using the LIFO method, increased. To test proper use of the lower of cost or market rule relating to the LIFO method, we should perform tests to determine that inventory recorded values exceed current market values of the items. (Callout #3) In addition, we suggest the following specific audit procedures: . Relating to inventories, we should be aware of possible obsolete items;, we should determine that all 'slow moving" items are valued atzero. (Callout #4) president indicates that no inventory items (or proceeds upon sale) have been pledged (Exhibit 5). We should carefully inspect temsforpledgingstatusduringthecountotinventory. (Callout #5) Relating to doubtful account to be written off as of year-end and should test and analyze the client's aging of receivabl Examine Board of Director approval of increased receivables from office ts receivable (see second bullet above), we should be aware of potential other accounts that might need es. Callout #6) ecash disbursement. Callout #7 ouch hough there were increases in fixed assets, the accumulated depreciation went up by a much lar that the client has a policy of making no depreciation entries related to acquisitions or disposa conside hepropriety.ofthispolicy. (Callout #8) ger percentage. It would seem e should supporto e change in leaseholdm provements. (Callout #9) The capital stock and paid-in capital accounts did not change during the year. We should obtain evidence that shareholders occurred duringthevear (Callout #10) no changes in Prev 1 of 1 Next Callouts Determination 1. "indicates that the allowance for doubtful accounts seems adequate as of year-end and that no adjusting entry is necessary." 2. "Cash- First National Bank." 3. "exceed current market values of the items." 4. "we should determine that all "slow moving" items are valued at zero." 5. "We should carefully inspect items for pledging status during the count of inventory. 6. "analyze the client's aging of receivables." 7. "vouch the cash disbursement. 8. "It would seem that the client has a policy of making no depreciation entries related to acquisitions or disposals during the year and we should consider the propriety of this policy." 9. "Vouch invoices in support of the change in leasehold improvements. 10. "no changes in shareholders occurred during the year." Exhibit Ii Keystone Working Trial Balance KEYSTONE COMPUTERS &NETWORKS, IN Year S Changes Spreadsheet For the Year Ended December 31. 20xS WTB-I 1000 10 Cash-General account 1000.20 Cash-Special account 1000.30 Cash in register 1,000.40 Petty cash 1050.10 Accounts receivable-trade 1050.40 Accounts recevable-officers 105090 Allowance for bad debts 1100.10 Inventories 1300.10 Prepaid expenses 2050.10 Furniture&fixtures 50 8,534,524 10.235,457 1,700.933 57.613 96,000) (104,000) 234,5891,375.835 156.900 74.676 2050.80 Leasehold improvements 205090 Accumulated depreciation 2100.00 Software development cost (250,987) (404 560) 153.573 1,000,000 3050.10 Accounts payable-trade 310000 Capital lease oblig-current 3200.10 Accrued liabilities 3300.30 Unearned service revenue 3400.50 Line of credit 4400.10 Capital lease oblig--noncurr 5050.10 Capital stock $100 10 Paid-in capital 570010 Retained earnings 1.349.839) (1.429.033) 43.200) (45.675) (178,900) (203.450) (6.612.550) (8,632.105) (456.700) (423.680) (423.500) (423.500) 1.626,203) (2.615.478) 415,000 6000.10 Sales of computers 6010.10 Software licenses 6020.10 Service revenue 6030.10 Consulting revenue 7020.10 Cost of sales--prod. & serv 74.122.435 72.134.566 44.890.788) (42.345.675) 248,900) (236,700) (4,567,888) (4,325,777) (46,751,990) (45,677,899) (1.074,091) (1.987.869) (402.212 070.10 Salaries--sales 3.167.889 2.765,677 7070.50 Payroll benefits--sales 707510 Advertiung & pronoion 7080.10 Travel & entertaimment 708030 Mncellaneous exp -sales 1.200,786 1,567,889 (164.188) 090 30 Adminustrative salaries 234.2343.945.670 812.3441.734565 7100 10 Rea 7140.10 Uuuies 720010 Insurance 7260 30 Legal and accounting 7320.10 Bad dela espene 7410.10 Supplies 7600.10 Deprecialion and anot 7650.10 Software development (76.453) 156.890 378.677 21.344476.899 7800.10 Interest expense 900 10 Current income taxes 7900 70 Deferred incone tases 9000.00 P&L Summary Total Balance Sheet Total Income Statement 989.275 229877 (989.275)(229,877) Exhibit 2: Keystone Ratios KEYSTONE COMPUTERS &NETWORKS, INC. Analytical Procedures Ratios For the Years Ended December 31, Ref. No. Plan-1 Prepared by WZ Date 1/10/Year 6 Year 4 Year 5 Industry 1.3 37.0 1.144 37.0 1.0% 0.3% 3.5 1.215 33.2 Current ratio Days sales in average accounts receivable Allowance for doubtful accounts/accounts receivable Bad debt expenseset sales Total liabilities to net worth Return on total assets Return on net worth Return on net sales Gross profitet sales Selling, operating, and admin. expenseet sales Times interest earned 1.1% 0.2% 2.7 8.3% 30.5% 1.0% 23.2% 21.4% 4.1 2.9 9.0% 29,0% 2.3% 24.0% 23.9% 5.5 7.5% 0.2% 22.1% 21 .2% 1.7 Exhibit 3 CPA Firm Summary of several key Keystone accounting policies in addition to those included in the Overall Audit Strategy (Chapter 6 ): Sales are recorded when shipped. Shipment terms are often (about 2/3 of time) FOB shipping point, with the remainder FOB destination. . Bad debt expense is estimated at a small percentage of credit sales based on experience. When an account is written off as uncollectible. the account receivable is credited, with a debit to allowance for doubtful accounts. Virtually all sales are for credit., payable within 30 days of the customer's receipt of the goods. Inventory is valued at LIFO Line of credit is entirely a current liability Purchases follow a similar pattern as above for sales. . Depreciation for acquisitions and disposals is calculated to the nearest month (e.g. a June 25 acquisition would be depreciated for 6 months). Exhibit 4 TO: CFO FROM Controller RE: Accounts to Write Off December 15. Year 5 DATE: As per our discussion, here are the accounts that our Collections Chief has indicated are uncollectible as of year-end and should be written off Customer Bill Jones JakeCo Zing Total Amount S 9.532 S12.405 S58.263 SS0.200 I have reviewed them and agree and will have my new assistant prepare a write-off entry as soon as these companies declare bankruptcy. Let me know if you need more information Controller Exhibit 5 Memo from Audit Partner to Audit Files November 17. year 4 TO: Files FROM: Partner of Keystone Audit I discussed the year coming to a close for Keystone with the Keystone president. He pointed out that he was disappointed in the year's decrease in profits. Here is the information he provided: The Controller for the past 5 years resigned in July upon receiving a substantially higher paying job with DDF Corporation. He was replaced and it has been a rougher-than-hoped-for transition as the new controller has been overwhelmed by the many details of the position. However. the new controller seems to be "catching up with it. A decrease in all major types of sales will be reported this year-due in part to an unsuccessful advertising campaign, including a few advertisements on early morning (5 AM) political talk shows. . No inventory items (or proceeds upon sale) have been pledged . Early in January of year 4, Keystone paid $150,000 to be the sole distributor of the GMNE Mixer. The contract lasts for 10 years and may be renewed. orking on the audit of Keystone Computers & Networks, Inc. (Keystone), a calendar year-end nonissuer. The two associates igned to the engagement provided a document with a number of observations relating to analytical procedures/risk assessment for the audit of year 5. Required Your job as senior on the engagement is to review the various points m each of the sentences called out in the points on the document, determine if the current language is appropriate as is, should be removed altogether, or replaced with any of the provided alternatives. Links to each of the exhibits are provided in the document, but are available in the list below for convenience. ade by the assistant, including consideration of the exhibits. For Exhibit 1- Working Trial Balance Exhibit 2 -Ratios Exhibit 3 - CPA Firm Summary of Several key Keystone accounting policies Exhibit 4- Email to CFO from Controller Exhibit 5 - Memo from Audit Partner to Aud dit Files Document TO: Audit Senior FROM: Audit Associates RE: Analytical Procedures/Risk Assessment Analysis DATE: January 7, year 6 We downloaded the year 4 audited and year 5 unaudited Keystone working trial balances into our macro (Exhibit 1). The program also calculated various ratios (Exhibit 2). Note that Exhibit 3 summarizes several of Keystone Company's key accounting policies Following are areas we believe include significant changes between years and our tentative conclusions: Overall, Keystone reports income decreasing from $989,275 to $229,877 calculated various ratios (Exhibit 2). Note that Exhibit 3 summarizes several of Keystone Company's key accounting policies Following are areas we believe include significant changes between years and our tentative conclusions: . Overall, Keystone reports income decreasing from $989,275 to $229,877 The allowance for doubtful accounts increased by 8,000 from year 4 to year 5. The company currenty has $104,000 in the allowance for doubtful accounts, and per the controller has $80,200 in uncollectible accounts in receivables (Exhibit 4). The total of $80,200 indicates that the allowance for doubtful accounts seems adequate as of year-end and that no adjusting entry is necessary, (Callout #1) See also the third bullet under suggested audit procedures. . The current ratio decreased a bit, from 1.2 to 11. The input with the largest effect decreasing the current ratio is Cash-First National Bank. (Callout #2) . The inventories, valued using the LIFO method, increased. To test proper use of the lower of cost or market rule relating to the LIFO method, we should perform tests to determine that inventory recorded values exceed current market values of the items. (Callout #3) In addition, we suggest the following specific audit procedures: . Relating to inventories, we should be aware of possible obsolete items;, we should determine that all 'slow moving" items are valued atzero. (Callout #4) president indicates that no inventory items (or proceeds upon sale) have been pledged (Exhibit 5). We should carefully inspect temsforpledgingstatusduringthecountotinventory. (Callout #5) Relating to doubtful account to be written off as of year-end and should test and analyze the client's aging of receivabl Examine Board of Director approval of increased receivables from office ts receivable (see second bullet above), we should be aware of potential other accounts that might need es. Callout #6) ecash disbursement. Callout #7 ouch hough there were increases in fixed assets, the accumulated depreciation went up by a much lar that the client has a policy of making no depreciation entries related to acquisitions or disposa conside hepropriety.ofthispolicy. (Callout #8) ger percentage. It would seem e should supporto e change in leaseholdm provements. (Callout #9) The capital stock and paid-in capital accounts did not change during the year. We should obtain evidence that shareholders occurred duringthevear (Callout #10) no changes in Prev 1 of 1 Next Callouts Determination 1. "indicates that the allowance for doubtful accounts seems adequate as of year-end and that no adjusting entry is necessary." 2. "Cash- First National Bank." 3. "exceed current market values of the items." 4. "we should determine that all "slow moving" items are valued at zero." 5. "We should carefully inspect items for pledging status during the count of inventory. 6. "analyze the client's aging of receivables." 7. "vouch the cash disbursement. 8. "It would seem that the client has a policy of making no depreciation entries related to acquisitions or disposals during the year and we should consider the propriety of this policy." 9. "Vouch invoices in support of the change in leasehold improvements. 10. "no changes in shareholders occurred during the year." Exhibit Ii Keystone Working Trial Balance KEYSTONE COMPUTERS &NETWORKS, IN Year S Changes Spreadsheet For the Year Ended December 31. 20xS WTB-I 1000 10 Cash-General account 1000.20 Cash-Special account 1000.30 Cash in register 1,000.40 Petty cash 1050.10 Accounts receivable-trade 1050.40 Accounts recevable-officers 105090 Allowance for bad debts 1100.10 Inventories 1300.10 Prepaid expenses 2050.10 Furniture&fixtures 50 8,534,524 10.235,457 1,700.933 57.613 96,000) (104,000) 234,5891,375.835 156.900 74.676 2050.80 Leasehold improvements 205090 Accumulated depreciation 2100.00 Software development cost (250,987) (404 560) 153.573 1,000,000 3050.10 Accounts payable-trade 310000 Capital lease oblig-current 3200.10 Accrued liabilities 3300.30 Unearned service revenue 3400.50 Line of credit 4400.10 Capital lease oblig--noncurr 5050.10 Capital stock $100 10 Paid-in capital 570010 Retained earnings 1.349.839) (1.429.033) 43.200) (45.675) (178,900) (203.450) (6.612.550) (8,632.105) (456.700) (423.680) (423.500) (423.500) 1.626,203) (2.615.478) 415,000 6000.10 Sales of computers 6010.10 Software licenses 6020.10 Service revenue 6030.10 Consulting revenue 7020.10 Cost of sales--prod. & serv 74.122.435 72.134.566 44.890.788) (42.345.675) 248,900) (236,700) (4,567,888) (4,325,777) (46,751,990) (45,677,899) (1.074,091) (1.987.869) (402.212 070.10 Salaries--sales 3.167.889 2.765,677 7070.50 Payroll benefits--sales 707510 Advertiung & pronoion 7080.10 Travel & entertaimment 708030 Mncellaneous exp -sales 1.200,786 1,567,889 (164.188) 090 30 Adminustrative salaries 234.2343.945.670 812.3441.734565 7100 10 Rea 7140.10 Uuuies 720010 Insurance 7260 30 Legal and accounting 7320.10 Bad dela espene 7410.10 Supplies 7600.10 Deprecialion and anot 7650.10 Software development (76.453) 156.890 378.677 21.344476.899 7800.10 Interest expense 900 10 Current income taxes 7900 70 Deferred incone tases 9000.00 P&L Summary Total Balance Sheet Total Income Statement 989.275 229877 (989.275)(229,877) Exhibit 2: Keystone Ratios KEYSTONE COMPUTERS &NETWORKS, INC. Analytical Procedures Ratios For the Years Ended December 31, Ref. No. Plan-1 Prepared by WZ Date 1/10/Year 6 Year 4 Year 5 Industry 1.3 37.0 1.144 37.0 1.0% 0.3% 3.5 1.215 33.2 Current ratio Days sales in average accounts receivable Allowance for doubtful accounts/accounts receivable Bad debt expenseset sales Total liabilities to net worth Return on total assets Return on net worth Return on net sales Gross profitet sales Selling, operating, and admin. expenseet sales Times interest earned 1.1% 0.2% 2.7 8.3% 30.5% 1.0% 23.2% 21.4% 4.1 2.9 9.0% 29,0% 2.3% 24.0% 23.9% 5.5 7.5% 0.2% 22.1% 21 .2% 1.7 Exhibit 3 CPA Firm Summary of several key Keystone accounting policies in addition to those included in the Overall Audit Strategy (Chapter 6 ): Sales are recorded when shipped. Shipment terms are often (about 2/3 of time) FOB shipping point, with the remainder FOB destination. . Bad debt expense is estimated at a small percentage of credit sales based on experience. When an account is written off as uncollectible. the account receivable is credited, with a debit to allowance for doubtful accounts. Virtually all sales are for credit., payable within 30 days of the customer's receipt of the goods. Inventory is valued at LIFO Line of credit is entirely a current liability Purchases follow a similar pattern as above for sales. . Depreciation for acquisitions and disposals is calculated to the nearest month (e.g. a June 25 acquisition would be depreciated for 6 months). Exhibit 4 TO: CFO FROM Controller RE: Accounts to Write Off December 15. Year 5 DATE: As per our discussion, here are the accounts that our Collections Chief has indicated are uncollectible as of year-end and should be written off Customer Bill Jones JakeCo Zing Total Amount S 9.532 S12.405 S58.263 SS0.200 I have reviewed them and agree and will have my new assistant prepare a write-off entry as soon as these companies declare bankruptcy. Let me know if you need more information Controller Exhibit 5 Memo from Audit Partner to Audit Files November 17. year 4 TO: Files FROM: Partner of Keystone Audit I discussed the year coming to a close for Keystone with the Keystone president. He pointed out that he was disappointed in the year's decrease in profits. Here is the information he provided: The Controller for the past 5 years resigned in July upon receiving a substantially higher paying job with DDF Corporation. He was replaced and it has been a rougher-than-hoped-for transition as the new controller has been overwhelmed by the many details of the position. However. the new controller seems to be "catching up with it. A decrease in all major types of sales will be reported this year-due in part to an unsuccessful advertising campaign, including a few advertisements on early morning (5 AM) political talk shows. . No inventory items (or proceeds upon sale) have been pledged . Early in January of year 4, Keystone paid $150,000 to be the sole distributor of the GMNE Mixer. The contract lasts for 10 years and may be renewed