4 auditing problems

5-47

5-50

6-39

6-40

please use word document

Problem #5-47: I highlighted the correct answers for 1 k & 2 a and 4. is a. The other answers are correct. 1. 2. 3. 4. 5. Ratio Day sales in accounts receivable Inventory turnover Debt to equity Return on assets Net fixed assets to equity Explanations j, k a, k h Ka i Problem #5-50: a) The computer printout of the subsidiary ledger is essential since it is a product of an entry made during the transaction with the account receivable. Correct that this is an important starting point for the audit. You need this printout to reconcile the subsidiary ledger balances with the account receivable control account. You also need it to pick the audit sample which we will study in a future chapter. You wouldn't use this as evidence though. b) Copies of sales invoices are essential since sales invoices are evidence of the transactions that led to the account being receivable. These are the most reliable. Since these are internally-created and internally-held documents are the least reliable since they are easily forged and altered. For this reason, we would not base our audit on this evidence. c) Purchase orders by themselves are not sufficient since customers can change their minds before delivery of the merchandise. Purchase orders need the support of other documents (e.g. Sales invoice). These are externally-generated documents which is more reliable but they are internally-held so these are of higher value but since they have been through the client's hands they are subject to having been altered or forged. d) Shipping documents are also reliable since they prove that the shipments were sent to the account receivable. To ensure maximum reliability, follow up must be made on whether any shipment was returned due to defect of either the shipment or the composition of the delivery. Correct. I use these if I can verify the delivery by taking the tracking number and checking it on a website such as UPS or FEDEX to at least tell that something was delivered but many an empty box has been shipped. e) The letter confirming correctness of the receivable is reliable evidence; since the customer has acknowledged all the details of the letter. This letter is so reliable it can even be used in court. Since this letter was received from the client, it could have been easily forged or altered so I accept this type of letter but then I call the person who signed the letter to verify they are who they say they are and know what they signed. It is a great way to catch someone committing fraud. f) The letter received by the auditor directly from the customer acknowledging the correctness is reliable; since it provides evidence that has not been tampered with in any way by the client. This is the most reliable. Correct. This is the most reliable but I still call the person who signed the letter and verify they are who they are and they know what they are signing. Think about it. If you were trying to commit fraud, you might get a customer to help you out with it. Problem #6-39: your answers are correct except as noted below: Factor a) b) c) d) e) f) g) h) i) j) Effect on risk of Material Misstatement (Increase or Decrease) Decrease Increase Decrease Decrease Increase Increase Increase Increase Decrease Decrease Decrease Increase Create a Risk of Fraud? (Yes or No) Yes No Yes No No Yes Yes Yes Yes No Yes No No Yes k) l) Increase Decrease Yes No Problem #6-40: your answers are correct except as noted below: Information a) b) c) d) e) f) g) h) i) j) k) l) m) n) o) Effect on Risk of Material Misstatement D I I I D NE DI DI NE I ID I NE I I NE