Question # 1

We considered broad "accounting systems" involving the Sales Cycle AND Inventory Observation to illustrate the direction of testing involving testing for overstatement or understatement.

Requirements:

1. Consider THREE ADJACENT pieces of the sales cycle and DISCUSS

the proper direction of testing for Sales for UNDERstatement.

2. In an Inventory Observation, discuss the proper direction for

taking test counts to test for OVERstatement of inventory?

3. The double-entry accounting system conceptually can be used to

gain audit efficiencies. Use journal entries and explain

how by testing another account one can also test (A) Accounts

receivable for UNDERstatement; and how by testing another

account one can test(B) a liability account (name the account)

for OVERstatement.

4. Discuss briefly the type of audit evidence used to test sales

for UNDERstatement?

1. Sales for UNDERstatement

2. Physical Inventory testing for OVERstatement

3A. JE & Discussion. Accounts Receivable and another account.

3B. JE & Discussion. A Liability and another account.

4. Sales for overstatement. The type of evidence is

Question # 2

For each situation presented below, indicate which means of

gathering evidence would be considered more reliable AND

indicate a reason from the following list:

A. Independent source of the information (Independence of

provider);

B. Auditors direct knowledge;

C. Knowledgeable source (qualifications of individuals

providing the information);

D. Degree of objectivity versus subjectivity; and

E. Functioning system of internal controls.

CHOOSE ONLY ONE LETTER.

DO NOT DISCUSS your answer. READ CAREFULLY.

Answers Item Number more reliable Letter for reason

a. ______ _____

b. ______ _____

c. ______ _____

d. ______ _____

a. In testing assets, (1) the auditor verifies the cost of

additions to the land account, or (2) the auditor considers

the adequacy of the allowance for doubtful accounts.

b. 1. The auditor relies on an analysis prepared by the

controller of gross margin to sales for the current and prior

periods; or (2) The auditor calculates gross margin to sales

and compares to similar data for prior periods.

c. As a test of accounts receivable, (1) the auditor reviews a

confirmation received directly from the customer of the company

being audited, or 2. The auditor asks the controller if the

amounts are correct.

d. Auditor tests two segments of the company. 1. In the first

segment, employees check each others work; 2. In the second

segment, no one checks the work.

Question # 3

Two types of accounts receivable confirmations are positive and negative. Explain what is meant by each type. State when an auditor would be inclined to use negative confirmations for accounts receivable. Explain what Assertion would be involved in the decision to use POSITIVE rather than NEGATIVE accounts receivable confirmations. When would alternative procedures be performed? DISCUSS an [ONE] alternative procedure involving accounts receivable.