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Questions Requiring Analysis: 12?21

Nolan Manufacturing Company retains you on April 1 to perform an audit for the fiscal year ending June 30. During the month of May, you make extensive studies of internal control over inventories.

All goods purchased pass through a receiving department under the direction of the chief purchasing agent. The duties of the receiving department are to unpack, count, and inspect the goods. The quantity received is compared with the quantity shown on the receiving department's copy of the purchase order. If there is no discrepancy, the purchase order is stamped ?OK?Receiving Dept.? and forwarded to the accounts payable section of the accounting department. Any discrepancies in quantity or variations from specifications are called to the attention of the buyer by returning the purchase order to him with an explanation of the circumstances. No records are maintained in the receiving department, and no reports originate there.

As soon as goods have been inspected and counted in the receiving department, they are sent to the factory production area and stored alongside the machines in which they are to be processed. Finished goods are moved from the assembly line to a storeroom in the custody of a stock clerk, who maintains a perpetual inventory record in terms of physical units but not in dollars.

What weaknesses, if any, do you see in the internal control over inventories?

Problems: 12?37

The following are typical questions that might appear on an internal control questionnaire for inventory: Are written procedures prepared by the client for the taking of the physical inventory? Do the client's inventory-taking procedures include a requirement to identify damaged inventory items? Does the client maintain perpetual inventory records?

Required: Describe the purpose of each of the above controls. Describe the manner in which each of the above procedures might be tested. Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of risk.

Objective Questions: 13?32

Select the best answer for each of the questions below and explain fully the reason for your selection. a. To assure accountability for fixed asset retirements, management should implement an internal control that includes: (1) Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets. (2) Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. (3) Utilization of serially numbered retirement work orders. (4) Periodic observation of plant assets by the internal auditors. LO 13-6, 7 b. The auditors may conclude that depreciation charges are insufficient by noting: (1) Insured values greatly in excess of book values. (2) Large amounts of fully depreciated assets. (3) Continuous trade-ins of relatively new assets. (4) Excessive recurring losses on assets retired. LO 13-3, 5 c. Which of the following is an internal control weakness related to factory equipment? (1) Checks issued in payment of purchases of equipment are not signed by the controller. (2) All purchases of factory equipment are required to be made by the department in need of the equipment. (3) Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. (4) Proceeds from sales of fully depreciated equipment are credited to other income. LO 13-6 d. Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated? (1) Depreciation. (2) Accounts Payable. (3) Cash. (4) Repairs. LO 13-5, 6 e. The auditors are most likely to seek information from the plant manager with respect to the (1) Adequacy of the provision for uncollectible accounts. (2) Appropriateness of physical inventory observation procedures. Page 558(3) Existence of obsolete machinery. (4) Deferral of procurement of certain necessary insurance coverage. LO 13-3, 5 f. To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: (1) Increase in insurance coverage. (2) Inspection of equipment and reconciliation with accounting records. (3) Verification of liens, pledges, and collateralizations. (4) Accounting for work orders. LO 13-1 g. Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts? (1) A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. (2) Relatively few transactions occur in property, plant, and equipment during the year. (3) The assets involved with property, plant, and equipment ordinarily have relatively longer lives. (4) Property, plant, and equipment accounts typically have a higher dollar value. LO 13-1, 6 h. For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: (1) All transactions resulting in the ending balance. (2) Tests of controls over disposals. (3) Transactions that occurred during the year. (4) Performing analytical procedures on beginning balances of the accounts. LO 13-2, 6 i. Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? (1) Accumulated depreciation. (2) Cost of goods sold. (3) Purchase returns and allowances. (4) Purchase discounts. LO 13-2, 6 j. An effective procedure for identifying unrecorded retirements of equipment is to: (1) Foot related property records. (2) Recalculate depreciation on the related equipment. (3) Select items of equipment in the accounting records and then locate them in the plant. (4) Select items of equipment and then locate them in the accounting records. LO 13-7 k. Which of the following is not an overall test of the annual provision for depreciation expense? (1) Compare rates used in the current year with those used in prior years. (2) Test computation of depreciation provisions for a representative number of units. (3) Test deductions from accumulated depreciation for assets purchased during the year. (4) Perform analytical procedures. LO 13-8 l. The audit of intangible assets typically involves

Problems: 13?35

The following are typical questions that might appear on an internal control questionnaire relating to plant and equipment:

1. Has a dollar minimum been established for expenditures to be capitalized?

2. Are subsidiary ledgers for plant and equipment regularly reconciled with general ledger controlling accounts?

Required:

a. State the purpose of each of the above controls.

b. Describe the manner in which each of the above procedures might be tested.

Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of risks of material misstatements.

AC410: Auditing Unit 6 Assignment Questions Requiring Analysis: 12-21 Nolan Manufacturing Company retains you on April 1 to perform an audit for the fiscal year ending June 30. During the month of May, you make extensive studies of internal control over inventories. All goods purchased pass through a receiving department under the direction of the chief purchasing agent. The duties of the receiving department are to unpack, count, and inspect the goods. The quantity received is compared with the quantity shown on the receiving department's copy of the purchase order. If there is no discrepancy, the purchase order is stamped \"OK Receiving Dept.\" and forwarded to the accounts payable section of the accounting department. Any discrepancies in quantity or variations from specifications are called to the attention of the buyer by returning the purchase order to him with an explanation of the circumstances. No records are maintained in the receiving department, and no reports originate there. As soon as goods have been inspected and counted in the receiving department, they are sent to the factory production area and stored alongside the machines in which they are to be processed. Finished goods are moved from the assembly line to a storeroom in the custody of a stock clerk, who maintains a perpetual inventory record in terms of physical units but not in dollars. What weaknesses, if any, do you see in the internal control over inventories? Problems: 12-37 The following are typical questions that might appear on an internal control questionnaire for inventory: Are written procedures prepared by the client for the taking of the physical inventory? Do the client's inventory-taking procedures include a requirement to identify damaged inventory items? Does the client maintain perpetual inventory records? Required: Describe the purpose of each of the above controls. Describe the manner in which each of the above procedures might be tested. Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of risk. Objective Questions: 13-32 Select the best answer for each of the questions below and explain fully the reason for your selection. a. To assure accountability for fixed asset retirements, management should implement an internal control that includes: (1) Continuous analysis of miscellaneous revenue to locate any cash proceeds from the sale of plant assets. (2) Periodic inquiry of plant executives by internal auditors as to whether any plant assets have been retired. (3) Utilization of serially numbered retirement work orders. (4) Periodic observation of plant assets by the internal auditors. LO 13-6, 7 b. The auditors may conclude that depreciation charges are insufficient by noting: (1) Insured values greatly in excess of book values. (2) Large amounts of fully depreciated assets. (3) Continuous trade-ins of relatively new assets. (4) Excessive recurring losses on assets retired. LO 13-3, 5 c. Which of the following is an internal control weakness related to factory equipment? (1) Checks issued in payment of purchases of equipment are not signed by the controller. (2) All purchases of factory equipment are required to be made by the department in need of the equipment. (3) Factory equipment replacements are generally made when estimated useful lives, as indicated in depreciation schedules, have expired. (4) Proceeds from sales of fully depreciated equipment are credited to other income. LO 13-6 d. Which of the following accounts should be reviewed by the auditors to gain reasonable assurance that additions to property, plant, and equipment are not understated? (1) Depreciation. (2) Accounts Payable. (3) Cash. (4) Repairs. LO 13-5, 6 e. The auditors are most likely to seek information from the plant manager with respect to the (1) Adequacy of the provision for uncollectible accounts. (2) Appropriateness of physical inventory observation procedures. Page 558(3) Existence of obsolete machinery. (4) Deferral of procurement of certain necessary insurance coverage. LO 13-3, 5 f. To strengthen internal control over the custody of heavy mobile equipment, the client would most likely institute a policy requiring a periodic: (1) Increase in insurance coverage. (2) Inspection of equipment and reconciliation with accounting records. (3) Verification of liens, pledges, and collateralizations. (4) Accounting for work orders. LO 13-1 g. Which of the following statements is not typical of property, plant, and equipment as compared to most current asset accounts? (1) A property, plant, and equipment cutoff error near year-end has a more significant effect on net income. (2) Relatively few transactions occur in property, plant, and equipment during the year. (3) The assets involved with property, plant, and equipment ordinarily have relatively longer lives. (4) Property, plant, and equipment accounts typically have a higher dollar value. LO 13-1, 6 h. For the audit of a continuing nonpublic client, the emphasis of the testing for property accounts is on: (1) All transactions resulting in the ending balance. (2) Tests of controls over disposals. (3) Transactions that occurred during the year. (4) Performing analytical procedures on beginning balances of the accounts. LO 13-2, 6 i. Audit of which of the following accounts is most likely to reveal evidence relating to recorded retirements of equipment? (1) Accumulated depreciation. (2) Cost of goods sold. (3) Purchase returns and allowances. (4) Purchase discounts. LO 13-2, 6 j. An effective procedure for identifying unrecorded retirements of equipment is to: (1) Foot related property records. (2) Recalculate depreciation on the related equipment. (3) Select items of equipment in the accounting records and then locate them in the plant. (4) Select items of equipment and then locate them in the accounting records. LO 13-7 k. Which of the following is not an overall test of the annual provision for depreciation expense? (1) Compare rates used in the current year with those used in prior years. (2) Test computation of depreciation provisions for a representative number of units. (3) Test deductions from accumulated depreciation for assets purchased during the year. (4) Perform analytical procedures. LO 13-8 l. The audit of intangible assets typically involves Problems: 13-35 The following are typical questions that might appear on an internal control questionnaire relating to plant and equipment: 1. Has a dollar minimum been established for expenditures to be capitalized? 2. Are subsidiary ledgers for plant and equipment regularly reconciled with general ledger controlling accounts? Required: a. State the purpose of each of the above controls. b. Describe the manner in which each of the above procedures might be tested. Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of risks of material misstatements