Textbook: Auditing & Assurance Services 6Edition

Problem 3.53 General Audit Procedures and Financial Statement Assertions. The eight general audit procedures produce evidence about the principal management assertions in financial statements. However, some procedures are useful for producing evidence about certain assertions, and other procedures are useful for producing evidence about other assertions. The assertion being audited can influence the auditors' choice of procedures. Required: Opposite each general audit procedure, write the management assertions most usefully audited by using each procedure. Answer: Audit Procedures a. Inspection of records or documents(vouching) b. Inspection of records or documents ( tracing) c. Inspection of records or documents (scanning) d. Inspection of tangible assets e. Observation f. Confirmation g. Inquiry h. Recalculation i.Reperformance j. Analytical procedures PCAOB Assertions Problem 4.61 Risk Assessment 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 an unmodified audit report on materially misleading financial statements. Bond, CPA, is considering audit risk at the financial statement level in planning the audit of Toxic Waste Disposal (TWD) Company's financial statements for the year ended December 31, 2014. TWD is a privately owned company that contracts with municipal governments to remove environmental wastes. Audit risk at the overall financial statement level is influenced by the risk of material misstatements, which may be indicated by a combination of factors related to management, the industry, and the company. Required: Based only on the following information, indicate whether each of the following factors (Items 1 through 15) would most likely increase overall audit risk, decrease overall audit risk, or have no effect on overall audit risk. Discuss your reasoning. Answer: Company profile 1 This was the first year TWD operated at a profit since 2009 because the municipalities received increased federal and state funding for environmental purposes. 2 TWD'S board of directors is controlled by Mead, the majority stockholder, who also acts as the chief executive officer. 3 The internal auditor reports to the controller, and the controller reports to Mead. 4The accounting department has experienced a high rate of turnover of key personnel. 5 TWD's bank has a loan officer who meets regularly with TWD's CEO and controller to monitor TWD's financial performance. 6TWD's employees are paid biweekly. 7Bond has audited TWD for five years. Recent Developments 8 During 2014, TWD changed the method of preparing its financial statements from the cash basis to the accrual basis under generally accepted accounting principles. 9 During 2014, TWD sold one-half of its controlling interest in United Equipment Leasing (UEL) Co. TWD retained significant interest in UEL. 10 During 2014, the state dropped litigation filed against TWD in 2010 alleging that the company discharged pollutants into state waterways. Loss contingency disclosures that TWD included in prior-years' financial statements are being removed for the 2013 financial statements. 11 During December 2014, TWD signed a contract to lease disposal equipment from an entity owned by Mead's parents. This related-party transaction is not disclosed in TWD's note to its 2014 financial statements. 12 During December 2014, TWD completed a barter transaction with a municipality. TWD removed waste from a municipally owned site and acquired title to another contaminated site at below-market price. TWD intends to service this new site in 2015. 13 During December 2014, TWD increased its casualty insurance coverage on several pieces of sophisticated machinery from historical cost to replacement cost. 14 Inquiries about the substantial increase in revenue that TWD recorded in the fourth quarter of 2014 disclosed a new policy. TWD guaranteed several municipalities that it would refund the federal and state funding paid to it if any municipality fails federal or state site cleanup inspection in 2015. 15 An initial public offering of TWD's stock is planned for late 2015. Problem 5.62 Separation of Duties. Your small business client, Phillip's computer Repair Shop, is experiencing financial difficulties and has to lay off one of its four employees in the accounting area. Phillip has asked you to determine what duties should be assigned to the three remaining employees-Abigail, Bryan, and Chris-to maintain the best separation of duties. Required: Assign the following 10 duties to each of the three employees. a. Reconcile bank statement. b. Open mail and list checks c. Prepare checks for Phillip's signature d. Prepare payroll checks e. Maintain personal records f. Prepare deposit and take to bank g. Maintain petty cash h. Maintain accounts receivable records i. Maintain general ledger j. Reconcile accounts receivable to general ledger account Problem 5.63 Type of Audit Tests. Indicate whether each of the following audit procedures is a test of controls, a substantive test, or dual-purpose test. Next, indicate the financial statement assertion most closely related to each audit procedure. a Vouch recorded sales invoices to supporting shipping documents b inspect recorded sales invoices for credit approval c Vouch recorded sales invoices prices to the approved price list d send confirmations to all customers regarding accounts receivable e Recalculate the arithmetic accuracy of the recorded sales invoices f compare the shipment date of recorded sales invoices with the invoice record date g trace recorded sales invoices to posting in the general ledger control account and in the correct customer's account h Select a sample of shipping documents from the shipping department file and trace shipments to recorded sales invoices i scan recorded sales invoices and shipping documents for missing numbers in sequence j vouch sales invoices and shipping documents k Evaluate the adequacy of the allowance for doubtful accounts l Obtain financial statements or credit reports on large past due accounts and inquire of the credit manager about collections m Calculate an estimate of the allowance for doubtful accounts using prior relations of write-offs and sales Problem 5.68 Internal control questionnaire items: Errors that could occur from control weaknesses. Refer to the internal control questionnaire on a payroll system (Exhibit 5.11) a Assume that answer to each question is no. Prepare a table matching the questions to errors or frauds that could occur because of the absence of the control. Your column headings should be Question Possible Error or Fraud Due to weakness B Which controls are preventive controls and which are detective? Problem 5.62 Separation of Duties. Your small business client, Phillip's computer Repair Shop, is experiencing financial difficulties and has to lay off one of its four employees in the accounting area. Phillip has asked you to determine what duties should be assigned to the three remaining employees-Abigail, Bryan, and Chris-to maintain the best separation of duties. Required: Assign the following 10 duties to each of the three employees. a. Reconcile bank statement. b. Open mail and list checks c. Prepare checks for Phillip's signature d. Prepare payroll checks e. Maintain personal records f. Prepare deposit and take to bank g. Maintain petty cash h. Maintain accounts receivable records i. Maintain general ledger j. Reconcile accounts receivable to general ledger account Problem 5.63 Type of Audit Tests. Indicate whether each of the following audit procedures is a test of controls, a substantive test, or dual-purpose test. Next, indicate the financial statement assertion most closely related to each audit procedure. a Vouch recorded sales invoices to supporting shipping documents b inspect recorded sales invoices for credit approval c Vouch recorded sales invoices prices to the approved price list d send confirmations to all customers regarding accounts receivable e Recalculate the arithmetic accuracy of the recorded sales invoices f compare the shipment date of recorded sales invoices with the invoice record date g trace recorded sales invoices to posting in the general ledger control account and in the correct customer's account h Select a sample of shipping documents from the shipping department file and trace shipments to recorded sales invoices i scan recorded sales invoices and shipping documents for missing numbers in sequence j vouch sales invoices and shipping documents k Evaluate the adequacy of the allowance for doubtful accounts l Obtain financial statements or credit reports on large past due accounts and inquire of the credit manager about collections m Calculate an estimate of the allowance for doubtful accounts using prior relations of write-offs and sales Problem 5.68 Internal control questionnaire items: Errors that could occur from control weaknesses. Refer to the internal control questionnaire on a payroll system (Exhibit 5.11) a Assume that answer to each question is no. Prepare a table matching the questions to errors or frauds that could occur because of the absence of the control. Your column headings should be Question Possible Error or Fraud Due to weakness B Which controls are preventive controls and which are detective