WRITTEN QUESTIONS

1. To gain an understanding of the client's present accounting systems, the firm of Abernethy and Chapman has a policy that all S)!stems must be recorded in a memo (i.e., narrative) format and a flowcharting format. By using both, staff members are able to achieve a more effective and a more efficient understanding of the design of each system.

1. Based on Exhibit 4-3 (a memo explanation of the Revenue Recognition section of the Revenue and Cash Receipts cycle), prepare a flowchart to provide a graphic display of this system. Use the flowchart symbols that appear in Exhibit 4-2.

1. Analyze Exhibit 4-4, a flowchart representation of the Cash Receipts procedures, and prepare a written memorandum to accompany and explain this particular system.

1. At the firm of Abernethy and Chapman, after the memo and flowchart have been prepared, a preliminary analysis is made of the internal control policies and procedures found in the system. The auditor is searching for weaknesses within the structure of the system as well as any particularly strong features that would reduce control risk. To assist the auditor in evaluating a system, Abernethy and Chapman utilizes the form presented in Exhibit 4-5. Complete this document based on the flowchart in Exhibit 4-4 representing the Cash Receipts section of the Revenue and Cash Receipts cycle. Be especially careful to note any internal control weaknesses or strengths that may be indicated. (DISK: CASE4.DOC)

1. Rogers has stated that he wants the auditing firm to help improve Lakeside's accounting systems. Exhibit 4-3 identifies the revenue recognition procedures. currently used in connection with distributorship sales. List improvements that could be made in this system.

LIBRARY ASSIGNMENT

1. Read the following as well as any other published information concerning the audit consideration to be given to a client's internal control structure:

"Consideration of the Internal Control Structure in a Financial Statement Audit," Statement on Auditing.Standards 55, issued by the.. Auditing Standards Board of the American Institute of Certified Public Accountants, April, 1988.

"SAS No. 55: The Auditor's New Responsibility for Internal Control," Journal of Accountancy. May, 1988, p. 86.

1

...

"Applying SAS No. 55 in Audits of Small Businesses," Journal of Accountancy.

November, 1988, p. 40.

"A Critique of SAS No. 55," Accounting Horizons, March, 1991, p. 1.

Assume that an auditing firm has assessed the control risk of a new client to be below the maximum. Write a report describing the factors that could have led to this judgment. Indicate, also, the various effects that this evaluation could have on the audit testing process.

Exhibit 4-1

Lakeside Company.

ORGANIZATION CHART

In Effect December 31, 1993

Assistant C.A Land

Assistant bShort

Assistant

S. Wlsdon

Warehouse

Crew

Maintenance Staff

I

Vice President

Treasurer

Controller

Vice President

Sales

Brendan Davis

Mark Hayes

Inventory

Carol Howell

Edward Thomas

I

I

1 Assistant

I

JanLuck

I

Manager .. Represent. Accountant Store 1 - District A S.A.Sweet - Manager ... - Represent. Store 2 District B - Manager .. Represent. i- District C Store 3 Manager Represent. Store 4 District D Manager Represent. Store 5 District E Manager Represent. Store6 ... -- District F