You are an auditor for Rodgers & Co. and have recently taken on a new client, ABC Manufacturing Company. You are in the initial stages and your manager asks you to respond to all inquiries regarding the audit evidence, the process of revenue and purchase cycle, and the audit report. PART A: Audit evidence (8 marks) During the planning phase, you come to the conclusion that analytical examination of some operating accounts, reveals the following facts: - Sales growth is significant while the market is experiencing flow difficulties. - Receivable turnover ratio increased considerably and the accounts receivable balance at the closing date have doubled. - Increase of inventories purchase paid in cash, while production remains at a stable level compared to that of the previous year. Required: 1. One purpose of performing analytical procedures in the planning phase of an audit is to assess the client's financial condition. Explain how the assessment of a client's financial condition can affect the auditor's decisions regarding evidence accumulation in later stages of the audit. (3 marks) 2. Specify the worrying facts noted by the analytical examination (do not copy the text) and the necessary controls to be carried out and type of evidence. (3 marks) The trial balance taken from the books of ABC Company before year-end is presented as follows: Accounts Debit Credit Cash in bank Accounts receivables 90.000 145,000 225.000 465,000 440,000 Building Accounts payable Capital stock Retained camins 235.000 200.000 210.000 500.000 300.000 20.000 100,000 Interest payable Collateral for loans 1.565,000 1.568,000 Indicate which accounts should be confirmed with outside sources and by whom they should be confirmed? (2 marks) Answer: PART B: The process of revenue and purchase cycle (9 marks) In the audit of the acquisition and payment cycle, the main goal is to make sure that the goods and services acquired, along with any cash disbursement by ABC company, are presented fairly and comply with GAAP. In order to determine this, you must test the controls that are in place. These tests that will be administered to ABC company incorporate the business functions in a single cycle. Discuss the business functions that comprise the acquisition and payment cycle. (3 marks) b. During the audit, you detect a lapping of accounts receivable. Explain what lapping means, indicate the internal control deficiency that allows it to occur, and the procedures performed to detect lapping. (3 marks) During auditing sales transaction, you have discovered the following misstatements: Sales included in the journals for which there was no shipment; Sale recorded more than once; Shipments made to nonexistent customers and recorded as sales. to detect each Provide one potential audit test used misstatement. (3 marks) Answer: PART C: The audit report (8 marks) During the audit, you detect that ABC has a material investment in XYZ Co., Foreign subsidiary whose net worth has been fully/ substantially eroded. The management has not provided any evidence of how they valued the investment to conclude on the carrying amount. The auditor was also unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC Ltd's investment in XYZ Co., because you were denied access to the financial information, management & the auditors of XYZ a- Indicate the conditions that must be met before an auditor can issue a standard unmodified opinion. (2 marks) b- Explain the conditions for issuing audit reports with modified opinion while specifying the types audit opinion. (3 marks) Based on the information above, identify the issues detected and the type of audit opinion that you would express in the report (Justify your answer). (3 marks) Answer: You are an auditor for Rodgers & Co. and have recently taken on a new client, ABC Manufacturing Company. You are in the initial stages and your manager asks you to respond to all inquiries regarding the audit evidence, the process of revenue and purchase cycle, and the audit report. PART A: Audit evidence (8 marks) During the planning phase, you come to the conclusion that analytical examination of some operating accounts, reveals the following facts: - Sales growth is significant while the market is experiencing flow difficulties. - Receivable turnover ratio increased considerably and the accounts receivable balance at the closing date have doubled. - Increase of inventories purchase paid in cash, while production remains at a stable level compared to that of the previous year. Required: 1. One purpose of performing analytical procedures in the planning phase of an audit is to assess the client's financial condition. Explain how the assessment of a client's financial condition can affect the auditor's decisions regarding evidence accumulation in later stages of the audit. (3 marks) 2. Specify the worrying facts noted by the analytical examination (do not copy the text) and the necessary controls to be carried out and type of evidence. (3 marks) The trial balance taken from the books of ABC Company before year-end is presented as follows: Accounts Debit Credit Cash in bank Accounts receivables 90.000 145,000 225.000 465,000 440,000 Building Accounts payable Capital stock Retained camins 235.000 200.000 210.000 500.000 300.000 20.000 100,000 Interest payable Collateral for loans 1.565,000 1.568,000 Indicate which accounts should be confirmed with outside sources and by whom they should be confirmed? (2 marks) Answer: PART B: The process of revenue and purchase cycle (9 marks) In the audit of the acquisition and payment cycle, the main goal is to make sure that the goods and services acquired, along with any cash disbursement by ABC company, are presented fairly and comply with GAAP. In order to determine this, you must test the controls that are in place. These tests that will be administered to ABC company incorporate the business functions in a single cycle. Discuss the business functions that comprise the acquisition and payment cycle. (3 marks) b. During the audit, you detect a lapping of accounts receivable. Explain what lapping means, indicate the internal control deficiency that allows it to occur, and the procedures performed to detect lapping. (3 marks) During auditing sales transaction, you have discovered the following misstatements: Sales included in the journals for which there was no shipment; Sale recorded more than once; Shipments made to nonexistent customers and recorded as sales. to detect each Provide one potential audit test used misstatement. (3 marks) Answer: PART C: The audit report (8 marks) During the audit, you detect that ABC has a material investment in XYZ Co., Foreign subsidiary whose net worth has been fully/ substantially eroded. The management has not provided any evidence of how they valued the investment to conclude on the carrying amount. The auditor was also unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC Ltd's investment in XYZ Co., because you were denied access to the financial information, management & the auditors of XYZ a- Indicate the conditions that must be met before an auditor can issue a standard unmodified opinion. (2 marks) b- Explain the conditions for issuing audit reports with modified opinion while specifying the types audit opinion. (3 marks) Based on the information above, identify the issues detected and the type of audit opinion that you would express in the report (Justify your answer)