13-26 (Objectives 13-1, 13-2, 13-3, 13-6) The following are audit procedures
from different transaction cycles:
1. Use
audit software to foot and cross-foot the cash disbursements journal and trace
the balance to the general ledger.
2. Select
a sample of entries in the acquisitions journal and trace each one to a related
vendorâs invoice to determine whether one exists.
3. Examine
documentation for acquisition transactions before and after the balance sheet
date to determine whether they are recorded in the proper period.
4. Inquire
of the credit manager whether each account receivable on the aged trial balance
is collectible.
5. Compute
inventory turnover for each major product and compare with previous years.
6. Confirm
a sample of notes payable balances, interest rates, and collateral with
lenders.
7. Use
audit software to foot the accounts receivable trial balance and compare the
balance with the general ledger.
Required
a. For each audit procedure, identify the
transaction cycle being audited.
b. For
each audit procedure, identify the type of evidence.
c. For each audit procedure, identify whether it
is a test of control or a substantive test.
d. For
each substantive audit procedure, identify whether it is a substantive test of
transactions, a test of details of balances, or an analytical procedure.
e. For each test of control or substantive test of
transactions procedure, identify the transaction-related audit objective or
objectives being satisfied.
f. For each analytical procedure or test of
details of balances procedure, identify the balance-related audit objective or
objectives being satisfied.
13-30 (Objectives 13-5, 13-7) Following are evidence decisions for the three audits
described in Figure 13-3 on page 411:
Audit
A Ineffective
client internal controls
Audit
B Very
effective client internal controls
Audit
C Somewhat
effective client internal controls
Evidence Decisions
1. The
auditor performed extensive positive confirmations at the balance sheet date.
2. The
auditor performed extensive tests of controls and minimal substantive tests.
3. The
auditor decided it was possible to assess control risk below the maximum.
4. The
auditor performed substantive tests.
5. This
audit was likely the least expensive to conduct.
6. The
auditor confirmed receivables at an interim date.
7. The
auditor identified effective controls and also identified some deficiencies in
controls.
8. The
auditor performed tests of controls.
Required
a. Explain why Audit B represents the maximum
amount of reliance that can be placed on internal control. Why canât all the
audit assurance be obtained by tests of controls?
b. Explain
why the auditor may not place the maximum extent of reliance on controls in
Audit B and Audit C.
·
c. For each of the eight evidence decisions,
indicate whether the evidence decision relates to each of the audits described
above. Every evidence decision relates to at least one of the audits, and some
may relate to two or all three audits.
13-33 (Objective 13-4) Kim Bryan, a new staff auditor, is confused by the
inconsistency of the three audit partners she has been assigned to on her first
three audit engagements. On the first engagement, she spent a considerable
amount of time in the audit of cash disbursements by examining cancelled
checks, electronic payments, and supporting documentation, but almost no
testing was spent in the verification of fixed assets. On the second
engagement, a different partner had her do less intensive tests in the cash
disbursements area and take smaller sample sizes than in the first audit, even
though the company was much larger. On her most recent engagement under a third
audit partner, there was a thorough test of cash disbursement transactions, far
beyond that of the other two audits, and an extensive verification of fixed
assets. In fact, this partner insisted on a complete physical examination of
all fixed assets recorded on the books. The total audit time on the most recent
audit was longer than that of either of the first two audits despite the
smaller size of the company. Bryanâs conclusion is that the amount of evidence
to accumulate depends on the audit partner in charge of the engagement.
Required
a. State several factors that can explain the
difference in the amount of evidence accumulated in each of the three audit
engagements as well as the total time spent.
.
b. What
could the audit partners have done to help Bryan understand the difference in
the audit emphasis on the three audits?
c. Explain how these three audits are useful in
developing Bryanâs professional judgment. How could the quality of her judgment
have been improved on the audits?
d. Which
audit most likely represents an integrated audit of a public companyâs
financial statements and internal control over financial reporting?
14-25 (Objectives 14-3, 14-4, 14-5) The following are commonly performed tests of controls
and substantive tests of transactions audit procedures in the sales and
collection cycle:
1.
Account for a sequence of shipping documents and examine each one to make sure
that a duplicate sales invoice is attached.
2.
Account for a sequence of sales invoices and examine each one to make sure that
a duplicate copy of the shipping document is attached.
3.
Compare the quantity and description of items on shipping documents with the
related duplicate sales invoices.
4. Trace
recorded sales in the sales journal to the related accounts receivable master
file and compare the customer name, date, and amount for each one.
5.
Examine sales returns for approval by an authorized official.
6. Review
the prelisting of cash receipts to determine whether cash is prelisted daily.
7.
Reconcile the recorded cash receipts on the prelisting with the cash receipts
journal and the bank statement for a 1-month period.
Required
a. Identify whether each audit procedure is a test
of control or a substantive test of transactions.
b. State
which of the six transaction-related audit objectives each of the audit
procedures fulfills.
c. Identify the type of evidence used for each
audit procedure, such as documentation and observation.
14-26 (Objective 14-3) The following are selected transaction-related audit
objectives and audit procedures for sales transactions:
Transaction-Related Audit Objectives
1.
Recorded sales exist.
2.
Existing sales are recorded.
3. Sales
transactions are correctly included in the accounts receivable master file and
are correctly summarized.
Procedures
1. Trace
a sample of shipping documents to related duplicate sales invoices and the
sales journal to make sure that the shipment was billed.
2.
Examine a sample of duplicate sales invoices to determine whether each one has
a shipping document attached.
3.
Examine the sales journal for a sample of sales transactions to determine
whether each one has a posting reference in the margin indicating that it has
been automatically compared by the computer with the accounts receivable master
file for customer name, date, and amount.
4.
Examine a sample of shipping documents to determine whether each one has a
duplicate sales invoice number printed on the bottom left corner.
5. Trace
a sample of debit entries in the accounts receivable master file to the sales
journal to determine whether the date, customer name, and amount are the same.
6. Vouch
a sample of duplicate sales invoices to related shipping documents filed in the
shipping department to make sure that a shipment was made.
Required
a. For each objective, identify at least one
specific misstatement that could occur.
b.
Describe the differences between the purposes of the first and second
objectives.
c. For each audit procedure, identify it as a test
of control or substantive test of transactions. (There are three of each.)
d. For
each objective, identify one test of control and one substantive test of
transactions.
e. For each test of control, state the internal
control that is being tested. Also, identify or describe a misstatement that
the client is trying to prevent by use of the control.
