Week 6 Assignment

December 9, 2012

Chapter 14

14-21) a. When a customer fails to include a remittance advice with a payment, it is common for
the person opening the mail to prepare one. Consequently, mail should be opened by which of
the following four company employees?

(4) Receptionist

b. A key internal control in the sales and collection cycle is the separation of duties between cash
handling and record keeping. The objective most directly associated with this control is to verify
that

(4) existing cash receipts are recorded.

c. Company personnel account for the sequence of shipping documents and verify that an entry
for each shipment is included in the sales journal. This control relates most directly to the sales
transaction-related audit objective of

(3) completeness.

14-22) a. A manufacturing company received a substantial sales return in the last month of the
year, but the credit memorandum for the return was not prepared until after the auditors had
completed their testing. The returned merchandise was included in the physical inventory.

(4) Receiving reports are prepared for all materials received and such reports are
accounted for on a regular basis.

b. Which of the following controls most likely will be effective in offsetting the tendency of
sales personnel to maximize sales volume at the expense of high bad debt write-offs?

(3) Employees involved in the credit-granting function are separated from the sales
function.

c. A sales invoice for $5,200 was computed correctly but, by mistake, was key-entered as $2,500
to the sales journal and to the accounts receivable master file. The customer remitted only
$2,500, the amount on his monthly statement.

(1) Prelistings and predetermined totals are used to control postings.

d. Copies of sales invoices show different unit prices for apparently identical items.

(1) All sales invoices are checked as to all details after their preparation.
14-23) a. An auditor is performing substantive tests of transactions for sales. One step is to trace
a sample of debit entries from the accounts receivable master file back to the supporting
duplicate sales invoices. What will the auditor intend to establish by this step?

(4) Debit entries in the accounts receivable master file are correctly supported by sales
invoices.

b. To verify that all sales transactions have been recorded, a substantive test of transactions
should be completed on a representative sample drawn from

(4) the shipping clerk’s file of duplicate copies of bills of lading.

c. Which audit procedure is most effective in testing credit sales for overstatement?

(2) Vouch a sample of recorded sales from the sales journal to shipping documents.

Chapter 15

15-11) Distinguish between a sampling error and a nonsampling error. How can each be
reduced?

Sampling error occurs when only a portion of the population is sampled. Sampling error
means that the sample is not 100% representative of the entire population. Sampling error
can be reduced by increasing the sample size and by utilizing a more applicable mode of
choosing sample items from the population.

Nonsampling error occurs when there is a failure to recognize exceptions and

inappropriate or ineffective audit procedures. Nonsampling error can be reduced by
appropriate supervision and oversight and ensuring that auditing procedures are better
designed.

15-24) a. An advantage of statistical sampling over nonstatistical sampling is that statistical

sampling helps an auditor

(4) measure the sufficiency of the audit evidence by quantifying sampling risk.

b. Which of the following best illustrates the concept of sampling risk?

(3)A randomly chosen sample may not be representative of the population as a whole for
the characteristic of interest.

c. For which of the following tests would an auditor most likely use attribute sampling?

(2) Inspecting employee time cards for proper approval by supervisors.

Chapter 16

16-20) a. As a result of analytical procedures, the auditor determines that the gross profit
percentage has declined from 30% in the preceding year to 20% in the current year. The auditor
should

(4) consider the possibility of a misstatement in the financial statements.

b. After a CPA has determined that accounts receivable have increased as a result of slow
collections in a “tight money” environment, the CPA will be likely to

(4) expand tests of collectibility.

c. In connection with his review of key ratios, the CPA notes that Pyzi had accounts receivable
equal to 30 days’ sales at December 31, 2008, and to 45 days’ sales at December 31, 2009.
Assuming that there have been no changes in economic conditions, clientele, or sales mix, this
change most likely will indicate

(2) an easing of credit policies in 2009.

16-21) a. The negative form of accounts receivable confirmation request is useful except when

(4) individual account balances are relatively large.

b.The return of a positive confirmation of accounts receivable without an exception attests to the

(2) accuracy of the receivable balance.

c. In confirming a client’s accounts receivable in prior years, an auditor found that there were
many differences between the recorded account balances and the confirmation responses. These
differences, which were not misstatements, required substantial time to resolve. In defining the
sampling unit for the current year’s audit, the auditor will most likely choose

(2) individual invoices.

16-22) a. When evaluating the adequacy of the allowance for uncollectible accounts, an auditor
reviews the entity’s aging of receivables to support management’s balance-related assertion of

(3) valuation and allocation.

b. Which of the following audit procedures will best uncover an understatement of sales and
accounts receivable?

(1) Test a sample of sales transactions, selecting the sample from prenumbered shipping
documents.
16-24) a. For each misstatement, identify the balance-related audit objective to which it pertains.
b. For each misstatement, list an internal control that should prevent it.
c.For each misstatement, list one test of details of balances audit procedure that the auditor can
use to detect it.

1. Several accounts receivable in the accounts receivable master file are not included in
the aged trial balance.
a. Completeness
b. Someone independent should reconcile the accounts receivable master file.
c. Compare footed aged trial balance to the general ledger.

2. One account receivable in the accounts receivable master file is included on the aged
trial balance twice.
a. Existence
b. Someone independent should reconcile the accounts receivable master file.
c. Compare footed aged trial balance to the general ledger.

3. Cash received from collections of accounts receivable in the subsequent period is

recorded as current period receipts.
a. Cutoff
b. A company policy that states that at the end of the month the cash cutoff
should be reached by recording only the cash amounts received prior to the
end of the month.
c. The deposits in transit that are shown on the bank reconciliation should be
compared to the deposits that reached the bank to determine if the delay is
reasonable delayed.

4. The allowance for uncollectible accounts is inadequate because of the client’s failure
to reflect depressed economic conditions in the allowance.
a. Realizable value
b. Perform analysis of the collectability of accounts receivable at the end of the
year and convey to customers to ascertain the probability of collectability of
individual accounts.
c. The auditor can compare the year end cash receipts to the previous years’
cash receipts during the same period and look at any changes and their effect
on the collectability of the accounts receivable.

5. Several accounts receivable are in dispute as a result of claims of defective

merchandise.
a. Accuracy
b. Claims for defective merchandise should be recorded immediately by the
client after the claim has been received to keep the account receivable
balances as accurate as possible.
c. The client’s correspondence files that come from the customers should be
reviewed by the auditor.
 6. The pledging of accounts receivable to the bank for a loan is not disclosed in the
financial statements.
a. Rights and obligations
b. A scheduled should be kept containing all the required disclosure
information by the controller.
c. An inquiry should be kept as to any assets pledged for the indebtedness when
the loan confirmations are sent by the auditor.

7. Goods shipped and included in the current period sales were returned in the
subsequent period.
a. Cutoff
b. A record book should be kept to record any returns that apply to goods
shipped and sales recorded.
c. Recorded returns from the subsequent period should be reviewed by the
auditor.

8. Long-term interest-bearing notes receivable from affiliated companies are included in

accounts receivable.
a. Classification
b. Separate accounts should be kept for the receivables collected from affiliated
companies.
c. The trial balance of accounts receivable should be reviewed by the auditor to
determine whether accounts from affiliated companies have been included in
the accounts of the customers.

9. The trial balance total does not equal the amount in the general ledger.
a. Detail tie-in
b. The trial balance should be footed and the total reconciled to the balance in
the general ledger.
c. Per the general ledger, the trial balance of accounts receivable should be
footed by the auditor and reconciled to the balance.

Chapter 17

17-27) a. Calculate the required sample size. Assume your firm uses the following nonstatistical
formula to determine sample size:
Sample size = (Book value of population / Tolerable misstatement) × Assurance factor
An assurance factor of 2 is used for a 10% ARIA.

Sample size = (6,900,000/150,000) x 2

Sample size = 92

b. Assume that instead of good results, poor results were obtained for tests of controls and
substantive tests of transactions for sales, sales returns and allowances, and cash receipts. How
will this affect your required sample size? How will you use this information in your sample size
determination?

If the results were poor then I would have to increase the required sample size by
increasing the assurance factor. This would have the equivalent effect of specifying a lower
acceptable risk of incorrect acceptance.

c. Regardless of your answer to part a, assume you decide to select a sample of 100 accounts for
testing. Indicate how you will select the accounts for testing using systematic selection.

A systematic sample can be selected based on the number of accounts, or the dollar value of
the population. In order to select a systematic sample based on the number of accounts, I
would have to divide the total accounts by required sample size which would give me the
interval.

For a systematic sample based on dollar value of the population, the population value
would have to be divided by the required sample size in order to find the correct interval. I
would then choose a random number between one and the interval to be the starting point
and then add it to the interval to determine dollar units selected. Accounts are selected for
testing where the cumulative total of accounts receivable includes the random number.

d. Assume a total book value of $230,000 for the 100 accounts selected for testing. You uncover
three overstatements totaling $1,500 in the sample. Evaluate whether the population is fairly
stated.

Projected error = (1,500/230,000) x 6,900,000

Projected error = $45,000 overstatement

The $45,000 is below the $150,000 tolerable misstatement which allows for a sampling risk
of $105,000. As a result, the population is considered to be fairly stated.