ACCT 314 Final

11-27 Following are audit procedures that are normally conducted in the purchasing process and related accounts. 1. Test a sample of purchase requisitions for proper authorization. 2. Test transactions around year-end to determine if they are recorded in the proper period. 3. Review results of confirmation of selected accounts payable. 4. Compare payables turnover to previous years' data. 5. Obtain selected vendors' statements and reconcile to vendor accounts. 6. Compare purchase returns and allowances as a percentage of revenue or cost of sales to industry data. Required: Identify whether the tests listed above are substantive analytical procedures, tests of details of transactions, or tests of details of account balances.

1. Tests of details of transactions 2. Tests of details of transactions 3. Tests of details of account balances 4. Substantive analytical procedures 5. Tests of details of account balances 6. Substantive analytical procedures

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded?A. The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance.B. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month.C. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by the customers.D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Briefly describe each of the following documents or records: purchase requisition, purchase order, receiving report, vendor invoice, and voucher. Why would an entity combine all documents related to a purchase transaction into a "voucher packet"?

A purchase requisition is a request for goods and services by an authorized individual or department within the entity. A purchase order contains the description, quality, quantity and other information on the goods and services being purchased. A receiving report is used to record the receipt of goods. A vendor invoice is the bill from the vendor that includes the description and quantity of the goods shipped or services provided, the price including freight, the terms of trade including cash discounts, and the date billed. A voucher is a document that is frequently used by entities to control the payment of acquired goods and services. An entity would combine all these documents into a 'voucher packet' because such a packet would contain all the information on a particular purchase transaction. If there are questions about the transaction at a later time, the entity can obtain access to all the documents and information more easily.

20. Which of the following would be most likely to cause an auditor to have substantial doubt regarding a company's ability to continue as a going concern?

A. A current ratio of 1.3 and a quick ratio of 0.8. A quick ratio of 0.8 indicates that the entity does not have sufficient liquid assets to settle its current liabilities, raising doubt about its ability to meet its obligations for a period of at least one year, which constitutes substantial doubt about the entity's ability to continue as a going concern. Investing activities are discretionary and negative cash flows are simply indicative of purchases of investments that exceeded proceeds from disposals. Management's refusal to sign a letter of representation is an audit scope limitation and will require the auditor to issue a disclaimer of opinion but is not indicative of going concern problems. Failure to obtain positive confirmations of several large receivables may raise doubt as to their collectability but would not necessarily raise going concern doubts

23. Watt, CPA, concludes that, while ABC Co. has properly accounted for and disclosed certain significant related party transactions, an emphasis-of-matter paragraph calling attention to these transactions should be added after Watt's opinion paragraph in the audit report. What should be included in the emphasis-of-matter paragraph?

A.A clear reference to the transactions and an indication that Watt's audit opinion is not modified in light of these transactions. An emphasis-of-matter paragraph is used to draw attention to something that is properly accounted for and disclosed in the financial statements. It is not necessary to repeat the details but rather to clearly refer to the item and where it is presented and disclosed. In addition, since the item was properly accounted for and disclosed, the auditor will make it clear that the opinion is not modified.

14. Which of the following schemes might be detected through the use of a bank cutoff statement?

A.Checks were written near year-end to reduce the balance in accounts payable but were not mailed until a week after year-end. A bank cutoff statement provides evidence in the form of identifying a significant lag between the date on which recognized in the accounting records as having been written or deposited and the time it takes to clear the bank. If checks written near year-end are held before being mailed, they will take longer than a normal amount of time to clear the entity's bank account, which may be detected by examining a bank cutoff statement. An overstatement of accounts receivable due to the misappropriation of checks received can be detected through the use of confirmations or through analytical procedures evaluating the number of days sales in accounts receivable, but not from examining a bank cutoff statement since there will not be a significant lag between the date on which the deposit is recorded and when the checks clear the bank. Checks written in inflated amounts and to nonexistent vendors may be detected by reviewing a list of vendors, and by tracing payments to supporting documentation and price lists. They will not be detected, however, by examining a bank cutoff statement.

21. In an audit of a company's financial statements, which of the following is not considered a disclosure in regards to which the auditor is specifically required to provide positive assurance?

A.Management Discussion and Analysis (MD&A). The auditor's report relates to the financial statements, including the statements themselves and the footnote disclosures, which are an integral part of general purpose financial statements. Disclosures will include the entity's accounting policies, such as how they may classify certain liabilities, information that requires additional explanation, such as parenthetical notations; and other disclosures required to be in the notes to the financial statements. Management's discussion and analysis, although presented in accompaniment with the financial statements, is not an integral part of them and is not considered a financial statement disclosure.

X Company prepares a sales invoice, using a pre-printed, sequentially numbered form, upon receipt of a copy of a bill of lading from the shipping department indicating that goods have been shipped. An auditor wishes to obtain evidence that all sales that that were recorded during the period actually occurred. Which of the following procedures would likely be most effective for that purpose?

A.Trace entries from the sales journal to sales invoices and bills of lading. To obtain evidence as to the occurrence assertion, an auditor would trace a sample from the accounting records to source documents to determine if each entry recorded is supported by evidence that a sale occurred. This would be accomplished by tracing entries from the sales journal to source documents. Receiving reports would relate to purchases, not sales. Tracing sales invoices to bills of lading would provide evidence that those transactions for which sales invoices were prepared actually occurred but would not indicate if all recorded transactions actually occurred. Tracing a sample of bills of lading to the sales journal would provide evidence about completeness, not occurrence.

22. Jensen, CPA determines during an audit of nonpublic client Clunker Co. that there may be substantial doubt as to the company's ability to continue as a going concern. Accordingly, Jensen conducts a thorough assessment of management plans for overcoming the adverse conditions which currently threaten the going concern assumption and decides the plans will likely succeed. Assuming management has properly disclosed the going concern issues and information about the plans for mitigation and if there are no other issues with the audit, which of the following types of opinion and report modification would Jensen be most likely to issue?

A.Unmodified with no additional paragraph. When there is substantial doubt as to whether an entity will be able to continue as a going concern, management's plans are evaluated. If they are not expected to be effective, management will disclose the doubt and the fact that plans are not expected to mitigate it. If properly disclosed, the auditor will issue an unqualified opinion but is required to include an emphasis-of-matter paragraph in the audit report to draw attention to the matter. If, as is the situation here, management's plans are expected to effectively mitigate going concern doubts, disclosures are still required but, if made, the auditor issues an unmodified opinion and is not required to include an emphasis-of-matter paragraph (although such a paragraph may be added indicating the situation). Neither an adverse nor a qualified opinion is appropriate in this situation.

Which of the assertions related to accounts receivable will confirmations be least likely to provide evidence in support of?

B. Completeness Confirmations provide the auditor with evidence supporting rights and obligations since the debtor is indicating that the money is owed to the client; allocation and valuation, since the debtor is indicating the amount owed, which can be compared to the recorded amount; and existence, since the debtor is acknowledging the debt. It does not provide evidence about completeness as confirmations will not be sent to debtors if receivables are not recorded.

10. When auditing an entity's reported amount for property, plant, and equipment, which assertion will be supported with evidence obtained by the auditor during an examination of the repairs and maintenance expense account?

B. Completeness. By examining the repairs and maintenance account, the auditor can determine if items that should have been capitalized as property, plant, and equipment were inappropriately recognized as expense and excluded from recorded amounts, supporting the assertion of completeness since costs related to property, plant, and equipment that are not recorded in repairs and maintenance are likely recorded in the asset accounts. The auditor will test existence by observing property, plant, and equipment. Valuation and allocation and rights and obligations can both be supported by tracing items to purchase documents.

25. An auditor is unable to obtain sufficient appropriate audit evidence regarding a significant transaction that does not affect the ending balance of any balance sheet account. There were no additional significant matters identified by the auditor during the course of the engagement. In this situation, the auditor is most likely to

B. Issue an unmodified opinion in regard to financial position and disclaim an opinion in regard to the results of operations and cash flows. Since the significant transaction did not affect the ending balance of any balance sheet account, the auditor would be able to issue an unmodified opinion in regard to the statement reporting financial position. The lack of evidence about the significant transaction, however, prevents the auditor from determining if it was properly accounted for, including its classification on the income statement or statement of cash flows, preventing the auditor from being able to express an opinion in regard to either results of operations or cash flows. Note that inability to verify net income generally precludes verifying cash flow from operating activities.

19. Harriott, CPA is conducting an audit of Calashni Co. and receives a letter from Calashni Co.'s attorney stating the following regarding the company's only pending lawsuit: Harriott notes there is no entry in the accounting records regarding the effects of the pending litigation. As a result, what type and amount of adjusting journal entry should Harriott propose?

B. None. An entity is required to recognize a loss if it is probable and estimable, but is only required to disclose it if it is reasonably possible. Contingent gains are not recognized. Since the probable outcome is a gain, no accrual is required and the accountant would not propose an adjusting entry.

X Company is concerned that it does not have enough employees to ensure adequate segregation of duties in its revenue cycle. Which of the following may be performed by the same individual?

B. Opening the mail and reconciling the perpetual inventory records to the physical count. Opening the mail gives an employee access to cash, not inventory. Reconciling physical counts of inventory to perpetual records involves reconciliation of inventory but not cash. As a result, these are unrelated and would not be incompatible if performed by the same individual. Approving sales and delivering inventory gives an individual both authority and custody, which are not compatible. Either opening the mail and recording entries in the sales journal, or recording entries in the sales journal and delivering inventory, have the same individual involved in both custody and recording, which are not compatible.

In testing controls over purchases, an auditor most likely would determine that the person who receives inventory

B. Prepares receiving reports for all goods received. Good internal control would generally require the person receiving inventory to complete a receiving report whenever goods are received to be matched against what has been ordered and what is billed. Although the person receiving inventory may receive advance copies of purchase orders to indicate that goods to be received are approved, the quantities would generally not be included so that a count will have to be made. The person receiving inventory has custody, which should be segregated from recording, including the posting of goods received to the general ledger; and reconciliations, such as a comparison of receiving reports to general ledger postings.

11-15 Internal control is strengthened when the quantity of merchandise ordered is omitted from the copy of the purchase order sent to the a. Department that initiated the requisition. b. Receiving department. c. Purchasing agent. d. Accounts payable department.

B. Receiving department

7. To obtain assurance that the accounting records accurately reflect only transactions that actually occurred, supporting management's occurrence assertion, the auditor would most likely examine a sample of general ledger postings and

B. Trace them back to the supporting source documentation. By choosing from a population consisting of general ledger postings, the auditor could potentially select any transaction that was recorded. By tracing a sample to source documentation, the auditor could verify that each transaction that was recorded is supported by a purchase order, receiving report, and invoice, indicating it likely did occur. Verifying proper reconciliation to applicable sub-ledgers will provide evidence supporting management's assertion related to the completeness of postings to the sub-ledger. Verifying the proper authorization and training of employees who made the general ledger postings would relate more to internal control than to an assertion made by management but does provide evidence about the entity's ability to provide accurate information. Using professional judgment to draw a conclusion as to reasonableness and accuracy of postings implies that the auditor has some basis for knowing what is reasonable, indicating that this would be an analytical procedure comparing an auditor expectation to recorded data and would support the accuracy assertion.

13. An auditor is recalculating depreciation on real property acquired during the year. Which of the following documents will provide the most relevant information regarding a property's depreciable base?

C. Closing statement. An asset's depreciable basis is its cost less its salvage value. To calculate, or recalculate, depreciation on an asset, the cost is necessary, which can be derived from the closing statement, which is the document used in real estate and many other transactions to summarize the amounts or items being exchanged between the parties, obligations being created or assumed, and costs being incurred that directly relate to the transaction. A deed is a document of ownership but does not provide information about cost or salvage value. A flood insurance policy provides evidence of ownership but not as to cost or salvage value.

8. An auditor observes new equipment while walking around a client's factory and vouches the new equipment to schedules of property, plant, and equipment that support the information in the financial statements. Which assertion is supported by the evidence obtained?

C. Completeness. Vouching equipment that has been observed by the auditor to its inclusion in the accounting records provides the auditor with evidence that the accounting records are complete and include all equipment that the entity has. To support existence, the auditor will trace items from the records to observations. To support rights and obligations, the auditor may look at purchase documents and insurance policies. To support valuation and allocation, the auditor will likely look at purchase documents.

11-13 In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition, and receiving report are verified. The next step in the system is a. Cancelation of the supporting documents. b. Entry of the check amount in the check register. c. Entering of the voucher into the voucher register. d. Approval of the voucher for payment.

C. Entering of the voucher into the voucher register.

Purchase cutoff procedures should be designed to test whether all inventoryA. Purchased and received before the end of the year was paid for.B. Ordered before the end of the year was received.C. Purchased and received before the end of the year was recorded.D. Owned by the company is in the possession of the company at the end of the year.

C. Purchased and received before the end of the year was recorded.

16. Which of the following audit procedures would be most effective in providing evidence regarding the existence of cash and cash equivalents?

C. Review bank confirmations to verify bank balances. Bank confirmations provide evidence of existence since they are an independent verification of cash being held by financial institutions on behalf of the entity. Reviewing bank reconciliations will primarily provide evidence about the valuation of cash and will not provide evidence of its existence unless amounts are traced to other documentation such as bank statements. Analytical procedures to determine if amounts and volume of transactions match expectations will provide evidence of completeness, not existence. Testing the translation of foreign currency transactions will provide evidence related to the valuation of cash denominated in another currency, but not its existence.

Which of the following procedures is least likely to be performed before the balance sheet date?A. Test of internal control over cash.B. Confirmation of receivables.C. Search for unrecorded liabilities.D. Observation of inventory.

C. Search for unrecorded liabilities.

18. Communicating which of the following to the audit committee is not typically required of an auditor?

C. The auditor's judgment of management integrity. The auditor evaluates the integrity of management when evaluating whether to accept or continue a client or engagement and, since the accountant is prohibited from associating with a client whose management lacks integrity, it is presumed that management's integrity is not an issue that would be communicated to the audit committee. The auditor is required to communicate significant findings that include qualitative aspects of accounting practices, policies, estimates, and disclosures; disagreements with managements; and any material corrected misstatements.

11-14 When goods are received, the receiving clerk should match the goods with a. The purchase order and the requisition form. b. The vendor invoice and the purchase order. c. The vendor shipping document and the purchase order. d. The vendor invoice and the vendor shipping document.

C. The vendor shipping document and the purchase order.

11. A client has disposed of several pieces of manufacturing equipment at a significant gain. This raises questions as to which assertion in regard to property, plant, and equipment?

C. Valuation and allocation. When equipment is sold at a significant gain, it raises questions as to the useful life, salvage value, and method of depreciation that were being used when depreciating the asset. These factors all affect the amount that will be recognized as depreciation expense, affecting the carrying value of the equipment and the valuation and allocation assertion.

10-12 For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve

C. Write-offs of customer accounts.

11-19 To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all a. Vendor invoices. b. Purchase orders. c. Receiving reports. d. Canceled checks.

C. receiving reports.

For effective internal control, the purchasing manager generally should

D. Be responsible for negotiating terms with vendors. Good internal control would generally require the segregation of functions related to authorization, custody, recording, and reconciliation. The purchasing manager would be responsible for authorization, including negotiating terms with vendors, and would not defer to the accounts payable department. Documentation will be canceled at the time payment is made, often by the check signer at the time checks are being signed. Accounts payable will establish agreement between the vendors invoice, the receiving report, and the purchase order as a basis for determining that payment may be made

15. King Corporation often transfers funds from its general account into a special account that is used exclusively to make debt payments. Near the end of the year, the company had the following transfers:

D. Cash is overstated by $20,000. The transfers made from the general account on 12/29/17 and 12/31/17 were recorded by both the general account and the special account in 2017. The $20,000 transfer on 12/30/17 was deducted from the general account in 2017 but was not added to the special account until 2018, resulting in an understatement of $20,000. The $40,000 transfer on 1/2/18, however, was deducted from the general account in 2018, but was added to the special account in 2017, resulting in an overstatement of $40,000. As a result, cash is overstated by the net amount of $20,000.

17. Choose the correct statement(s) regarding an auditor's final assessment, near the end of an audit, of significant accounting estimates made by management:

D. Estimates are reconsidered in relation to the financial statements as a whole. Near the end of an audit, virtually all audit evidence considered necessary by the auditor has been obtained to support the individual items reported and disclosed in the financial statements. The purpose of an evaluation of estimates at this stage is to determine if the financial statements appear to fairly reflect financial position, results of operations, and cash flows. Individual estimates would not be recalculated. Estimates should be neither overly conservative nor overly aggressive since a material understatement of financial position or results of operations still constitutes a material misstatement. Whether a company's stock is publicly traded will not necessarily affect the level of additional scrutiny applied to a stock option plan.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?A. Examination of unusual relationships between monthly accounts payable balances and recorded cash payments.B. Reconciliation of vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date.C. Investigation of payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.D. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

D. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

9. An auditor was satisfied that the carrying value of factory equipment was fairly stated as of the beginning of the period. During the period, the entity had several transactions involving the purchase and disposal of equipment. Which of the following would be the most effective in providing evidence that all equipment reported in the financial statements actually exists?

D. Select items from the accounting records and observe them in the entity's factory. By selecting items from the accounting records and observing them in the entity's factory, the auditor can determine that items that are included in the accounting records actually do exist. Tracing items seen on the factory floor to the accounting records provides evidence that the accounting records are complete. Tracing items from the accounting records to purchase documents provides evidences of rights and obligations and valuation and allocation. Evaluating the entity's policies for capitalizing and expensing costs related to equipment acquisitions provides evidence about valuation and allocation

24. Under which of the following circumstances would a disclaimer of opinion be appropriate?

D. The chief executive officer is unwilling to sign the management representation letter. The chief executive officer's refusal to sign a management representation letter constitutes a scope limitation that would prevent the auditor from being able to obtain appropriate audit evidence that is sufficient to support an opinion. As a result, the auditor will issue a disclaimer. Management's refusal to change unreasonable lives being used for depreciable assets and changing an accounting principle without justification represent GAAP departures that will result in a qualified or adverse opinion, depending on the materiality of the effects. Evidence that the chief executive officer has committed a material fraud may indicate a material misstatement of the financial statements, requiring a qualified or adverse opinion.

X Company prepares a sales invoice, using a pre-printed sequentially numbered form, upon receipt of a copy of a bill of lading from the shipping department indicating that goods have been shipped. An auditor wishes to obtain evidence that all sales that occurred during the period were actually recorded. Which of the following procedures would likely be most effective for that purpose?

D. Trace a sample of bills of lading to the sales journal. To obtain evidence as to the completeness assertion, an auditor would trace a sample from the population of source documents to the accounting records. A bill of lading is prepared for goods shipped, which would include all sales. Tracing bills of lading to the sales journal will indicate to the auditor whether all of those selected were recorded, which would support the conclusion that all sales were recorded. Tracing from the sales journal to source documents supports the assertion that the recorded sales actually occurred. Receiving reports would relate to purchases, not sales. Tracing sales invoices to bills of lading would provide evidence that those transactions for which sales invoices were prepared actually occurred.

Smith Corporation has numerous customers. A customer file is kept on disk. Each customer file contains a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be toA. Develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations.B. Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding the credit limit.C. Request a printout of all account balances so that they can be manually checked against the credit limits.D. Request a printout of a sample of account balances so that they can be individually checked against the respective credit limits.

Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding the credit limit.

11-9 List the procedures an auditor might use to search for unrecorded liabilities.

Inquiry of management about control activities used to identify unrecorded liabilities and accruals at the end of an accounting period. • Obtain copies of vendors' monthly statements and reconcile the amount to client's accounts payable records. • Confirm vendor accounts, including accounts with small or zero balances. • Vouch large monetary items from the purchases journal and cash disbursements journal for a limited time after year-end; examine the dates on each receiving report or vendor's invoice to determine if the liability relates to the current audit period. • Examine the files of unmatched purchase orders, receiving reports and vendor invoices for any unrecorded liabilities.

The negative request form of accounts receivable confirmation is useful particularly when....1)"The assessed level of control risk relating to receivables is"2)"The number of small balances is" 3)"Consideration by the recipient is" A. Low, High, Likely B. Low, Low, Unlikely C. High, Low, Likely D. High, High, Likely

Low, High, Likely

14-8 What is a typical control over authorization of capital asset transactions?

Most entities have some type of authorization table for approving capital asset transactions. Control activities should be present to ensure that the authorization to purchase capital assets is consistent with the authorization table. For example, the control activities should specify monetary limits at each managerial level to ensure that larger projects are brought to the attention of higher levels of management for approval before commitments are made. The entity also needs to have control activities for authorizing the sale or other disposition of capital assets. This should include a level of authorization above the department initiating the disposition. Control activities should also identify assets that are no longer used in operations, because they may require different accounting treatment. Finally, an appropriate level of management should properly authorize all major maintenance or improvement transactions.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable whenA. No reply to a positive confirmation request is received.B. No reply to a negative confirmation request is received.C. The collectibility of the receivables is in doubt.D. Pledging of the receivables is probable.

No reply to a positive confirmation request is received.

What control activities typically ensure that the occurrence, authorization, and completeness assertions are met for a purchase transaction? What tests of controls are performed for each of these assertions?

Occurrence - Control Activities: Segregation of duties Purchase not recorded without approved purchase order and receiving report Accounting for numerical sequences of receiving reports and vouchers Cancellation of documents Occurrence - Tests of Controls: Observe and evaluate proper segregation of duties. Test of a sample of vouchers for the presence of an authorized purchase order and receiving report; if IT application, examine application controls. Review and test client's procedures for accounting for numerical sequence of receiving reports and vouchers; if IT application, examine application controls. Examine paid vouchers and supporting documents for indication of cancellation. Authorization - Control Activities: Approval of acquisitions consistent with the client's authorization monetary limits Approved purchase requisitions and purchase orders Competitive bidding procedures followed Authorization - Tests of Controls: Review client's monetary limits authorization for acquisitions. Examine purchase requisitions or purchase orders for proper approval; if IT is used for automatic ordering, examination of application controls. Review client's competitive bidding procedures. Completeness - Control Activities: Accounting for numerical sequences of receiving reports and vouchers Receiving report matched to vendor invoices and entered in purchases journal Completeness - Tests of Controls: Review and test client's procedures for accounting for numerical sequence of receiving reports and vouchers; if IT application, examine application controls. Trace a sample of receiving reports to their respective vendor invoices and vouchers. Trace a sample of vouchers to the purchases journal.

14-7 Describe two or more factors that the auditor should consider in assessing the inherent risk for (a) intangible assets and (b) the property management process.

Three inherent risk factors that should be considered when assessing inherent risk for property, plant and equipment are complex accounting issues, difficult-to-audit transactions, and misstatements detected in prior audits. Lease accounting, self-constructed assets and capitalized interest are examples of transactions that involve complex accounting issues. The vast majority of property, plant and equipment transactions are relatively easy to audit. However, transactions involving donated assets, non-monetary exchanges, and self-constructed assets are more difficult to audit because it may be difficult to verify the value of such assets. If the auditor has detected misstatements in prior audits, the likelihood of misstatements in the current year is higher.

List two inherent risk factors that directly affect the purchasing process. Why should auditors be concerned about issues such as the supply of raw materials and the volatility of prices?

Two inherent risk factors that directly affect the purchasing process are (1) industryrelated factors, and (2) misstatements detected in prior audits. If the entity deals with a large number of vendors and prices tend to be relatively stable, there is less risk that the entity's operations will be affected by raw-material shortages or that production costs will be difficult to control. However, if an entity is dependent on a single vendor to supply a critical component and the vendor is unable to provide the component, the entity may suffer production shortages and shipping delays that significantly affect financial performance. Additionally, industries that use commodities such as oil, coal and precious metals may be subject to both shortages and price instability that significantly affect their financial results. The presence of misstatements in previous audits is a good indicator that misstatements are likely to be present during the current audit. If misstatements were present in previous audits, the auditor should assess inherent risk to be high.

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?A. Understating the sales journal.B. Overstating the accounts receivable control account.C. Overstating the accounts receivable subsidiary ledger.D. Understating the cash receipts journal.

Understating the sales journal.

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff?

Unrecorded sales for the year.

11-29 In obtaining evidence in support of financial statement assertions, the auditor develops specific audit procedures to access those assertions. Required: All's Fair Appliance Company is an appliance wholesaler. Select the most appropriate audit procedure from the list below and enter the number in the appropriate place on the grid. (An audit procedure may be selected once, more than once, or not at all.) Audit Procedure: 1. Compare selected amounts from the accounts payable listing with the voucher and supporting documents. 2. Review drafts of the financial statements. 3. Search for unrecorded liabilities. 4. Select a sample of receiving documents for a few days before and after year-end. 5. Obtain a listing of the accounts payable and agree total to general ledger control account. Specific Assertion a. Verify that recorded accounts payable include all amounts owed to vendors. (completeness) b. Verify that all accounts payable are recorded in the correct period. (cutoff) c. Determine whether accounts payable have been properly accumulated from the journal to the general ledger. (accuracy) d. Determine whether recorded accounts payable are valid. (existence/occurrence)

a.Verify that recorded accounts payable include all amounts owed to vendors. (completeness): 3 b.Verify that all accounts payable are recorded in the correct period. (cutoff): 4 c.Determine whether accounts payable have been properly accumulated from the journal to the general ledger. (accuracy): 5 d.Determine whether recorded accounts payable are valid. (existence/occurrence): 1

12. Upon examining repair and maintenance costs recorded by Cane Company during the year, an auditor finds a material amount that should have been capitalized in property, plant and equipment. If this error is left uncorrected, how would it affect Cane's reported net income and assets in its year-end financial statements?

d. Net Income: Understate Assets: Understate When a cost that should have been capitalized is recognized as repairs and maintenance, an expense, the carrying value of the asset is understated and the expense is overstated causing net income to be understated.