Chapter 11

1. The auditor compared (reconciled) the total recorded amounts in the subsidiary ledger with the accounts receivable amount recorded in the general ledger. 2. The auditor vouched a sample of recorded sales transactions to customer orders and shipping documents. 3. The auditor tracked cash receipts to determine that Superior Co. is collecting and depositing the proceeds into bank accounts controlled by the entity. 4. The auditor tested the receipts of cash and the associated reduction in accounts receivable at year end to determine that the transactions were reported in the proper period. 5. The auditor vouched accounts receivable to shipping documents. 6. The auditor obtained a management representations letter that includes assertions relating to sales and receivables. 7. The auditor reviewed the credit ratings of delinquent customers. 8. The auditor counted the cash on hand. 9. The auditor obtained exchange rates for the foreign currency held at year end. 10. To test for overstatements of cash disbursements, the auditor identified the last check written for the period and traced the effect to the accounting records.

1. Completeness 2. Occurrence 3. Right and Obligations 4. Cutoff 5. Existence 6. Accuracy 7. Valuation and Allocation 8. Existence 9. Valuation and allocatino 10. Cutoff

You and John Adams are in the process of collecting evidence in your audit of a client's cash receipts and cash disbursements. To properly test management's assertions about the balances in the financial statements, you are preparing to perform substantive testing of the cash cycle. In the exhibits is a bank reconciliation prepared by your client, who has a September 30 year end. Based on the bank reconciliation, select from the option list provided one or more procedures (as indicated) for each of the following items that you most likely should perform to gather sufficient appropriate audit evidence. Each choice may be used once, more than once, or not at all. 1. Balance per bank - select 2 procedures 2. Deposits in transit - select 5 procedures 3. Outstanding checks - select 5 procedures 4. Customer note collected by bank - select 1 procedure 5. Error - select 2 procedures Procedure 6. Balance per books - select 1 procedure

1. Confirm directly with bank; trace items on the bank reconciliation to cutoff statement 2. Trace to cash receipts journal; determine reason for unusual delay; Inspect supporting documents for reconciling item not appearing on cutoff statement; Trace items on the bank reconciliation to cutoff statement; Trace items on the cutoff statement to bank reconciliation 3. Trace to cash disbursements journal; Determine reason for unusual delay; Inspect supporting documents for reconciling item not appearing on cutoff statement; Trace items on the bank reconciliation to cutoff satement; Trace items on the cutoff statement to bank reconciliation 4. Inspect bank credit memo 5. Inspect bank credit memo; Trace items on the bank reconciliation to cutoff statement 6. Compare to 9/30/Year 1 general ledger

1. The company shipped merchandise (FOB destination) to a customer on December 29, Year 1, and recorded the sale but not the relief of inventory. The customer received the merchandise on December 31, Year 1. 2. The company shipped merchandise (FOB shipping point) to a customer on December 3, Year 1, and recorded the sale and relief of inventory. The customer, unhappy with the merchandise, returned the goods on December 29, Year 1. The company records the following entry upon receipt of the goods: Inventory (dr.), Cost of Sales (cr.). 3. The company shipped merchandise to a consignee on December 16, Year 1, and did not record the transaction. The consignee returned the merchandise on December 28, Year 1. Upon receipt of the goods, the company made the following entry: Inventory (dr.), Sales (cr.). 4. The company shipped merchandise (FOB shipping point) on December 29, Year 1, and recorded relief of inventory, but not the sale, on that date. The customer has not received the merchandise, and the company has not recorded the sale as of January 3, Year 2.

1. Cost of Sales, Inventory 2. Sales, Accounts receivable 3. Sales, Inventory 4.Accounts receivable, Sales

1. The client's books show a credit to the accounts receivable of a particular customer in the amount of $21,000. After confirmation with the customer, it is discovered that the client made an error and the actual payment was for $31,000. 2. A debtor of the audit client confirms that a $12,000 payment was sent to the client on 12/23/Yr 8. The client recorded this payment on its books on 12/23/Yr 8. Examination of the client's records shows that the payment was received on 12/30/Yr 8. 3. A $35,000 FOB shipping point sale was made by the audit client on 12/31/Yr 9. The goods were shipped immediately and received by the local customer the next day. The client recorded the sale when the customer received the goods. Cost of sales is 30% of sales. 4. The audit client made a sale FOB receiving point for $13,500 on 12/26/Yr 9. The goods were shipped immediately, and the customer received the order on 1/2/Yr 10. The sale was included in the client's revenue for Fiscal Year 9. Cost of sales is 30% of sales.

1. Decrease accounts receivable by $10,000. 2. No entry needed 3. Increase cost of sales by $10,500 4. Decrease sales by $13,500

1. Chip Technology 2. BiCon Semiconductor 3. Whistler's Computer Warehouse 4. Digital Digits5. Rockford's 6. Jungle Applications

1. Exception noted: propose adjustment and request that the controller post it to the accounting records 2. Verify by examining shipping documents and subsequent cash collections 3. Exception noted: propose adjustment and request that the controller post it to the accounting records 4. Verify that dditional invoices noted on confirmation pertain to the subsequent year 5. Not an exception, no futher audit work deemed necessary 6. Verify by examining shipping documents and subsequent cash collections

As part of the fieldwork on an engagement, the auditor obtained and documented an understanding of the company's internal controls relating to accounts receivable and assessed control risk related to accounts receivable at the maximum level. Susan, the staff person assigned to the engagement, requested and obtained from the company an aged accounts receivable schedule listing the total amount owed by each customer as of December 31, Year 2, and sent positive confirmation requests to a sample of the company's customers. Assume that all confirmations received have been appropriately signed, unless otherwise noted. For each customer in the table below, review the relevant confirmation letter and Susan's comments at the bottom of each in the exhibits. Select from the option list provided the conclusion or the procedure that should be followed to clear the exception, if one exists. Choose only one procedure per confirmation. Each choice may be used once, more than once, or not at all. 1. Performance Marine Sales, Inc. 2. West Coast Ski Center, Inc. 3. Fish & Ski World, Inc. 4. NC Boating Center, Inc. 5. Alexi Fishing Charters 6. Harbor Creek Landing

1. Exception noted; propose adjustment and request that the controller post it to the accounting records 2. Exception noted; propose adjustment and request that the controller post it to the accounting records 3. Verify that additional invoices noted on confirmation pertain to the subsequent year 4. Verify by examining subsequesent cash collections and/or shipping documents 5. Send a second request for confirmation to the customer 6. Not an exception, no further audit work deemed necessary

During the course of the Year 2 audit of Pawn Co., the auditor examined the company's bank reconciliation schedule. The auditor discovered potential cutoff problems that may or may not require adjusting journal entries. For each of the potential cutoff problems indicated below, complete the required journal entries. To prepare each required journal entry: Click on a cell in the Account Name column and select from the option list the appropriate account. An account may be used once, more than once, or not at all. Enter the corresponding debit or credit amount in the associated column. Round all amounts to the nearest whole number. Not all rows in the table might be needed to complete each journal entry. If no journal entry is needed, check the "No entry required" box at the top of the table as your response. 1. The bank balance did not include the $10,000 of receipts for December 31, Year 2, that were deposited and recorded by the company on that day but were not recorded until January 4, Year 3, by the bank. Record the necessary Year 2 adjustments, if any. 2. A check for $7,000 was drawn on the company's account, payable to a vendor, dated and recorded in the company's books on December 31, Year 2, but not mailed until January 9, Year 3. Record the necessary Year 2 adjustments, if any. 3. A difference of $500 between the cash balance per books and the cash balance per bank statement arose from the Year 2 service fees charged on December 31, Year 2, by the bank. Record the necessary Year 2 adjustments, if any.

1. No entry required 2. Cash 7000 ap 7000 3. Service exp 500 cash 500

You are adding correcting entries to the general ledger during an audit shortly after the client's 12/31/Year 1 year end. To prepare each required journal entry: Click on a cell in the Account Name column and select from the option list the appropriate account. An account may be used once, more than once, or not at all. Enter the corresponding debit or credit amount in the associated column. Round all amounts to the nearest whole number. Not all rows in the table might be needed to complete each journal entry. If no journal entry is needed, check the "No entry required" box at the top of the table as your response. 1. You receive a confirmation from a debtor indicating that payment for $10,000 was sent on 12/23/Year 1. Your research indicates that it was received by the client on 1/2/Year 2, thus not recorded by year end. 2. You receive a confirmation from a debtor indicating that payment for $18,000 was made on 12/15/Year 1. Your research indicates that the amount was credited to the wrong customer in the subsidiary ledger. 3. You receive a confirmation from a debtor indicating that payment of $1,000 was made on 12/20/Year 1. But the credit for the payment was $2,000. Your research indicates that receipt was recorded twice in error. 4. A cutoff test of credit sales revealed that a shipment to a customer that was made FOB shipping point for an amount of $40,000 on 12/28/Year 1 was not recorded. It was received by the customer on 1/3/Year 2. Cost of Sales is 40% of Sales. 5. A cutoff test of credit sales revealed that a shipment to a customer that was made FOB receiving point for an amount of $80,000 on 12/29/Year 1 was not recorded. It was received by the customer on 1/3/Year 2. Cost of Sales is 40% of Sales.

1. No entry required 2. No entry required 3. A/R 1000 cash 1000 4. A/R 40000 COGS 16000 sales 40000 inventory 16000 5. No entry required

During the course of the Year 2 audit of Chester Co., the auditor discovered potential cutoff problems that may or may not require adjusting journal entries. For each of the potential cutoff problems indicated below, complete the required journal entries. To prepare each required journal entry: 1. Click on a cell in the Account Name column and select from the option list the appropriate account. An account may be used once or not at all for a journal entry. 2. Enter the corresponding debit or credit amount in the associated column. 3. Round all amounts to the nearest whole number. 4. Not all rows in the table might be needed to complete each journal entry. 5. If no journal entry is needed, check the "No entry required" box at the top of the table as your response. 1. The company shipped merchandise with a carrying amount of $75,000 FOB destination on December 23, Year 2, and recorded the sale and relief of inventory on that date. The customer received the merchandise on December 31, Year 2. The merchandise has a gross profit margin of 10%. Record the necessary Year 2 adjustments, if any. Account Name, Debit, Credit 1-5 2. The company shipped merchandise with a carrying amount of $45,000 to a consignee on December 24, Year 2, and recorded the sale and the relief of inventory on that date. The consignee had not sold the merchandise as of January 5, Year 3. The merchandise has a gross profit margin of 10%. Record the necessary Year 2 adjustments, if any. Account Name, Debit, Credit 5-10 3. At the beginning of Year 2, the company entered into a 3-year contract to provide services at $30,000 per year. The total contract was $90,000, and services will be provided continuously over the 3-year period. The contract was paid in full on January 1, Year 2, and the company recorded $90,000 as revenue on that date. Account Name, Debit, Credit 10-15

1. No entry required 2. Sales 50,000 Inventory 45000 A/R 50000 COGS 45000 3. Service revenue 60,000 contract liability 60000

Bob Senior is the engagement supervisor for the audit of Cubs Co. He has compiled the following client-prepared bank reconciliation and related information in the exhibits. Select from the option list provided six potential issues that Bob Senior might have when examining the bank reconciliation prepared by Cubs. Each choice may be used once or not at all.

1. Reconciliation was not reviewed in a timely manner 2. Reconciliation was not agreed to bank statement balance at the appropriate date 3. Reconciliation contains stale checks 4. Reconciliation has unsubstantiated unrecorded items 5. Reconciliation contains aged items that should have been added to the bank balance 6. Reconciliation balance was not properly agreed to the December 31 general ledger balance

1. An auditor is uncertain of whether a client's sales are being recorded in the proper reporting period. 2. An auditor wants to determine whether the client's accounts receivable are valued at the proper amount. 3. An auditor wants to know whether the client is reporting sales as revenue, minus any returns and allowances. 4. An auditor wants to assess whether the client's sales and receivables reflect all recordable transactions for the period.

1. Test sales cutoff 2. Age accounts receivable 3. Inspect the income statement 4. Calculate accounts receivable turnover ratio

1. The auditor reviewed delinquent customers' credit ratings. 2. The auditor confirmed accounts receivable. 3. The auditor tested sales transactions at year end to determine that they were recorded in the proper period. 4. The auditor accounted for the numerical sequence of sales orders. 5. The auditor vouched the recorded accounts receivable to shipping documents. 6. The auditor determined that accounts receivable was presented on the balance sheet as a current asset. 7. The auditor aged the accounts receivable. 8. The auditor inquired of management about the possibility that the receivables had been sold or factored. 9. The auditor reconciled the total receivables from the subsidiary ledger to the balance in the general ledger. 10. The auditor determined that a note was included describing any sales to related parties.

1. Valuation and allocation 2. Existence 3. Cutoff 4. Completeness 5. Existence 6. Classificiation and understandability 7. Valuation and allocation 8. Rights and obligations 9. Completeness 10. Classification and understandability

Johnson, CPA, is determining whether the accounts receivable balance of a nonissuer client is accurate. He has asked you to evaluate whether external confirmations of accounts receivable balances are necessary for this audit. Which section of the generally accepted auditing standards best describes whether Johnson is required to use external confirmation procedures? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.

AU-C 330.20

Which section of the generally accepted auditing standards states when negative confirmation requests may be used as the sole substantive procedure? Enter your response in the answer fields below. Guidance on correctly structuring your response appears above and below the answer fields.

AU-C 505.15