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Homeworkarena

ACCT 444 Week 3 Homework Solution

Homeworkarena

ACCT 444 Week 3 Homework Solution

 

http://www.homeworkarena.com/acct-444-wk-3-homework

 

 

Chapter 7

7-27 (Objective 7-4) The following are examples of documentation typically obtained by auditors:

Vendors’ invoices

General ledger files

Bank statements

Cancelled payroll checks

Payroll time records

Purchase requisitions

Receiving reports (documents prepared when merchandise is received)

Minutes of the board of directors

Remittance advices

Signed W-4s (Employee’s Withholding Exemption Certificates)

Signed lease agreements

Duplicate copies of bills of lading

Subsidiary accounts receivable records

Cancelled notes payable

Duplicate sales invoices

Articles of incorporation

Title insurance policies for real estate

Notes receivable

Required

Classify each of the preceding items according to type of documentation: (1) internal or (2) external.

 

 

Explain why external evidence is more reliable than internal evidence.

.

 

 

7-30 (Objective 7-4) Eight different types of evidence were discussed. The following questions concern the reliability of that evidence:

Required

Explain why confirmations are normally more reliable evidence than inquiries of the client.

.

 

Describe a situation in which confirmation will be considered highly reliable and another in which it will not be reliable.

.

 

Under what circumstances is the physical observation of inventory considered relatively unreliable evidence?

.

 

Explain why recalculation tests are highly reliable but of relatively limited use.

.

 

Give three examples of relatively reliable documentation and three examples of less reliable documentation. What characteristics distinguish the two?

 

Give several examples in which the qualifications of the respondent or the qualifications of the auditor affect the reliability of the evidence.

 

Explain why analytical procedures are important evidence even though they are relatively unreliable by themselves.

.

 

7-31 (Objective 7-4) As auditor of the Star Manufacturing Company, you have obtained

A trial balance taken from the books of Star one month before year-end:

There are no inventories consigned either in or out.

All notes receivable are due from outsiders and held by Star.

 

Required

Which accounts should be confirmed with outside sources? Briefly describe from whom they should be confirmed and the information that should be confirmed. Organize your answer in the following format:

 

<table width="605"> <tbody><tr> <td width="19">

 

</td> <td width="162">

 

</td> <td width="182">

 

</td> <td width="268">

 

</td> <td width="19">

 

</td> </tr> <tr> <td width="19">

 

</td> <td width="162">

 

</td> <td width="182">

 

</td> <td width="268">

 

</td> <td width="19">

 

</td> </tr> <tr> <td width="19">

 

</td> <td width="162">

 

</td> <td width="182">

 

</td> <td width="268">

 

</td> <td width="19">

 

</td> </tr> </tbody></table>

Chapter 8

8-22 (Objective 8-7) Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a tool in conducting audits. For several engagements, he computed the industry ratios included in publications by Standard and Poor’s and compared them with industry standards. For most engagements, the client’s business was significantly different from the industry data in the publication and the client automatically explained away any discrepancies by attributing them to the unique nature of its operations. In cases in which the client had more than one branch in different industries, Gordon found the ratio analysis no help at all. How can Gordon improve the quality of his analytical procedures?

8-33 (Objectives 8-3, 8-7, 8-8) Your comparison of the gross margin percent for Jones Drugs for the years 2008 through 2011 indicates a significant decline. This is shown by the following information:

A discussion with Marilyn Adams, the controller, brings to light two possible explanations. She informs you that the industry gross profit percent in the retail drug industry declined fairly steadily for 3 years, which accounts for part of the decline. A second factor was the declining percent of the total volume resulting from the pharmacy part of the business. The pharmacy sales represent the most profitable portion of the business, yet the competition from discount drugstores prevents it from expanding as fast as the nondrug items such as magazines, candy, and many other items sold. Adams feels strongly that these two factors are the cause of the decline.

The following additional information is obtained from independent sources and the client’s records as a means of investigating the controller’s explanations:

 

Required

Evaluate the explanation provided by Adams. Show calculations to support your conclusions.

.

Which specific aspects of the client’s financial statements require intensive investigation in this audit?

.

Chapter 9

9-33 (Objectives 9-6) Below are ten independent risk factors:

The client lacks sufficient working capital to continue operations.

The client fails to detect employee theft of inventory from the warehouse because there are no restrictions on warehouse access and the client does not reconcile inventory on hand to recorded amounts on a timely basis.

The company is publicly traded.

The auditor has identified numerous material misstatements during prior year audit engagements.

The assigned staff on the audit engagement lack the necessary skills to identify actual errors in an account balance when examining audit evidence accumulated.

The client is one of the industry’s largest based on its size and market share.

The client engages in several material transactions with entities owned by family members of several of the client’s senior executives.

The allowance for doubtful accounts is based on significant assumptions made by management.

The audit plan omits several necessary audit procedures.

The client fails to reconcile bank accounts to recorded cash balances.

Required

Identify which of the following audit risk model components relates most directly to each of the ten risk factors:

Acceptable audit risk

Inherent risk

Control risk

Planned detection risk

 

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