Comprehensive Questions 11-21 (Assessing Control Risk) An auditor is required to obtain a sufficient understanding of each of the components

Comprehensive Questions 11-21 (Assessing Control Risk) An auditor is required to obtain a sufficient understanding of each of the components of an entity’s system of internal control to plan the audit of the entity’s financial statements and to assess control risk for the assertions embodied in the account balance, transaction class, and disclosure components of the financial statements.

Required
a. Explain the reasons an auditor may assess control risk at the maximum level for one or more assertions embodied in an account balance.
b. What must an auditor do to support assessing control risk at less than the maximum level when the auditor has determined that controls have been placed in operation?
c. What should an auditor consider when seeking a further reduction in the planned assessed level of control risk?
d. What are an auditor’s documentation requirements concerning an entity’s system of internal control and the assessed level of control risk?
AICPA (adapted)

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(Assessing Roche Publishing Company’s Cash Management Efficiency) Lisa Pinto, vice president of finance at

Assessing Roche Publishing Company’s Cash Management Efficiency

Lisa Pinto, vice president of finance at Roche Publishing Company, a rapidly growing publisher of college texts, is concerned about the firm’s high level of short-term resource investment. She believes that the firm can improve the management of its cash and, as a result, reduce this investment. In this regard, she charged Arlene Bessenoff, the treasurer, with assessing the firm’s cash management efficiency. Arlene decided to begin her investigation by studying the firm’s operating and cash conversion cycles.

AND SO ON

Roche Publishing Company is currently spending $12,000,000 per year on its operating-cycle investment, but it expects that initiating a cash discount will increase its operating-cycle investment to $13,100,000 per year. (Note: The operating-cycle investment per dollar of inventory, receivables, and payables is assumed to be the same.) Arlene’s concern was whether the firm’s cash management was as efficient as it could be. Arlene knew that the company paid 12% annual interest for its resource investment and therefore viewed this value as the firm’s required return. For this reason, she was concerned about the resource investment cost resulting from any inefficiencies in the management of Roche’s cash conversion cycle. (Note: Assume a 365- day year.)

To Do

a. Assuming a constant rate for purchases, production, and sales throughout the year, what are Roche’s existing operating cycle (OC), cash conversion cycle (CCC), and resource investment need?

b. If Roche can optimize operations according to industry standards, what would its operating cycle (OC), cash conversion cycle (CCC), and resource investment

need be under these more efficient conditions?

c. In terms of resource investment requirements, what is the annual cost of Roche’s operational inefficiency?

d. Evaluate whether Roche’s strategy for speeding its collection of accounts receivable would be acceptable. What annual net profit or loss would result from implementation of the cash discount?

e. Use your finding in part d, along with the payables and inventory costs given, to determine the total annual cost the firm would incur to achieve the industry level of operational efficiency.

f. Judging on the basis of your findings in parts c and e, should the firm incur the annual cost to achieve the industry level of operational efficiency? Explain why or why not.

Click here for the solution: (Assessing Roche Publishing Company’s Cash Management Efficiency) Lisa Pinto, vice president of finance at