5-54 If a company’s control risk is assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls

5-54 (Testing internal Controls) If a company’s control risk is assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls.

Required
a. For each of the following control activities, indicate the audit procedure the auditor would use to determine its operating effectiveness.
b. Briefly describe how substantive tests of account balances should be modified if the auditor finds that the control procedure is not working as planned. In doing so, indicate (a) what could happen because of the control deficiency, and (b) how the auditor’s tests should be expanded to test for the potential misstatement.

Controls
1. Credit approval by the credit department is required before salespersons accept orders of more than $15,000 and for all customers who have a past-due balance higher than $22,000.
2. All merchandise receipts are recorded on pre numbered receiving slips. The controller’s department periodically accounts for the numerical sequence of the receiving slips.
3. Payments for goods received are made only by the accounts payable department on receipt of a vendor invoice, which is then matched for prices and quantities with approved purchase orders and receiving slips.
4. The accounts receivable bookkeeper is not allowed to issue credit memos or to approve the write-off of accounts.
5. Cash receipts are opened by a mail clerk, who prepares remittances to send to accounts receivable for recording. The clerk prepares a daily deposit slip, which is sent to the controller. Deposits are made daily by the controller.
6. Employees are added to the payroll master file by the payroll department only after receiving a written authorization from the personnel department.
7. The only individuals who have access to the payroll master file are the payroll department head and the payroll clerk responsible for maintaining the payroll file. Access to the file is controlled by computer passwords.
8. Edit tests built into the computerized payroll program prohibit the processing of weekly payroll hours in excess of 53 and the payment to an employee for more than three different job classifications during a one-week period.
9. Credit memos are issued to customers only on the receipt of merchandise or the approval of the sales department for adjustments.
10. A salesperson cannot approve a sales return or price adjustment that exceeds 6% of the cumulative sales for the year for any one customer. The divisional sales manager must approve any subsequent approvals of adjustments for such a customer.


Click here for the solution: If a company’s control risk is assessed as low, the auditor needs to gather evidence on the operating effectiveness of the controls

Eight different types of evidence were discussed

Auditing P 7-32

Eight different types of evidence were discussed. The following questions concern the reliability of that evidence:
a. Explain why confirmations are normally more reliable evidence than inquiries of the client.
b. Describe a situation in which confirmation will be considered highly reliable and another in which it will not be reliable.
c. Under what circumstances is the physical observation of inventory considered relatively unreliable evidence
d. Explain why recalculation tests are highly reliable but of relatively limited use.
e. Give three examples of relatively reliable documentation and three examples of less reliable documentation. What characteristics distinguish the two
f. Give several examples in which the qualifications of the respondent or the qualifications of the auditor affect the reliability of the evidence.
g. Explain why analytical procedures are important evidence even though they are relatively unreliable by themselves.


Click here for the solution: Eight different types of evidence were discussed

List two examples of audit evidence the auditor can use in support of each of the following

Auditing P 7-31

List two examples of audit evidence the auditor can use in support of each of the following:
a. Recorded amount of entries in the acquisitions journal
b. Physical existence of inventory
c. Accuracy of accounts receivable
d. Ownership of fixed assets
e. Liability for accounts payable
f. Obsolescence of inventory
g. Existence of petty cash


Click here for the solution: List two examples of audit evidence the auditor can use in support of each of the following

Tests of account balances are intended to obtain audit evidence about the fairness of the inventory accounts

Problem 14-31 Tests of account balances are intended to obtain audit evidence about the fairness of the inventory accounts or, alternatively, identify material misstatements in the amounts presented. Audit procedures can only be selected after the auditor determines specific audit objectives related to management assertions.

Management Assertions
1. Existence or occurrence
2. Completeness
3. Rights and obligations
4. Valuation or allocation
5. Presentation and disclosure

Required: For each audit procedure below, identify the related management assertion(s) that the audit procedure tests and explain the audit objective of the procedure.
(a) Trace totals of inventory files to the general ledger, including proper classification as raw materials, WIP, or finished goods.
(b) Test additions to inventory by selecting a sample of recorded purchases from the inventory records and examining supporting documents.
(c) Review consignment contracts and scan inventory records for inclusion of amounts for any consigned items not owned.
(c) Reperform calculations supporting decisions about write-downs or write-offs of inventory and trace any adjustment amounts to the inventory records.
(d) Using computer-assisted auditing techniques reperform calculations testing mathematical accuracy, including totals extensions of price and quantity and unit or batch aggregations; recalculation is based on appropriate application of the client costing method (FIFO, LIFO, weighted average, specific identification, etc.).


Click here for the solution: Tests of account balances are intended to obtain audit evidence about the fairness of the inventory accounts

The empirical evidence reveals that very few firms change their standard prices and standard quantities during the fiscal year

P 12–6: Changing Standards

The empirical evidence reveals that very few firms change their standard prices and standard quantities during the fiscal year. Most firms have the following policy, “We set our standards before the fiscal year begins and we NEVER, NEVER change them during the year (except when we have to).”

Required:
a. Evaluate the “never change” policy. Does it make any sense? Why would firms adopt such a policy?
b. When would you expect firms to change their standards during the fiscal year?

Click here for the solution: The empirical evidence reveals that very few firms change their standard prices and standard quantities during the fiscal year