In your audit of Aviary Industries for calendar year 2011, you found a number of matters that you believe represent possible adjustments to the company's books. These matters are described below. Management's attitude is that "once the books are closed, they're closed," and management does not want to make any adjustments. Planning materiality for the audit was $100,000, determined by computing 5% of expected income before taxes. Actual income before taxes on the financial statements prior to any adjustments is $1,652,867. Possible adjustments: 1. Several credit memos that were processed and recorded after year-end relate to sales and accounts receivable for 2011. These total $26,451. 2. Inventory cutoff tests indicate that $25,673 of inventory received on December 30, 2011, was recorded as purchases and accounts payable in 2012. These items were included in the inventory count at year-end and therefore were included in ending inventory. 3. Inventory cutoff tests also indicate several sales invoices recorded in 2011 for goods that were shipped in early 2012. The goods were included in inventory even though they were set aside in a separate shipping area. The total amount of these shipments was $41,814. 4. The company wrote several checks at the end of 2011 for accounts payable that were held and not mailed until January 15, 2012. These totaled $43,671. Recorded cash and accounts payable at December 31, 2011, are $2,356,553 and $2,666,290, respectively. 5. The company has not established a reserve for obsolescence of inventories. Your tests indicate that such a reserve is appropriate in an amount somewhere between $15,000 and $30,000. 6. Your review of the allowance for uncollectible accounts indicates that it may be understated by between $35,000 and $55,000. Required a. Determine the adjustments that you believe must be made for Aviary's financial statements to be fairly presented. Include the amounts and accounts affected by each adjustment. b. Why may Aviary Industries' management resist making these adjustments? c. Explain what you consider the most positive way of approaching management personnel to convince them to make your proposed changes. d. Describe your responsibilities related to unadjusted misstatements that management has determined are immaterial individually and in the aggregate. e. Assuming Aviary Industries is an accelerated filer public company, describe how the noted adjustments might impact your audit report on internal control over financial reporting.
> Identify the factors an auditor uses to decide the appropriate ARACR. Compare the sample size for an ARACR of 10% with that of 5%, all other factors being equal.
> In using difference estimation, an auditor took a random sample of 100 inventory items from a large population to test for proper pricing. Several of the inventory items were misstated, but the combined net amount of the sample misstatement was not mater
> Define what is meant by the population standard deviation and explain its importance in variables sampling. What is the relationship between the population standard deviation and the required sample size?
> What alternative courses of action are appropriate when a population is rejected using nonstatistical sampling for tests of details of balances? When should each option be followed?
> What is meant by a decision rule using difference estimation? State the decision rule.
> Why is it difficult to determine the appropriate sample size for MUS? How should the auditor determine the proper sample size?
> Assume that a sample of 100 units was obtained in sampling the inventory in Question 17-4. An auditor is determining the appropriate sample size for testing inventory valuation using MUS. The population has 2,620 inventory items valued at $12,625,000. Th
> What is meant by the "percent of misstatement assumption" for MUS in those population items that are misstated? Why is it common to use a 100% misstatement assumption when it is almost certain to be highly conservative?
> What is the relationship between ARIA and ARACR?
> Evaluate the following statement made by an auditor: "I took a random sample and derived a 90 percent confidence interval of $800,000 to $900,000. That means that the true population value will be between $800,000 and $900,000, 90 percent of the time."
> Explain what is meant by acceptable risk of incorrect acceptance. What are the major audit factors affecting ARIA?
> Identify the factors an auditor uses to decide the appropriate TER. Compare the sample size for a TER of 7% with that of 4%, all other factors being equal.
> Explain how the auditor determines tolerable misstatement for MUS.
> The 2,620 inventory items described in Question 17-14 are listed on 44 inventory pages with 60 lines per page. There is a total for each page. The client's data are not in machine-readable form. Describe how a monetary unit sample can be selected in this
> What major difference between (a) Tests of controls and substantive tests of transactions (b) Tests of details of balances makes attributes sampling inappropriate for tests of details of balances? SOLUTION The most important difference between (a) te
> Define what is meant by sampling risk. Does sampling risk apply to nonstatistical sampling, MUS, attributes sampling, and variables sampling? Explain.
> Define monetary unit sampling and explain its importance in auditing. How does it combine the features of attributes and variables sampling?
> Evaluate the following statement made by an auditor: "On every aspect of the audit where it is possible, I calculate the point estimate of the misstatements and evaluate whether the amount is material. If it is, I investigate the cause and continue to te
> Distinguish between the point estimate of the total misstatements and the true value of the misstatements in the population. How can each be determined?
> Define stratified sampling and explain its importance in auditing. How can an auditor obtain a stratified sample of 30 items from each of three strata in the confirmation of accounts receivable?
> Monetary unit sampling (MUS) is the most commonly used statistical method of sampling for tests of details because of its simplicity and its ability to provide statistical results in dollars. Read an article titled "Monetary-Unit Sampling Using Microsoft
> Explain the difference between replacement sampling and nonreplacement sampling. Which method do auditors usually follow? Why?
> Explain the difference between an attribute and an exception condition. State the exception condition for the audit procedure: The duplicate sales invoice has been initialed indicating the performance of internal verification.
> Explain the major difference between statistical and nonstatistical sampling. What are the three main parts of statistical and nonstatistical methods?
> Auditors have used samples to conduct audit tests for decades. Despite the frequent use of sampling, auditors often use nonstatistical sampling rather than statistical sampling. Visit the website for The CPA Journal (www.cpajournal.com) and use the searc
> Describe the nature of the following documents and records and explain their use in the sales and collection cycle: bill of lading, sales invoice, credit memo, remittance advice, monthly statement to customers.
> For this problem use the Metaphor-AR-2002 file in ACL-Demo. The suggested command or other source of information needed to solve the problem requirement is included at the end of each question. a. Determine the total number and amount of September 2002 t
> In Part III of this case study, you obtained an understanding of internal control and made an initial assessment of control risk for each transaction-related audit objective for acquisition and cash disbursement transactions. The purpose of Part V is to
> The Meyers Pharmaceutical Company, a drug manufacturer, has the following internal controls for billing and recording accounts receivable: 1. An incoming customer's purchase order is received in the order department by a clerk who prepares a prenumbered
> YourTeam.com is an online retailer of college and professional sports team memorabilia, such as hats, shirts, pennants and other sports logo products. Consumers select the college or professional team from a pull-down menu on the company's Web site. For
> Items 1 through 10 present various internal control strengths or internal control deficiencies. 1. Credit is granted by a credit department. 2. Once shipment occurs and is recorded in the sales journal, all shipping documents are marked "recorded" by the
> You have been asked by the board of trustees of a local church to review its accounting procedures. As part of this review you have prepared the following comments about the collections made at weekly services and record keeping for members' pledges and
> The following are a list of possible errors or fraud (1 through 5) involving cash receipts and controls (a through g) that may prevent or detect the errors or fraud: Possible Errors or Fraud 1. Customer checks are properly credited to customer accounts a
> What is meant by an attribute in sampling for tests of controls and substantive tests of transactions? What is the source of the attributes that the auditor selects?
> In recent years, several high-profile incidents of improper revenue recognition attracted the attention of the business media. The SEC has also expressed concerns about the number of instances of improper revenue recognition identified by SEC staff. One
> What major considerations should the auditor take into account in determining how extensive the review of subsequent events should be?
> In obtaining letters from attorneys, Bill Malano's aim is to receive the letters as early as possible after the balance sheet date. This provides him with a signed letter from every attorney in time to properly investigate any exceptions. It also elimina
> Distinguish between the two general types of subsequent events and explain how they differ. Give two examples of each type.
> Describe the action that an auditor should take if an attorney refuses to provide information that is within the attorney's jurisdiction and may directly affect the fair presentation of the financial statements.
> Distinguish between an asserted and an unasserted claim. Explain why a client's attorney may not reveal an unasserted claim.
> During the audit of the Merrill Manufacturing Company, Ralph Pyson, CPA, has become aware of four lawsuits against the client through discussions with the client, reading corporate minutes, and reviewing correspondence files. How should Pyson determine t
> Explain why the analysis of legal expense is an essential part of every audit.
> Explain why an auditor is interested in a client's future commitments to purchase raw materials at a fixed price.
> In the audit of the James Mobley Company, you are concerned about the possibility of contingent liabilities resulting from income tax disputes. Discuss the procedures you could use for an extensive investigation in this area.
> The following questions concern internal controls in the acquisition and payment cycle. Choose the best response. a. A client erroneously recorded a large purchase twice. Which of the following internal controls would be most likely to detect this error
> The cost accounting records are often an essential area to audit in a manufacturing or construction company. Required a. Why should the auditor review the cost accounting records and test their accuracy? b. For the audit of standard cost accounting reco
> Distinguish between a contingent liability and an actual liability and give three examples of each.
> Describe the purpose of a financial statement disclosure checklist and explain how it helps the auditor determine if there is sufficient appropriate evidence for each of the presentation and disclosure objectives.
> Identify and describe the four presentation and disclosure audit objectives.
> Audit committees of public companies have many responsibilities in today's financial reporting environment. Visit the website of Microsoft Corporation (www.microsoft.com) and locate the Audit Committee's Charter under the "Investor Relations" link to ans
> The Check Clearing for the 21st Century Act (Check 21 Act) allows recipients of paper checks to create a digital image of the original check, eliminating the need for further handling of the actual check. The Federal Reserve Board has created a consumer
> In connection with an audit you are given the following work sheet: Checks Drawn but Not Paid by Bank No. Amount 573 ………………â
> The following are various potential misstatements due to errors or fraud (1 through 7), and a list of auditing procedures (a through h) the auditor would consider performing to gather evidence to determine whether the error or fraud is present. Possible
> In the audit of the Regional Transport Company, a large branch that maintains its own bank account, cash is periodically transferred to the central account in Cedar Rapids. On the branch account's records, bank transfers are recorded as a debit to the ho
> You are auditing general cash for the Pittsburgh Supply Company for the fiscal year ended July 31, 2011. The client has not prepared the July 31 bank reconciliation. After a brief discussion with the owner, you agree to prepare the reconciliation, with a
> The Frist Corporation has the following internal controls related to inventory: 1. The inventory purchasing system only allows purchases from pre-approved vendors. 2. The perpetual inventory system tracks the average number of days each inventory product
> Distinguish between FOB destination and FOB origin. What procedures should the auditor follow concerning acquisitions of inventory on an FOB origin basis near year-end?
> The following audit procedures are concerned with tests of details of general cash balances: 1. Obtain a standard bank confirmation from each bank with which the client does business. 2. Compare the balance on the bank reconciliation obtained from the cl
> The following are misstatements that might be found in the client's year-end cash balance (assume that the balance sheet date is June 30): 1. The outstanding checks on the June 30 bank reconciliation were under footed by $2,000. 2. A loan from the bank o
> The following questions deal with discovering fraud in auditing year-end cash. Choose the best response. a. Which of the following is one of the better auditing techniques to detect kiting? (1) Review composition of authenticated deposit slips. (2) Revi
> How will a company's bank reconciliation reflect an electronic deposit of cash received by the bank from credit card agencies making payments on behalf of customers purchasing products from the company's online Web site, but not recorded in the company's
> Explain why, in verifying bank reconciliations, most auditors emphasize the possibility of a nonexistent deposit in transit being included in the reconciliation and an outstanding check being omitted rather than the omission of a deposit in transit and t
> Why is there a greater emphasis on the detection of fraud in tests of details of cash balances than for other balance sheet accounts? Give two specific examples that demonstrate how this emphasis affects the auditor's evidence accumulation in auditing ye
> Distinguish between the verification of petty cash reimbursements and the verification of the balance in the fund. Explain how each is done. Which is more important?
> Assume that a client with excellent internal controls uses an imprest payroll bank account. Explain why the verification of the payroll bank reconciliation ordinarily takes less time than the tests of the general bank account, even if the number of disbu
> Distinguish between lapping and kiting. Describe audit procedures that can be used to uncover each.
> Items 1 through 8 are selected questions typically found in questionnaires used by auditors to obtain an understanding of internal control in the inventory and warehousing cycle. In using the questionnaire for a client, a "yes" response to a question ind
> When the auditor fails to obtain a cutoff bank statement, it is common to verify the entire statement for the month subsequent to the balance sheet date. How is this done and what is its purpose?
> In testing the cutoff of accounts payable at the balance sheet date, explain why it is important that auditors coordinate their tests with the physical observation of inventory. What can the auditor do during the physical inventory to enhance the likelih
> Explain the purpose of a four-column proof of cash. List two types of misstatements it is meant to uncover.
> What is meant by an imprest bank account for a branch operation? Explain the purpose of using this type of bank account.
> Why are auditors usually less concerned about the client's cash receipts cutoff than the cutoff for sales? Explain the procedure involved in testing for the cutoff for cash receipts.
> Describe what is meant by a cutoff bank statement and state its purpose.
> How do bank confirmations differ from positive confirmations of accounts receivable? Distinguish between them in terms of the nature of the information confirmed, the sample size, and the appropriate action when the confirmation is not returned after the
> Evaluate the effectiveness and state the shortcomings of the preparation of a bank reconciliation by the controller in the manner described in the following statement: "When I reconcile the bank account, the first thing I do is review the sorted list of
> Why is the monthly reconciliation of bank accounts by an independent person an important internal control over cash balances? Which individuals will generally not be considered independent for this responsibility?
> Explain the relationships among the initial assessed control risk, tests of controls and substantive tests of transactions for cash disbursements, and the tests of details of cash balances. Give one example in which the conclusions reached about internal
> The following questions concern testing the client's internal controls for inventory and warehousing. Choose the best response. a. When an auditor tests a client's cost accounting records, the auditor's tests are primarily designed to determine that (1)
> Explain the relationships among the initial assessed control risk, tests of controls and substantive tests of transactions for cash receipts, and the tests of details of cash balances.
> You are doing the first-year audit of Sherman School District and have been assigned responsibility for doing a four-column proof of cash for the month of October 2011. You obtain the following information: 6. Interest on a bank loan for the month of Oct
> It is less common to confirm accounts payable at an interim date than accounts receivable. Explain why.
> E-Antiques, Inc. is an Internet-based market maker for buyers and sellers of antique furniture and jewelry. The company allows sellers of antique items to list descriptions of those items on the E-Antiques Web site. Interested buyers review the Web site
> You are a CPA engaged in an audit of the financial statements of Pate Corporation for the year ended December 31, 2011. The financial statements and records of Pate Corporation have not been audited by a CPA in prior years. The stockholders' equity secti
> You are engaged in the audit of a corporation whose records have not previously been audited by you. The corporation has both an independent transfer agent and a registrar for its capital stock. The transfer agent maintains the record of stockholders and
> The following audit procedures are commonly performed by auditors in the verification of owners' equity: 1. Review the articles of incorporation and bylaws for provisions about owners' equity. 2. Analyze all owners' equity accounts for the year and docum
> Items 1 through 6 are common questions found in internal control questionnaires used by auditors to obtain an understanding of internal control for owners' equity. In using the questionnaire for a client, a "yes" response indicates a possible internal co
> The Redford Corporation took out a 20-year mortgage on June 15, 2011, for $2,600,000 and pledged its only manufacturing building and the land on which the building stands as collateral. Each month subsequent to the issue of the mortgage, a payment of $20
> The following covenants are extracted from the indenture of a bond issue. The indenture provides that failure to comply with its terms in any respect automatically makes the loan immediately due (the regular date is 20 years hence). List any audit steps
> The following questions concern internal controls in the inventory and warehousing cycle. Choose the best response. a. Which of the following controls will most likely justify a reduced assessed level of control risk for the occurrence assertion for purc
> The ending general ledger balance of $186,000 in notes payable for the Sterling Manufacturing Company is made up of 20 notes to eight different payees. The notes vary in duration anywhere from 30 days to 2 years, and in amounts from $1,000 to $10,000. In
> Your client, Red Horse Inc., prepared the following schedule for long term debt for the audit of financial statements for the year ended December 31, 2011: Required a. What type of evidence would you examine to support the beginning balances in the accou
> The following are frequently performed audit procedures for the verification of bonds payable issued in previous years: 1. Analyze the general ledger account for bonds payable, interest expense, and unamortized bond discount or premium. 2. Obtain a confi
> Distinguish between a vendor’s invoice and a vendor’s statement. Which document should ideally be used as evidence in auditing acquisition transactions and which for verifying accounts payable balances? Why?
> Items 1 through 6 are questions typically found in a standard internal control questionnaire used by auditors to obtain an understanding of internal control for notes payable. In using the questionnaire for a client, a "yes" response indicates a possible
> The following questions concern the audit of accounts in the capital acquisition and repayment cycle. Choose the best response. a. During an audit of a publicly held company, the auditor should obtain written confirmation regarding debenture transactions
> The following multiple choice questions concern interest-bearing liabilities. Choose the best response. a. The audit program for long-term debt should include steps that require the (1) Verification of the existence of the bondholders. (2) Examination o
> Explain the relationship between the audit of owners' equity and the calculations of earnings per share. What are the main auditing considerations in verifying the earnings per share figure?
> What should be the major emphasis in auditing the retained earnings account? Explain your answer.
> If a transfer agent disburses dividends for a client, explain how the audit of dividends declared and paid is affected. What audit procedures are necessary to verify dividends paid when a transfer agent is used?
> Assuming that the auditor properly documents receiving report numbers as a part of the physical inventory observation procedures, explain how the proper cutoff of purchases, including tests for the possibility of raw materials in transit, should be verif
