In your audit of Aviary Industries for calendar year 2019, you found 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 percent 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 2019. These total $26,451. 2. Inventory cutoff tests indicate that $25,673 of inventory received on December 30, 2019, was recorded as purchases and accounts payable in 2020. These items were included in the inventory count at year end and therefore included in ending inventory. 3. Inventory cutoff tests indicate several sales invoices recorded in 2019 for goods that were shipped in early 2020. The goods were included in inventory even though they were set aside in a separate area. The total amount of these shipments was $41,814. Contract terms specified that transfer of control of the goods occurs at the point of shipment. 4. The company wrote several checks at the end of 2019 for accounts payable that were held and not mailed until January 15, 2020. These totaled $43,671. Recorded cash and accounts payable at December 31, 2019, 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.
> Auditing standards provide general guidance to auditors regarding audit sampling but do not require statistical versus nonstatistical sampling or specify which sampling method auditors should use. Search the Internet for “PCAOB Audit Sampling” or go to p
> This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found on the textbook website. You should read all of the ref
> In the confirmation of accounts receivable for the Reliable Service Company, 85 positive and no negative confirmations were mailed to customers. This represents 35 percent of the dollar balance of the total accounts receivable. Second requests were sent
> The following are various changes in audit circumstances. Audit Circumstance 1. The client began experiencing an increase in returns due to product changes that resulted in increased defects. 2. You found several pricing errors in your substantive tests
> You have been assigned to the first audit of the Chicago Company for the year ending March 31, 2019. Accounts receivable were confirmed on December 31, 2018, and at that date the receivables consisted of approximately 200 accounts with balances totaling
> This problem requires the use of ACL software, which can be accessed through the textbook website. Information about downloading and using ACL and the commands used in this problem can also be found on the textbook website. You should read all of the ref
> Tim Flynn is the engagement manager for the audit of O’Donnell Enterprises. Tim is currently planning tests of details of balances for accounts receivable and is considering the use of electronic confirmation requests to improve response rates. The histo
> The following items were discovered during the December 31, 2019, audit of the financial statements of Westmoreland Corporation: 1. The company’s financial statements did not include an accrual for bonuses earned by senior management in
> Schroeder, CPA, has been engaged by Somerville Company to conduct agreed-upon procedures related to an investment performance schedule of the Red Cedar Investment Fund. Somerville has requested that Schroeder recalculate the rate of return on specific in
> Nilsson, CPA, is conducting the audit of Ellison Waste Management Corporation. In addition, a supplemental negative assurance report is required for a major mortgage holder. The supplemental report concerns indenture agreements to keep the client from de
> Assume that the auditor has selected 100 sales invoices from a population of 100,000 to test for an indication of internal verification of pricing and extensions. Determine the CUER at a 10 percent ARO if four exceptions are found in the sample using sta
> Carl Monson, the owner of Major Products Manufacturing Company, a small, successful, long-time audit client of your firm, has requested you to work with his company in preparing three-year forecasted information for the year ending December 31, 2020, and
> The following questions concern auditor responsibilities related to the audit of the payroll and personnel cycle. Choose the best response. a. In auditing the payroll function of a client, an auditor would least likely (1) verify proper segregation of du
> The following questions concern audit sampling. Choose the best response. a. An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods (1) eliminate the need to apply professional judgment
> The following questions concern auditor responsibilities related to the audit of accounts receivable. Choose the best response. a. The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out t
> The following questions relate to nonstatistical and monetary unit sampling. Choose the best response. a. A number of factors influence the sample size for a substantive test of details of an account balance. All other factors being equal, which of the f
> The following questions concern contingencies, subsequent events, and communications with those charged with governance. Choose the best response. a. A client acquired 25 percent of its outstanding capital stock after year end but prior to the date of th
> The following questions concern internal controls and accumulating evidence in the acquisition and payment cycle. Choose the best answer. a. While auditing a client’s purchase transactions, an auditor selects a sample of vouchers and then compares the da
> The following questions concern engagements other than the audit of financial statements performed by accountants. Choose the best response. a. Which of the following is a prospective financial statement for general use upon which an accountant may appro
> The following questions concern internal controls and tests for property, plant, and equipment. Choose the best response. a. An audit firm performs a preliminary review of the client’s internal controls over its property, plant, and equipment cycle. Whic
> The following questions concern the audit of accounts in the capital acquisition and repayment cycle. Choose the best response. a. Which of the following audit procedures would be most relevant when examining the completeness transaction-related audit ob
> Define statistical attributes sampling. For which types of tests do auditors use attributes sampling?
> The following questions deal with operational auditing. Choose the best response. a. Which of the following best describes the operational audit? (1) It concentrates on seeking aspects of operations in which waste would be reduced by the introduction of
> The following questions concern auditing year-end cash and financial instruments. Choose the best response. a. Which of the following controls would most likely detect a kiting scheme? (1) Preparing a bank reconciliation (2) Using a lockbox system for cu
> Describe why transactions in the payroll and personnel cycle are generally more significant than payroll-related balance sheet accounts.
> The following questions deal with internal controls in the inventory and warehousing cycle and tests of details of balances for inventory. Choose the best response. a. Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequ
> What is meant by the analysis of expense accounts? List four expense accounts that are commonly analyzed in audits.
> What is the most important balance-related audit objective for depreciation expense? What are the auditor’s primary concerns?
> With the rapid growth of cloud computing, many organizations are contracting with third-party service providers to process and store all kinds of data off site. In doing so, entities are now dependent on the effectiveness of controls provided by external
> With greater frequency, organizations are issuing sustainability reports that describe how they engage in socially responsible activities. Many believe that users will increasingly want assurances from CPAs about the reliability of the information presen
> Jennifer Nantale is a new staff auditor on the audit engagement of Greenville Light & Sound, which is a publicly traded company with a calendar year end. The engagement team has completed its review of the third-quarter financial statements, and the fir
> In an engagement to review the financial statements of a nonpublic company, SSARS require the accountant to obtain review evidence that is primarily based on inquiries and analytical procedures. The nature of the accountant’s inquiries is a matter of jud
> How might the matters communicated to those charged with governance impact the nature of information included in the auditor’s report?
> 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 2019. You obtain the following information: 1. Balance per books September 30 $ 10,725 Octo
> Haskin Company was founded 40 years ago and now has several manufacturing plants in the Northeast and Midwest. The evaluation of proposed capital expenditures became increasingly difficult for management as the company became geographically dispersed and
> The audit firm of Waggoner and Allen, LLP, recently received a request to submit a proposal to audit the financial statements of the Williamson County Public School System. The system is funded mostly through property tax assessments of county residents,
> You are auditing general cash for the Pittsburgh Supply Company for the fiscal year ended July 31, 2019. 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 following audit procedures are concerned with tests of details of general cash and financial instruments balances: 1. Obtain a standard bank confirmation from each bank with which the client does business. 2. Compare the balance on the bank reconcili
> Explain the differences in the primary roles performed by human resources, the employee’s primary supervisor, and those who oversee the creation of a payroll journal or listing and the payroll master file.
> A client applies manufacturing overhead to inventory on the basis of $3.47 per direct labor hour. Explain how the auditor will evaluate the reasonableness of total direct labor hours and manufacturing overhead in the ending inventory of finished goods.
> Assume that the auditor tested an account receivable with a balance of $3,000 and determined that the audited value was $2,700. That is, the auditor determined the receivable was overstated by $300. What is the projected misstatement (excluding the incre
> Describe a contingency. What conditions are required for a contingent liability to exist?
> What procedures do auditors typically follow to address the completeness of disclosures?
> State the relationship between the following: a. ARO and sample size b. Population size and sample size c. TER and sample size d. EPER and sample size
> Distinguish among difference estimation, ratio estimation, mean-per-unit estimation, and stratified mean-per-unit estimation. Give one example in which each can be used.
> Explain the circumstances under which an auditor should perform audit tests primarily designed to uncover fraud in the payroll and personnel cycle.
> Briefly explain why accounting standards related to fair value estimates make the audit of financial instruments more complex.
> Explain why an auditor compares the “date of deposit according to the books” to the “date of disbursement according to the books” on an interbank transfer schedule to detect kiting.
> For the audit of Carbald Supply Company, Carole Wever, CPA, is conducting a test of sales for 9 months of the year ended December 31, 2019. Included among her audit procedures are the following: 1. Electronically re-add the sales journal and trace the ba
> The following tests of controls and substantive tests of transactions audit procedures for acquisitions and cash disbursements are to be used in the audit of Ward Publishing Company. You concluded that internal control appears effective and a reduced ass
> You are assigned to the December 31, 2019, audit of Sea Gull Airframes, Inc. The company designs and manufactures aircraft superstructures and airframe components. You observed the physical inventory at December 31 and are satisfied that it was properly
> You are the manager in the audit of Vernal Manufacturing Company and are turning your attention to the income statement accounts. The in-charge auditor assessed control risk for all cycles as low, supported by tests of controls. There are no major inhere
> Roost and Briley, CPAs, are doing the audit of Leggert Lumber Co., an international wholesale lumber broker. Because of the nature of their business, payroll is the largest expense. You are the in-charge auditor on the engagement responsible for developi
> Under what circumstances would an auditor choose to confirm information such as the right of return or special sales terms in addition to the customer balance?
> Explain why proper presentation of debt balances and related disclosures is important from a creditor’s perspective.
> Financial statement data for years ending December 31 for Holland Company follows: a. Determine the inventory turnover for 2016 and 2015. b. Determine the number of days’ sales in inventory for 2016 and 2015. Use 365 days and round to
> For the year ending August 31, 2016, Mammalia Medical Co. mistakenly omitted adjusting entries for (1) depreciation of $5,800, (2) fees earned that were not billed of $44,500, and (3) accrued wages of $7,300. Indicate the combined effect of the errors on
> Two income statements for Fuller Company follow: Prepare a horizontal analysis of Fuller Company’s income statements. Fuller Company Income Statements For Years Ended December 31 2016 2015 Fees earned $680,000 $850,000 Operating e
> The following data were taken from Mesa Company’s balance sheet: a. Compute the ratio of liabilities to stockholders’ equity. b. Has the creditor’s risk increased or decreased from December 31, 2015
> Dillin Inc. reported the following on the company’s statement of cash flows in 2016 and 2015: Eighty percent of the net cash flow used for investing activities was used to replace existing capacity. a. Determine Dillinâ€
> McMahon Inc. reported the following on the company’s statement of cash flows in 2016 and 2015: Seventy percent of the net cash flow used for investing activities was used to replace existing capacity. a. Determine McMahonâ€
> Amy Austin established an insurance agency on March 1 of the current year and completed the following transactions during March: a. Opened a business bank account with a deposit of $50,000 in exchange for common stock. b. Purchased supplies on account, $
> A summary of cash flows for Sentinel Travel Service for the year ended August 31, 2016, follows: The cash balance as of September 1, 2015, was $89,000. Prepare a statement of cash flows for Sentinel Travel Service for the year ended August 31, 2016.
> Noric Cruises Inc. reported the following results for the year ended October 31, 2016: Retained earnings, November 1, 2015 $12,400,000 Prepare a retained earnings statement for the fiscal year ended October 31, 2016. Net income 2,350,000 Cash divid
> During the taking of its physical inventory on December 31, 2016, Waterjet Bath Company incorrectly counted its inventory as $728,660 instead of the correct amount of $719,880. Indicate the effect of the misstatement on Waterjet Bath’s December 31, 2016,
> On July 1, 2016, Livingston Corporation, a wholesaler of manufacturing equipment, issued $46,000,000 of 20-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $42,309,236. Interest on the bonds is payable semiannually on Decem
> Financial statement data for years ending December 31 for Edison Company follows: a. Determine the ratio of sales to assets for 2016 and 2015. b. Does the change in the ratio of sales to assets from 2015 to 2016 indicate a favorable or an unfavorable t
> A summary of cash flows for Ousel Travel Service for the year ended November 30, 2016, follows: Prepare a statement of cash flows for Ousel Travel Service for the year ended November 30, 2016. Cash receipts: Cash received from customers $1,465,000
> Rockwell Inc. reported the following results for the year ended June 30, 2016: Prepare a retained earnings statement for the fiscal year ended June 30, 2016. Retained earnings, July 1, 2015 . $3,900,000 Net income 714,000 Cash dividends declared 10
> Chloe Co. sold $300,000 of equipment during January under a one-year warranty. The cost to repair defects under the warranty is estimated at 5% of the sales price. On June 20, a customer required a $90 part replacement, plus $42 of labor under the warran
> During the taking of its physical inventory on August 31, 2016, Kate Interiors Company incorrectly counted its inventory as $366,900 instead of the correct amount of $378,500. Indicate the effect of the misstatement on Kate Interiors’ August 31, 2016, ba
> Financial statement data for years ending December 31 for Latchkey Company follows: a. Determine the ratio of sales to assets for 2016 and 2015. b. Does the change in the ratio of sales to assets from 2015 to 2016 indicate a favorable or an unfavorable
> Valley Realty acts as an agent in buying, selling, renting, and managing real estate. The unadjusted trial balance on July 31, 2016, follows: The following business transactions were completed by Valley Realty during August 2016: Aug. 1. Purchased offi
> Using the following accounts and balances, prepare the Stockholders’ Equity section of the balance sheet. Five-hundred thousand shares of common stock are authorized, and 40,000 shares have been reacquired. Common Stock, $120 par $
> On October 23, 2016, Wilkerson Company had a market price of $40 per share of common stock. For the previous year, Wilkerson paid an annual dividend of $1.20. Compute the dividend yield for Wilkerson Company.
> Financial statement data for years ending December 31 for Robinhood Company follows: a. Determine the accounts receivable turnover for 2016 and 2015. b. Determine the number of days’ sales in receivables for 2016 and 2015. Use 365 day
> Journalize the entries to record the following selected bond investment transactions for Hall Trust: a. Purchased for cash $300,000 of Oates City 4% bonds at 100 plus accrued interest of $3,000. b. Received first semiannual interest payment. c. Sold $150
> On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item, as shown in Exhibit 10. Inventory Quantity Cost per Unit Market Value per Unit (Net Realli
> Hahn Flooring Company’s perpetual inventory records indicate that $1,333,150 of merchandise should be on hand on December 31, 2016. The physical inventory indicates that $1,309,900 of merchandise is actually on hand. Journalize the adjusting entry for th
> Balance sheet data for Brimstone Company follows: a. Determine the working capital and current ratio for 2016 and 2015. b. Does the change in the current ratio from 2015 to 2016 indicate a favorable or an unfavorable trend? 2016 2015 Current assets
> Using the following data for Sentinel Travel Service as well as the retained earnings statement shown in Practice Exercise 1-5B, prepare a balance sheet as of August 31, 2016: Exercise 1-5B: Using the income statement for Sentinel Travel Service shown
> Using the following accounts and balances, prepare the Stockholders’ Equity section of the balance sheet. Two hundred fifty thousand shares of common stock are authorized, and 17,500 shares have been reacquired. Common Stock, $60 p
> On June 30, 2016, Setzer Corporation had a market price of $100 per share of common stock. For the previous year, Setzer paid an annual dividend of $4.00. Compute the dividend yield for Setzer Corporation.
> Using the bond from Practice Exercise 12-5A, journalize the first interest payment and the amortization of the related bond premium. Round to the nearest dollar. Exercise 12-5A: On the first day of the fiscal year, a company issues a $2,000,000, 8%, fi
> Financial statement data for years ending December 31 for Chiro-Solutions Company follows: a. Determine the accounts receivable turnover for 2016 and 2015. b. Determine the number of days’ sales in receivables for 2016 and 2015. Use 3
> On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item, as shown in Exhibit 10. Inventory Quantity Cost per Unit Market Value per Unit (Net Realli
> Castle Furnishings Company’s perpetual inventory records indicate that $675,400 of merchandise should be on hand on November 30, 2016. The physical inventory indicates that $663,800 of merchandise is actually on hand. Journalize the adjusting entry for t
> Owen Co. is considering the following alternative financing plans: Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming income before bond interest and income tax is $750,000. Plan 1 Plan 2 Issue 7% b
> Balance sheet data for HQ Properties Company follows: a. Determine the working capital and current ratio for 2016 and 2015. b. Does the change in the current ratio from 2015 to 2016 indicate a favorable or an unfavorable trend? 2016 2015 Current as
> Using the following data for Ousel Travel Service as well as the retained earnings statement shown in Practice Exercise 1-5A, prepare a balance sheet as of November 30, 2016: Exercise 1-5A: Using the income statement for Ousel Travel Service shown in
> On April 1, 2016, Maria Adams established Custom Realty. Maria completed the following transactions during the month of April: a. Opened a business bank account with a deposit of $24,000 in exchange for common stock. b. Paid rent on office and equipment
> On January 1, 2016, Valuation Allowance for Available-for-Sale Investments had a zero balance. On December 31, 2016, the cost of the available-for-sale securities was $24,260, and the fair value was $26,350. Prepare the adjusting entry to record the unre
> Financial data for Bonita Company follows: a. Compute the ratio of cash to monthly cash expenses. b. Interpret the results computed in (a). For Year Ended December 31, 2016 $ 187,180 Cash on December 31, 2016 Cash flow from operations (458,400)
> Using the income statement for Sentinel Travel Service shown in Practice Exercise 1-4B, prepare a retained earnings statement for the year ended August 31, 2016. Barb Schroeder invested an additional $36,000 in the business in exchange for common stock,
> On January 1, 2016, Valuation Allowance for Available-for-Sale Investments had a zero balance. On December 31, 2016, the cost of the available-for-sale securities was $78,400, and the fair value was $72,600. Prepare the adjusting entry to record the unre
> On the first day of the fiscal year, a company issues a $2,000,000, 8%, five-year bond that pays semiannual interest of $80,000 ($2,000,000 × 8% × ½), receiving cash of $2,170,604. Journalize the bond issuance.
> The payroll register of Konrath Co. indicates $13,200 of social security withheld and $3,300 of Medicare tax withheld on total salaries of $220,000 for the period. Earnings of $35,000 are subject to state and federal unemployment compensation taxes at th
> Guzman Company received a 60-day, 5% note for $54,000 dated July 12 from a customer on account. a. Determine the due date of the note. b. Determine the maturity value of the note. c. Journalize the entry to record the receipt of the payment of the note a
> National Furniture Company has 25,000 shares of cumulative preferred 2% stock, $75 par and 200,000 shares of $10 par common stock. The following amounts were distributed as dividends: Determine the dividends per share for preferred and common stock for
> Financial data for Otto Company follows: a. Compute the ratio of cash to monthly cash expenses. b. Interpret the results computed in (a). For Year Ended December 31, 2016 $ 69,350 Cash on December 31, 2016 Cash flow from operations (114,000)
