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Lecture

Chapter 10 In Class Questions_solutions.pdf

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Department
Accounting
Course
ACCTG456
Professor
Trish Stringer
Semester
Winter

Description
In Class #10.1 – Accounts receivable ledger Victoria is overseeing the accounts receivable ledger. Her main focus is the posting of entries for sales and sales returns to the control account and the individual accounts receivable accounts. The members of her team have each been given specific tasks, which are detailed in the audit program. A predominately substantive3 approach is being taken to the audit of accounts receivables for this client because, although controls at the company are generally good, the accounts receivable area is not significant enough to justify controls testing. Due to staff shortages this year, Victoria has been assigned a group of inexperienced audit assistants. Therefore, she has to be very careful when evaluating the results of the testing. In some cases, the working papers are not completed with sufficient detail; in others she has to aske the audit assistants to redo the work. Required 1: Help Victoria explain to her audit assistants the reasons why they must account for the numerical sequence of sales invoices, credit (sales returns) memos, sales orders, and shipping documents. Internally generated documents are often nu mbered consecutively. The numbers provide a convenient reference for the audit trail. For example, the sales invoice number is used to identify the document underlying the transaction entered in to the sales journal. In addition, the numbers reveal if a document has been omitted from the reco rds, or duplicated in the records. The control is stronger if the numbers are preprinted on the forms or automatically numbered by the software program when the invoice is generated (because they cannot be duplicated). For example, the sales invoices should be entered consecutively in the sales journal. If a number appears twice, there is an error because two valid invoices cannot have the same number. If the sales invoices in the sales journal omit a number, the original document should be accounted for (i.e., the document is cancelled and filed in a cancelled document file). The numerical sequence is also useful for cut-o ff testing. The auditor s hould establish the last valid number for the current financial year and ensure that all documents for previous numbers are recorded for the current year, and all subs equent numbered documents are recorded in the next financial year. All documents mentioned are internally genera ted documents and should be preprinted (for forms that are completed by hand) or numbered by the computer software when the electronic form is generated. Required 2: One of the audit assistants is checking credit memos. The task is to compare the dates, products, quantities, prices, and amounts on credit memos and supporting documents with the entries to customer accounts for sales returns and allowances. The assistant checks all memos with dates up to and including December 31 (year end) and reports that he finds nothing unusual. Why would Victoria send the assistant back to examine credit memos with January dates? Explain. Credit memos are the documentary basis for a credit to accounts receivable (debtors) and a corresponding debit to sales returns and allowances . These entries result in a lower balance for accounts receivable and an increased expense (or reduced revenue). They are used to reverse a recorded sale. The greater audit risk for ac counts receivable and sa les relates to their overstatement, thus the auditors ar e particularly interested in a ny evidence that a recorded sale was not valid. Victoria would be worried that credit memos and the resulting credits to accounts receivable and debits to sales returns and allowance are made following the year-end to reverse invalid sales recorded in the current financial year. Thes e reversals could be pr ocessed after year-end. Therefore, Victoria wants evidence about the validity of sales returns in July, to provide evidence about the validity of sales prior to year-end. Required 3: Why is it important for Victoria to undertake some procedures herself, such as reviewing the accounts for unusual items, instead of assigning the tasks to the assistants? What types of things would she be looking for when performing these procedures? What other procedures would be best performed by a more senior auditor? Victoria would undertake some substantive tes ting herself because the audit assistants are inexperienced; they would be less likely to dete ct ‘unusual’ relationships because they are not familiar enough with what is ‘usual’. In some cas es, a lack of fluctuation in an account can raise more questions than a fluctuation because othe r evidence suggests that the account balance should be different. A more se nior auditor would have a better understanding of how non- financial information relates to financial data. Other tasks usually performed by more senior a uditors would be interviewing senior client personnel, including directors, obtaining access to confidential documents and board meeting minutes (where a junior aud itor would not understand the di scussion), communicating with external parties such as solicitors about comp lex matters, making judgement estimates, such as the allowance for doubtful accounts , speaking to experts about valuations, auditing complex accounts, such as derivatives, auditing disclosure s such as related parties, reading contracts between the client and its customers/suppliers /employees, reading cont racts for leasing of property, plant, and equipment (PPE). In Class #10.2 – Accounts receivable confirmations CBA Chartered Accountants is a successful mid-tier accounting
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