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ACCTG456 Study Guide - Quiz Guide: Financial Statement, Accounts Receivable

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School
University of Alberta
Department
Accounting
Course
ACCTG456
Professor
Trish Stringer

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Document Summary

Id: helen au assessed control risk to be low. What is the appropriate audit strategy she should adopt? predominantly substantive audit approach control testing strategy combined audit strategy substantive year end testing. Cole catena was testing the controls of blue coast wholesale fish market. When testing controls, which one of the following evidence gathering procedures is used? vouching of transactions confirmations of accounts receivable enquiry of client personnel tracing of transactions to source documents. Landon fung has decided to perform substantive procedures at a major retailer. Jordon chen wanted to ensure that all the transactions at his client were recorded. Which assertions was he talking about? rights and obligations and completeness occurrence and completeness valuation and allocation and occurrence occurrence and rights and obligations. Quiz #4: gary chua used analytical procedures at his client, ultimate vacations. He did not use any specific method for choosing the invoices.

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Related Questions

Angela Walsh is a new staff auditor. On her first three engage-ments, she was assigned to perform tests of controls foracquisitions and payments and test of details of balances foraccounts payable.

The approach taken in each audit is briefly described below:

Audit 1– The client is a medium-sized company. Extensive testsof controls were per- formed for acquisitions and payments. Fairlyextensive substantive analytical proce- dures were also performed.The tests of details of balances of the year-end accounts payablebalance were minimal, and no confirmations were sent (confirmationsare not required for testing accounts payable).

Audit 2– This company is also medium-sized. Extensive tests ofcontrols were also performed, but after these tests were completed,additional substantive tests of trans- actions were performed.Extensive tests of the year-end accounts payable balance wereperformed, although no confirmations were sent.

Audit 3– Although the auditors gained an understanding ofinternal control, no tests of controls were performed overacquisitions and payments. However, extensive sub- stantive testsof transactions were performed, and confirmations were sent as partof the extensive testing of year-end accounts payable. Althoughthis company was smaller than the first two companies, the totalaudit time spent testing accounts pay- able was greater than forthe first two audits.
Angela is confused by the apparent inconsistency in the auditapproach on the three audits, and concludes that the audit approachand amount of audit evidence to collect de- pends on the auditpartner in charge of the engagement.

(A.) Match each engagement with one of the followingdescriptions:

(1) Extensive reliance on controls was planned for this auditengagement, but con- trol risk was increased after tests ofcontrols.

(2.) This audit is likely for a public company, and is also themost efficient audit.

(3.) This company has ineffective controls, and may also havefraud risks present.

(B.) What other factors likely explain the different approachesto the audit of acquisitions
and payments and accountspayable for these three engagements?

(C.) What could Angela’s supervisors have done to improve herunderstanding of the audit strategy for each engagement?

Q4

Part A

(a) How does the materiality of a condition that might lead to a departure affect the auditor’s choice of audit opinions? Discuss in detail naming the various types of audit opinions that may be issued given the different amounts of misstatements detected. (10 marks)

(b) For each of the following independent situations, indicate the type of audit report you would issue and provide your reasons. You may assume that each item is material. (10 marks)

(i) On 2 January 2017, the Hot Wheels Auto Parts Limited received a notice from its primary supplier that, effective immediately, all wholesale prices would be increased by 10%. On the basis of this notice, Hot Wheels Auto Parts revalued its 31 December 2016 inventory to reflect the higher costs. The inventory constituted a material proportion of total assets; the effect of the revaluation was material to current assets but not to total assets. The increase in valuation is adequately disclosed in the notes to the financial statements.

(ii) Your client holds a significant investment in Iraq. Due to recent political instability sparked off by a series of terrorist acts by the militants, Iraq’s communication with the outside world has been completely cut-off. You are thus unable to obtain sufficient and appropriate evidence regarding your client’s investment in Iraq.

Part B

During an examination of financial statements, an auditor needs to verify management’s assertions that are part of the financial statements. In doing so, the auditor must choose the quality and quantity of evidence, and the timing of the tests to be performed.

(a) Describe five factors that influence the quality or appropriateness of audit evidence. (5 marks)

(b) Why is it necessary to obtain corroborating evidence for inquiry and for observation? (5 marks)

(c) Describe the highest quality form(s) of evidence an auditor would normally obtain to verify each of the following assertions. Be sure to state the type of audit evidence/audit procedure technique being used, e.g. inquiry. (10 marks)

(i) ownership of share certificates held in a safe deposit box

(ii) valuation of gross trade accounts receivable

(iii) completeness of additions of fixed assets

(iv) validity of trade accounts payable

(v) valuation of finished goods inventory

Part C

An auditor is required to obtain sufficient understanding of each element of a company’s internal control system in order to properly plan the audit of the company’s financial statements and to assess control risk for the assertions included in the account balances.

How does the quantity of evidence differ between procedures to obtain an understanding of internal control and tests of internal controls? (4 marks)

(b) Distinguish between a compliance/reliance strategy and a substantive strategy. (6 marks)

(c) For each of the following, give an example of a physical control the client can use to protect the asset or record: (5 marks)

(i) cash received by retail clerks

(ii) accounts receivable records

(iii) raw material inventory

(iv) manufacturing equipment

(v) marketable securities

(d) Explain what is meant by independent checks on performance! (5 marks)

performance review and give two specific examples.

A424

Homework #3

Due Tuesday, February 28

Worth 100 Points

Note: Students are expected to work independently (i.e., on your own) on all homework assignments. Please type and post to Canvas.

Part I. Risk Assessments

1. For each illustration, select the component of audit risk that is most directly illustrated. The components of audit risk may be used once, more than once, or not at all. (10 points, 1 point each).

Components: Inherent Risk (IR), Control risk (CR), or Detection Risk (DR)

a. A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.

b. Cash is more susceptible to theft than an inventory of coal.

c. Confirmation of receivables by an auditor fails to detect a material misstatement.

d. Disbursements have occurred without proper approval.

e. There is inadequate segregation of duties.

f. A necessary substantive audit procedure is omitted.

g. Notes receivable are susceptible to material misstatement, assuming there are no related internal controls.

h. Technological developments make a major product obsolete.

i. The client is very close to violating debt covenants.

j. XYZ Company, a client, lacks sufficient working capital to continue operations.

2. Read Case 1.6, Nextcard, Inc. from our Casebook. Pretend you are the auditor for Nexcard, Inc. in the planning phase of the audit for FY 2000 and perform the following risk assessment procedures. That is, just focus on the information in the case prior to the discovery of the fraud (pages 83-86). (50 points total)

a. Perform a risk assessment as part of your audit plan for fiscal year 2000. Set or assess each component/factor of the audit risk model. Describe in detail how you set or assessed each factor (i.e., include specific risk factors from the case and explain how they influenced your assessment). (25 points)

b. Perform a fraud risk assessment for the risk of material misstatement due to fraudulent financial reporting. That is, identify and briefly describe specific fraud risk factors (i.e., more than 1) for each of the three components of the fraud risk triangle, specific to fraudulent financial reporting. (15 points)

c. Identify and describe one significant pervasive risk present during the Nextcard audit. In doing so, explain how the pervasive risk affects the risk of material misstatement. Then, describe how the auditor could respond to that pervasive risk (how could they change the audit plan to address that risk). (5 points)

d. Identify and describe one significant specific risk present during the Nextcard audit. In doing so, explain how the specific risk affects the risk of material misstatement. Then, describe how the auditor could respond to that specific risk (how could they change the audit plan to address that risk). (5 points)

Part II. Evidence and Management Assertions

1. For each of the following specific audit procedures, indicate the type of audit procedure it represents: (1) inspection of records or documents, (2) inspection of tangible assets, (3) observation, (4) inquiry, (5) confirmation, (6) recalculation, (7) reperformance, (8) analytical procedures, and (9) scanning. (10 points, 1 point each)

a. sending a written request to the entity’s customers requesting that they report the amount owed to the entity

b. examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period.

c. agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account.

d. discussing the adequacy of the allowance for doubtful accounts with the credit manager.

e. comparing the current-year gross profit percentage with the gross profit percentage for the last four years.

f. examining a new plastic extrusion machine to ensure that this major acquisition was received.

g. watching the entity’s warehouse personnel count the raw materials inventory.

h. performing test counts of the warehouse personnel’s count of the raw material.

i. obtaining a letter from the entity’s attorney indicating that there were no lawsuits in progress against the entity.

j. tracing the prices used by the entity’s billing program for pricing sales invoices to the entity’s approved price list.

2. For each of the audit procedures listed above in Part II. 1. (a-j), identify the category (assertions about classes of transactions and events, or assertions about account balances) and identify the primary management assertion being tested. (30 points, 3 points each)