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Chapter 5

Chapter 5 In Class Questions_solutions.pdf

3 Pages

Course Code
Trish Stringer

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In Class #5.1 – Identifying audit assertions For each of the following terms, identify the related assertion: (a) Inventory is recorded at the lower of cost and net realizable value. (b) All delivery vans recorded in the accounting records are owned by the entity. (c) All payroll-related accruals at year end are recorded. (d) The accounts receivable sub-ledger agrees to the general ledger control account. (e) All sales were recorded in the correct period. (f) There is no inventory on consignment. (g) Purchases made after year end were recorded in the subsequent year. (h) There is no impairment of goodwill. (i) There are 10 delivery vans in the parking lot. (j) There are no undisclosed contingent liabilities (a) Valuation (b) Rights and Obligations (c) Completeness (d) Completeness (e) Cut-off (f) Rights and Obligations (g) Cut-off (h) Valuation (i) Existence (j) Completeness In Class #5.2 – Confirmation evidence & Adequacy of documentation and audit evidence Required: Discuss the strength and weaknesses of accounts receivable confirmations as audit evidence for HCG. Accounts receivable confirmations would provide evidence about the existence assertion for accounts receivable at HCG. If th e accounts receivable customer replies with an affirmative answer, they provide external evidence that they owe HCG for services rendered. Debtor confirmations also provide evidence abou t the rights and obligations assertion, because they give evidence about whether the amounts were owed to HCG companies. They do not provide reliable evidence about the valuation and allocation assertion because the customer does not provide any more assurance that they inte nd to pay the account, although they may note that there is an error in the account balance. The balance of receivables for River Valley Cent re is material, and although payment terms are 14 days, many of the smaller accounts are more than 60 days overdue. This suggests that procedures at River Valley Centre for approval of credit and collection of accounts receivable are not very effective. Accounts receivable confirmations could be sent to the large balances (60% is owed by 5 medical practitioners) to obtain evidence about their existence. However, further procedures would be required to gather reli able evidence about their valuat ion. It is not stated how long these accounts have been outstanding. If they are within 14 days, it is le ss likely that there are significant doubts about their even tual recovery. However, a subs equent receipts review would provide additional evidence which would be necessa ry because of the mate rial nature of the accounts. The smaller accounts, 40% of the ba lance, appea
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