审计学：一种整合方法 阿伦斯 英文版 第12版 课后答案 Chapter 9 Solutions Manual
审计学一种整合方法阿伦斯英文版第12版RRChapter09ppt课件
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
9-7
Set Preliminary Judgment About Materiality
Auditors decide early in the audit the combined amount of misstatements of the financial statements that would be considered material.
If there is a material misstatement, the auditor will bring it to the client’s attention so that a correction can be made.
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
©2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
Planning extent of tests
9-5
Steps in Applying Materiality
Step Estimate total 3 misstatement in segment
Step Estimate the 4 combined misstatement
Step 5
Compare combined estimate with judgment about materiality
审计学：一种整合方法_第12版_英文版Cha(1)
Accumulating Evidence and Evaluating Evidence
Evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria.
Determines correspondence
Report on results
Report on tax deficiencies
Established criteria
Internal Revenue Code and all
interpretations
Learning Objective 2
Auditing is determining whether recorded information properly reflects the economic events that occurred during the accounting period.
Learning Objective 3
The final stage in the auditing process is preparing the Audit Report, which is the communication of the auditor’s findings to users.
Audit of a Tax Return Example
Learning Objective 1
Describe auditing.
Nature of Auditing
审计学：一种整合方法 阿伦斯 英文版 第12版 课后答案 Chapter 20 Solutions Manual
Chapter 20Completing the Tests in theAcquisition and Payment Cycle:Verification of Selected AccountsReview Questions20-1Because the source of the debits in the asset account is the acquisitions journal (or similar record), the current period acquisitions of property, plant and equipment have already been partially verified as part of the acquisition and payment cycle. The disposal of assets, depreciation and accumulated depreciation are not tested as a part of the acquisition and payment cycle.20-2The reason for the emphasis on current period acquisitions in auditing property, plant, and equipment is that there is an expectation that permanent assets will be kept and maintained on the records for several years. The assets carried over from the preceding years can be assumed to have been verified in the prior years' audits.If it cannot be shown through tests of controls and substantive tests of transactions that all disposals have been recorded, additional testing of the prior balance could be required. A first year audit also necessitates tests of the beginning balance.20-3Many clients may accidentally or intentionally record purchases of assets in the repair and maintenance account. The misstatement is caused by a lack of understanding of generally accepted accounting principles and some clients' desire to avoid income taxes. Repair and maintenance accounts are verified primarily to uncover unrecorded property purchases.The auditor typically vouches the larger amounts debited to those expense accounts at the same time that property accounts are being audited.20-4The audit procedures that may be applied to determine that all property, plant and equipment retirements have been recorded are as follows:1. Review whether newly acquired assets replace existing assets. Ifso, inquire as to whether the old asset has been removed from thebooks.2. Analyze gains on the disposal of assets and miscellaneous incomefor receipts from the disposal of assets. Compare these to property,plant and equipment accounts to see whether the asset has beenremoved from the books.3. Review planned modification and changes in product lines, taxes,or insurance coverage for indications of deletions of equipment.4. Make inquiries of management and production personnel about thedisposal of assets.20-5The two considerations to be kept in mind in auditing depreciation expense are:1. Whether the client is following a consistent depreciation policy fromperiod to period.2. The accuracy of the client's calculations.An overall reasonableness test can be made by calculating the depreciation rate for the year times the undepreciated fixed assets. In addition, it is desirable to check the accuracy of the depreciation calculation. The extent of the accuracy tests will vary depending on the engagement circumstances.20-6Since the source of the debits to prepaid insurance is the acquisitions journal or similar record (assuming all insurance premiums are charged to prepaid insurance rather than insurance expense), the current period premiums have already been partially verified as a part of the acquisition and payment cycle. The allocation of the premium between prepaid insurance is not tested as a part of the acquisition and payment cycle.20-7The audit of prepaid insurance should ordinarily take a relatively small amount of audit time because:1. The balance in prepaid insurance is normally immaterial;2. There are ordinarily few transactions during the year and mosttransactions are immaterial;3. The transactions are ordinarily not complex.20-8The evaluation of the adequacy of insurance is a test of reasonable protection against the loss of existing assets. The verification of prepaid insurance is performed to determine whether:1. The balances represent proper charges against future operations.2. The additions represent charges to these accounts and arereflected at actual cost.3. Amortization or write-off is reasonable under the circumstances.The evaluation of adequacy of insurance coverage is more important because of the potential loss due to under-insurance. Verification of prepaid insurance usually involves an immaterial amount and is not emphasized in most audits.20-9The audit of prepaid expenses differs from the audit of other asset accounts, such as accounts receivable or property, plant, and equipment, because prepaid expenses are often immaterial. Analytical procedures are often sufficient for auditing prepaid expenses, while tests of details of balances are usually required for other accounts such as accounts receivable and property, plant, and equipment.20-10Debits to accrued rent arise from the cash disbursements journal, which is verified as a part of tests of controls and substantive tests of transactions for cash disbursements. The credits typically arise from the general journal and may not have been verified as a part of these tests. Furthermore, tests of controls and substantive tests of transactions do not include verification of the inclusion of accruals on all existing property and verification of the consistent treatment of the accruals from year to year.20-11Property tax accruals take little audit time for most audits, and since there are relatively few transactions to test and they are typically material in amount, it is common to verify the accounts 100 percent. On the other hand, accounts payable takes quite a bit of audit time and since there are usually a large number of transactions to test and they are typically varied in amount, it is common to verify the account on a test basis.20-12The following documents will be used to verify accrued property taxes and related expense accounts:1. Deeds to properties2. Property tax returns3. Cancelled checks4. Invoices from the taxing authority20-13Three expense accounts that are tested as part of the acquisition and payment cycle or the payroll and personnel cycle are:1. Property tax expense2. Payroll expense3. Rent expenseThree expense accounts that are not directly verified as part of either of these cycles are:1. Depreciation expense2. Amortization of patents3. Year-end bonuses to officers20-14The analysis of expense accounts is a procedure by which selected expense accounts are verified by examining underlying supporting vendors' invoices or other documentation to determine if the transactions making up the total are correctly stated. The emphasis in most expense account analysis is on the occurrence of recorded amounts, accuracy, and classification.Potentially the same objectives are accomplished in tests of controls and substantive tests of transactions as for expense account analysis. The major differences are that tests of controls and substantive tests of transactions are selected from all of the acquisitions and cash disbursements journals for the entire period whereas transactions examined for expense analysis are limited to the account being analyzed. Nevertheless, the procedures are closely related, and if the tests of controls and substantive tests of transactions procedures results are satisfactory, reduced expense account analysis is implied.20-15The approach for verifying depreciation expense should emphasize the consistency of the method of depreciation used and the related computations, since these aspects of depreciation expense are the main determinants of the account balance. The use of analytical procedures and reperformance tests is important for depreciation expense.In verifying repair expense, the emphasis should be on vouching transactions that may be capital items; therefore, examining supporting documentation for transactions from months with unusually large totals or transactions that are themselves large or unusual is the normal audit approach followed.The approach is different because in repairs and maintenance the primary objective is to locate improperly classified fixed assets, whereas in depreciation the emphasis is on consistency from period to period and accurate depreciation calculations.20-16The factors that should affect the auditor's decision whether or not to analyze an account balance are:1. The analytical procedures indicate there is a high likelihood ofmisstatement in an account.2. The tests of controls and substantive tests of transactions indicatethere is a high likelihood of misstatement in an account.3. The account is likely to contain misstatements because it is difficultfor the client to properly classify or value the transactions.4. The auditor knows that the account is frequently subject to abuse ormisstatement.5. The analysis of the account might disclose a contingency.6. Tax returns and the SEC require the disclosure of certaininformation, which the account is likely to provide.Four expense accounts that are commonly analyzed in audit engagements are:1. Legal expense2. Travel and entertainment expense3. Tax expense4. Repair and maintenance expenseMultiple Choice Questions From CPA Examinations20-17 a. (1) b. (1) c. (4)20-18 a. (3) b. (4) c. (4)20-19 a. (1) b. (4) c. (3)20-20 a. (2) b. (4) c. (4)Discussion Questions and Problems 20-2120-24a. No. In a first audit the audi tor’s attention cannot be confined to activity in the year under audit because (1) some balance sheetaccounts include material amounts which originated in prior years,(2) some income and expense accounts include entries which arebased on decisions or transactions of prior years, and (3)consistency over the years in the application of generally acceptedaccounting principles is necessary for fairly presented financialstatements. Also, some audit testing of a nonrecurring nature willbe necessary in an initial engagement because the auditor does nothave the benefits of (1) familiarity with the company's history,personnel, system and operations, (2) information regarding thecomposition and reliability of beginning of the year balances, and (3)preceding year's audit working papers. Consequently, in the firstaudit the auditor will require such corporation documents as bylaws,articles of incorporation, minutes since incorporation, organizationcharts and flowcharts, and must comprehensively obtain anunderstanding of internal control and assess control risk todetermine the scope of audit testing.b. The audit program procedures that the auditor should use to verifythe January 1, 2007, balances in the land, building and equipment,and accumulated depreciation accounts of Hardware ManufacturingCompany should include the following:1. Read the minutes since incorporation in 2003 to ascertainthat for major property transactions approved, alltransactions were recorded in the accounts, and recordedtransactions were properly approved.2. Scan activity in the general ledger accounts sinceincorporation in 2003 for both fixed assets and accumulateddepreciation to identify items of large amount and unusualnature which will warrant further investigation.3. Examine support for principal property additions to ascertainthat the capitalization includes costs of freight-in, installation,and major improvements and labor, and overhead on self-constructed assets.4. Ascertain that fixed assets donated by stockholders wererecorded at fair market value on the date of donation andthat contributed capital was properly credited.5. Compare the yearly totals of repairs and maintenanceaccount balances and test abnormally high amounts to seethat they do not include assets charged to expense.6. Examine recorded deeds supporting ownership of buildingsand determine that any encumbrance was properly reportedin the financial statements.7. Examine support (asset and accumulated depreciation) forrecorded disposals or abandonments of material amounts.20-24 (continued)8. Tour the plants and account for major property items onhand to substantiate the reasonableness of fixed assetmaster file records and to ascertain that idle, obsolete orworthless assets are not being reported at more than theirfair value in the financial statements.9. Test the assigned lives of depreciable assets and the bases,methods and computations of accumulated depreciation forpropriety and consistency.10. Review charges to the accumulated depreciation accounts todetermine that they properly represent disposals,abandonments or extraordinary repairs.11. Review the gains and losses on property disposals as anadditional means of assurance that the depreciation livesand methods used are reasonable.12. Scan federal income tax returns of prior years and revenueagents' reports pertaining to them to determine whetheradjustments made for tax purposes should also be made onthe books.13. Determine that generally accepted accounting principles ofincome tax allocation are being used for differences betweentax depreciation and financial statement depreciation.14. Inspect real estate and property tax bills to furthersubstantiate ownership and valuation of fixed assets.20-25Overall, the program fails to emphasize the possibility of omitted property from the list. The key to an adequate audit of accrued property taxes is making sure all owned property and only owned property is included and on the list.20-2620-27 The banker has failed to recognize that the audit tests discussed relate as much to the income statement as to the balance sheet. For example, obtaining an understanding of internal control and the tests of controls and substantive tests of transactions are heavily income statement oriented, analytical procedures are more closely related to the income statement than to the balance sheet, and even tests of details of the balance sheet help to uncover misstatements in the income statement. The typical audit recognizes the interrelationship between the income statement and the balance sheet and uses this interrelationship to help design more effective tests to uncover misstatements in both statements. The auditor is and should be greatly concerned about the fair presentation of the income statement.Case – Ward Publishing Company20-28a. The tests of acquisition and cash disbursement transactions have two purposes: to determine whether related internal accountingcontrols are functioning (tests of controls), and to determinewhether the transactions actually contain any monetarymisstatements (substantive). The results of the tests apply to thepopulation of all acquisitions and cash disbursements, includingplant and equipment and lease acquisitions and cashdisbursements, even though the specific sample tested does notinclude any such transaction. Thus, if the results of the tests arefavorable, it is concluded that there is a lower expectation ofmisstatements in plant and equipment and lease transactions, andvice-versa.b. A summary of the results from tests of controls and substantivetests of transactions for acquisitions and cash disbursements from Case 19-32 is: all transaction-related audit objectives are being met at a satisfactory level except:1. All supporting documents are not always attached to thevendor's invoice. Note: Students using a nonstatisticalapproach to Case 19-32 may not conclude that the resultsfor this attribute [9.b.(1)] are unacceptable, depending ontheir estimate of CUER. However, most students will likelyconclude that the results are unacceptable.2. All vendors’ invoices are not initialed for internal verification.Half of those not initialed had account classification errors.The impact of these results and the results from items 1 through 7 affect the balance-related audit objectives for plant and equipment in the following way:Conclusions 3, 5, and 7 indicate a need for more extensive auditing for existence, completeness, accuracy, and classification.All large items should be verified and samples should be larger than normal. All other tests can be performed at minimum levels.c. The results of tests of controls and substantive tests of transactionsare directly related to the tests of many expense accounts, primarilythrough tests for account classification, but also through tests ofaccuracy and existence. For example, if the auditor concludes thatthe internal controls are effective for recording acquisitiontransactions, the likelihood of misstatements for accounts such assupplies, purchases, and repairs and maintenance is greatlyreduced. The auditor must keep in mind, however, that certainexpense accounts are not usually verified as a part of tests ofcontrols and substantive tests of transactions. An example isdepreciation expense. Similarly, certain accounts may have ahigher inherent risk such as legal expense and therefore requireadditional testing even if tests of controls and substantive tests oftransactions results are satisfactory. Also, analytical proceduresand tests of details of balances for balance sheet accounts resultsaffect the extent of auditing needed for expense accounts.d. The results of tests of controls and substantive tests of transactionsindicate the potential for significant classification misstatements.(See the results for Audit Procedure 9b(5) for classification in Part 2of Case 19-32.) This potential for misclassification misstatementcombined with the analytical procedures results in Conclusion 6indicate a need for more extensive account analysis for repairs andmaintenance, small tools expense, and the three other accountswhere there are significant changes from prior years. No otherconclusions should cause the auditor significant concern in theaudit of expense accounts.20-29 a. Items 1 through 6 would have been found in the following way:1. The company's policies for depreciating equipment areavailable from several sources:a) The prior year's audit schedules and permanent file.b) Footnote disclosure in the annual report and SECForm 10-K.c) Company procedures manuals.d) Detailed fixed asset records.2. The ten-year lease contract would be found when supportingdata for current year's equipment additions were examined.Also, it may be found by a review of company lease files,contract files, or minutes of meetings of the board ofdirectors. The calculations would likely be shown on asupporting schedule and can be traced to the general journal.3. The building wing addition would be apparent by the additionto buildings during the year. The use of the low constructionbid amount would be found when support for the additionwas examined. When it was determined that thisinappropriate method was followed, the actual costs couldbe determined by reference to construction work orders andsupporting data. The wing could also be examined.4. The paving and fencing could be discovered when supportwas examined for the addition to land.5. The details of the retirement transactions could bedetermined by examining the sales agreement, cash receiptsdocumentation, and related detailed fixed asset record. Thisexamination would be instigated by the recording of theretirement in the machinery account or the review of cashreceipts records.6. The auditor would become apprised of a new plant in severalways:a) Volume would increase.b) Account details such as cash, inventory, prepaidexpenses, and payroll would be attributed to the newlocation.c) The transaction may be indicated in documents suchas the minutes of the board, press releases, andreports to stockholders.d) Property tax and insurance bills examined show thenew plant.One or more of these occurrences should lead the auditor to investigate the reasons and circumstances involved. Documents from the city and appraisals could be examined to determine the details involved.b. The appropriate adjusting journal entries are as follows:1. No entry necessary.2. This is an operating lease and should not have beencapitalized.Prepaid rent $50,000Lease liability 354,000Allowance for depreciation-machinery and equipment 20,200Machinery and equipment $404,000Depreciation expense 20,200To correct initial recording of lease:Equipment rent expense $37,500Prepaid rent $37,500 To record nine months rent:9/12 x $50,000 = $37,5003. The wing should have been recorded at its cost to the company.(Accounts originally credited) $15,000Buildings $15,000 To correct initial recording of new wing:Depreciation expense $3,167Allowance for depreciation—Buildings $3,167 To correct depreciation for excess cost.Depreciation on beginning balance1,200,000/25 = 48,000Depreciation recorded on addition51,500 - 48,000 = 3,500Correct depreciation for addition:Remaining useful life of addition is 12 years(600,000/1,200,000 x 25 = 12-1/2 years; 12-1/2 - ½ = 12 years)Depreciation = $160,000/12 x ½ = $6,667Correction = $6,667 - $3,500 = $3,1674. The paving and fencing are land improvements and should bedepreciated over their useful lives.Land improvements (may be $50,000combined with buildingswith buildings account—buildings and improvements)Land $50,000To correct initial recording of paving and fencing:Depreciation expense $2,500Allowance for depreciation—Land Improvements $2,500 To record first year's depreciation on paving and fencing:$50,000/10 x ½ = $2,5005. The cost and allowance for depreciation should have beenremoved from the accounts and a gain or loss on sale recorded.Cost of asset $480,000Allowance for depreciation:To 12/31/06 - 480,000/10 x 3-1/2 168,000For 2007 - 480,000/10 x ½ 24,000192,000Net book value 288,000Cash proceeds 260,000Loss on sale $28,000The correcting entry is:Allowance for depreciation—Machinery and Equipment $203,000Loss on sale of assets 28,000Machinery and Equipment $220,000Depreciation expense 11,0006. Donated property should be capitalized at its fair market value.Land $100,000Buildings 400,000Contributed capital- $500,000Donated PropertyTo record land and building for new plant donated by Crux City:Depreciation expense $8,000Allowance for depreciation—Buildings $8,000 To record depreciation on new plant:$400,000/25 x ½ = $8,00020-30a.To: In-Charge AuditorFrom: Audit ManagerSubject: Concerns about the schedule prepared by the client and the staff assistant in the audit of Vernal Manufacturing CompanyThe analytical procedures schedule for the audit of Vernal Manufacturing Company is completely inadequate and needs to be redone. There are several deficiencies:1. The headings, references, and indexing on the audit schedule areincomplete. It appears that the schedule was prepared by the client, but itis not possible to determine from the schedule.2. A classified income statement would provide more useful informationthan the single-step statement provided.3. The schedule should include the additional columns showing the percentof net sales for 12-31-06 and 12-31-07. This information would permit usto more effectively evaluate the relative change in each account.4. There is no indication that the general ledger totals were compared togeneral ledger balances or that calculations were tested.5. There is no identification of accounts that we are concerned may bematerially misstated. For example, the $1,381 change in insurance expenseappears immaterial but the 427% change in other expense may besignificant.6. There is no indication of specific accounts that require additionalinvestigation and the nature of such investigation.7. There is no indication that the client's explanations have been evaluatedand supported by evidence. Management inquiry is a weak form ofevidence and unsatisfactory by itself.b. For every explanation provided by the client, an alternativepossibility is a misstatement in the financial statements. The auditor must be satisfied that significant differences are not material misstatements. The following are a few examples:c. To perform a meaningful determination of the most importantvariances, an alternative design of the audit schedule follows. It is much easier to determine relevant variances with an adequate analytical procedures schedule.PER G/L PERCENT PER G/L PERCENT CHANGE12-31-06 12-31-06 12-31-07 12-31-07 Amount PercentSales $8,467,312 100.8% $9,845,231 102.5% $1,377,919 16.3%Sales returns andallowances (64,895) (0.8%) (243,561) (2.5%) (178,666) 275.3%Net Sales 8,402,417 100.0% 9,601,670 100.0% 1,199,253 14.3%Cost of goods sold:Beginning inventory 1,487,666 17.7% 1,389,034 14.5% (98,632) (6.6%) Purchases 2,564,451 30.5% 3,430,865 35.7% 866,414 33.8% Freight-in 45,332 0.5% 65,782 0.7% 20,450 45.1% Purchase returns (76,310) (0.9%) (57,643) (0.6%) 18,667 (24.5%) Factory wages 986,755 11.7% 1,145,467 11.9% 158,712 16.1% Factory benefits 197,652 2.4% 201,343 2.1% 3,691 1.9% Factory overhead 478,659 5.7% 490,765 5.1% 12,106 2.5% Factory depreciation 344,112 4.1% 314,553 3.3% (29,559) (8.6%) Ending inventory (1,389,034) (16.5%) (2,156,003) (22.5%) (766,969) 55.2%Total 4 ,639,283 55.2% 4,824,163 50.2% 184,880 4.0%Gross margin 3,763,134 44.8% 4,777,507 49.8% 1,014,373 27.0% Selling, general and administrative:Executive salaries 167,459 2.0% 174,562 1.8% 7,103 4.2% Executive benefits 32,321 0.4% 34,488 0.4% 2,167 6.7%Office salaries 95,675 1.1% 98,540 1.0% 2,865 3.0%Office benefits 19,888 0.2% 21,778 0.2% 1,890 9.5%Travel and entertainment 56,845 0.7% 75,583 0.8% 18,738 33.0% Advertising 130,878 1.6% 156,680 1.6% 25,802 19.7%Other sales expense 34,880 0.4% 42,334 0.4% 7,454 21.4% Stationery and supplies 38,221 0.5% 21,554 0.2% (16,667) (43.6%) Postage 14,657 0.2% 18,756 0.2% 4,099 28.0% Telephone 36,551 0.4% 67,822 0.7% 31,271 85.6%Dues and memberships 3,644 0.0% 4,522 0.0% 878 24.1%Rent 15,607 0.2% 15,607 0.2% 0 0.0%Legal fees 14,154 0.2% 35,460 0.4% 21,306 150.5% Accounting fees 16,700 0.2% 18,650 0.2% 1,950 11.7% Depreciation, SG&A 73,450 0.9% 69,500 0.7% (3,950) (5.4%)Bad debt expense 166,454 2.0% 143,871 1.5% (22,583) (13.6%) Insurance 44,321 0.5% 45,702 0.5% 1,381 3.1%961,705 11.4% 1,045,409 10.9% 83,704 8.7%Total operating income 2,801,429 33.3% 3,732,098 38.9% 930,669 33.2%Other expenses:Interest expense 120,432 1.4% 137,922 1.4% 17,490 14.5%Other 5,455 0.1% 28,762 0.3% 23,307 427.3%Total 125,887 1.5% 166,684 1.7% 40,797 32.4%Other income:Gain on sale of assets 43,222 0.5% (143,200) (1.5%) (186,422) (431.3%) Interest income 243 0.0% 223 0.0% (20) (8.2%) Miscellaneous income 6,365 0.1% 25,478 0.3% 19,113 300.3%Total 49,830 0.6% (117,499) (1.2%) (167,329) (335.8%) Income before taxes 2,725,372 32.4% 3,447,915 35.9% 722,543 26.5% Income taxes 926,626 11.0% 1,020,600 10.6% 93,974 10.1%Net income $1,798,746 21.4% $2,427,315 25.3% $ 628,569 34.9%The following are variances of special significance to the audit that have been determined from the revised analytical procedures worksheet. Before doing additional work, there should be further discussion with knowledgeable management about the variances identified. After investigating management's explanations, the following additional audit procedures may be appropriate:。
审计学：一种整合方法阿伦斯英文版第12版课后答案Chapter15SolutionsManual
审计学：⼀种整合⽅法阿伦斯英⽂版第12版课后答案Chapter15SolutionsManualChapter 15Audit Sampling for Tests of Controls andSubstantive Tests of TransactionsReview Questions15-1 A representative sample is one in which the characteristics of interest for the sample are approximately the same as for the population (that is, the sample accurately represents the total population). If the population contains significant misstatements, but the sample is practically free of misstatements, the sample is nonrepresentative, which is likely to result in an improper audit decision. The auditor can never know for sure whether he or she has a representative sample because the entire population is ordinarily not tested, but certain things, such as the use of random selection, can increase the likelihood of a representative sample.15-2Statistical sampling is the use of mathematical measurement techniques to calculate formal statistical results. The auditor therefore quantifies sampling risk when statistical sampling is used. In nonstatistical sampling, the auditor does not quantify sampling risk. Instead, conclusions are reached about populations on a more judgmental basis.For both statistical and nonstatistical methods, the three main parts are:1. Plan the sample2. Select the sample and perform the tests3. Evaluate the results15-3In replacement sampling, an element in the population can be included in the sample more than once if the random number corresponding to that element is selected more than once. In nonreplacement sampling, an element can be included only once. If the random number corresponding to an element is selected more than once, it is simply treated as a discard the second time. Although both selection approaches are consistent with sound statistical theory, auditors rarely use replacement sampling; it seems more intuitively satisfying to auditors to include an item only once.15-4 A simple random sample is one in which every possible combination of elements in the population has an equal chance of selection. Two methods of simple random selection are use of a random number table, and use of the computer to generate random numbers. Auditors most often use the computer to generate random numbers because it saves time, reduces the likelihood of error, and provides automatic documentation of the sample selected.15-5In systematic sampling, the auditor calculates an interval and then methodically selects the items for the sample based on the size of the interval. The interval is set by dividing the population size by the number of sample items desired.To select 35 numbers from a population of 1,750, the auditor divides 35 into 1,750 and gets an interval of 50. He or she then selects a random number between 0 and 49. Assume the auditor chooses 17. The first item is the number 17. The next is 67, then 117, 167, and so on.The advantage of systematic sampling is its ease of use. In most populations a systematic sample can be drawn quickly, the approach automatically puts the numbers in sequential order and documentation is easy.A major problem with the use of systematic sampling is the possibility of bias. Because of the way systematic samples are selected, once the first item in the sample is selected, other items are chosen automatically. This causes no problems if the characteristics of interest, such as control deviations, are distributed randomly throughout the population; however, in many cases they are not. If all items of a certain type are processed at certain times of the month or with the use of certain document numbers, a systematically drawn sample has a higher likelihood of failing to obtain a representative sample. This shortcoming is sufficiently serious that some CPA firms prohibit the use of systematic sampling. 15-6The purpose of using nonstatistical sampling for tests of controls and substantive tests of transactions is to estimate the proportion of items in a population containing a characteristic or attribute of interest. The auditor is ordinarily interested in determining internal control deviations or monetary misstatements for tests of controls and substantive tests of transactions.15-7 A block sample is the selection of several items in sequence. Once the first item in the block is selected, the remainder of the block is chosen automatically. Thus, to select 5 blocks of 20 sales invoices, one would select one invoice and the block would be that invoice plus the next 19 entries. This procedure would be repeated 4 other times.15-8 The terms below are defined as follows:15-8 (continued)15-9The sampling unit is the population item from which the auditor selects sample items. The major consideration in defining the sampling unit is making it consistent with the objectives of the audit tests. Thus, the definition of the population and the planned audit procedures usually dictate the appropriate sampling unit.The sampling unit for verifying the occurrence of recorded sales would be the entries in the sales journal since this is the document the auditor wishes to validate. The sampling unit for testing the possibility of omitted sales is the shipping document from which sales are recorded because the failure to bill a shipment is the exception condition of interest to the auditor.15-10 The tolerable exception rate (TER) represents the exception rate that the auditor will permit in the population and still be willing to use the assessed control risk and/or the amount of monetary misstatements in the transactions established during planning. TER is determined by choice of the auditor on the basis of his or her professional judgment.The computed upper exception rate (CUER) is the highest estimated exception rate in the population, at a given ARACR. For nonstatistical sampling, CUER is determined by adding an estimate of sampling error to the SER (sample exception rate). For statistical sampling, CUER is determined by using a statistical sampling table after the auditor has completed the audit testing and therefore knows the number of exceptions in the sample.15-11 Sampling error is an inherent part of sampling that results from testing less than the entire population. Sampling error simply means that the sample is not perfectly representative of the entire population.Nonsampling error occurs when audit tests do not uncover errors that exist in the sample. Nonsampling error can result from:1. The auditor's failure to recognize exceptions, or2. Inappropriate or ineffective audit procedures.There are two ways to reduce sampling risk:1. Increase sample size.2. Use an appropriate method of selecting sample items from thepopulation.Careful design of audit procedures and proper supervision and review are ways to reduce nonsampling risk.15-12 An attribute is the definition of the characteristic being tested and the exception conditions whenever audit sampling is used. The attributes of interest are determined directly from the audit program.15-13 An attribute is the characteristic being tested for in a population. An exception occurs when the attribute being tested for is absent. The exception for the audit procedure, the duplicate sales invoice has been initialed indicating the performance of internal verification, is the lack of initials on duplicate sales invoices.15-14 Tolerable exception rate is the result of an auditor's judgment. The suitable TER is a question of materiality and is therefore affected by both the definition and the importance of the attribute in the audit plan.The sample size for a TER of 6% would be smaller than that for a TER of 3%, all other factors being equal.15-15 The appropriate ARACR is a decision the auditor must make using professional judgment. The degree to which the auditor wishes to reduce assessed control risk below the maximum is the major factor determining the auditor's ARACR.The auditor will choose a smaller sample size for an ARACR of 10% than would be used if the risk were 5%, all other factors being equal.15-16 The relationship between sample size and the four factors determining sample size are as follows:a. As the ARACR increases, the required sample size decreases.b. As the population size increases, the required sample size isnormally unchanged, or may increase slightly.c. As the TER increases, the sample size decreases.d. As the EPER increases, the required sample size increases.15-17 In this situation, the SER is 3%, the sample size is 100 and the ARACR is 5%. From the 5% ARACR table (Table 15-9) then, the CUER is 7.6%. This means that the auditor can state with a 5% risk of being wrong that the true population exception rate does not exceed 7.6%.15-18 Analysis of exceptions is the investigation of individual exceptions to determine the cause of the breakdown in internal control. Such analysis is important because by discovering the nature and causes of individual exceptions, the auditor can more effectively evaluate the effectiveness of internal control. The analysis attempts to tell the "why" and "how" of the exceptions after the auditor already knows how many and what types of exceptions have occurred.15-19 When the CUER exceeds the TER, the auditor may do one or more of the following:1. Revise the TER or the ARACR. This alternative should be followed onlywhen the auditor has concluded that the original specifications weretoo conservative, and when he or she is willing to accept the riskassociated with the higher specifications.2. Expand the sample size. This alternative should be followed whenthe auditor expects the additional benefits to exceed the additionalcosts, that is, the auditor believes that the sample tested was notrepresentative of the population.3. Revise assessed control risk upward. This is likely to increasesubstantive procedures. Revising assessed control risk may bedone if 1 or 2 is not practical and additional substantive proceduresare possible.4. Write a letter to management. This action should be done inconjunction with each of the three alternatives above. Managementshould always be informed when its internal controls are notoperating effectively. If a deficiency in internal control is consideredto be a significant deficiency in the design or operation of internalcontrol, professional standards require the auditor to communicatethe significant deficiency to the audit committee or its equivalent inwriting. If the client is a publicly traded company, the auditor mustevaluate the deficiency to determine the impact on the auditor’sreport on internal control over financial reporting. If the deficiency isdeemed to be a material weakness, the auditor’s report on internalcontrol would contain an adverse opinion.15-20 Random (probabilistic) selection is a part of statistical sampling, but it is not, by itself, statistical measurement. To have statistical measurement, it is necessary to mathematically generalize from the sample to the population.Probabilistic selection must be used if the sample is to be evaluated statistically, although it is also acceptable to use probabilistic selection with a nonstatistical evaluation. If nonprobabilistic selection is used, nonstatistical evaluation must be used.15-21 The decisions the auditor must make in using attributes sampling are: What are the objectives of the audit test? Does audit sampling apply?What attributes are to be tested and what exception conditions are identified?What is the population?What is the sampling unit?What should the TER be?What should the ARACR be?What is the EPER?What generalizations can be made from the sample to thepopulation?What are the causes of the individual exceptions?Is the population acceptable?15-21 (continued)In making the above decisions, the following should be considered: The individual situation.Time and budget constraints.The availability of additional substantive procedures.The professional judgment of the auditor.Multiple Choice Questions From CPA Examinations15-22 a. (1) b. (3) c. (2) d. (4)15-23 a. (1) b. (3) c. (4) d. (4)15-24 a. (4) b. (3) c. (1) d. (2)Discussion Questions and Problems15-25a.An example random sampling plan prepared in Excel (P1525.xls) is available on the Companion Website and on the Instructor’s Resource CD-ROM, which is available upon request. The command for selecting the random number can be entered directly onto the spreadsheet, or can be selected from the function menu (math & trig) functions. It may be necessary to add the analysis tool pack to access the RANDBETWEEN function. Once the formula is entered, it can be copied down to select additional random numbers. When a pair of random numbers is required, the formula for the first random number can be entered in the first column, and the formula for the second random number can be entered in the second column.a. First five numbers using systematic selection:Using systematic selection, the definition of the sampling unit for determining the selection interval for population 3 is the total number of lines in the population. The length of the interval is rounded down to ensure that all line numbers selected are within the defined population.15-26a. To test whether shipments have been billed, a sample of warehouse removal slips should be selected and examined to see ifthey have the proper sales invoice attached. The sampling unit willtherefore be the warehouse removal slip.b. Attributes sampling method: Assuming the auditor is willing to accept a TER of 3% at a 10% ARACR, expecting no exceptions in the sample, the appropriate sample size would be 76, determined from Table 15-8.Nonstatistical sampling method: There is no one right answer to this question because the sample size is determined using professional judgment. Due to the relatively small TER (3%), the sample size should not be small. It will most likely be similar in size to the sample chosen by the statistical method.c. Systematic sample selection:22839 = Population size of warehouse removal slips(37521-14682).76 = Sample size using statistical sampling (students’answers will vary if nonstatistical sampling wasused in part b.300 = Interval (22839/76) if statistical sampling is used (students’ answers will vary if nonstatisticalsampling was used in part b).14825 = Random starting point.Select warehouse removal slip 14825 and every 300th warehouse removal slip after (15125, 15425, etc.)Computer generation of random numbers using Excel (P1526.xls): =RANDBETWEEN(14682,37521)The command for selecting the random number can be entered directly onto the spreadsheet, or can be selected from the function menu (math & trig) functions. It may be necessary to add the analysis tool pack to access the RANDBETWEEN function. Once the formula is entered, it can be copied down to select additional random numbers.d. Other audit procedures that could be performed are:1. Test extensions on attached sales invoices for clerical accuracy. (Accuracy)2. Test time delay between warehouse removal slip date and billing date for timeliness of billing. (Timing)3. Trace entries into perpetual inventory records to determinethat inventory is properly relieved for shipments. (Postingand summarization)15-26 (continued)e. The test performed in part c cannot be used to test for occurrenceof sales because the auditor already knows that inventory wasshipped for these sales. To test for occurrence of sales, the salesinvoice entry in the sales journal is the sampling unit. Since thesales invoice numbers are not identical to the warehouse removalslips it would be improper to use the same sample.15-27a. It would be appropriate to use attributes sampling for all audit procedures except audit procedure 1. Procedure 1 is an analyticalprocedure for which the auditor is doing a 100% review of the entirecash receipts journal.b. The appropriate sampling unit for audit procedures 2-5 is a line item,or the date the prelisting of cash receipts is prepared. The primaryemphasis in the test is the completeness objective and auditprocedure 2 indicates there is a prelisting of cash receipts. All otherprocedures can be performed efficiently and effectively by using theprelisting.c. The attributes for testing are as follows:d. The sample sizes for each attribute are as follows:15-28a. Because the sample sizes under nonstatistical sampling are determined using auditor judgment, students’ answers to thisquestion will vary. They will most likely be similar to the samplesizes chosen using attributes sampling in part b. The importantpoint to remember is that the sample sizes chosen should reflectthe changes in the four factors (ARACR, TER, EPER, andpopulation size). The sample sizes should have fairly predictablerelationships, given the changes in the four factors. The followingreflects some of the relationships that should exist in student’ssample size decisions:SAMPLE SIZE EXPLANATION1. 90 Given2. > Column 1 Decrease in ARACR3. > Column 2 Decrease in TER4. > Column 1 Decrease in ARACR (column 4 is thesame as column 2, with a smallerpopulation size)5. < Column 1 Increase in TER-EPER6. < Column 5 Decrease in EPER7. > Columns 3 & 4 Decrease in TER-EPERb. Using the attributes sampling table in Table 15-8, the sample sizesfor columns 1-7 are:1. 882. 1273. 1814. 1275. 256. 187. 149c.d. The difference in the sample size for columns 3 and 6 result from the larger ARACR and larger TER in column 6. The extremely large TER is the major factor causing the difference.e. The greatest effect on the sample size is the difference between TER and EPER. For columns 3 and 7, the differences between the TER and EPER were 3% and 2% respectively. Those two also had the highest sample size. Where the difference between TER and EPER was great, such as columns 5 and 6, the required sample size was extremely small.Population size had a relatively small effect on sample size.The difference in population size in columns 2 and 4 was 99,000 items, but the increase in sample size for the larger population was marginal (actually the sample sizes were the same using the attributes sampling table).f. The sample size is referred to as the initial sample size because it is based on an estimate of the SER. The actual sample must be evaluated before it is possible to know whether the sample is sufficiently large to achieve the objectives of the test.15-29 a.* Students’ answers as to whether the allowance for sampling error risk is sufficient will vary, depending on their judgment. However, they should recognize the effect that lower sample sizes have on the allowance for sampling risk in situations 3, 5 and 8.b. Using the attributes sampling table in Table 15-9, the CUERs forcolumns 1-8 are:1. 4.0%2. 4.6%3. 9.2%4. 4.6%5. 6.2%6. 16.4%7. 3.0%8. 11.3%c.d. The factor that appears to have the greatest effect is the number ofexceptions found in the sample compared to sample size. For example, in columns 5 and 6, the increase from 2% to 10% SER dramatically increased the CUER. Population size appears to have the least effect. For example, in columns 2 and 4, the CUER was the same using the attributes sampling table even though the population in column 4 was 10 times larger.e. The CUER represents the results of the actual sample whereas theTER represents what the auditor will allow. They must be compared to determine whether or not the population is acceptable.15-30a. and b. The sample sizes and CUERs are shown in the following table:a. The auditor selected a sample size smaller than that determinedfrom the tables in populations 1 and 3. The effect of selecting asmaller sample size than the initial sample size required from thetable is the increased likelihood of having the CUER exceed theTER. If a larger sample size is selected, the result may be a samplesize larger than needed to satisfy TER. That results in excess auditcost. Ultimately, however, the comparison of CUER to TERdetermines whether the sample size was too large or too small.b. The SER and CUER are shown in columns 4 and 5 in thepreceding table.c. The population results are unacceptable for populations 1, 4, and 6.In each of those cases, the CUER exceeds TER.The auditor's options are to change TER or ARACR, increase the sample size, or perform other substantive tests to determine whether there are actually material misstatements in thepopulation. An increase in sample size may be worthwhile inpopulation 1 because the CUER exceeds TER by only a smallamount. Increasing sample size would not likely result in improvedresults for either population 4 or 6 because the CUER exceedsTER by a large amount.d. Analysis of exceptions is necessary even when the population isacceptable because the auditor wants to determine the nature andcause of all exceptions. If, for example, the auditor determines thata misstatement was intentional, additional action would be requiredeven if the CUER were less than TER.15-30 (Continued)e.15-31 a. The actual allowance for sampling risk is shown in the following table:b. The CUER is higher for attribute 1 than attribute 2 because the sample sizeis smaller for attribute 1, resulting in a larger allowance for sampling risk.c. The CUER is higher for attribute 3 than attribute 1 because the auditorselected a lower ARACR. This resulted in a larger allowance for sampling risk to achieve the lower ARACR.d. If the auditor increases the sample size for attribute 4 by 50 items and findsno additional exceptions, the CUER is 5.1% (sample size of 150 and three exceptions). If the auditor finds one exception in the additional items, the CUER is 6.0% (sample size of 150, four exceptions). With a TER of 6%, the sample results will be acceptable if one or no exceptions are found in the additional 50 items. This would require a lower SER in the additional sample than the SER in the original sample of 3.0 percent. Whether a lower rate of exception is likely in the additional sample depends on the rate of exception the auditor expected in designing the sample, and whether the auditor believe the original sample to be representative.15-32a. The following shows which are exceptions and why:b. It is inappropriate to set a single acceptable tolerable exception rate and estimated population exception rate for the combined exceptions because each attribute has a different significance tothe auditor and should be considered separately in analyzing the results of the test.c. The CUER assuming a 5% ARACR for each attribute and a sample size of 150 is as follows:15-32 (continued)d.*Students’ answers will most likely vary for this attribute.e. For each exception, the auditor should check with the controller todetermine an explanation for the cause. In addition, the appropriateanalysis for each type of exception is as follows:15-33a. Attributes sampling approach: The test of control attribute had a 6% SER and a CUER of 12.9%. The substantive test of transactionsattribute has SER of 0% and a CUER of 4.6%.Nonstatistical sampling approach: As in the attributes samplingapproach, the SERs for the test of control and the substantive testof transactions are 6% and 0%, respectively. Students’ estimates ofthe CUERs for the two tests will vary, but will probably be similar tothe CUERs calculated under the attributes sampling approach.b. Attributes sampling approach: TER is 5%. CUERs are 12.9% and4.6%. Therefore, only the substantive test of transactions resultsare satisfactory.Nonstatistical sampling approach: Because the SER for the test ofcontrol is greater than the TER of 5%, the results are clearly notacceptable. Students’ estimates for CUER for the test of controlshould be greater than the SER of 6%. For the substantive test oftransactions, the SER is 0%. It is unlikely that students will estimateCUER for this test greater than 5%, so the results are acceptablefor the substantive test of transactions.c. If the CUER exceeds the TER, the auditor may:1. Revise the TER if he or she thinks the original specificationswere too conservative.2. Expand the sample size if cost permits.3. Alter the substantive procedures if possible.4. Write a letter to management in conjunction with each of theabove to inform management of a deficiency in their internalcontrols. If the client is a publicly traded company, theauditor must evaluate the deficiency to determine the impacton the auditor’s report on internal control over financialreporting. If the deficiency is deemed to be a materialweakness, the auditor’s report on internal control wouldcontain an adverse opinion.In this case, the auditor has evidence that the test of control procedures are not effective, but no exceptions in the sample resulted because of the breakdown. An expansion of the attributestest does not seem advisable and therefore, the auditor shouldprobably expand confirmation of accounts receivable tests. Inaddition, he or she should write a letter to management to informthem of the control breakdown.d. Although misstatements are more likely when controls are noteffective, control deviations do not necessarily result in actualmisstatements. These control deviations involved a lack ofindication of internal verification of pricing, extensions and footingsof invoices. The deviations will not result in actual errors if pricing,extensions and footings were initially correctly calculated, or if theindividual responsible for internal verification performed theprocedure but did not document that it was performed.e. In this case, we want to find out why some invoices are notinternally verified. Possible reasons are incompetence,carelessness, regular clerk on vacation, etc. It is desirable to isolatethe exceptions to certain clerks, time periods or types of invoices.Case15-34a. Audit sampling could be conveniently used for procedures 3 and 4 since each is to be performed on a sample of the population.b. The most appropriate sampling unit for conducting most of the auditsampling tests is the shipping document because most of the testsare related to procedure 4. Following the instructions of the auditprogram, however, the auditor would use sales journal entries asthe sampling unit for step 3 and shipping document numbers forstep 4. Using shipping document numbers, rather than thedocuments themselves, allows the auditor to test the numericalcontrol over shipping documents, as well as to test for unrecordedsales. The selection of numbers will lead to a sample of actualshipping documents upon which tests will be performed.。
审计学：一种整合方法 阿伦斯 英文版 第12版 课后问题详解 Chapter 22 Solutions Manual
Chapter 22Audit of the Capital Acquisition and Repayment Cycle Review Questions22-1Four examples of interest bearing liability accounts commonly found on balance sheets are:1. Notes payable2. Contracts payable3. Mortgages payable4. Bonds payableThese liabilities have the following characteristics in common:1. Relatively few transactions affect the account balance, but eachtransaction is often highly material in amount.2. The exclusion of a single transaction could be material in itself.3. There is a legal relationship between the client entity and the holderof the stock, bond, or similar ownership document.4. There is a direct relationship between interest and dividendaccounts and debt and equity.These liabilities differ in what they represent and the nature of their respective liabilities.22-2The characteristics of the liability accounts in the capital acquisition and repayment cycle that result in a different auditing approach than the approach followed in the audit of accounts payable are:1. Relatively few transactions affect the account balance, but eachtransaction is often highly material in amount.2. The exclusion of a single transaction could be material in itself.3. There is a legal relationship between the client entity and the holderof the stock, bond, or similar ownership document.4. There is a direct relationship between interest and dividendaccounts and debt and equity.22-3It is common to audit the balance in notes payable in conjunction with the audit of interest expense and interest payable because it minimizes the verification time and reduces the likelihood of overlooking misstatements in the balance. Once the auditor is satisfied with the balance in notes payable and the related interest rates and due dates for each note, it is easy to test the accuracy of accrued interest. If the interest expense for the year is also tested at the same time, the likelihood of omitting a note from notes payable for which interest has been paid is minimized. When there are a large number of notes or a large number of transactions during the year, it is usually too time consuming to completely tie out interest expense as a part of the audit of the notes payable and related accrued interest. Normally, however, there are only a few notes and few transactions during the year.22-4The most important controls the auditor should be concerned about in the audit of notes payable are:1. The proper authorization for the issuance of new notes (or renewals)to insure that the company is not being committed to debtarrangements that are not authorized.2. Controls over the repayment of principal and interest to insure thatthe proper amounts are paid.3. Proper records and procedures to insure that all amounts in alltransactions are properly recorded.4. Periodic independent verification to insure that all the controls overnotes payable are working.22-5The most important analytical procedures used to verify notes payable is a test of interest expense. By the use of this test, auditors can uncover misstatements in interest calculations or possible unrecorded notes payable.22-6It is more important to search for unrecorded notes payable than unrecorded notes receivable because the omission of an asset is less likely to occur than the omission of a debt. Several audit procedures the auditor can use to uncover unrecorded notes payable are:1. Examine the notes paid after year-end to determine whether theywere liabilities at the balance sheet date.2. Obtain a standard bank confirmation that includes specificreference to the existence of notes payable from all banks withwhich the client does business.3. Review the bank reconciliation for new notes credited directly to thebank account by the bank.4. Obtain confirmation from creditors who have held notes from theclient in the past and are not currently included in the notes payableschedule.5. Analyze interest expense to uncover a payment to a creditor who isnot included on the notes payable schedule.6. Review the minutes of the board of directors for authorized butunrecorded notes.22-7The primary purpose of analyzing interest expense is to uncover a payment to a creditor who is not included on the notes payable schedule. The primary considerations the auditor should keep in mind when doing the analysis are:1. Is the payee for the interest payment listed in the cashdisbursements journal also included in the notes payable list?2. Has a confirmation for notes payable been received from the payee? 22-8The tests of controls and substantive tests of transactions for liability accounts in the capital acquisition and repayment cycle consists of tests of the control and substantive tests over the payment of principal and interest and the issuance of new notes or other liabilities, whereas the tests of details of balances concern the balance of the liabilities, interest payable, and interest expense. A unique aspect of the capital acquisition and repayment cycle is that auditors normally verify the transactions and balances in the account at the same time, as described in the solution to Review Question 22-3.22-9Four types of restrictions long-term creditors often put on companies in granting them a loan are:1. Financial ratio restrictions2. Payment of dividends restrictions3. Operations restrictions4. Issue of additional debt restrictionsThe auditor can find out about these restrictions by examining the loan agreement and related correspondence associated with the loan, and by confirmation. The auditor must perform calculations and observe activities to determine whether the client has observed the restrictions.22-10 The primary objectives in the audit of owners' equity accounts are to determine whether:1. The internal controls over capital stock and related dividends areadequate.2. Owners' equity transactions are recorded properly, as defined bythe following six transaction-related audit objectives:⏹Occurrence⏹Completeness⏹Accuracy⏹Posting and summarization⏹Classification⏹Timing22-10 (continued)3. Owners' equity balances in the financial statements satisfy thefollowing balance-related audit objectives:⏹Detail tie-in⏹Existence⏹Completeness⏹Accuracy⏹Classification⏹Cutoff4. Owners' equity balances are properly presented and disclosed tosatisfy the following presentation and disclosure-related auditobjectives:⏹Occurrence and Rights and Obligations⏹Completeness⏹Accuracy and Valuation⏹Classification and Understandability22-11 Although the corporate charter and bylaws are legal documents, their legal nature is not being judged by the auditor. They are being used only to reference transactions being tested by the auditor and provide insight into some of the key control features of the company. The auditor should consult an attorney if the information the auditor needs from the documents is not clear or if a legal interpretation is needed.22-12 The major internal controls over owners' equity are:1. Proper authorization of transactions2. Proper record keeping3. Adequate segregation of duties between maintaining owners' equityrecords and handling cash and stock certificates4. The use of an independent registrar and stock transfer agent22-13 The audit of owners' equity for a closely held corporation differs from that for a publicly held corporation in that the amount of time spent in verifying owners' equity in a closely held corporation is usually minimal because of the relatively few transactions for capital stock accounts that occur during the year. For publicly held corporations, the audit of owners' equity is more complex due to the existence of a larger number of shareholders and frequent changes in the individuals holding stock.The audits are not significantly different in regard to whether the transactions in the equity accounts are properly authorized and recorded and whether the amounts in the accounts are properly classified, described, and stated in accordance with generally accepted accounting principles.22-14 The duties of a stock registrar are to make sure that stock is issued by a corporation in accordance with the capital authorization of the board of directors, to sign all newly issued stock certificates, and to make sure old certificates are received and cancelled before a replacement certificate is issued when there is a change in the ownership of the stock.The duties of a transfer agent are to maintain the stockholder records, and in some cases, disburse cash dividends to shareholders.The use of the services of a stock registrar improves the effectiveness of the client's internal controls by preventing the improper issuance of stock certificates. Along similar lines, the use of the services of an independent transfer agent improves the control over the stock records by putting them in the hands of an independent organization.22-15 The number of shares outstanding, the correct valuation of capital stock transactions, and par value can all be confirmed with a transfer agent. The balance can then be easily recalculated from this information.22-16 Since it is important to verify that properly authorized dividends have been paid to owners of stock as of the dividend record date, a comparison of a random sample of cancelled dividend checks to a dividend list prepared by management would be inadequate. Such an audit step is useless unless the dividend list has first been verified to include all stockholders of record at the dividend record date.A better test is to determine the total number of shares outstanding at the dividend date from the stock registrar and recompute the total dividends that should have been paid for comparison with the total amount actually paid. A random sample of cancelled checks should then be compared to the independent registrar's records to verify that the payments were actually made to valid shareholders.22-17 If a transfer agent disburses dividends for a client, the total dividends declared can be verified by tracing the amount to a cash disbursement entry to the agent and also confirming the amount. There should ordinarily be no need to test individual dividend disbursement transactions if a stock transfer agent is used.22-18 The major emphasis in auditing the retained earnings account should be on the recorded changes that have taken place during the year, such as net earnings for the year, dividends declared, prior period adjustments, extraordinary items charged or credited directly to retained earnings, or setting up or elimination of appropriations. Except for dividends declared, the other items should be verified during other parts of the engagement. This is especially true of the net earnings for the year. Therefore, the audit of retained earnings primarily consists of an analysis of the changes in retained earnings and the verification of the authorization and accuracy of the underlying transactions.22-19 For auditing owners' equity and calculating earnings per share, it is crucial to verify that the number of shares used in each is accurate. Earnings are verified as an integral part of the entire audit and should require no additional verification as a part of owners' equity. The most important auditing considerations in verifying the earnings per share figure are the accounting principles prescribed by APB 15 and the descriptions of the various classes of stock in the corporate charter and minutes of the board of directors.Multiple Choice Questions From CPA Examinations22-20 a. (2) b. (2) c. (2)22-21 a. (4) b. (3) c. (1)Discussion Questions and Problems22-2222-23a.b. The auditor should be alert for the following provisions in the bondindenture agreement:1. Restrictions on payment of dividends2. Convertibility provisions3. Provisions for repayment4. Restrictions on additional borrowing5. Required maintenance of specified financial ratiosc. The auditor can determine whether the above provisions have beenmet by the following procedures:22-23 a. (continued)1. Audit of payments of dividends2. Determine if the appropriate stock authorizations areadequate3. Determine if sinking fund is adequate4. Search for other liabilities5. Calculate ratios and compare to agreementd. The auditor should verify the unamortized bond discount orpremium on a bond that was in force at the beginning of the year byrecalculation. This is done by dividing the premium or discount bythe number of total months the bonds will be outstanding andmultiplying by the number of months remaining. For bonds issuedin the current year, the bond premium or discount must first beverified. The monthly premium or discount is then calculated andmultiplied by the number of months still outstanding.e. The following information should be requested from the bondholderin the confirmation of bonds payable:1. Amount of bond2. Maturity date3. Interest rate4. Payment dates5. Payment amounts6. Assets pledged as security7. Restrictions on client activities22-24 a. The auditing necessary for notes payable and related interest accounts in these circumstances would be minimal. Aside fromchecking interest calculations and postings to the proper accountsas a matter of audit routine, the only major audit procedure wouldbe to confirm the amount and provisions of the note with the bank.b. If Fox was unprofitable, had a need for additional financing, andhad deficient internal controls, it would be necessary to search forunrecorded notes. This could be done by obtaining standard bankconfirmations with specific reference to the existence of notespayable, reviewing the bank statements and reconciliations for newnotes credited directly to the bank account by the bank, andanalyzing interest expense to uncover a payment to a creditor whois not included on the notes payable schedule.22-25 a. The emphasis in the verification of notes payable in this situation should be in determining whether all existing notes are included inthe client's records. The four audit procedures listed do not satisfythis emphasis.b.22-25 (continued)c. Procedure 2 is not necessary in light of procedure 3. They bothperform the same function and the confirmation is from anindependent source. The sample sizes for the procedures areprobably appropriate, considering the deficiencies in record keepingprocedures.d. In addition to the procedures mentioned, the following ones areessential because there must be a search for unrecorded notes:1. Analyze interest expense and send a confirmation for notespayable to all payees not receiving a confirmation for notes.2. Confirm the balance in notes payable to payees included inlast year's notes payable list but not confirmed in the currentyear.3. Examine notes paid after year-end to determine whetherthey were liabilities at the balance sheet date.4. Obtain a standard bank confirmation that includes a specificreference to notes payable from all banks with which theclient does business.5. Review the minutes of the board of directors.22-26 In each case, any actual failure to comply would have to be reported in a footnote to the statements in view of the possible serious consequences of advancing the maturity date of the loan. The individual audit steps that should be taken are as follows:a. Calculate the working capital ratio at the beginning of and throughthe previous fiscal year. If it is under 2 to 1, determinecompensation of officers for compliance with the limitation.b. Examine the client's copies of insurance policies or certificates ofinsurance for compliance with the covenant, preparing a scheduleof book value, appraised or estimated value, and coverage for thereport. Confirm policies held with trustee.c. Examine vouchers supporting tax payments on all property coveredby the indenture. By reference to the local tax laws and thevouchers, determine that all taxes have been paid before thepenalty-free period expired. If the vouchers in any case areinadequate, confirm with the trustee who holds the tax receipts.d. Vouch the payments to the sinking fund. Confirm bond purchasesand sinking fund balance with trustee. Observe evidence ofdestruction of bonds for bonds cancelled. Report the fund as anasset, preferably giving the composition as to cash and bonds heldalive, if any.22-27 a. It is desirable to prepare an audit schedule for the permanent file for the mortgage so that the appropriate information concerning themortgage will be conveniently available for future years' audits. Thisinformation should include all the provisions of the mortgage as wellas the purchase price, date of purchase, and a list of items pledgedas collateral. It may also contain an amortization schedule ofprincipal and interest (especially if the auditor has access to acomputer program for preparation of such a schedule)b. The audit of mortgage payable, interest expense, and interestpayable should all be done together since these accounts arerelated and the results of testing each account have a bearing onthe other accounts. The likelihood of misstatement in the client'srecords is determined faster and more effectively by doing themtogether.c. The audit procedures that should ordinarily be performed to verifythe issue of the mortgage, the balance in the mortgage and interestpayable, and the balance in the interest expense accounts are:1. Determine if the mortgage was properly authorized.2. Obtain the mortgage agreement and schedule the pertinentprovisions in the permanent file, including the face amount,payments, interest rate, restrictions, and collateral.3. Confirm the mortgage amount, terms, and collateral with thelending institution.4. Recompute interest payable at the balance sheet date andreconcile interest expense to the decrease in principal andthe payments made.5. Test interest expense for reasonableness.d. Generally accepted accounting principles require disclosures relatedto long-term debt. The terms of the debt agreement are to bedisclosed, including interest rates, maturity dates, five-yearpayment information, assets pledged as collateral, among otheritems. Significant restrictions on the activities of the company, suchas maintaining cash or other compensating balances or restrictingthe amount of dividends that can be paid, should be disclosed.Thus, auditors obtain copies of long-term debt agreements todetermine that the client’s disclosures are complete and accurate.22-30 The proposal for the limitation of procedure is not justified by the stated facts. Although the transfer agent and the registrar know the number of shares issued, they do not necessarily know the number of shares outstanding. Furthermore, the audit of capital stock includes more than determining the number of shares outstanding. For example, the auditor must determine what authorizations exist for the issuance of shares, what assets were received in payment of shares, how the transactions were recorded, and what subscription contracts have been entered into. Confirmation from the registrar could not help in determining these things.In addition to confirmation from the registrar, the audit of capital stock might include the following procedures, the purposes of which are briefly indicated:1. Examine the corporation charter―to determine the number ofshares authorized and the special provisions for each class of stockif more than one class is authorized.22-30 (continued)2. Examine minutes of stockholders' and directors' meetings―todetermine authorization for appointments of the registrar and thetransfer agent; to determine authorization for the issuance orreacquisition of shares.3. Examine provisions regarding capital stock in the corporation law ofthe state of incorporation—to determine any special provisions,such as those for the issuance of no par stock.4. Analyze the capital stock accounts to obtain an orderly picture ofstock transactions for use as a guide to other auditing proceduresand as a permanent record.5. Trace the consideration received for capital stock into the records—to determine what consideration has been received and how it hasbeen recorded.6. Examine and schedule treasury stock and review entries fortreasury stock—to determine the existence of treasury stock asauthorized and to determine that a proper record has been made.7. Review registrar's invoices and cash disbursements—to determinethat original issue taxes have been paid.8. Compare dividends with stock outstanding at dividend dates—todetermine that dividends have been properly paid and also tosubstantiate the stock outstanding.9. Review subscription and option contracts, etc.—to determine thefacts in regard to subscriptions and options and to determine thatthese facts have been properly recorded and that they areadequately disclosed.22-31 a. The audit program for the audit of Pate Corporation's capital stock account would include the following procedures:1. Examine the articles of incorporation, the bylaws, and theminutes of the board of directors from the inception of thecorporation to determine the provisions or decisionsregarding the capital stock, such as classes of stock, parvalue or stated value, authorized number of shares,authorization for the sale of new issues or additional sales ofunissued stock, declarations of stock splits and dividends inthe form of cash or stock, and granting of stock options orstock rights. Determine that the accounting records are inaccordance with these provisions or decisions and thatappropriate disclosure is made by footnote if necessary.Extract pertinent data for the auditor's permanent file.2. Examine the stock certificate stub book and determinewhether the total of the open stubs agrees with the CapitalStock account in the general ledger. Examine cancelledstock certificates, which are generally attached to thecorresponding stub.22-31 (continued)Information on the stubs regarding the number of shares,date, etc. for both outstanding and cancelled stockcertificates should be compared with the Capital Stockaccount. All certificate numbers should be accounted for and, if the CPA deems it necessary, confirmation of the number of certificates printed should be obtained from theprinter. A test check should be made to determine that theproper amounts of original issue and capital stock transfertaxes have been affixed to the stubs and the cancelledcertificates. The stockholders shown in the stock certificatestub book should be compared with the stockholders' masterfile if one is maintained.3. Analyze the Capital Stock account from the corporation'sinception and verify all entries. Trace all transactionsinvolving the transfer of cash either to the cash receipts orthe cash disbursements records. If property other than cashwas received in exchange for capital stock, trace therecording of the property to the proper asset account andconsider the reasonableness of the valuation placed on theproperty. Transactions showing the sale of stock at adiscount or premium should be traced to the CapitalContributed in Excess of Par Value account. If capital stockhas been sold at a discount, consideration should be givento the possible violation of state laws and the client'sattention should be directed to the matter. Should theanalysis of the Capital Stock account disclose that thecorporation has engaged in treasury stock transactions,determine that the increase or decrease in net assetsresulting from these transactions has not been placed in theRetained Earnings account.The audit procedures to be applied to the audit of the Capital Contributed in Excess of Par Value account areusually applied at the same time that the Capital Stockaccount is being audited because the two accounts areinterrelated. The accounts should be analyzed and theentries verified when the related entries in the Capital Stockaccount are verified. If an entry is not related to CapitalStock account entries, as in the case of a write-off of a deficitas the result of a quasi reorganization, authorization for theentry and the supporting material should be examined.4. The following audit procedures would be applied to the RetainedEarnings account:a) Analyze the account from its inception. Consider thevalidity of the amounts representing income or lossthat were closed from the Profit and Loss account.Amounts representing appraisal increments or writingup of assets should be considered for reasonableness,and the increase should be reported separately fromretained earnings in the stockholders' equity sectionof the balance sheet.b) Any extraordinary gains or losses carried directly tothe Retained Earnings account should be investigatedand their treatment reviewed in relation to generallyaccepted accounting principles.c) Entries recording the appropriation of retainedearnings or the return of such appropriations shouldbe reviewed for reasonableness, and authorization forthe entries should be traced to the proper authority.Similarly, actions of the board of directors thataffected retained earnings should be traced to theaccount analysis.d) Conditions such as loan covenants or contingentliabilities that were uncovered during the audit thatmight require or make desirable the placing ofrestrictions on retained earnings should be reviewedfor proper disclosure in the financial statements.e) Entries recording cash or stock dividends should betraced to the minutes of the board of directors forauthorization and traced to the Cash account or theCapital Stock account. A separate computationshould be made by the CPA of the total amount ofdividends paid based upon his or her schedules ofoutstanding stock as an overall test of the existenceof the distributions. If stock dividends have beendistributed, the amount removed from retainedearnings should be reviewed for compliance withgenerally accepted accounting principles.b. In conducting his or her audit, the CPA verifies retained earnings as he orshe does other items on the balance sheet for several reasons. Aprincipal reason is that the verification is an assurance or doublecheck that no important item was overlooked in the audit of theaccounts that were the contra or balancing part of the entryrecorded in retained earnings. An example of an important item thatmay be overlooked would be a balance sheet account that wasclosed during the year under audit and the account removed fromthe general ledger current file. Another reason is that, though theentry in the contra account may have been examined, the auditormay have overlooked that the balancing part of the entry was toretained earnings, a treatment that may have been contrary togenerally accepted accounting principles; his or her audit ofretained earnings would bring this noncompliance to his or herattention.Still another reason for verifying the retained earnings account is to determine whether any portion of the balance in theaccount may be subject to restriction by state law or other authority.Since the account is the basis for the payment of dividends, it isimportant to determine that the balance is composed of incomerealized from transactions free from any restrictions.。
阿伦斯 审计学：一种整合方法 课后习题答案
Chapter 1The Demand for Audit and Other Assurance Services Review Questions1-1The relationship among audit services, attestation services, and assurance services is reflected in Figure 1-3 on page 13 of the text. An assurance service is an independent professional service to improve the quality of information for decision makers. An attestation service is a form of assurance service in which the CPA firm issues a report about the reliability of an assertion that is the responsibility of another party. Audit services are a form of attestation service in which the auditor expresses a written conclusion about the degree of correspondence between information and established criteria.The most common form of audit service is an audit of historical financial statements, in which the auditor expresses a conclusion as to whether the financial statements are presented in conformity with generally accepted accounting principles. An example of an attestation service is a report on the effe ctiveness of an entity’s internal control over financial reporting. There are many possible forms of assurance services, including services related to business performance measurement, health care performance, and information system reliability.1-2 An independent audit is a means of satisfying the need for reliable information on the part of decision makers. Factors of a complex society which contribute to this need are:1.Remoteness of informationa.Owners (stockholders) divorced from managementb.Directors not involved in day-to-day operations ordecisionsc.Dispersion of the business among numerous geographiclocations and complex corporate structures2.Biases and motives of providerrmation will be biased in favor of the providerwhen his or her goals are inconsistent with thedecision maker's goals.3.Voluminous dataa.Possibly millions of transactions processed daily viasophisticated computerized systemsb.Multiple product linesc.Multiple transaction locationsplex exchange transactionsa.New and changing business relationships lead toinnovative accounting and reporting problemsb.Potential impact of transactions not quantifiable,leading to increased disclosures1-3 1. Risk-free interest rate This is approximately the rate the bank could earn by investing in U.S. treasury notes for thesame length of time as the business loan.2.Business risk for the customer This risk reflects thepossibility that the business will not be able to repay itsloan because of economic or business conditions such as arecession, poor management decisions, or unexpectedcompetition in the industry.rmation risk This risk reflects the possibility thatthe information upon which the business risk decision wasmade was inaccurate. A likely cause of the information riskis the possibility of inaccurate financial statements.Auditing has no effect on either the risk-free interest rate or business risk. However, auditing can significantly reduce information risk.1-4The four primary causes of information risk are remoteness of information, biases and motives of the provider, voluminous data, and the existence of complex exchange transactions.The three main ways to reduce information risk are:er verifies the information.er shares the information risk with management.3.Audited financial statements are provided.The advantages and disadvantages of each are as follows:1-5 To do an audit, there must be information in a verifiable form and some standards (criteria) by which the auditor can evaluate the information. Examples of established criteria include generally accepted accounting principles and the Internal Revenue Code. Determining the degree of correspondence between information and established criteria is determining whether a given set of information is in accordance with the established criteria. The information for Jones Company's tax return is the federal tax returns filed by the company. The established criteria are found in the Internal Revenue Code and all interpretations. For the audit of Jones Company's financial statements the information is the financial statements being audited and the established criteria are generally accepted accounting principles.1-6The primary evidence the internal revenue agent will use in the audit of the Jones Company's tax return include all available documentation and other information available in Jones' office or from other sources. For example, when the internal revenue agent audits taxable income, a major source of information will be bank statements, the cash receipts journal and deposit slips. The internal revenue agent is likely to emphasize unrecorded receipts and revenues. For expenses, major sources of evidence are likely to be cancelled checks, vendors' invoices and other supporting documentation.1-7This apparent paradox arises from the distinction between the function of auditing and the function of accounting. The accounting function is the recording, classifying and summarizing of economic events to provide relevant information to decision makers. The rules of accounting are the criteria used by the auditor for evaluating the presentation of economic events for financial statements and he or she must therefore have an understanding of generally accepted accounting principles (GAAP), as well as auditing standards. The accountant need not, and frequently does not, understand what auditors do, unless he or she is involved in doing audits, or has been trained as an auditor.1-81-9Five examples of specific operational audits that could be conducted by an internal auditor in a manufacturing company are:1.Examine employee time cards and personnel records todetermine if sufficient information is available to maximizethe effective use of personnel.2.Review the processing of sales invoices to determine if itcould be done more efficiently.3.Review the acquisitions of goods, including costs, todetermine if they are being purchased at the lowest possiblecost considering the quality needed.4.Review and evaluate the efficiency of the manufacturingprocess.5.Review the processing of cash receipts to determine if theyare deposited as quickly as possible.1-10 When using a strategic systems auditing approach in an audit of historical financial statements, an auditor must have a thorough understanding of the client and its environment. This knowledge should include the client’s regulatory and operating environment, business strategies and processes, and measurement indicators. The strategic systems approach is also useful in other assurance or consulting engagements. For example, an auditor who is performing an assurance service on information technology would need to understand the client’s business strategies and processes related to information technology, including such things as purchases and sales via the Internet. Similarly, a practitioner performing a consulting engagement to evaluate the efficiency and effectiveness of a cli ent’s manufacturing process would likely start with an analysis of various measurement indicators, including ratio analysis and benchmarking against key competitors.1-11 The major differences in the scope of audit responsibilities are:1.CPAs perform audits in accordance with auditing standards ofpublished financial statements prepared in accordance withgenerally accepted accounting principles.2.GAO auditors perform compliance or operational audits inorder to assure the Congress of the expenditure of publicfunds in accordance with its directives and the law.3.IRS agents perform compliance audits to enforce the federaltax laws as defined by Congress, interpreted by the courts,and regulated by the IRS.4.Internal auditors perform compliance or operational auditsin order to assure management or the board of directors thatcontrols and policies are properly and consistentlydeveloped, applied and evaluated.1-12 The four parts of the Uniform CPA Examination are: Auditing and Attestation, Financial Accounting and Reporting, Regulation, and Business Environment and Concepts.1-13 It is important for CPAs to be knowledgeable about e-commerce technologies because more of their clients are rapidly expanding their use of e-commerce. Examples of commonly used e-commerce technologiesinclude purchases and sales of goods through the Internet, automatic inventory reordering via direct connection to inventory suppliers, and online banking. CPAs who perform audits or provide other assurance services about information generated with these technologies need a basic knowledge and understanding of information technology and e-commerce in order to identify and respond to risks in the financial and other information generated by these technologies.Multiple Choice Questions From CPA Examinations1-14 a. (3) b. (2) c. (2) d. (3)1-15 a. (2) b. (3) c. (4) d. (3)Discussion Questions And Problems1-16 a. The relationship among audit services, attestation services and assurance services is reflected in Figure 1-3 on page 13of the text. Audit services are a form of attestationservice, and attestation services are a form of assuranceservice. In a diagram, audit services are located within theattestation service area, and attestation services arelocated within the assurance service area.b. 1. (1) Audit of historical financial statements2.(2) An attestation service other than an auditservice; or(3) An assurance service that is not an attestationservice (WebTrust developed from the AICPASpecial Committee on Assurance Services, but theservice meets the criteria for an attestationservice.)3.(2) An attestation service other than an auditservice4.(2) An attestation service other than an auditservice5.(2) An attestation service other than an auditservice6.(2) An attestation service that is not an auditservice (Review services are a form ofattestation, but are performed according toStatements on Standards for Accounting andReview Services.)7.(2) An attestation service other than an auditservice8.(2) An attestation service other than an auditservice9.(3) An assurance service that is not an attestationservice1-17 a. The interest rate for the loan that requires a review report is lower than the loan that did not require a review becauseof lower information risk. A review report provides moderateassurance to financial statement users, which lowersinformation risk. An audit report provides further assuranceand lower information risk. As a result of reducedinformation risk, the interest rate is lowest for the loanwith the audit report.b.Given these circumstances, Vial-tek should select the loanfrom City First Bank that requires an annual audit. In thissituation, the additional cost of the audit is less than thereduction in interest due to lower information risk. Thefollowing is the calculation of total costs for each loan:1-17 (continued)c. Vial-tek may desire to have an audit because of the manyother positive benefits that an audit provides. The auditwill provide Vial-tek’s management with assurance aboutannual financial information used for decision-makingpurposes. The audit may detect errors or fraud, and providemanagement with information about the effectiveness ofcontrols. In addition, the audit may result inrecommendations to management that will improve efficiencyor effectiveness.d. Under a strategic systems audit approach, the auditor musthave a thorough understanding of the client and itsenvironment, including the client’s e-commerce technologies,industry, regulatory and operating environment, suppliers,customers, creditors, and business strategies and processes.This thorough analysis helps the auditor identify risksassociated with the client’s strategies that may affectwhether the financial statements are fairly stated. Whenapplying the strategic systems audit approach, the auditoroften discovers ways to help the client improve businessoperations, thereby providing added value to the auditfunction.1-18 a. The services provided by Consumers Union are very similar to assurance services provided by CPA firms. The servicesprovided by Consumers Union and assurance services providedby CPA firms are designed to improve the quality ofinformation for decision makers. CPAs are valued for theirindependence, and the reports provided by Consumers Unionare valued because Consumers Union is independent of theproducts tested.b.The concepts of information risk for the buyer of anautomobile and for the user of financial statements areessentially the same. They are both concerned with theproblem of unreliable information being provided. In thecase of the auditor, the user is concerned about unreliableinformation being provided in the financial statements. Thebuyer of an automobile is likely to be concerned about themanufacturer or dealer providing unreliable information.c.The four causes of information risk are essentially the samefor a buyer of an automobile and a user of financialstatements:(1)Remoteness of information It is difficult for a userto obtain much information about either an automobilemanufacturer or the automobile itself withoutincurring considerable cost. The automobile buyer doeshave the advantage of possibly knowing other users who are satisfied or dissatisfied with a similar automobile.(2)Biases and motives of provider There is a conflictbetween the automobile buyer and the manufacturer. The buyer wants to buy a high quality product at minimum cost whereas the seller wants to maximize the selling price and quantity sold.(3)Voluminous data There is a large amount of availableinformation about automobiles that users might like to have in order to evaluate an automobile. Either that information is not available or too costly to obtain.1-18 (continued)(4)Complex exchange transactions The acquisition of anautomobile is expensive and certainly a complexdecision because of all the components that go intomaking a good automobile and choosing between a largenumber of alternatives.d.The three ways users of financial statements and buyers ofautomobiles reduce information risk are also similar:(1)User verifies information him or herself That can beobtained by driving different automobiles, examiningthe specifications of the automobiles, talking toother users and doing research in various magazines.(2)User shares information risk with management Themanufacturer of a product has a responsibility to meetits warranties and to provide a reasonable product.The buyer of an automobile can return the automobilefor correction of defects. In some cases a refund maybe obtained.(3)Examine the information prepared by Consumer ReportsThis is similar to an audit in the sense thatindependent information is provided by an independentparty. The information provided by Consumer Reports iscomparable to that provided by a CPA firm that auditedfinancial statements.1-19 a. The following parts of the definition of auditing are related to the narrative:(1)Virms is being asked to issue a report aboutqualitative and quantitative information for trucks.The trucks are therefore the information with whichthe auditor is concerned.(2)There are four established criteria which must beevaluated and reported by Virms: existence of thetrucks on the night of June 30, 2005, ownership ofeach truck by Regional Delivery Service, physicalcondition of each truck and fair market value of eachtruck.(3)Susan Virms will accumulate and evaluate four types ofevidence:(a)Count the trucks to determine their existence.(b)Use registrations documents held by Oatley forcomparison to the serial number on each truck todetermine ownership.(c)Examine the trucks to determine each truck'sphysical condition.(d)Examine the blue book to determine the fairmarket value of each truck.(4)Susan Virms, CPA, appears qualified, as a competent,independent person. She is a CPA, and she spends most of her time auditing used automobile and truck dealerships and has extensive specialized knowledge about used trucks that is consistent with the nature of the engagement.1-19(continued)(5)The report results are to include:(a)which of the 35 trucks are parked in Regional'sparking lot the night of June 30.(b)whether all of the trucks are owned by RegionalDelivery Service.(c)the condition of each truck, using establishedguidelines.(d)fair market value of each truck using thecurrent blue book for trucks.b.The only parts of the audit that will be difficult for Virmsare:(1)Evaluating the condition, using the guidelines of poor,good, and excellent. It is highly subjective to do so.If she uses a different criterion than the "bluebook," the fair market value will not be meaningful.Her experience will be essential in using thisguideline.(2)Determining the fair market value, unless it isclearly defined in the blue book for each condition.1-20 a. The major advantages and disadvantages of a career as an IRS agent, CPA, GAO auditor, or an internal auditor are:1-20 (continued)EMPLOYMENT ADVANTAGES DISADVANTAGESINTERNAL AUDITOR 1.Extensive exposure to allsegments of theenterprise with whichemployed.2.Constant exposure to oneindustry presentingopportunity for expertisein that industry.3.Likely to have exposureto compliance, financialand operational auditing.1.Little exposure totaxation and the auditthereof.2.Experience is limited toone enterprise, usuallywithin one or a limitednumber of industries.(b)Other auditing careers that are available are:Auditors within many of the branches of the federalgovernment ., Atomic Energy Commission)Auditors for many state and local government units .,state insurance or bank auditors)1-21 The most likely type of auditor and the type of audit for each of the examples are:EXAMPLE TYPE OF AUDITOR TYPE OF AUDIT1.2.3.4.5.6.7.8.9.10.11.12.IRSGAOInternal auditor or CPACPA or Internal auditorGAOCPAGAOIRSCPAInternal auditor or CPAInternal auditor or CPAGAOComplianceOperationalOperationalFinancial statementsOperationalFinancial statementsFinancial statementsComplianceFinancial statementsComplianceFinancial statementsCompliance1-22 a. The conglomerate should either engage the management advisory services division of a CPA firm or its own internalauditors to conduct the operational audit.b.The auditors will encounter problems in establishingcriteria for evaluating the actual quantitative events andin setting the scope to include all operations in whichsignificant inefficiencies might exist. In writing thereport, the auditors must choose proper wording to statethat no financial audit was performed, that the procedureswere limited in scope and that the results reported do notnecessarily include all the inefficiencies that might exist.1-23 a. The CPA firm for the Internet company described in this problem could address these customer concerns by performinga WebTrust attestation engagement. The WebTrust assuranceservice was created by the profession to respond to thegrowing need for assurance resulting from the growth ofbusiness transacted over the Internet.b.The appropriate WebTrust principle for each of the customerconcerns noted in the problem is as follows:1.Accuracy of product descriptions and adherence tostated return policies: (3) Processing Integrity.2.Credit card and other personal information: (1) OnlinePrivacy and (2) Security.3.Selling information to other companies: (1) OnlinePrivacy and (2) Security.4.System failure: (4) Availability.Internet Problem Solution: Assurance Services1-1 This problem requires students to work with the AICPA assurance services Web site.1.Considering the assurance needs of customers and thecapabilities of CPAs, the Special Committee on AssuranceServices developed business plans for six assurance services.Chapter 1 of the textbook discussed several of theseservices. Go to the service description for the assuranceservice that most interests you (any one of the six). Whatare the major aspects or sections of the associated businessplan ., does the plan address market potential, competition,etc.?)Answer: Each business plan provides background information,describes the service, assesses market potential, discussesissues such as competition and why CPAs should offer theservice, identifies practice tools available and steps thatCPAs must take to begin offering the services.2.The Special Committee's report on Assurance Servicesdiscusses competencies needed by assurance providers todayand in the coming decade. Briefly describe the 5 generalcompetencies needed in the next decade (Hint: See the“About Assurance Services” link. Then follow the“Assurance Services and Academia” link.)Answer:The Committee identified the following five majorimperatives regarding future competencies, each of whichimplies increasing emphasis on the competencies noted:1-1 (continued)Customer focus.Assurance service providers need tounderstand user decision processes and how informationshould enter into those processes. Increased emphasis isneeded on: understanding user needs, communication skills,relationship management, responsiveness and timeliness.Migration to higher value-added information activities. Toprovide more value to client/decision makers and others,assurance service providers need to focus less on activitiesinvolved in the conversion of business events intoinformation ., collecting, classifying, and summarizingactivities) and more on activities involved in thetransformation of information into knowledge ., analyzing,interpreting, and evaluating activities) that effectivelydrives decision processes. This will require: analyticalskills, business advisory skills, business knowledge, modelbuilding (including sensitivity analysis), understanding theclient’s business processes, measurement theory(development of operational definitions of concepts, designof appropriate measurement techniques, etc.).Information technology (IT).Assurance services deal ininformation. Hence, the profound changes occurring ininformation technology will shape virtually all aspects ofassurance services. As information specialists, assuranceservice providers need to embrace information technology inall of its complex dimensions. Embracing IT meansunderstanding how it is transforming all aspects of business.It also means learning how to effectively use newdevelopments in hardware, software, communications, memory,encryption, etc., in everything assurance service providersdo as information specialists, not only in dealing withclients, but also in dealing with each other as individuals,teams, firms, state societies, and national professionalorganizations.Pace of change and complexity. Assurance services will takeplace in an environment of rapid change and increasingcomplexity. Assurance service providers need to investheavily in life-long learning in order to maintain up-to-date knowledge and skills. They will require: intellectualcapability, learning and rejuvenation.Competition.Growth in new assurance services will dependless on franchise/regulation and more on market forces.Assurance service providers need to develop their marketingskills —the ability to see clients’ latent informationand assurance needs and rapidly design and deploy cost-effective services to meet those needs —in order toeffectively compete for market-driven assurance services.Required skills include: marketing and selling,understanding customer needs, designing and deployingeffective solutions.1-1 (continued)(Note: Internet problems address current issues using Internet sources. Because Internet sites are subject to change, Internet problems and solutions are subject to change. Current information on Internet problems is available at。
审计学：一种整合方法阿伦斯英文版第12版课后问题详解Chapter18SolutionsManual
Chapter 18Audit of the Payroll andPersonnel CycleReview Questions18-1 General ledger accounts that are likely to be affected by the payroll and personnel cycle in most audits include the following:Cash Direct laborInventory Salary expenseConstruction in progress Commission expenseWages payable Payroll tax expensePayroll taxes withheldAccrued payroll taxes18-2In companies where payroll is a significant portion of inventory, as in manufacturing and construction companies, the improper account classification of payroll can significantly affect asset valuation for accounts such as work in process, finished goods, and construction in process. For example, if the salaries of administrative personnel are incorrectly charged to indirect manufacturing overhead, the overhead charged to inventory on the balance sheet can be overstated. Similarly, if the indirect labor cost of individual employees is charged to specific jobs or processes, the valuation of inventory is affected if labor is improperly classified. When some jobs are billed on a cost plus basis, revenue and the valuation of inventory are both affected by improperly classifying labor to jobs.18-3Five tests of controls that can be performed for the payroll and personnel cycle are:1. Examine time card for indication of approval to ensure thatpayroll payments are properly authorized. The purpose ofthis test is to determine that recorded payroll payments arefor work actually performed by existing employees(occurrence).2. Account for a sequence of payroll checks to ensure existingpayroll payments are recorded. The purpose of this test isto determine that existing payroll transactions are recorded(completeness).3. Examine time cards to ensure that recorded payroll paymentsare for work actually performed by existing employees. The purpose of this test is the same as in item 1 above.4. Compare postings to the chart of accounts to ensure thatpayroll transactions are properly classified.(Classification)5. Observe when recording takes place to ensure that payrolltransactions are recorded on a timely basis. (Timing)18-4The percentage of total audit time in the cycle devoted to performing tests of controls and substantive tests of transactions is usually far greater in the payroll and personnel cycle than for the sales and collection cycle because there is relatively little independent third party evidence, such as confirmation, to verify the related payroll accounts. In contrast, the accounts related to the sales and collection cycle can usually be verified for the most part by confirmations from customers. In addition, in the sales and collection cycle, verification of the realizability of receivables and sales cutoff tests are important and time- consuming tasks.18-5The auditor should be concerned with whether the human resources department is following the proper hiring and termination procedures. An obvious reason for this would be to ensure that there are adequate safeguards against hiring and retaining incompetent and untrustworthy people. The ramifications of hiring such people can range from simple inefficiency and waste to outright fraud or theft. More importantly, though, it is necessary for the auditor to assure himself or herself that the client is hiring and terminating according to operations standards and procedures. It is necessary to see if the internal controls are working as planned before they can be effectively evaluated. To say that the auditor doesn't care who is hired and who is fired is to suggest that he or she doesn't care if the internal controls work according to any standards. Failure to follow proper termination procedures could lead to fraudulent payments for work not performed.18-6To trace a random sample of prenumbered time cards to the related payroll checks in the payroll register and compare the hours worked to the hours paid is to test if those employees who worked are being paid for their time actually worked. Employees are likely to inform management if they are not paid, or underpaid. To trace a random sample of payroll checks from the payroll register and compare the hours worked to the hours paid is to test if the recorded payroll payments are for work actually performed by existing employees. This test, in effect, attempts to discover nonexistent employees or duplicate payments, if there are any. For this reason, the second procedure is typically more important to the audit of payroll.18-7In auditing payroll withholding and payroll tax expense, the emphasis should normally be on evaluating the adequacy of the payroll tax return preparation procedures rather than the payroll tax liability, because a major reason for misstatements in the liability account is incorrect preparation of the returns in the past. If the preparationprocedures are inadequate, and the amounts do not appear reasonable, then the auditor should expand his or her work and recompute the withholding and expense amounts to determine that the proper amount has been accrued. In addition, the auditor should consider the amount of penalties which may be assessed for inadequate withholdings and include these amounts in the accrual if they are significant.18-8Several analytical procedures for the payroll and personnel cycle and misstatements that might be indicated by significant fluctuations are as follows:18-9An auditor should perform audit tests primarily designed to uncover fraud in the payroll and personnel cycle when he or she has determined that internal controls are deficient (or the opportunity exists for management to override the internal controls) or when there are other reasons to suspect fraud. Audit procedures that are primarily for the detection of fraud in the payroll and personnel cycle include:1. Examine cancelled payroll checks for employee name,authorized signature, and proper endorsement (especially forsecond endorsements) to discover checks going to nonexistentemployees. The endorsement should be compared to signatureson W-4 forms.2. Trace selected transactions recorded in the payroll journalor listing to the human resources department files to determine whether the employees were actually employed during the period.3. Select several terminated employees from payroll records todetermine whether each former employee received his or her termination pay in accordance with company policy and to determine that the employee's pay was discontinued on the date of termination.18-9 (continued)4. Examine the subsequent payroll periods of terminatedemployees to ascertain that the employees are no longerbeing paid.5. Request a surprise payroll payoff to observe if anyunclaimed checks result, which will necessitate extensiveinvestigation.18-10 The Payroll Master File is maintained for each employee indicating the gross pay for each payment period, deductions from the gross pay, the net pay, the check number, and the date. The purpose of this record is to provide detailed information for federal and state income tax purposes, and to serve as the final record of what each employee was actually paid.The W-2 Form is issued to each employee at the end of each calendar year and indicates his or her gross pay, income taxes withheld, and FICA withheld for the year. In serving as a summary of the employee's earnings record, the W-2 form conveniently provides information necessary for the employee to fill out his or her income tax returns.A Payroll Tax Return is the form required by and submitted to the local, state and federal governments for the payment of withheld taxes and the employer's portion of FICA taxes and state and federal unemployment compensation taxes.18-11 Where the primary objective is to detect fraud, the auditor will examine the following supporting documents and records:1. Cancelled payroll checks for employee name, authorizedsignature and proper endorsement, watching specifically forunusual or recurring second endorsements.2. Payroll journal or listing, tracing transactions to thepersonnel files to determine whether the employees wereactually employed during the payroll period.3. Payroll journal or listing and individual payroll records,selecting terminated employees to determine whether eachterminated employee received his or her termination pay inaccordance with company policy and whether each employee waspaid in the subsequent payroll period.4. Payroll checks, observing each employee as he or she picksup and signs for his or her check.5. Time cards, testing them for reasonableness or observingwhether they are being punched by the proper employees.18-12 Types of authorizations in the payroll and personnel cycle are:1. Deduction authorization, without which the wrong amount (orno deduction) may be deducted from the employee's paycheck.2. Rate authorizations, without which the employee may begetting paid at the wrong rate.3. Time card authorization, without which the employee may begetting paid for the wrong quantity of hours worked.18-12(continued)4. Payroll check authorization, without which unauthorizedfunds may be paid out.5. Commission rate authorization, without which the salespeoplemight be improperly compensated for their sales efforts.6. Authorization to hire a new employee, without whichnonexistent or unqualified personnel may be added to thepayroll.18-13 It is common to verify total officers' compensation even when the tests of controls and substantive tests of transactions results in payroll are excellent because the salaries and bonuses of officers must be included in the SEC's 10-K Report and the federal income tax return and because management may be in a position to pay themselves more than the authorized amount, since the controls over the officers' payroll are typically weaker and therefore easier to override than those of the normal payroll.The usual audit procedure used to verify the officers' compensation is to obtain the authorized salary of each officer from the minutes of the board of directors and compare it to the related earnings record.18-14 An imprest payroll account is a separate payroll bank account in which a constant balance, either zero or small, is maintained. When a payroll is paid, the exact amount of the net payroll is transferred by check or electronic funds transfer from the general account to the imprest account. The purpose and advantage of an imprest payroll account is that it limits the company's exposure to payroll fraud by limiting the amount that may be misappropriated.18-15 Several audit procedures the auditor can use to determine whether recorded payroll transactions are recorded at the proper amounts are:1. Recompute hours worked from time cards.2. Compare pay rates with union contract, approval by the boardof directors, or other source.3. Recompute gross pay.4. Check withholdings by reference to tax tables andauthorization forms in personnel files.5. Recompute net pay.6. Compare cancelled check with payroll journal or listing foramount.18-16 Attributes sampling can be used in the payroll and personnel cycle in performing tests of controls and substantive tests of transactions with the following objectives:1. Time card hours agree with payroll computations.2. Overtime hours are approved.3. Foreman approves all time cards.4. Hourly rates agree with personnel files and union contracts.18-16 (continued)5. Gross pay calculation is verified.6. Exemptions taken agree with W-4.7. Income tax, other deductions, and net pay calculations areverified.8. Authorizations are available for voluntary withholdings andmiscellaneous deductions.9. Paycheck endorsement is same as signature on W-4 form.The frequency of control deviations or monetary errors must be estimated prior to performing the tests. This estimate together with the acceptable risk of assessing control risk too low (ARACR) and the tolerable exception rate will enable the auditor to determine the sample size required. Once the tests are performed on the sample, evaluation of the results will indicate whether the exception rate is lower than, equal to, or higher than that anticipated. The auditor must then use this judgment to decide the appropriate action to take.Multiple Choice Questions From CPA Examinations18-17 a. (2) b. (1) c. (3)18-18 a. (1) b. (4) c. (4) d. (4)Discussion Questions and Problems18-1918-2018-2118-2218-23 A flowchart of steps for each type of test is given below(requirements a, b, and c):18-24 a. Brendin's approach to determining why this year's payroll tax expense was so high suffers from two seriousdeficiencies: First, it lacks relevance, and second, it istoo narrowly focused. The approach lacks relevance in thathe is testing payroll withholding which is not the same aspayroll tax expense. Some payroll taxes are related towithholding such as FICA, but income tax withheld does notgive rise to an expense, and certain payroll taxes, such asunemployment compensation, are not withheld. The approach istoo narrowly focused in that the analytical test resultscould have resulted from a misstatement of the payrollitself; Brendin does not appear to be considering thispossibility.b. A more suitable approach for determining whether payroll taxwas properly stated in the current year would be to evaluatethe reasonableness of the total payroll, reconcile thepayroll to amounts shown on payroll tax reports, and checkcomputations as shown on those reports for reasonableness.18-25 The following audit procedures should be used to verify the payroll related accounts:1. Accrued payroll:a. Review the company's policy for computing the accrualand whether it is consistent with the prior year.b. Assess whether 60 percent is a reasonableapproximation of the portion of the subsequent payrollapplication to the current year.c. Test the subsequent payroll for cutoff and accuracy.d. Determine that the computation of the accrual iscorrect.2. Withheld payroll taxes:a. Compare the balance in the liability account with thepayroll journal or listing.b. Reconcile the amount to subsequent payroll tax reportsand cash disbursed.c. Review in light of the subsequent period's payroll.3. Accrued payroll taxes:a. Trace FICA withheld from payroll journal or listing topayroll tax reports.b. Review amounts on payroll tax reports forreasonableness.c. Reconcile accruals to payroll tax reports.d. Examine subsequent cash disbursed.18-26 a. The purpose of a surprise payroll payoff is to determine whether or not nonexistent personnel are included in thepayroll.b. Procedures other than a surprise payroll payoff that can beused to discover nonexistent employees are:1. Examine cancelled payroll checks for employee name,authorized signature, and proper endorsement that agreeswith the employee's signed W-4 form.18-26(continued)2. Select several terminated employees from payroll recordsto determine whether each former employee received his orher termination pay in accordance with company policy andwas not paid in subsequent payrolls.c. When the payroll payoff is taking place, the client shouldobserve these control procedures:1. All employees must prove identity.2. Unclaimed paychecks must be further investigated.Unclaimed paychecks might be accounted for byemployees who are sick or on vacation. After allpresent employees have received their checks, theremaining paychecks should be traced to the personnelfiles to determine if these employees were everemployed by the client. Thereafter, if practical, theremaining checks should be held until the employeescan be present with proper identification to claim thecheck.d. See c.2 above.18-2718-27 (continued)18-28 a. An audit program to verify sales commission expense is as follows:1. Select a sample of office copies of sales invoices.a. Check commissions rate to commissions rate file.b. Check computation of sales commissions.c. Examine invoices for internal verification byaccounts receivable clerk.d. Trace sales commission amounts to salescommission ledger.2. Foot the sales commission ledger for one or moremonths, and trace the total to the general ledger.3. Compare totals for periods in the sales commissionledger to period balances of sales commission expense.b. An audit program to verify accrued sales commissions is:1. Compare the accrual with that of the previous year.Investigate any significant change.2. Compare the amount of commissions paid to the salesmenon the fifteenth of the month following year-end tothe total accrued commissions at year-end. Obtain areconciliation and explanation for any reconcilingitems.3. Send confirmations to salesmen for the larger amountsof accrued commissions and a sample of the smalleramounts.Case18-29 a. Conventional forms and documents in a payroll system include the following:Personnel recordsDeduction authorization formsRate authorization formsTime cards and job time ticketsPayroll checksPayroll journal or listing and labor distributionEarnings recordW-2 formPayroll tax returnsIn using the computer service center, it appears that there is no loss in documentation in substance; however, theearnings record is not printed out each pay period, thus,the current version is usually in machine readable form.(This assumes that authorization forms exist although theyare not discussed in the case.) The fact that the earningsrecord is in magnetic form is not a problem, as long as theservice bureau has adequate backup and recovery controls.The above analysis reflects the fact that Leggert's internal controls in the payroll area are generally good.There is good segregation of duties between the Presidentand Clark, assuming both are trustworthy, honest people.Procedures, forms, records, and reports are comprehensiveand well-designed.The only potential deficiency in internal control is that errors in details could be made by the service bureauand not necessarily be caught. It is difficult to imagine that these would be material.18-29 (continued)b.c. Procedures in performance format:1. Make observations of the following activities by MaryClark:a) Control, collection and processing of time cards.b) Rechecking of hours on time cards.c) Processing and approval of payroll journal or listing.d) Posting of general ledger.2. Make observations of the following activities by thePresident:a) Maintenance of personnel files.b) Distribution of paychecks.c) Processing and approval of payroll journal or listing.d) Posting of general ledger.3. Make observations of the following general matters andactivities:a) Use of time clock by employees.b) Existence and use of adequate chart of accounts.4. Select a sample of payroll check numbers and:a) Account for existence and recording of paychecks.b) Examine paychecks for President's signature.c) Examine checks for proper endorsement.d) Compare cancelled checks with personnel records. 18-29 (continued)e) Compare date on check with date recorded inpayroll journal or listing and on the time card.5. Select a sample of payroll entries from the payrolljournal or listing and perform the following steps:a) Obtain time cards, examine for President'sapproval, and trace hours to payroll journal orlisting.b) Examine personnel files and authorization forrates and deductions.c) Recompute gross pay, deductions, and net pay.d) Compare account classification with chart ofaccounts or procedures manual.6. Select a sample of payroll journals and perform thefollowing steps:a) Examine payroll journal for approval by Clark.b) Trace postings to general ledger.d. A sampling data sheet follows. Note that this sampling datasheet was prepared using attributes sampling. The onlydifference between this approach and a nonstatisticalapproach is the determination of sample size. Undernonstatistical sampling, students’ sample sizes will vary.Internet Problem Solution: Outsourcing the Payroll Function18-1 You have just landed a new client for your firm - a new hotel constructed in Atlanta, Georgia. Although construction of the hotel is complete, the company has not completed hiring all the necessary employees. The company's president has approached you with several questions related to the company's payroll. Please answer the following questions posed by the president about outsourcing the payroll function. (Hint: Visit [/] to find some of your answers. You may need to do other research on the Internet to answer these questions.)1.“I'm considering outsourcing our payroll function. What aresome of the issues that I should think about before deciding to outsource?”Answer: Student responses will vary. However, the following issues are among those that the president should consider:∙Typical outsourcing agreements are long-term. A long-term contract with the outsourcing provider mayprove inflexible if future business needsnecessitate a change.∙Outsourcing results in a loss of control over the company’s data. The president may be concernedabout sharing of data with competitors.∙The president should also consider the adequacy of the service provider’s system. Does the providerutilize the most current technology? Can theprovider manage a significant increase in volume oftransactions? Will the provider continue to offerexcellent service?∙Can the service provider deliver all of the necessary salaries and wages reports and analysesthat the company may want or need?∙Costs are typically lower when outsourcing major IS functions. The company will be able to avoidinvestments in certain hardware and software as wellas in personnel if the payroll function isoutsourced.2.“If I decide to outsource the payroll function, whatpayroll service companies would you suggest I consider?”Answer: There are a variety of payroll service companies including ADP [/] and Ceridian [/].18-1 (continued)3.“I have several vacant positions at my new hotel. I'mconcerned that my beginning salaries might be too low. Couldyou find out what nationwide median salaries are for thevacant positions? The vacant positions are: restaurantmanager, catering sales manager, security director, and thefront office manager. Make certain that you let me know whatsalaries are in our region of the country. I may have notconsidered that properly when I advertised the positions.”Answer: Median salary information can be found on’s web site. The “HCECompensation”link[/careerresources/lodgprop.asp] will direct students to the appropriate location.There they will have to select the appropriate categorywhich, in this case, is a “lodging property.”Studentsshould then scroll down the salaries information until theyfind data for the South Atlantic Region. The median salariesare: restaurant manager - $37,151.62; catering sales manager- $38,472.10; security director - $52,810.67; and frontoffice manager - $37,947.73. You might wish to point out tothe students the difficulty in interpreting such data asthat presented on this site. Specifically, median salariesdata are presented for a number of categories such as sizeof facility, geographic region, and location. Theinquisitive student should inquire about these differencesand so a liberal view may be appropriately applied whengrading this component of the problem.(Note: Internet problems address current issues using Internet sources. Because Internet sites are subject to change, Internet problems and solutions are subject to change. Current information on Internet problems is available at /arens).。
审计学：一种整合方法 阿伦斯 英文版 第12版 课后答案 Chapter 23 Solutions Manual
Chapter 23Audit of Cash BalancesReview Questions23-1 The appropriate tests for the ending balance in the cash accounts depend heavily on the initial assessment of control risk, tests of controls, and substantive tests of transactions for cash receipts. The company's controls over cash receipts assist the auditor in determining that cash received is promptly deposited, that receipts recorded are proper, that customer accounts are promptly updated, and that the cash cutoff at year-end is proper. If the results of the evaluation of internal control, the tests of controls, and the substantive tests of transactions are adequate, it is appropriate to reduce the tests of details of balances for cash, especially for the detailed tests of bank reconciliations. On the other hand, if the tests indicate that the client's controls are deficient, extensive year-end testing may be necessary.23-2The appropriate tests for the ending balance in the cash accounts depend heavily on the initial assessment of control risk, tests of controls, and substantive tests of transactions for cash disbursements. The company's controls over cash disbursements assist the auditor in determining that cash disbursed is for approved company purposes, that cash disbursements are promptly recorded in the proper amount, and that cash cutoff at year-end is proper. If the results of the evaluation of internal control, the tests of controls, and the substantive tests of transactions are adequate, it is appropriate to reduce the tests of details of balances for cash, especially for the detailed tests of bank reconciliations. On the other hand, if the tests indicate that the client's controls are inadequate, extensive year-end testing may be necessary.An example in which the conclusions reached about the controls in cash disbursements would affect the tests of cash balances would be:If controls over the issuance of blank checks, the review of payees, amounts, and supporting documentation, the signing of checks, and the reconciliation of bank statements and vendors' statements are adequate, the auditor's review of outstanding checks on the year-end bank reconciliation may be greatly reduced.The year-end outstanding checks can be verified by testing a sample of checks returned with the cutoff bank statement rather than tracing all paid outstanding checks and the final monthly checks in the cash disbursements journal to the last month's cleared checks and the bank reconciliation.23-3The monthly reconciliation of bank accounts by an independent person is an important internal control over cash balances because it provides an opportunity for an internal verification of the cash receipts and cash disbursements transactions, investigation of reconciling items on the bank reconciliation, and the verification of the ending cash balance. Anyone responsible for the following duties would not be considered independent for the purposes of preparing monthly bank reconciliations: Issuance of checksReceipt and deposit of cashOther handling of cashRecord keeping23-4The controller's approach is to reconcile until the balance agrees. The shortcoming of this approach is that it does not include a review of the items that flow through the account and it opens the door for the processing of improper items. Such items as checks payable to improper parties, reissuance of outstanding checks to improper parties, and kiting of funds would not be discovered with the controller's approach. The controller's procedures should include the following:a. Examination of all checks clearing with the statement (including those onprevious month's outstanding check list) and comparison of payee andamount to the cash disbursements journal.b. Test of cash receipts to determine that they are deposited within areasonable amount of time.c. Follow-up on old outstanding checks so that they can be recognized asincome after it is determined that they will not be cashed, and no liabilityexists.23-5Bank confirmations differ from positive confirmations of accounts receivable in that bank confirmations request several specific items of information, namely:1. The balances in all bank accounts.2. Restrictions on withdrawals.3. The interest rate on interest-bearing accounts.4. Information on liabilities to the bank for notes, mortgages, or other debt.Positive confirmations of accounts receivable request of the buyer to confirm an account balance stated on the confirmation form or designate a different amount with an explanation. The auditor anticipates few exceptions to accounts receivable confirmations, whereas with bank confirmations he expects differences that the client must reconcile. Bank confirmations should be requested for all bank accounts, but positive confirmations of accounts receivable are normally requested only for a sample of accounts. If bank confirmations are not returned, they must be pursued until the auditor is satisfied as to what the requested information is. If positive confirmations of accounts receivable are not returned, second and maybe third requests may be made, but thereafter, follow-ups are not likely to be pursued. Alternative procedures, such as examination of subsequent payments or other support of customers' accounts may then be used.23-5 (continued)The reason why more importance is placed on bank confirmations than accounts receivable confirmations is that cash, being the most liquid of assets, must be more closely controlled than accounts receivable. In addition, other information–such as liabilities to the bank must be known for purposes of the financial statements. Finally, there are usually only a few bank accounts and most bank accounts have a large volume of transactions during the year.23-6This is a good auditing procedure that attempts to discover if any accounts that should have been closed are still being used, such as by a company employee to deposit customer remittances. The procedure may also discover unrecorded and contingent liabilities.23-7 A cutoff bank statement is a partial period bank statement with the related cancelled checks, duplicate deposit slips, and other documents included in bank statements, which is mailed by the bank directly to the auditor. The purpose of the cutoff bank statement is to verify the reconciling items on the client's year-end reconciliation with evidence that is inaccessible to the client.23-8Auditors are usually less concerned about the client's cash receipts cutoff than the cutoff for sales, because the cutoff of cash receipts affects only cash and accounts receivable and not the income statement, whereas a misstatement in the cutoff of sales affects accounts receivable and the income statement.For the purpose of detecting a cash receipt cutoff misstatement, there are two useful audit procedures. The first is to trace the deposits in transit to the cutoff bank statement to determine the date they were deposited in the bank account. Because the recorded cash will have to be included as deposits in transit on the bank reconciliation, the auditor can test for the number of days it took for the in-transit items to be deposited. If there is more than a two or three day delay between the balance sheet date and the subsequent deposit of all deposits in transit, there is an indication of a cutoff misstatement. The second audit procedure requires being on the premises at the balance sheet date and counting all cash and checks on hand and recording the amount in the audit files. When the bank reconciliation is tested, the auditor can then check whether the deposits in transit equal the amount recorded.23-9An imprest bank account for a branch operation is one in which a fixed balance is maintained. After authorized branch personnel use the funds for proper disbursements, they make an accounting to the home office. After the expenditures have been approved by the home office, a reimbursement is made to the branch account from the home office's general account for the total of the cash disbursements. The purpose of using this type of account is to provide controls over cash receipts and cash disbursements by preventing the branch operators from disbursing their cash receipts directly, and by providing review and approval of cash disbursements before more cash is made available.23-10 The purpose of the four-column proof of cash is to verify:Whether all recorded cash receipts were deposited.Whether all deposits in the bank were recorded in the accounting records.Whether all recorded cash disbursements were paid by the bank.Whether all amounts that were paid by the bank were recorded as cash disbursements in the accounting records.Two types of misstatements that the four-column proof of cash is meant to uncover are:Cash received that was not recorded in the cash receipts journalChecks that cleared the bank but have not been recorded in the cash disbursements journal23-11 Whenever a cutoff bank statement is not received directly from the bank, the auditor may verify the bank statement for the month subsequent to year-end. The audit procedures used for the verification are as follows:1. Foot all of the cancelled checks, debit memos, deposits, and creditmemos.2. Check to see that the bank statement balances when the totals in 1 areused.3. Review the items included in 1 to make sure they were cancelled by thebank in the proper period and do not include any erasures or alterations.The purpose of this verification is to test whether the client's employees have omitted, added, or altered any of the documents accompanying the statement.23-12 Lapping is a defalcation in which a cash shortage is concealed by delaying the crediting of cash receipts to the proper accounts receivable. The first step in the fraud is to withhold cash remitted by a customer from a bank deposit. A few days later, because the customer must receive credit for the remittance, the first customer's account is credited with an amount from a remittance made by a second customer. The process requires the continuous shifting of shortages from account to account and the crediting of subsequent receipts to the wrong accounts receivable.Kiting is a procedure used to conceal cash shortages from employers and auditors, to conceal bank overdrafts from the bank or banks affected, or to pad a cash position. All kiting procedures are designed to take advantage of the "float" period during which a check is in transit between banks.A shortage in the cash in bank account may be concealed by depositing in the bank a transfer check drawn on another bank. The transfer check, not recorded as a deposit or a cash disbursement, brings the bank account into agreement with the books of account. The check is recorded a few days later and the shortage "reappears" unless the process is repeated. A similar effect may be obtained by depositing unrecorded fictitious N.S.F. checks.23-12 (continued)If a depositor desires to write a check for which he does not have funds on deposit, he can deposit a transfer check large enough to cover the payment, even though the transfer check itself creates an overdraft. The transfer process may be repeated indefinitely or may be terminated by a deposit of sufficient funds to cover the overdraft. Because the purpose of this procedure is to conceal an overdraft from the bank, the transfer check may or may not be recorded on the books on the date that it was drawn.Kiting to pad a cash position typically occurs at the end of a fiscal period; a check transferring funds from one bank to another is deposited and recorded on the date drawn but is not recorded as a cash disbursement until the following period. In this case, the credit on the books would probably be made to a revenue account and the subsequent debit to an expense account.The following audit procedures would be used to uncover lapping:Confirm accounts receivable and give close attention to exceptions made by customers about payment dates. The confirmation procedure is betterapplied as a surprise at an interim date so that if a person is engaged inlapping, he or she will not have been able to bring the "lapped" accountsup to date. If the confirmations are always prepared at year-end, the auditstep may be anticipated by the person doing the lapping and the shortagegiven a different form such as kiting of checks.Make a surprise count of the cash and customers checks on hand. The deposit of these funds should be made under the auditor's control, andthe details of the deposit should later be compared with the cash receiptsbook and the accounts receivable records.Compare the details of remittance lists (if prepared), stamped duplicate deposit slips, and entries in the cash receipts book. Because deposit slipsare easily altered, some auditors prepare duplicate deposit slips fordeposits made a few days before and after the audit date and have theseslips authenticated by the bank. These authenticated duplicate depositslips are compared to remittance lists and to entries in the cash book.Compare the check vouchers received with the customers' checks with stamped duplicate deposit slips, the entries in the cash book, andpostings to the accounts receivable records. If the client stamps thevoucher with the date it was received, the auditor should make carefulcomparisons of the stamped dates to the dates recorded in the cashreceipts journal.Kiting might be uncovered by the following audit procedures:As a surprise count of cash and customers' checks on hand is made as a test for lapping, determine that checks representing transfers of funds areproperly recorded on the books.Prepare a schedule of the interbank transfers made for a few days before and after the audit date. The schedule should show, for each check, thedate that the cash disbursement was recorded on the books, and thedates of withdrawal and deposit shown on the bank statements.Obtain cutoff bank statements directly from the bank covering the seven to ten day period after the balance sheet date. Examine the checksreturned with the cutoff statements and pay attention to dates of thetransactions stamped by the banks on the backs of the checks. Thesestamped dates should not be earlier than the dates of the checks or thedates of cash disbursements recorded on the books. Protested (N.S.F.)checks should be investigated to determine they are not fictitious checksdeposited temporarily to cover a shortage.23-13 Assuming a client with excellent internal controls uses an imprest payroll bank account, the verification of the payroll bank reconciliation ordinarily takes less time than the tests of the general bank account even though the number of payroll checks exceeds those written on the general account because an imprest payroll account has no activity other than payroll checks drawn and deposits made to reestablish the standard minimum account balance. Furthermore, most employees cash their checks quickly, so there usually are few outstanding checks, especially older ones, and no other reconciling items. On the other hand, the general bank account will include all regular activity plus bank charges, notes, other liabilities, etc., which must be reconciled and verified.23-14The verification of petty cash reimbursements consists of footing the petty cash vouchers supporting the amounts of the reimbursements, accounting for a sequence of petty cash vouchers, examining the petty cash vouchers for authorization and cancellation, and examining the supporting documentation attached to the vouchers for reasonableness. The balance in the fund is verified by a count of the petty cash. Testing of petty cash transactions is more important than the ending balance in the account, because even if the amount of the petty cash fund is small, there is potential for a large number of improper transactions if the fund is frequently reimbursed.23-15There is a greater emphasis on the detection of fraud in tests of details of cash balances than for other balance sheet accounts because the amount of cash flowing into and out of the cash account is frequently larger than for any other account in the financial statements. Furthermore, the susceptibility of cash to misappropriation is greater than other types of assets because most other assets must be converted to cash to make them usable.This emphasis affects the auditor's evidence accumulation in auditing year-end cash as in these examples:Verifying whether cash transactions are properly recordedTesting of bank reconciliationsObtaining bank confirmations23-16 The misstatements that are of the greatest concern to auditors in bank reconciliations are intentional ones to cover up a cash shortage, usually resulting from a defalcation. A fraudulent deposit in transit or an omitted outstanding check will both cover up a cash shortage. Omitted deposits in transit or inclusion of a nonexistent outstanding check are likely misstatements only when the bank balance, after reconciling items are accounted for, is greater than the book balance, a highly unlikely occurrence.23-17This questions deals with a situation where a company’s bank received an electronic deposit of cash from credit card agencies making payments on behalf of customers purchasing products from the company’s o nline Web site. The company does not have the electronic deposit recorded in the general ledger. The company’s bank reconciliation should include an adjustment for this transaction, which would increase the book balance of cash and decrease accounts receivable from credit card agencies.Multiple Choice Questions From CPA Examinations23-18 a. (3) b. (2) c. (1)23-19 a. (4) b. (3) c. (4)Discussion Questions and Problems23-2023-21The objectives of each of the audit procedures are:1. To ascertain all cash balances and liabilities to banks that might exist. Theverification includes amounts and descriptions.2. To assure that the client is using the correct balance from the bank inpreparing its reconciliation.3. To determine which checks on the outstanding check list have sincecleared and to uncover checks that should have been included on theoutstanding check list, but were not. These could represent a cover-up ofa cash shortage.4. To create a list of outstanding checks for follow-up to determine why theyhave not cleared and to investigate the possibility of a misstatement ofcash and accounts payable.5. To assure that all loans, terms, and arrangements with the bank wereproperly authorized by the board of directors and are disclosed in thefinancial statements.6. To reconcile the recording of cash receipts and cash disbursementsbetween the bank and the client's books and to prepare a bankreconciliation at the same time. This may disclose existence,completeness, accuracy, cutoff, or posting and summarizationmisstatements.7. To determine if there is a cutoff misstatement in cash disbursements.8. To make sure the cash receipts were recorded by the bank shortly afterthe beginning of the new year and recorded in the current year's cashreceipts journal. A misstatement in either of these could indicate thecover-up of a cash shortage or a cash receipts cutoff misstatement.23-22 a. Bank reconciliation:Balance per bank $ 696Add:Deposits in transit 1,000Check erroneously charged to Pittsburgh Supply 3962,092Less: outstanding checks (1,394)Adjusted bank balance $ 698Balance per books before adjustments $ 8,256Adjustments to books:July bank service charge (87)Note payment (5,800 principal, 300 interest) (6,100)NSF check (311)Unrecorded check (1,060)Balance per books after adjustments $ 698(1) 6/30 DIT $ 600July deposits per books 25,456July deposits per bank (25,056)7/31 DIT $ 1,000(2) 6/30 O/S checks $ 1,742July checks per books 21,811July checks clear (23,615)Erroneous check charged 396Unrecorded check $ 1,0607/31 O/S checks $ 1,394b. Adjusting entry:Miscellaneous expense $ 87Interest expense 300Note payable 5,800Allowance for doubtful accounts 311Purchases 1,060*Cash in bank $7,558 To record adjustments arising from 7/31/07 bank reconciliation.*Will require reversal on August 1 because of recording in cashdisbursements journal.c.d. The correct cash balance for the financial statements is $698.23-23 a. In verifying the interbank transfers, the following audit procedures should be performed:1. List interbank transfers made a few days before and afterthe balance sheet date (already done).2. Trace these interbank transfers to the appropriate accoun-ting records, bank reconciliations, and bank records to verifyproper recording.b. For December 2006Cash in bank $14,000Branch bank clearing account 14,000Cash in bank 15,000Branch bank clearing account 15,000Cash in bank 28,000Branch bank clearing account 28,000Only the first entry is essential because the same entry is also being made on the branch bank for the other two entries.For January 2007Eliminate corresponding entries already made for the above.c. For December 2006Home office clearing account $26,000Cash in bank 26,000Home office clearing account 15,000Cash in bank 15,000 Home office clearing account 28,000Cash in bank 28,000For January 2007Eliminate corresponding entries already made for the above.d. ande.CORRECTED RECONCILIATIONDecember 31, 2007Balance per bank 12-31-07 $16,996.76Add:Deposits in transit 2,662.25Less: Outstanding checks* (2,467.75)Balance per bank - adjusted $17,191.26Balance per books - before adjustments $17,174.86Add: proceeds of note collected by bank 400.00 Less:Dishonored check $200.00Unrecorded bank service charge 5.50Error in recording check 178.10 (383.60)Balance per books - adjusted $17,191.26 *List of checks totals $2,467.75, not $2,267.75.b.Cash $400.00Notes receivable 400.00To record collection of a noteleft for collection.Accounts receivable 200.00Cash 200.00To charge dishonored check toaccounts receivable.Miscellaneous expense 5.50Cash 5.50To charge December bank servicecharge to expense.Accounts payable 178.10Cash 178.10To charge to accounts payable(or to receivables) the actualamount of a check drawn whichwas recorded for a lower amount.Cash Cash9/30/07Receipts Disbursements10/31/07 Balance per bank $5,411 $26,536 $25,217 $6,730 Deposits in transit9/30/07 3,611 (3,611)10/31/07 693 693 Outstanding checks9/30/07 (916) (916)10/31/07 1,278 (1,278) Bank error-check chargedto wrong account (407) 407 NSF checks (300) (609) 309 Balance per bank -adjusted $8,106 $23,318 $24,563 $6,861 Balance per booksunadjusted $8,106 $19,711 $23,967 $3,850 Adjustments to be madeInterest charged 596 (596) Note proceed 3,607 3,607 Balance per books -adjusted $8,106 $23,318 $24,563 $6,861b. Adjusting journal entries:Dr. Cash in bank $ 3,607Cr. Notes receivable 3,300Cr. Interest income 307Dr. Interest expense 596Cr. Cash in Bank 596To record adjustmentsresulting from Oct.31,2007 reconciliation ofbank account.■Case23-26Tuck CompanyRECONCILIATION OF CASH RECEIPTS, CASH DISBURSEMENTSAND BANK ACCOUNTFor the Month of December 200711/30/07 12/31/07Beginning Cash Cash EndingReconciliation Receipts Disbursements ReconciliationPer bank statement $19,400 $148,700 $132,500 $35,600 Deposits in transit:11/30/07 1,100 (1,100)12/31/07 2,400 2,400Outstanding checks:11/30/07 (2,300) (2,300)12/31/07 4,000 (4,000) Check of Tucker Co.charged in error (300) 300 Dishonored checksreturned duringDecember (400) (400)Adjusted bankamounts $18,200 $149,600 $133,500 $34,300 Per books beforeadjustment $18,200 $149,690 $124,885 $43,005 Correction ofrecording ofcheck #1501 (675) 675 Cancellation ofcheck #1504 (800) 800 Counter checkdrawn bypresident 200 (200) Postdated check#1575 presentedfor payment 10,000 (10,000) Correction ofrecording ofnote proceeds (90) (90) Bank servicecharges madein December 30 (30) Adjustment forcheck #2540 (140) 140 Adjusted bookamounts $18,200 $149,600 $133,500 $34,300Internet Problem Solution: Automated Clearing House System for Electronic Funds Transfers23-1 The swift and accurate movement of money is critically important to the health of our economy. The Federal Reserve Bank plays a major role in assuring the continued flow of money in our nation. Visit the Federal Reserve Bank [/paymentsys.htm] and the NACHA [/About/default.htm] to learn how money is transferred among individuals and institutions and then answer the following questions:1. What is the ACH network? Who provides clearing services?Answer: From the NACHA website: “The ACH Network is a highlyreliable and efficient nationwide batch-oriented electronic fundstransfer system governed by the NACHA OPERATING RULESwhich provide for the interbank clearing of electronic payments forparticipating depository financial institutions. The Federal Reserveand Electronic Payments Network act as ACH Operators, centralclearing facilities through which financial institutions transmit orreceive ACH entries.”2. What types of payments are processed in the ACH?Answer: From the NACHA website:∙Direct Deposit of payroll, Social Security and other government benefits, and tax refunds;∙Direct Payment of consumer bills such as mortgages, loans, utility bills and insurance premiums;∙Business-to-business payments;∙E-checks;∙E-commerce payments;∙Federal, state and local tax payments.3. Who sets the rules that are followed by NACHA?Answer: From the NACHA website: NACHA provides the legalfoundation for the ACH Network through the development andenforcement of the The NACHA Operating Rules. Rules andguidelines are established for all participants in the ACH systemand ensure that the Network infrastructure, applications, rules andenforcement are consistent with processing payments in a secure,reliable, and efficient manner, and that financial institutions haveaccess to effective risk management tools.(Note: Internet problems address current issues using Internet sources. Because Internet sites are subject to change, Internet problems and solutions are subject to change. Current information on Internet problems is available at /arens).。
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Chapter 9Materiality and RiskReview Questions9-1The planning phases are: accept client and perform initial planning, understand the client’s business and industry, assess client business risk, perform preliminary analytical procedures, set materiality and assess acceptable audit risk and inherent risk, understand internal control and assess control risk, gather information to assess fraud risk, and develop overall audit plan and audit program. Evaluation of materiality is part of phase five. Risk assessment is part of phase three (client business risk), phase five (acceptable audit risk and inherent risk), phase six (control risk), and phase seven (fraud risk).9-2Materiality is defined as: the magnitude of an omission or misstatement of accounting information that, in light of the surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement."Obtain reasonable assurance," as used in the audit report, means that the auditor does not guarantee or insure the fair presentation of the financial statements. There is some risk that the financial statements contain a material misstatement.9-3Materiality is important because if financial statements are materially misstated, users' decisions may be affected, and thereby cause financial loss to them. It is difficult to apply because there are often many different users of the financial statements. The auditor must therefore make an assessment of the likely users and the decisions they will make. Materiality is also difficult to apply because it is a relative concept. The professional auditing standards offer little specific guidance regarding the application of materiality. The auditor must, therefore, exercise considerable professional judgment in the application of materiality.9-4The preliminary judgment about materiality is the maximum amount by which the auditor believes the financial statements could be misstated and still not affect the decisions of reasonable users. Several factors affect the preliminary judgment about materiality and are as follows:1. Materiality is a relative rather than an absolute concept.2. Bases are needed for evaluating materiality.3. Qualitative factors affect materiality decisions.4. Expected distribution of the financial statements will affect thepreliminary judgment of materiality. If the financial statements arewidely distributed to users, the preliminary judgment of materialitywill probably be set lower than if the financial statements are notexpected to be widely distributed.5. The level of acceptable audit risk will also affect the preliminaryjudgment of materiality.9-5Because materiality is relative rather than absolute, it is necessary to have bases for establishing whether misstatements are material. For example, in the audit of a manufacturing company, the auditor might use as bases: net income before taxes, total assets, current assets, and working capital. For a governmental unit, such as a school district, there is no net income before taxes, and therefore that would be an unavailable base. Instead, the primary bases would likely be fund balances, total assets, and perhaps total revenue.9-6The following qualitative factors are likely to be considered in evaluating materiality:a. Amounts involving fraud are usually considered more importantthan unintentional errors of equal dollar amounts.b. Misstatements that are otherwise minor may be material if there arepossible consequences arising from contractual obligations.c. Misstatements that are otherwise immaterial may be material if theyaffect a trend in earnings.9-7 A preliminary judgment about materiality is set for the financial statementsas a whole. Tolerable misstatement is the maximum amount of misstatement that would be considered material for an individual account balance. The amount of tolerable misstatement for any given account is dependent upon the preliminary judgment about materiality. Ordinarily, tolerable misstatement for any given account would have to be lower than the preliminary judgment about materiality.In many cases, it will be considerably lower because of the possibility of misstatements in different accounts that, in total, cannot exceed the preliminary judgment about materiality.9-8There are several possible answers to the question. One example is: Cash $500 OverstatementFixed assets $3,000 OverstatementLong-term loans $1,500 UnderstatementNote: Cash and fixed assets are tested for overstatement and long-term loans for understatement because the auditor's objective in this case is to testfor overstatements of owner's equity.The least amount of tolerable misstatement was allocated to cash and long-term loans because they are relatively easy to audit. The majority of the total allocation was to fixed assets because there is a greater likelihood of misstatement of fixed assets in a typical audit.9-9An estimate of the total misstatement in a segment is the estimate of the total misstatements based upon the sample results. If only a sample of the population is selected and audited, the auditor must project the total sample misstatements to a total estimate. This is done audit area by audit area. The misstatements in each audit area must be totaled to make an estimate of the total misstatements in the overall financial statements. It is important to make these estimates so the auditor can evaluate whether the financial statements,9-9 (continued)taken as a whole, may be materially misstated. The estimate for each segment is compared to tolerable misstatement for that segment and the estimate of the overall misstatement on the financial statements is compared to the preliminary judgment about materiality.9-10If an audit is being performed on a medium-sized company that is part of a conglomerate, the auditor must make a materiality judgment based upon the conglomerate. Materiality may be larger for a company that is part of a conglomerate because even though the financial statements of the medium-sized company may be misstated, the financial statements of the large conglomerate might still be fairly stated. If, however, the auditor is giving a separate opinion on the medium-sized company, the materiality would be lower than for the audit of a conglomerate.9-11The audit risk model is as follows:PDR= AARIR x CRWhere PDR = Planned detection riskAAR= Acceptable audit riskIR= Inherent riskCR= Control riskPlanned detection risk A measure of the risk that audit evidence fora segment will fail to detect misstatements exceeding a tolerableamount, should such misstatements exist.Acceptable audit risk A measure of how willing the auditor is toaccept that the financial statements may be materially misstatedafter the audit is completed and an unqualified opinion has beenissued.Inherent risk A measure of the auditor's assessment of thelikelihood that there are material misstatements in a segmentbefore considering the effectiveness of internal control.Control risk A measure of the auditor's assessment of thelikelihood that misstatements exceeding a tolerable amount in asegment will not be prevented or detected by the client's internalcontrols.SAS 107 (AU 312) notes that the combination of inherent risk and control risk reflect the risk of material misstatement.9-12Planned detection risk is a measure of the risk that the audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist. When planned detection risk is increased from medium to high, the amount of evidence the auditor must accumulate is reduced.9-13An increase in planned detection risk may be caused by an increase in acceptable audit risk or a decrease in either control risk or inherent risk. A decrease in planned detection risk is caused by the opposite: a decrease in acceptable audit risk or an increase in control risk or inherent risk.9-14Inherent risk is a measure of the auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control.Factors affecting assessment of inherent risk include:Nature of the client's businessResults of previous auditsInitial vs. repeat engagementRelated partiesNonroutine transactionsJudgment required to correctly record transactions andMakeup of the populationFactors related to fraudulent financial reportingFactors related to misappropriation of assets9-15Inherent risk is set for segments rather than for the overall audit because misstatements occur in segments. By identifying expectations of misstatements in segments, the auditor is thereby able to modify audit evidence by searching for misstatements in those segments.When inherent risk is increased from medium to high, the auditor should increase the audit evidence accumulated to determine whether the expected misstatement actually occurs. The audit evidence goes in the opposite direction in Review Question 9-12.9-16Extensive misstatements in the prior year's audit would cause inherent risk to be set at a high level (maybe even 100%). An increase in inherent risk would lead to a decrease in planned detection risk, which would require that the auditor increase the level of planned audit evidence.9-17Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.Acceptable audit risk has an inverse relationship to evidence. If acceptable audit risk is reduced, planned evidence should increase.9-18When the auditor is in a situation where he or she believes that there is a high exposure to legal liability, the acceptable audit risk would be set lower than when there is little exposure to liability. Even when the auditor believes that there is little exposure to legal liability, there is still a minimum acceptable audit risk that should be met.9-19The first category of factors that determine acceptable audit risk is the degree to which users rely on the financial statements. The following factors are indicators of this:Client's sizeDistribution of ownershipNature and amount of liabilitiesThe second category of factors is the likelihood that a client will have financial difficulties after the audit report is issued. Factors affecting this are: Liquidity positionProfits (losses) in previous yearsMethod of financing growthNature of the client's operationsCompetence of managementThe third category of factors is the auditor's evaluation of management's integrity. Factors that may affect this are:Relationship with current or previous auditorsFrequency of turnover of key financial or internal audit personnelRelationship with employees and labor unions9-20Exact quantification of all components of the audit risk model is not required to use the model in a meaningful way. An understanding of the relationships among model components and the effect that changes in the components have on the amount of evidence needed will allow practitioners to use the audit risk model in a meaningful way.9-21The auditor should revise the components of the audit risk model when the evidence accumulated during the audit indicates that the auditor's original assessments of inherent risk or control risk are too low or too high or the original assessment of acceptable audit risk is too low or too high.The auditor should exercise care in determining the additional amount of evidence that will be required. This should be done without the use of the audit risk model. If the audit risk model is used to determine a revised planned detection risk, there is a danger of not increasing the evidence sufficiently.Multiple Choice Questions From CPA Examinations9-22 a. (4) b. (4) c (1)9-23 a. (1) b. (1) c. (1)9-24 a. (2) b. (3) c. (1)Discussion Questions And Problems9-25 a. The justification for a lower preliminary judgment about materialityfor overstatements is directly related to legal liability and audit risk.Most auditors believe they have a greater legal and professionalresponsibility to discover overstatements of owners' equity thanunderstatements because users are likely to be more critical ofoverstatements. That does not imply there is no responsibility forunderstatements.b. There are two reasons for permitting the sum of tolerablemisstatements to exceed overall materiality. First, it is unlikely thatall accounts will be misstated by the full amount of tolerablemisstatement. Second, some accounts are likely to be overstatedwhile others are likely to be understated, resulting in netmisstatement that is likely to be less than overall materiality.c. This results because of the estimate of sampling error for eachaccount. For example, the likely estimate of accounts receivable isan understatement of $7,500 + or - a sampling error of $11,500.You would be most concerned about understatement for accountsreceivable because the estimated understatement of $19,000exceeds the tolerable misstatement of $18,000 for that account.d. You would be most concerned about understatement amountssince the total estimated understatement amount ($30,000)exceeds the preliminary judgment about materiality forunderstatements ($20,000). You would be most concerned aboutaccounts receivable given that the total misstatement for thataccount exceeds tolerable misstatement for understatement.e.1. This may occur because total tolerable misstatement wasallowed to exceed the preliminary judgment (see Part b forexplanation).2. The auditor must determine whether the actual totaloverstatement amount actually exceeds the preliminaryjudgment by performing expanded audit tests or by requiringthe client to make an adjustment for estimatedmisstatements.9-26 a. The profession has not established clear-cut guidelines as to theappropriate preliminary estimates of materiality. These are mattersof the auditor's professional judgment.To illustrate, the application of the illustrative materialityguidelines shown in Fig 9-2(p. 252are used for the problem. Other guidelines may be equallyacceptable.b. The allocation to the individual accounts is not shown. The difficultyof the allocation is far more important than the actual allocation.There are several ways the allocation could be done. The most likely way would be to allocate only on the basis of the balance sheet rather than the income statement. Even then the allocation could vary significantly. One way would be to allocate the same amount to each of the balance sheet accounts on the consolidated statement of financial position. Using a materiality limit of $12,500,000 before taxes (because it is the most restrictive) and the same dollar allocation to each account excluding retained earnings, the allocation would be approximately $595,000,000 to each account. There are 21 account summaries included in the statement of financial position, which is divided into $12,500,000.An alternative is to assume an equal percentage misstatement in each of the accounts. Doing it in that manner, total assets should be added to total liabilities and owners' equity, less retained earnings. The allocation would be then done on a percentage basis.c. Auditors generally use before tax net earnings instead of after taxnet earnings to develop a preliminary judgment about materiality given that transactions and accounts being audited within a segment are presented in the accounting records on a pretax basis.Auditors generally project total misstatements for a segment and accumulate all projected total misstatements across segments on a pretax basis and then compute the tax effect on an aggregate basis to determine the effects on after tax net earnings.d. By allocating 75% of the preliminary estimate to accountsreceivable, inventories, and accounts payable, there is far less materiality to be allocated to all other accounts. Given the total dollar value of those accounts, that may be a reasonable allocation.The effect of such an allocation would be that the auditor might be able to accumulate sufficient competent evidence with less total effort than would be necessary under part b. Under part b, it would likely be necessary to audit, on a 100% basis, accounts receivable, inventories, and accounts payable. On most audits it would be expensive to do that much testing in those three accounts.It would likely be necessary to audit accounts such as cash and temporary investments on a 100% basis. That would not becostly on most audits because the effort to do so would be smallcompared to the cost of auditing receivables, inventories, andaccounts payable.e. It is necessary for you to be satisfied that the actual estimate ofmisstatements is less than the preliminary judgment aboutmateriality for all of the bases. First you would reevaluate thepreliminary judgment for earnings. Assuming no change isconsidered appropriate, you would likely require an adjusting entryor an expansion of certain audit tests.9-27 a. The following terms are audit planning decisions requiring professional judgment:Preliminary judgment about materialityAcceptable audit riskTolerable misstatementInherent riskRisk of fraudControl riskPlanned detection riskb. The following terms are audit conclusions resulting from applicationof audit procedures and requiring professional judgment:Estimate of the combined misstatementsEstimated total misstatement in a segmentc. It is acceptable to change any of the factors affecting audit planningdecisions at any time in the audit. The planning process beginsbefore the audit starts and continues throughout the engagement.9-28Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.a. True. A CPA firm should attempt to use reasonable uniformity fromaudit to audit when circumstances are similar. The only reasons forhaving a different audit risk in these circumstances are the lack ofconsistency within the firm, different audit risk preferences fordifferent auditors, and difficulties of measuring audit risk.b. True. Users who rely heavily upon the financial statements needmore reliable information than those who do not place heavyreliance on the financial statements. To protect those users, theauditor needs to be reasonably assured that the financialstatements are fairly stated. That is equivalent to stating thatacceptable audit risk is lower. Consistent with that conclusion, theauditor is also likely to face greatest legal exposure in situationswhere external users rely heavily upon the statements. Therefore,the auditor should be more certain that the financial statements arecorrectly stated.c. True. The reasoning for c is essentially the same as for b.d. True. The audit opinion issued by different auditors conveys thesame meaning regardless of who signs the report. Users cannot beexpected to evaluate whether different auditors take different risklevels. Therefore, for a given set of circumstances, every CPA firmshould attempt to obtain approximately the same audit risk.9-29 a. False. The acceptable audit risk, inherent risk, or control risk may all be different. A change of any of these factors will cause achange in audit evidence accumulated.b. False. Inherent risk and control risk may be different. Even ifacceptable audit risk is the same, inherent risk and control risk willcause audit evidence accumulation to be different.c. True. These are the primary factors determining the evidence thatshould be accumulated. Even in those circumstances, however,different auditors may choose to approach the evidenceaccumulation differently. For example, one firm may choose toemphasize analytical procedures, whereas other firms mayemphasize tests of controls.9-30 a.1. The auditor may set inherent risk at 100% because of lack ofprior year information. If the auditor believes there is areasonable chance of a material misstatement, 100%inherent risk is appropriate. Similarly, because the auditordoes not plan to test internal controls due to theineffectiveness of internal controls, a 100% risk isappropriate for control risk.2. Acceptable audit risk and planned detection risk will beidentical. Using the formula:PDR = AAR / (IR x CR), if IR and CRequal 1, then PDR = AAR.3. If planned detection risk is lower, the auditor mustaccumulate more audit evidence than if planned detectionrisk is higher. The reason is that the auditor is willing to takeonly a small risk that substantive audit tests will fail touncover existing misstatements in the financial statements.b.1. Using the formula in a., planned detection risk is equal to20% [PDR = .05 / (.5 x .5) = .2].2. Less evidence accumulation is necessary in b-1 than ifplanned detection risk were smaller. Comparing b-1 to a-2for an acceptable audit risk of 5%, considerably lessevidence would be required for b-1 than for a-2.c.1. The auditor might set acceptable audit risk high becauseRedwood City is in relatively good financial condition andthere are few users of financial statements. It is common inmunicipal audits for the only major users of the financialstatements to be state agencies who only look at them forreasonableness. Inherent risk might be set low because ofgood results in prior year audits and no audit areas wherethere is a high expectation of misstatement. Control riskwould normally be set low because of effective internalcontrols in the past, and continued expectation of goodcontrols in the current year.2. Using the formula in a-2, PDR = .05 / (.2 x .2) = 1.25.Planned detection risk is equal to more than 100% in thiscase.3. No evidence would be necessary in this case, because thereis a planned detection risk of more than 100%. The reasonfor the need for no evidence is likely to be the immaterialityof repairs and maintenance, and the effectiveness of internalcontrols. The auditor would normally still do some analyticalprocedures, but if those are effective, no additional testing isneeded. It is common for auditors to use a 100% planneddetection risk for smaller account balances. It wouldordinarily be inappropriate to use such a planned detectionrisk in a material account such as accounts receivable orfixed assets.9-31 a. Acceptable audit risk A measure of how willing the auditor is to accept that the financial statements may be materially misstatedafter the audit is completed and an unqualified opinion has beenissued. This is the risk that the auditor will give an incorrect auditopinion.Inherent risk A measure of the auditor's assessment of thelikelihood that there are material misstatements in a segmentbefore considering the effectiveness of internal control. This riskrelates to the auditor's expectation of misstatements in the financialstatements, ignoring internal control.Control risk A measure of the auditor's assessment of the likelihoodthat misstatements exceeding a tolerable amount in a segment willnot be prevented or detected by the client's internal controls. Thisrisk is related to the effectiveness of a client's internal controls.Planned detection risk A measure of the risk that audit evidence fora segment will fail to detect misstatements exceeding a tolerableamount, should such misstatements exist. In audit planning, thisrisk is determined by using the other three factors in the risk modelusing the formula PDR = AAR / (IR x CR).b.1 2 3 4 5 6Acceptable Audit Risk .05 .05 .05 .05 .01 .01IR x CR 1.00 .24 .24 .06 1.00 .24PDR = AAR / (IR x CR) .05 .208 .208 .833 .01 .042Planned Detection Riskin percent 5% 20.8% 20.8% 83.3% 1% 4.2%c.1. Decrease; Compare the change from situation 1 to 5.2. Increase; Compare the change from situation 1 to 2.3. Increase; Compare the change from situation 1 to 2.4. No effect; Compare the change from situation 2 to 3.d. Situation 5 will require the greatest amount of evidence becausethe planned detection risk is smallest. Situation 4 will require theleast amount of evidence because the planned detection risk ishighest. In comparing those two extremes, notice that acceptableaudit risk is lower for situation 5, and both control and inherent riskare considerably higher.9-32 a. Low, medium, and high for the four risks and planned evidence have meaning only in comparison to each other. For example, anacceptable audit risk that is high means the auditor is willing toaccept more risk than in a situation where there is medium riskwithout specifying the precise percentage of risk. The same is truefor the other three risk factors and planned evidence.b.1 2 3 4 5 6Acceptable Audit Risk H H L L H MIR x CR L M H M M MPDR = AAR / (IR x CR) H M L L M MPlanned Evidence L M H H M ML = low, M = medium, H = highc.9-339-34Cases 9-359-36Computer prepared Excel worksheets (P936a.xls and P936b.xls) are contained on the Companion Website and on the Instructor’s Resource CD-ROM, which is available upon request.a. See Worksheet 9-36A on pages 9-18 and 9-19. It is important torecognize that there is no one solution to this requirement. Thedetermination of materiality and allocation to the accounts is alwaysarbitrary. In this illustration, the auditor makes estimatedadjustments for problems noted by analytical procedures. This is animportant step as the potential adjustments reduce income beforetaxes, and thus materiality. The illustrated solution recognizes thatwith downward adjustments, actual income may be much closer tothe contractual amount required for an additional contribution to theemployee's pension plan. This creates a sensitivity that will need tobe watched carefully as the audit progresses. The allocation to theaccounts is particularly arbitrary. It is noteworthy that the sum ofallocated amounts equals 1.5 times materiality. It is assumed thatthis is consistent with the audit firm's internal policies.b. The level of acceptable audit risk is based on an evaluation of threefactors:1. The degree to which external users rely on the statements.2. The likelihood that the client will have financial difficultiesafter the audit report is issued.3. The auditor's evaluation of management's integrity.Stanton Enterprise is a public company and therefore has a highdegree of reliance by external users on its financial statements. TheCompany's operating results and financial condition indicate thatthere is very little likelihood of financial difficulty in the immediatefuture. With regard to management's integrity, although there hasbeen some concern with Leonard Stanton's past bankruptcy, thecarefully monitored relationship has been good for the four yearsStanton has been a client. On that basis, it appears managementintegrity is good.Overall, then, an acceptable audit risk level of medium would seem appropriate.c. See Worksheet 9-36B on pages 9-20 and 9-21 that shows bothhorizontal and vertical analysis of the 2006 audited and the 2007unaudited financial statements, as well as computation ofapplicable ratios. Following are the key observations to be made:。