ACCT 314 Final

D. Trace a sample of bills of lading to the sales journal. To obtain evidence as to the completeness assertion, an auditor would trace a sample from the population of source documents to the accounting records. A bill of lading is prepared for goods shipped, which would include all sales. Tracing bills of lading to the sales journal will indicate to the auditor whether all of those selected were recorded, which would support the conclusion that all sales were recorded. Tracing from the sales journal to source documents supports the assertion that the recorded sales actually occurred. Receiving reports would relate to purchases, not sales. Tracing sales invoices to bills of lading would provide evidence that those transactions for which sales invoices were prepared actually occurred.

A.Trace entries from the sales journal to sales invoices and bills of lading. To obtain evidence as to the occurrence assertion, an auditor would trace a sample from the accounting records to source documents to determine if each entry recorded is supported by evidence that a sale occurred. This would be accomplished by tracing entries from the sales journal to source documents. Receiving reports would relate to purchases, not sales. Tracing sales invoices to bills of lading would provide evidence that those transactions for which sales invoices were prepared actually occurred but would not indicate if all recorded transactions actually occurred. Tracing a sample of bills of lading to the sales journal would provide evidence about completeness, not occurrence.

B. Opening the mail and reconciling the perpetual inventory records to the physical count. Opening the mail gives an employee access to cash, not inventory. Reconciling physical counts of inventory to perpetual records involves reconciliation of inventory but not cash. As a result, these are unrelated and would not be incompatible if performed by the same individual. Approving sales and delivering inventory gives an individual both authority and custody, which are not compatible. Either opening the mail and recording entries in the sales journal, or recording entries in the sales journal and delivering inventory, have the same individual involved in both custody and recording, which are not compatible.

B. Completeness Confirmations provide the auditor with evidence supporting rights and obligations since the debtor is indicating that the money is owed to the client; allocation and valuation, since the debtor is indicating the amount owed, which can be compared to the recorded amount; and existence, since the debtor is acknowledging the debt. It does not provide evidence about completeness as confirmations will not be sent to debtors if receivables are not recorded.

B. Prepares receiving reports for all goods received. Good internal control would generally require the person receiving inventory to complete a receiving report whenever goods are received to be matched against what has been ordered and what is billed. Although the person receiving inventory may receive advance copies of purchase orders to indicate that goods to be received are approved, the quantities would generally not be included so that a count will have to be made. The person receiving inventory has custody, which should be segregated from recording, including the posting of goods received to the general ledger; and reconciliations, such as a comparison of receiving reports to general ledger postings.

D. Be responsible for negotiating terms with vendors. Good internal control would generally require the segregation of functions related to authorization, custody, recording, and reconciliation. The purchasing manager would be responsible for authorization, including negotiating terms with vendors, and would not defer to the accounts payable department. Documentation will be canceled at the time payment is made, often by the check signer at the time checks are being signed. Accounts payable will establish agreement between the vendors invoice, the receiving report, and the purchase order as a basis for determining that payment may be made

B. Trace them back to the supporting source documentation. By choosing from a population consisting of general ledger postings, the auditor could potentially select any transaction that was recorded. By tracing a sample to source documentation, the auditor could verify that each transaction that was recorded is supported by a purchase order, receiving report, and invoice, indicating it likely did occur. Verifying proper reconciliation to applicable sub-ledgers will provide evidence supporting management's assertion related to the completeness of postings to the sub-ledger. Verifying the proper authorization and training of employees who made the general ledger postings would relate more to internal control than to an assertion made by management but does provide evidence about the entity's ability to provide accurate information. Using professional judgment to draw a conclusion as to reasonableness and accuracy of postings implies that the auditor has some basis for knowing what is reasonable, indicating that this would be an analytical procedure comparing an auditor expectation to recorded data and would support the accuracy assertion.

C. Completeness. Vouching equipment that has been observed by the auditor to its inclusion in the accounting records provides the auditor with evidence that the accounting records are complete and include all equipment that the entity has. To support existence, the auditor will trace items from the records to observations. To support rights and obligations, the auditor may look at purchase documents and insurance policies. To support valuation and allocation, the auditor will likely look at purchase documents.

D. Select items from the accounting records and observe them in the entity's factory. By selecting items from the accounting records and observing them in the entity's factory, the auditor can determine that items that are included in the accounting records actually do exist. Tracing items seen on the factory floor to the accounting records provides evidence that the accounting records are complete. Tracing items from the accounting records to purchase documents provides evidences of rights and obligations and valuation and allocation. Evaluating the entity's policies for capitalizing and expensing costs related to equipment acquisitions provides evidence about valuation and allocation

B. Completeness. By examining the repairs and maintenance account, the auditor can determine if items that should have been capitalized as property, plant, and equipment were inappropriately recognized as expense and excluded from recorded amounts, supporting the assertion of completeness since costs related to property, plant, and equipment that are not recorded in repairs and maintenance are likely recorded in the asset accounts. The auditor will test existence by observing property, plant, and equipment. Valuation and allocation and rights and obligations can both be supported by tracing items to purchase documents.

C. Valuation and allocation. When equipment is sold at a significant gain, it raises questions as to the useful life, salvage value, and method of depreciation that were being used when depreciating the asset. These factors all affect the amount that will be recognized as depreciation expense, affecting the carrying value of the equipment and the valuation and allocation assertion.

d. Net Income: Understate Assets: Understate When a cost that should have been capitalized is recognized as repairs and maintenance, an expense, the carrying value of the asset is understated and the expense is overstated causing net income to be understated.

C. Closing statement. An asset's depreciable basis is its cost less its salvage value. To calculate, or recalculate, depreciation on an asset, the cost is necessary, which can be derived from the closing statement, which is the document used in real estate and many other transactions to summarize the amounts or items being exchanged between the parties, obligations being created or assumed, and costs being incurred that directly relate to the transaction. A deed is a document of ownership but does not provide information about cost or salvage value. A flood insurance policy provides evidence of ownership but not as to cost or salvage value.

A.Checks were written near year-end to reduce the balance in accounts payable but were not mailed until a week after year-end. A bank cutoff statement provides evidence in the form of identifying a significant lag between the date on which recognized in the accounting records as having been written or deposited and the time it takes to clear the bank. If checks written near year-end are held before being mailed, they will take longer than a normal amount of time to clear the entity's bank account, which may be detected by examining a bank cutoff statement. An overstatement of accounts receivable due to the misappropriation of checks received can be detected through the use of confirmations or through analytical procedures evaluating the number of days sales in accounts receivable, but not from examining a bank cutoff statement since there will not be a significant lag between the date on which the deposit is recorded and when the checks clear the bank. Checks written in inflated amounts and to nonexistent vendors may be detected by reviewing a list of vendors, and by tracing payments to supporting documentation and price lists. They will not be detected, however, by examining a bank cutoff statement.

D. Cash is overstated by $20,000. The transfers made from the general account on 12/29/17 and 12/31/17 were recorded by both the general account and the special account in 2017. The $20,000 transfer on 12/30/17 was deducted from the general account in 2017 but was not added to the special account until 2018, resulting in an understatement of $20,000. The $40,000 transfer on 1/2/18, however, was deducted from the general account in 2018, but was added to the special account in 2017, resulting in an overstatement of $40,000. As a result, cash is overstated by the net amount of $20,000.

C. Review bank confirmations to verify bank balances. Bank confirmations provide evidence of existence since they are an independent verification of cash being held by financial institutions on behalf of the entity. Reviewing bank reconciliations will primarily provide evidence about the valuation of cash and will not provide evidence of its existence unless amounts are traced to other documentation such as bank statements. Analytical procedures to determine if amounts and volume of transactions match expectations will provide evidence of completeness, not existence. Testing the translation of foreign currency transactions will provide evidence related to the valuation of cash denominated in another currency, but not its existence.

D. Estimates are reconsidered in relation to the financial statements as a whole. Near the end of an audit, virtually all audit evidence considered necessary by the auditor has been obtained to support the individual items reported and disclosed in the financial statements. The purpose of an evaluation of estimates at this stage is to determine if the financial statements appear to fairly reflect financial position, results of operations, and cash flows. Individual estimates would not be recalculated. Estimates should be neither overly conservative nor overly aggressive since a material understatement of financial position or results of operations still constitutes a material misstatement. Whether a company's stock is publicly traded will not necessarily affect the level of additional scrutiny applied to a stock option plan.

C. The auditor's judgment of management integrity. The auditor evaluates the integrity of management when evaluating whether to accept or continue a client or engagement and, since the accountant is prohibited from associating with a client whose management lacks integrity, it is presumed that management's integrity is not an issue that would be communicated to the audit committee. The auditor is required to communicate significant findings that include qualitative aspects of accounting practices, policies, estimates, and disclosures; disagreements with managements; and any material corrected misstatements.

B. None. An entity is required to recognize a loss if it is probable and estimable, but is only required to disclose it if it is reasonably possible. Contingent gains are not recognized. Since the probable outcome is a gain, no accrual is required and the accountant would not propose an adjusting entry.

A. A current ratio of 1.3 and a quick ratio of 0.8. A quick ratio of 0.8 indicates that the entity does not have sufficient liquid assets to settle its current liabilities, raising doubt about its ability to meet its obligations for a period of at least one year, which constitutes substantial doubt about the entity's ability to continue as a going concern. Investing activities are discretionary and negative cash flows are simply indicative of purchases of investments that exceeded proceeds from disposals. Management's refusal to sign a letter of representation is an audit scope limitation and will require the auditor to issue a disclaimer of opinion but is not indicative of going concern problems. Failure to obtain positive confirmations of several large receivables may raise doubt as to their collectability but would not necessarily raise going concern doubts

A.Management Discussion and Analysis (MD&A). The auditor's report relates to the financial statements, including the statements themselves and the footnote disclosures, which are an integral part of general purpose financial statements. Disclosures will include the entity's accounting policies, such as how they may classify certain liabilities, information that requires additional explanation, such as parenthetical notations; and other disclosures required to be in the notes to the financial statements. Management's discussion and analysis, although presented in accompaniment with the financial statements, is not an integral part of them and is not considered a financial statement disclosure.

A.Unmodified with no additional paragraph. When there is substantial doubt as to whether an entity will be able to continue as a going concern, management's plans are evaluated. If they are not expected to be effective, management will disclose the doubt and the fact that plans are not expected to mitigate it. If properly disclosed, the auditor will issue an unqualified opinion but is required to include an emphasis-of-matter paragraph in the audit report to draw attention to the matter. If, as is the situation here, management's plans are expected to effectively mitigate going concern doubts, disclosures are still required but, if made, the auditor issues an unmodified opinion and is not required to include an emphasis-of-matter paragraph (although such a paragraph may be added indicating the situation). Neither an adverse nor a qualified opinion is appropriate in this situation.

A.A clear reference to the transactions and an indication that Watt's audit opinion is not modified in light of these transactions. An emphasis-of-matter paragraph is used to draw attention to something that is properly accounted for and disclosed in the financial statements. It is not necessary to repeat the details but rather to clearly refer to the item and where it is presented and disclosed. In addition, since the item was properly accounted for and disclosed, the auditor will make it clear that the opinion is not modified.

D. The chief executive officer is unwilling to sign the management representation letter. The chief executive officer's refusal to sign a management representation letter constitutes a scope limitation that would prevent the auditor from being able to obtain appropriate audit evidence that is sufficient to support an opinion. As a result, the auditor will issue a disclaimer. Management's refusal to change unreasonable lives being used for depreciable assets and changing an accounting principle without justification represent GAAP departures that will result in a qualified or adverse opinion, depending on the materiality of the effects. Evidence that the chief executive officer has committed a material fraud may indicate a material misstatement of the financial statements, requiring a qualified or adverse opinion.

B. Issue an unmodified opinion in regard to financial position and disclaim an opinion in regard to the results of operations and cash flows. Since the significant transaction did not affect the ending balance of any balance sheet account, the auditor would be able to issue an unmodified opinion in regard to the statement reporting financial position. The lack of evidence about the significant transaction, however, prevents the auditor from determining if it was properly accounted for, including its classification on the income statement or statement of cash flows, preventing the auditor from being able to express an opinion in regard to either results of operations or cash flows. Note that inability to verify net income generally precludes verifying cash flow from operating activities.

C. Write-offs of customer accounts.

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding the credit limit.

Understating the sales journal.

Unrecorded sales for the year.

Low, High, Likely

No reply to a positive confirmation request is received.

A purchase requisition is a request for goods and services by an authorized individual or department within the entity. A purchase order contains the description, quality, quantity and other information on the goods and services being purchased. A receiving report is used to record the receipt of goods. A vendor invoice is the bill from the vendor that includes the description and quantity of the goods shipped or services provided, the price including freight, the terms of trade including cash discounts, and the date billed. A voucher is a document that is frequently used by entities to control the payment of acquired goods and services. An entity would combine all these documents into a 'voucher packet' because such a packet would contain all the information on a particular purchase transaction. If there are questions about the transaction at a later time, the entity can obtain access to all the documents and information more easily.

Two inherent risk factors that directly affect the purchasing process are (1) industryrelated factors, and (2) misstatements detected in prior audits. If the entity deals with a large number of vendors and prices tend to be relatively stable, there is less risk that the entity's operations will be affected by raw-material shortages or that production costs will be difficult to control. However, if an entity is dependent on a single vendor to supply a critical component and the vendor is unable to provide the component, the entity may suffer production shortages and shipping delays that significantly affect financial performance. Additionally, industries that use commodities such as oil, coal and precious metals may be subject to both shortages and price instability that significantly affect their financial results. The presence of misstatements in previous audits is a good indicator that misstatements are likely to be present during the current audit. If misstatements were present in previous audits, the auditor should assess inherent risk to be high.

Occurrence - Control Activities: Segregation of duties Purchase not recorded without approved purchase order and receiving report Accounting for numerical sequences of receiving reports and vouchers Cancellation of documents Occurrence - Tests of Controls: Observe and evaluate proper segregation of duties. Test of a sample of vouchers for the presence of an authorized purchase order and receiving report; if IT application, examine application controls. Review and test client's procedures for accounting for numerical sequence of receiving reports and vouchers; if IT application, examine application controls. Examine paid vouchers and supporting documents for indication of cancellation. Authorization - Control Activities: Approval of acquisitions consistent with the client's authorization monetary limits Approved purchase requisitions and purchase orders Competitive bidding procedures followed Authorization - Tests of Controls: Review client's monetary limits authorization for acquisitions. Examine purchase requisitions or purchase orders for proper approval; if IT is used for automatic ordering, examination of application controls. Review client's competitive bidding procedures. Completeness - Control Activities: Accounting for numerical sequences of receiving reports and vouchers Receiving report matched to vendor invoices and entered in purchases journal Completeness - Tests of Controls: Review and test client's procedures for accounting for numerical sequence of receiving reports and vouchers; if IT application, examine application controls. Trace a sample of receiving reports to their respective vendor invoices and vouchers. Trace a sample of vouchers to the purchases journal.

Inquiry of management about control activities used to identify unrecorded liabilities and accruals at the end of an accounting period. • Obtain copies of vendors' monthly statements and reconcile the amount to client's accounts payable records. • Confirm vendor accounts, including accounts with small or zero balances. • Vouch large monetary items from the purchases journal and cash disbursements journal for a limited time after year-end; examine the dates on each receiving report or vendor's invoice to determine if the liability relates to the current audit period. • Examine the files of unmatched purchase orders, receiving reports and vendor invoices for any unrecorded liabilities.

C. The vendor shipping document and the purchase order.

C. Entering of the voucher into the voucher register.

B. Receiving department

C. receiving reports.

D. Review of cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

C. Purchased and received before the end of the year was recorded.

C. Search for unrecorded liabilities.

1. Tests of details of transactions 2. Tests of details of transactions 3. Tests of details of account balances 4. Substantive analytical procedures 5. Tests of details of account balances 6. Substantive analytical procedures

a.Verify that recorded accounts payable include all amounts owed to vendors. (completeness): 3 b.Verify that all accounts payable are recorded in the correct period. (cutoff): 4 c.Determine whether accounts payable have been properly accumulated from the journal to the general ledger. (accuracy): 5 d.Determine whether recorded accounts payable are valid. (existence/occurrence): 1

Three inherent risk factors that should be considered when assessing inherent risk for property, plant and equipment are complex accounting issues, difficult-to-audit transactions, and misstatements detected in prior audits. Lease accounting, self-constructed assets and capitalized interest are examples of transactions that involve complex accounting issues. The vast majority of property, plant and equipment transactions are relatively easy to audit. However, transactions involving donated assets, non-monetary exchanges, and self-constructed assets are more difficult to audit because it may be difficult to verify the value of such assets. If the auditor has detected misstatements in prior audits, the likelihood of misstatements in the current year is higher.

Most entities have some type of authorization table for approving capital asset transactions. Control activities should be present to ensure that the authorization to purchase capital assets is consistent with the authorization table. For example, the control activities should specify monetary limits at each managerial level to ensure that larger projects are brought to the attention of higher levels of management for approval before commitments are made. The entity also needs to have control activities for authorizing the sale or other disposition of capital assets. This should include a level of authorization above the department initiating the disposition. Control activities should also identify assets that are no longer used in operations, because they may require different accounting treatment. Finally, an appropriate level of management should properly authorize all major maintenance or improvement transactions.