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8, 10, & 11 Textbook Exercises
8-16 (Analytical Procedures) In audit planning the audit of Circuits Technology, Inc. (CTI). CTI actively installs and acts as a reseller while providing computer network products including client software, gateway hardware, software, and twinax hardware to other businesses. Figure 8-14 provides a short summary based on the CTI´s financial statements. Required a. Calculate purchases, gross margin, inventory turn days, accounts receivable turn days, and accounts payable turn days for the years ended 20x2, 20x3, 20x4, 20x5. b. Describe the trends identified by performing analytical procedures in the gross operating cycle, the net operating cycle, and gross margin. c. If tolerable misstatement is $45,000 for inventory, develop an expectation range for inventory turn days. d. With respect to inventory, what might these trends indicate about the potential misstatement in inventory?
The table below further analysis purchases, gross margin percentage, and inventory turn days, accounts receivable turn days, accounts payable turn days, and the gross and net operating cycle.
Computer general controls 4.099 $ $ $ $ $ $ 20x5 822 1.827 $ 52. Control environment 2.003 201 4.812 1. the increase in gross margin to the best result in the four year period.399 2.046 1. Computer application controls 4.691 2.2. while inventory turn days also increases significantly.947 $ $ $ $ $ $ 1.1.923 2.099 225 4. Physical controls 4.4.1% 185 97 282 51 231 1.3. net Inventory Accounts Payable Sales Cost of Sales 20x4 $ $ $ $ $ $ 962 1. There are scenarios in which tolerable misstatements in the inventory are turned by the auditor through the process of calculating the inventory turn days using the following formula: Tolerable Misstatement / Cost of Goods Sold * 365 = 45 / 1.905 1. and an escalated collection period.3.027 175 3.Exhibit 8-16: CTI Selectied Financial Information ($000) 20x1 20x2 20x3 Accounts Receivable.3.224 Gross Margin Purchases Gross Margin 184.108.40.206% 160 70 230 33 197 2.171 $ 48.3.025 164 3.335 1.859 2.327 380 5. Segregation of duties 4. 1. Control activities 4. Information processing controls 4. Authorization 4.638 2. The adjustment from a 183 day inventory into 199 inventory turn is significant and the results are further detailed in the example below. Performance reviews . increasing to 199 days.121 1. or errors because of fraudulent financial reporting.780 1. The largest changes in the 20x5 include the combined decrease of purchases and increased gross margins increasing to 52.883 52. Important trends for 20x5 (the likely year about to be audited) further involve a significant increase in inventory turn around.4% 199 83 283 36 246 $ $ $ $ $ $ 837 1.968 $ $ $ $ $ $ $ 1. d.859 * 365 = 7.84 days c. calculating errors.3. 10-32 (Components of Internal Control) Internal controls can be categorized using the following framework. This is possible evidence for the overstatement of the inventory and will eventually lead to errors in counting.993 $ 52.2% 199 95 294 43 251 Inventory Turn Days Accounts Receivable Turn Days Gross Operating Cycle Accounts Payable Turn Days Net Operating Cycle b. Controls over the financial reporting process 4.623 2.5. Risk assessment 3. Information and communication 4.022 1.4%.
The computer does their share by comparing the information on sales with the sales invoices that are underlined with shipping information. Waterfront has established a disclosure committee in order to review a selection of the latest accounting policies. Management has structured an established code of conduct which includes rules that present interests related to purchasing agents. Managers of Waterfront manufacturing departments must examine all the expenditures charged for the responsibility center on a weekly basis. b. The documentary transaction trail for each of the credit sales is recorded within the company policy manuals. and continues to keep a log of programs and files that were previously accessed. m. The CEO. of which is then reviewed by the security manager on a daily basis. d. Security software limits access to programs and data files. Human resources have a unique focus on making sure that accounting personnel have adequate qualifications to complete the work performed on billing and accounts receivable. l. The controller examines respective sales as well as the collections bi-monthly.6. Customer billing complaints strictly forwarded to internal audits for follow-up and resolution. Monitoring 6. Any computer program revision must first be approved by user departments once the testing of the program is completed and all the test data is available. b. j. i. Indicate the category of internal control applicable to each procedure using the framework above. e. A committee of the board of directors examines and monitors business risks. c. Controls over management discretion in financial reporting 5. 10-32 . h. f. Access to spreadsheets used in the financial reporting process is limited and spreadsheets are tested with test data on a quarterly basis. and controller examine the financial consequences of business risks on an annually basis in order to guarantee that the controls are in place to address significant business risks. g. Antifraud programs and controls Following is a list of controls prescribed by Waterfront. n.4. CFO. k. Inc. a. A computer program prints a daily report of all shipments that have not yet been billed to customers. Identify an assertion to which each procedure pertains (some procedures may have a pervasive impact on multiple assertions). Required a.
departments once the testing is complete for the entire test data. j. while maintaining the logs of programs and files which have access to a reviewed security manager daily. Access to spreadsheets applied to a financial reporting statement limit the spreadsheets which are tested on a quarterly basis. Waterfront has successfully set up a disclosure committee which is 4.2 5 3 1 4.Control Category a. Presentation and Disclosure Virtually any assertion Existence and Occurrence. What are an auditor’s documentation requirements concerning an entity’s system of internal control and the assessed level of control risk? 11-21.3. There is computer systems which develop daily reports were all shipments that are yet to be billed by customers. m. Completeness. k.3. Human resources puts extra focus in order to guarantee that accounting personnel has the respective qualifications in order to complete the work performed in the billing and accounts receivable. Explain the reasons an auditor may assess control risk at the maximum level for one or more assertions embodied in an account balance. and controller review the financial consequences of business risks annually to guarantee that the controls are in position to address significant business risks. CFO.3. . The CEO.6 designed to examine the selection of new accounting policies.1 4. The controller successfully examines sales and collects on a bi-monthly basis.2 4. b.3. The committee of board directors examines and evaluates business risks. g. h.3. Management has set up a code of conduct that includes rules related to 1 conflicts in the interest of purchasing agents. i.1 4. transaction class. The intentions to audit the entity´s financial statements as well as assess control risks for the assertions included in the account balance. Customer billing complaints are directed to internal audit for followup and resolution. Security software limits access to programs and data files. 4.3 11-21 (Assessing control risk) An auditor is required to obtain suffice understanding for each of the components of an entity’s system of internal control. Management for every Waterfront´s manufacturing departments must be reviewed and the expenditures have to be charged to the responsibility center on a weekly basis. All computer program revisions must be approved by user d. f. c. Completeness Existence and Occurrence Virtually any assertion Virtually any assertion Virtually any assertion Virtually any assertion 1 4. b.3. A computer compares selective information on the sales invoice compared to other underlying information. l.5 e. n. Required a. What should an auditor consider when seeking a further reduction in the planned assessed level of control risk? d. 2 Assertion(s) Existence and Occurrence Valuation and Allocation. What must an auditor do to support assessing control risk at less than the maximum level when the auditor has determined that controls have been placed in operation? c. The documentary transaction trail for all credit sales is recorded inside the organizations policy manuals. and disclosure components of the financial statements.5 4. Valuation and Allocation Valuation and Allocation Virtually any assertion Existence and Occurrence Completeness Valuation.
source of evidence.a. b. the basis for the assessment should also be recorded. and audit staffing must be recorded in an audit program and applied to working papers. If the assessment happens to be below the maximum level. d. an auditor must evaluate whether internal controls are sufficiently designed to prevent or detect material misstatements in a particular financial statement assertions while obtaining evidence through tests and controls based on policies and procedures at an operating level. . timeless of evidence. Through the process of reducing the planned assessed level of control risk. and/or narrative memoranda. The decision of the auditors occurs regardless of the type of evidence. or because evaluation of their efficiency would be a waste of time. As the auditor´s assessment of control risk reaches maximum level. the auditor must acknowledge the likelihood of evidence being obtained through a cost-effective manner to support a lower assessment. the existence of related evidential matter. An auditor will assess control risk at the optimal risk at the maximum level for some or even all the assertions because the auditor has faith in internal controls which are most likely to relate to assertions due to auditors that believe that they will become ineffective. An auditors understanding of internal controls should be documented within the form of completed questionnaires. . c. the individual conclusion needs to be recorded. flowcharts. To support the assessment of control risk at an amount below the maximum level.