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MULTIPLE CHOICE: 1. The permanent file section of the working papers that is kept for each audit client most likely contains a. Review notes pertaining to questions and comments regarding the audit work performed. b. A schedule of time spent on the engagement by each individual auditor. c. Correspondence with the client's legal counsel concerning pending litigation. d. Narrative descriptions of the client's internal control policies and procedures ANSWER: 2. D
Of the following procedures, which is not considered part of “obtaining an understanding of the client’s environment?” a. Examining trade publications to gain a better understanding of the client's industry. b. Confirming customer accounts receivable for existence and valuation. c. Touring the client's manufacturing and warehousing facilities to gain a clearer understanding of operations. d. Studying the internal controls over cash receipts and disbursements. ANSWER: B
If working papers are to have the characteristics that will ensure that they achieve their primary purposes, which of the following is the most important? a. Working papers must be of standard format and standard content. b. Working papers must be properly indexed and crossreferenced to the draft audit report. c. Working papers must provide sufficient, competent, and useful information to support the audit report. d. Working papers must be arranged in logical order following the audit program sequence. ANSWER: C
Chapter 4 Audit Evidence and Audit Programs Which of the following is not an example of analytical evidence? a. Compared inventory turnover by major class with the prior year on a monthly and quarterly basis. b. Compared gross profit percentages by major product classes with the prior year. c. Examined invoices for plant asset additions to determine whether the client had erroneously recorded ordinary repairs as plant assets. d. Examined monthly performance reports and investigated significant variations from budgeted amounts. ANSWER: C
Choose the best illustration of objective audit evidence from the following a. The paid invoice file containing invoices matched with receiving reports and purchase orders. b. Management's assertion that payment procedures require matching of invoice with receiving report and purchase order. c. Clerical staff assurances that management policy regarding payment of invoices--matching of invoice with receiving report and purchase order--is always followed. d. The treasurer's statement of not remembering any exceptions in which an invoice was submitted for payment that was not accompanied by a matching receiving report and purchase order. ANSWER: A
An initial (first-time) audit requires more audit time to complete than a recurring audit. One of the reasons for this is that a. New auditors are usually assigned to an initial audit. b. Predecessor auditors need to be consulted. c. The client's business, industry, and internal control are unfamiliar to the auditor and need to be carefully studied. d. A larger proportion of customer accounts receivable need to be confirmed on an initial audit. ANSWER: C
Progress flowchart. b. Searching for unrecorded liabilities. Physical. ANSWER: D 9. b. Observing the client's year-end physical inventory taking. Audit program. Increase the amount of management information available. C Of the following audit procedures. Performing a lower of cost or market test of the client's inventories. which best supports the valuation objective? a. ANSWER: 10. d. Engagement letter. Reviewing a contingent liability footnote for proper wording. Ensure that only material items are audited. Analytical. b.Chapter 4 Audit Evidence and Audit Programs 7. c. CPAs should design audit programs for each individual audit and should include audit steps and procedures to a. Which would be the most competent type of evidence available to satisfy this objective? a. An assumption underlying analytical procedures is that . D 38 An auditor wants to develop an audit test to evaluate the reasonableness of the quantity of scrap material resulting from a certain production process compared to industry standards. b. Provide assurances that the objectives of the audit are met. c. ANSWER: A 11. As part of audit planning. d. d. c. Documentary. d. Hearsay. Which of the following is a basic tool used by the auditor to control the audit work and review the progress of the audit? a. c. ANSWER: 8. Time and expense summary. Detect and eliminate fraud.
ANSWER: C 13. These procedures cannot replace tests of balances and transactions. Interviewing the personnel who record accounts receivable. which of the following statements is always true? a. c. . The client's audit committee should not be told of the specific audit procedures that will be performed. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. d. It is an acceptable practice to carry out substantial parts of the examination at interim dates. A letter to the auditor in response to an inquiry is an example of a. Receipt by the auditor of a positive confirmation. d. D ANSWER: 12. Statistical tests of financial information may lead to the discovery of material errors in the financial statements. b. With respect to the auditor's planning of a year-end examination. ANSWER: D 14.39 Chapter 4 Audit Evidence and Audit Programs a. d. Documentary evidence. What is the most competent type of evidence in this situation? a. No response received for a request for a negative confirmation. Analytical evidence. Confirmation evidence. An engagement should not be accepted after the fiscal year-end. An inventory count must be observed at the balance sheet date. Physical evidence. b. b. c. b. c. An auditor is examining accounts receivable. Verifying that postings to the receivable account from journals have been made. d. Relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. c.
The independence of the source of evidence. ANSWER: D 18. and report. ANSWER: A 17. b. c. Detect errors or fraud. ANSWER: B 16. b. b. c. Protect the auditor in the event of litigation. The objectivity of the auditor gathering the evidence. Working papers are properly referenced and kept in logical groupings. c. the independent auditor may discard working papers after two years. the primary responsibility of an audit supervisor is to determine that: a. The reliability of the evidence in meeting the audit objective.Chapter 4 Audit Evidence and Audit Programs ANSWER: 15. B 40 Which of the following statements about working papers is correct? a. The auditor should document the understanding of the client's internal control obtained to plan the audit c. Which of the following factors is most important in determining the competence of audit evidence? a. Standard departmental procedures are adhered to with regard to work paper preparation and technique. When reporting on comparative financial statements. b. Each worksheet is properly identified with a descriptive heading. d. Test internal evidence. d. Working papers adequately support the audit findings. Working papers may be regarded as a substitute for the client's accounting records. are The procedures specifically outlined in an audit program primarily designed to a. . When reviewing audit working papers. d. conclusions. The quantity of the evidence obtained. d. Working papers are not permitted to be used as a reference source by the client. Gather evidence.
Compare revenue. Unusual transactions. c. d. Only after the auditor who prepared the working papers has signed and dated them. b. cost of sales. Confirm customers' accounts receivable and clear all material exceptions. d. Compare sales trends and profit margins with industry averages and investigate significant differences. A copy of a long-term bond indenture. Noncompliance with prescribed control procedures. Which of the following workpapers would one normally expect to find in the permanent file? a. Weaknesses of a material nature in the client's internal control. . Of the following procedures. b. Examine monthly performance reports and investigate significant revenue and expense variances. ANSWER: A 22. The working trial balance. d. ANSWER: A 21. and gross profit with the prior year and investigate significant variations. b. Improper separation of accounting and other financial duties.41 Chapter 4 Audit Evidence and Audit Programs ANSWER: D 19. b. which does not produce analytical evidence? a. A workpaper analyzing customer replies to confirmation requests. c. c. The in-charge auditor decides that work papers are complete a. An analysis of additions and disposals relating to marketable securities. When proper cross-references to other working papers are noted. c. Auditors apply analytical procedures to the client's operations in order to identify a. When satisfied that the audit objectives have been met and the working papers support the conclusions. When working papers make reference to the steps outlined in the audit program. ANSWER: C 20. d.
b. ANSWER: C 25. D This is an An auditor test counted a batch of inventory. Tests of control procedures designed to evaluate the validity of management's representation letter. Evidence gathered by auditors must be both valid and relevant to be considered competent. ANSWER: 26. d. C 42 Audit evidence can come in different forms with different degrees of persuasiveness.Chapter 4 Audit Evidence and Audit Programs ANSWER: 23. Substantive tests designed to evaluate the reasonableness of financial information. example of what kind of evidence? a. Analytical. Evidential matter gathered by an auditor from outside an enterprise is reliable. Tests of control procedures designed to detect errors in reported financial information. Accounting data developed under satisfactory conditions of internal control are more relevant than data developed under unsatisfactory internal control conditions. c. Documentary. Which of the following is the least persuasive type of evidence? a. Physical. c. Correspondence between the auditor and vendors. b. Documents mailed by outsiders to the auditor. c. Sales invoices inspected by the auditor. d. c. Which of the following statements relating to the competence of evidential matter is always true? a. b. d. Computations made by the auditor. ANSWER: C . ANSWER: C 24. Hearsay. Analytical procedures are a. b. Oral representations made by management are not valid evidence. Substantive tests designed to evaluate a system of internal control. d.
d. The client constructed a major addition to its central manufacturing facility during the year under audit. which of the following would be the best evidence? a. When preparing working papers. b. The client's board or directors is elected by the stockholders at the annual meeting. Analytical evidence developed by comparing the ratio of advertising expenses to sales with historical data for the company and industry. Considered as a part of the client's accounting records that are retained by the auditor. Internal control over the recording of plant asset additions and repairs and maintenance expenditures is found to be weak. c. Arithmetical evidence developed by re-computing charges submitted by the advertising agency and paid by the company. c. Kept on the client's premises so that the client can have access to them for reference purposes. Designed to meet the circumstances and the auditor's needs on each engagement. In evaluating the reasonableness of advertising expense. The primary support for the financial statements being examined. ANSWER: D 29. c. ANSWER: C 28. Documentary evidence obtained by vouching charges to the account and by retracing charges from source documents to the account. Audit working papers are used to record the results of the auditor's evidence-gathering procedures. d. Oral evidence obtained through discussions with company marketing executives and representatives of the advertising agency retained. Which of the following is not a consideration in the development of audit programs? a. b. d.43 Chapter 4 Audit Evidence and Audit Programs 27. ANSWER: D . b. the auditor should remember that working papers should be a. The client is a private university located in the Midwest.
Reduce the size of the file. ANSWER: B 31. Better organize the working papers. Allow division of labor within the audit team. Which of the following is not a typical analytical procedure? a. Accounts receivable turnover. An auditor. ANSWER: A . Comparison of financial information with similar information regarding the industry in which the entity operates.Chapter 4 Audit Evidence and Audit Programs 44 30. who notes that customer accounts receivable have increased significantly in the current year as a percentage of sales. d. d. Earnings per share. Return on total assets before interest and taxes. Comparison of recorded amounts of major disbursements with appropriate invoices. Study of relationships of financial information with relevant nonfinancial information. d. Operating cycle. suspects that a larger proportion of the accounts will prove uncollectible. Comparison of recorded amounts of major disbursements with budgeted amounts. ANSWER: C 32. Which of the following would be least likely to be comparable between similar corporations in the same industry line of business? a. ANSWER: C 33. The auditor observes the taking of the client's physical inventory and performs test counts. b. The main advantage of properly indexed working papers is to a. Which of the following is an example of inferential evidence? a. c. Facilitate the efficient use of audit staff. c. c. b. b. b. c. d. The auditor inspects marketable securities for existence. The auditor counts cash on hand at year-end.
d. Requesting the client's outside legal counsel to evaluate the possible outcome of pending litigation. would most likely use recalculation as a substantive test for which of the following expense-related accounts? a. Aid the auditor in adequately planning his work. Interest expense. ANSWER: B 34. Advertising expense. an auditor prepares and accumulates audit working papers. b. d. ANSWER: D . Requesting payees to respond in writing to the terms contained in notes payable appearing in the client's ledger. Provide a point of reference for future audit engagements. d. Inspecting plant asset additions for existence. Requesting the client's customers to verify year-end accounts receivable balances. Support the underlying concepts included in the preparation of the basic financial statements. Reviewing the client's production quality control program. The primary purpose of the audit working papers is to a. Questioning the client's employees about existing internal control policies and procedures. B During the course of an audit engagement. c. ANSWER: 36. c. Recalculating accrued interest on notes payable. c. 35. D Which of the following is not an appropriate auditing procedure supporting fairness of financial presentation? a. b. ANSWER: 37. d. Purchases of supplies. Repairs and maintenance expense. b. Support the auditor's opinion.45 Chapter 4 Audit Evidence and Audit Programs Which of the following is not an example of confirmation evidence? a. A CPA. in performing an independent audit. Examining invoices in support of legal fees recorded during the fiscal year. c. b.
The audit program. Which of the following ultimately determines the specific audit procedures necessary to provide an independent auditor with a reasonable basis for the expression of an opinion? a. d. c. b. b. ANSWER: A 40. Client's management. d. Sales commission rates were increased at the beginning of the year. There was compliance with generally accepted standards of reporting. Sales commissions as a percentage of sales declined significantly during the year under audit. Sales increased during the year. d. Which of the following is responsible for the fairness of the representations made in financial statements? a. AICPA. Commissions were not recorded on these sales. Audit committee. c. Of the following possible causes. c. c. There was a proper study and evaluation of internal control. The sales force was reduced at the end of the year. Independent auditor. ANSWER: 42. The auditor's judgment. The auditor's working papers. the most likely is a. Sufficient competent evidential matter was obtained. an audit supervisor finds that the auditor's reported findings are not adequately cross-referenced to supporting .Chapter 4 Audit Evidence and Audit Programs 46 38. The work was adequately planned. ANSWER: B 41. d. An audit program provides proof that a. b. b. ANSWER: D 39. Fictitious sales were recorded at year-end to inflate earnings. Generally accepted auditing standards. B During the working paper review.
Provide a workpaper indexing system that shows the relationship between findings. d. c. External b. ANSWER: A 45. D Which of the following would be the most relevant form of evidence to evaluate the reasonableness of account balances? a. Analytical. Most of the independent auditor's work in formulating an opinion on the financial statements consists of a. c. d. Studying and evaluating internal control. During an audit of the accounts receivable function. Obtaining and examining evidential matter. what source of evidence should most impact audit conclusions? a. Hearsay. A Generally. Examining cash transactions. Inquiry. Prepare a working paper to indicate that the full scope of the audit was carried out. b. ANSWER: B 46. and the related facts. The supervisor will most likely instruct the auditor to a. c. b. Eliminate any cross-references to other working papers since the system is unclear. d. Informal. Comparing recorded accountability with assets. Oral. b. you found that the accounts receivable turnover rate had fallen from 7.3 over the last three years. d. ANSWER: 43.47 Chapter 4 Audit Evidence and Audit Programs documentation. c. Familiarize him/herself with the sequence of working papers so that he(she) will be able to answer questions about the conclusions stated in the report.3 to 4. Documentary. ANSWER: 44. Physical. conclusions. What is the most likely cause of the decrease in the turnover rate? .
the Which of the following is generally included or shown in auditor's working papers? a. the client's accounting records. The principal reason for developing a written audit program is to help assure that the a. Original source documents. performance. A change from net 30 to net 25. Provides the principal evidential support for the auditor's report. Audit work is properly supervised. d. b. Aids in the planning. Ledger entries. ANSWER: A 49. Which of the following does not describe one of the functions of audit workpapers? a. The manner in which exceptions and unusual matters disclosed by the auditor's procedures were resolved or treated. A more liberal credit policy. Facilitates third-party reviews. d. c. Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements. Aids in the professional development of the operating staff. B ANSWER: 47. ANSWER: D 48. Externally generated documents. Analyses that are designed to be a part of. . or a substitute for. ANSWER: D 50. Journal entries. the direction of audit testing should be from the a. c. b. and review of audits. b. Greater cash sales. d. b. The procedures used by the auditor to verify the personal financial status of members of the client's management team. d. 48 An increase in the discount offered for early payment. To test for unsupported entries in the ledger.Chapter 4 Audit Evidence and Audit Programs a. c. c.
Audit work is properly planned and documented. Explain the use of tick marks. ANSWER: A 52. Audit information is generally considered relevant when it is: a. b. The principal purpose for cross-indexing audit working papers is to a. and convincing. d. Provide for a standardized approach to the audit engagement. Which of the following best explains why confirmation produces evidence of high quality? a. Document an auditor's understanding of the internal control. b. Provide explanation of the audit steps performed. b. Confirmation by knowledgeable third parties is usually the most relevant evidence available. c. Factual. Audit report contains only significant findings. Confirmation by knowledgeable third parties is usually the least costly evidence available. Objective and unbiased. adequate. directing. d. c. B ANSWER: 51. and controlling audit work. c. ANSWER: D 54. Provide a trail for the auditor and the reviewer. Written assertions from knowledgeable third parties provide sufficient evidence to achieve most audit objectives. . Delineate the audit risk accepted by the auditor. d. c.49 Chapter 4 Audit Evidence and Audit Programs b. Work of different auditors is properly coordinated. c. b. Serve as a tool for planning. External auditors often confirm assertions contained in the organization's financial statements and accounting records with third parties. One of the primary roles of an audit program is to: a. Derived through valid statistical sampling. ANSWER: D 53. d. Give the working papers a professional appearance. Consistent with the audit objectives.
c.Chapter 4 Audit Evidence and Audit Programs d. In performing substantive audit tests. ANSWER: 57. or inspected is referred to as _____________ evidence. A customer's purchase order. Evidence consisting of everything that can be counted. Audit programs can be developed only after the auditor has completed the audit _______________ process. focusing on the existence or occurrence objective helps locate misstatements due to while the completeness objective directs audit attention to misstatements due to . which of the following is an example of internal documentary evidence? a. PLANNING B An auditor who gathers increased quantities of evidence for larger account balances is observing the standard relating to of audit evidence. observed. The carrier's bill of lading. An auditor who gathers increased amounts of external evidence under conditions of weak internal control is observing the standard of of audit evidence. OMISSION 60. ANSWER: SUFFICIENCY 58. As a category of evidence. . As an auditor reviewing your client's accounts receivable. Sales invoice copies. documents may be external or internal. D 50 ANSWER: 55. A vendor's month-end statement. Confirmation by knowledgeable third parties is highly competent because of its independent source. b. ANSWER: COMPLETION: 56. examined. d. ANSWER: COMPETENCE (VALIDITY) 59. ANSWER: COMMISSION.
For each of the listed auditing procedures. An auditor-prepared bank reconciliation is an example of _______________ evidence. ANSWER: DOCUMENTED evidence may be the best form the objective. c. indicate. by letter. the type of evidence it represents. f. transactions must be . For the audit trail to exist. A group of related transactions affecting essentially the same set of general ledger accounts is referred to as a _________________ . 62. The focal point of the current file is the ____________ _______________ ______________ often referred to as a table of contents. ANSWER: TRANSACTION CYCLE 65. e. d. vouch a transaction backward from the ledger account to the inception of the transaction or event. in concerning errors of omission the application of analytical of evidence that auditors' are often first procedures. Analytical supporting suspicions aroused by ANSWER: COMPLETENESS 63. or conversely. ANSWER: MATHEMATICAL 64. PHYSICAL The audit trail consists of that stream of evidence that enables the auditor to trace a transaction or event forward from its inception to the appropriate ledger account. b. a.51 Chapter 4 Audit Evidence and Audit Programs ANSWER: 61. ANSWER: WORKING TRIAL BALANCE MATCHING: 66. Physical evidence Confirmation evidence Documentary evidence Analytical evidence Mathematical evidence Hearsay evidence .
10. 3.Chapter 4 Audit Evidence and Audit Programs 52 ____ 1. Vouched debits to repairs accounts by examining vendors’ invoices documentary ____ 3. 11. Obtained letter from client’s outside legal counsel regarding pending litigation ____ 7.Compared operating cash flows with net income and identified causes of significant disparities. SOLUTION: 1. Prepared ten-year income summary expressing all components as a percentage of sales ____ 6. Obtained replies directly from customers concerning the correctness of client’s recorded year-end accounts receivable balances ____ 10.Examined securities purportedly owned by the client and held by local brokers ____ 11. 6. Compared accounts receivable turnover with industry Averaage ____ 5. Observed the client’s year-end physical inventory physical ____ 4. 4. 8. 7. e c a d d b f e b a d . 5. 9. Calculated year-end interest accrual and compared with general ledger balance ____ 9. 2. Inquired of corporate treasurer as to reason(s) for acquiring marketable securities ____ 8. Audited client-prepared bank reconciliation (mathematical ____ 2.
EXISTENCE ____ 10. d.D – EXISTENCE…RIGHTS…VALUATION Evaluated the reasonableness of the client’s depreciation policy D – VALUATION … Obtained letter from client’s outside legal counsel regarding pending litigation E – PRESENTATION … Inspected recorded addition to client materials handling facilities A . Existence or occurrence Completeness Rights and obligations Valuation or allocation Presentation and disclosure ____ 1. ____ 8. Inquired of corporate treasurer as to reasons for buying and holding securities E-PRESENTATION ____ 4. Obtained confirmation of marketable securities from client’s brokers A. ____ 9. a. Selected a sample of bills of lading representing shipments to customers and traced to sales invoices to determine that all shipments have been billed to customers B-COMPLETENESS ____ 5. c. ____ 7.C – COMPLETENESS…RIGHTS… ____ 6. Confirmed customer accounts receivable A. For each of the listed procedures. Examined vendors’ invoices recorded after year-end to determine whether any of these invoices represent liabilities of the client as of year-end B. by letter. Investigated decrease in revenue from scrap sales as revealed by the application of analytical procedures B – COMPLETENESS SOLUTION: 1. Vouched property additions to underlying Documentation consisting of vendors’ invoices and work orders D-VALUATION ____ 3. the assertion(s) being tested.C. b.d .D ____ 2. indicate. a. e.53 Chapter 4 Audit Evidence and Audit Programs 67.
4. and equipment 69. amortization. d e b b. 8. and product warranty Payroll summaries. vendors’ invoices Cash in bank Sales revenue Inventories Accounts payable Notes payable Capital stock Marketable securities Operating expenses Wages and salaries expense Property. brokers’ confirmations Vendors’ invoices. 3. 9. . 4. copy of note in client’s files Records maintained by registrar and transfer agent Securities in vault or in safekeeping. 9. human resources records Plant assets at various locations. SOLUTION: 1. brokers’ advices. client’s workpapers supporting such charges as depreciation. deposit tickets Sales invoices.d d e a b 54 PROBLEM/ESSAY 68. 10. canceled checks. For each of the following ledger accounts. tapes 4.Chapter 4 Audit Evidence and Audit Programs 2. 7. Audit evidence must be sufficient and competent. 10. 2. shipping documents. canceled checks. goods out on consignment Vendors’ records of accounts receivable.c a. plant.c. To be competent. 8. 6. 5. 2. clock cards. cash register 3. 10. 6. 8. Goods in warehouses. Bank statement. vendors’ invoices Payees’ confirmation of amounts owed to them. 5. 7. give an example of substance underlying the account balance: 1. the evidence must be both valid and relevant. 7. 3. 6. canceled checks. 9. time cards. 5.
200 Net income $2. Sales commissions average 6 percent of sales: 2002 Sales $18.520 ===== % 100% 2003 22. 2) The conditions under which the evidence was obtained (e.. b.g. sufficiency is usually based on materiality and the adequacy of existing internal control. Sufficient audit evidence is evidence that is adequate to support the auditor’s opinion on the financial statements. external evidence possesses greater validity than internal evidence). What is meant by “sufficient audit evidence?” Define the concepts of validity and relevance as they relate to audit evidence.300 ===== % 100% Change (%) 22% . Grimes Hardware. and 3) The manner in which the evidence was obtained (e.000 Sales commissions 1. Observing the taking of the inventory.g. but is not relevant to determining ownership. 70. Relevance means that the evidence pertains to specific audit objectives.920 Operating expenses 3.600 6.080 Gross profit 6..000 Cost of sales 10. SOLUTION: a.720 Income taxes 1.g..55 Chapter 4 Audit Evidence and Audit Programs Required: a.000 11. provides evidence concerning existence of the inventory.900 3. evidence produced by strong internal control possesses greater validity than evidence gathered under weak internal control).200 Income before taxes 3. for example. Validity of audit evidence is a function of three qualities: 1) The independence and competence of the source of the evidence (e. evidence obtained directly by the auditor possesses greater validity than evidence obtained indirectly). A matter of audit judgment.300 2. b.000 1 100 9.000 4. The following operating data has been provided to Erica Chavez by her audit client.
300 ===== % 100% 50 5 45 16 29 9 20 == Change (%) 22% 10 2 43 13 69 67 71 b. c. Assuming sales commissions have been accurately computed based on 2003 sales. the auditor has previously determined that commissions average 6% of sales.200 Net income $2. for example.300 2. b. significant changes warrant further investigation. Given the assumption that past trends may be expected to continue into the future. 2002 Sales $18.100 9.520 ===== % 100% 56 6 38 17 21 7 14 == 2003 22.000 1. Sales may have . Complete the vertical and horizontal analysis by calculating the correct percentages.Chapter 4 Audit Evidence and Audit Programs Required: a.600 6. If. by expressing all components as percentages of a common base (sales in this case). Trend analysis (the “Change” column) examines changes in data over time. what are the possible explanations for any abnormalities produced by your percentage calculations? SOLUTION: a.000 Cost of sales 10.080 Gross profit 6. If sales commissions are accurate and represent 6 percent of sales.920 Operating expenses 3.200 Income before taxes 3.900 3. permits the auditors to compare percentages with previously developed auditor expectations. the sales base must be overstated in order to produce a commission rate of only 5 percent.000 4. Vertical analysis (the first two percentage columns). he/she may wish to investigate the lower rate reflected in 2003 results.720 Income taxes 1.000 11. Why are both vertical and horizontal analysis important inputs to analytical procedures? 56 c.000 Sales commissions 1.
SOLUTION: 2003 Sales Cost of sales Gross margin $15. The material decline in cost of sales as a percentage of sales suggests that recorded sales transactions were not accompanied by cost of sales entries.25 v.200 Total current assets 12. This suggests the possibility .300 1. 2.660 Cost of sales 7.0 2002 14. 71.800 7.100 4.300 10. Although the gross margin has not changed materially in 2003 relative to 2002 and approximates the industry average for both years.980 7.980 7.57 Chapter 4 Audit Evidence and Audit Programs been fabricated.580 50% 49% Inventory and accounts receivable appear to warrant emphasis for Blackwell Wholesale Tires.980 Required: Based on the above data.400 4. inventory turnover has declined significantly and is well below the industry average (1.860 2002 14. or 2004 sales may have been recorded in 2003.5).800 Ending inventory 6. in which areas do you recommend concentrating audit resources for the 2003 audit? Support your answer by citing the relevant data.5 Accounts receivable turnover 11.300 Total current liabilities 7.n/30 Industry averages: Gross margin 51% Current ratio 2:1 Inventory turnover 2.200 Accounts receivable-trade 2.660 7. The following financial data have been extracted from the records of Blackwell Wholesale Tires: 2003 Sales $15.300 Customer payment terms: 2/10.400 5.
or some combination of these.223 & 6. especially if inventories are overstated and/or customer accounts receivable are delinquent. incorrect inventory prices. but for 2003 turnover has declined to approximately 7 times versus 11 times for the industry.16 in 2002 to .774 * 1.023 & $5. obsolete inventory. one would expect a turnover between 11 and 12 times. or weak collection procedures.84 in 2003. or inflated accounts receivable are possible explanations for the decline in turnover. the quick ratio (current assets minus inventory divided by current liabilities) has declined from 1.n/30. Given payment terms of 2/10. Failure to properly investigate customer credit.Chapter 4 Audit Evidence and Audit Programs 58 of inflated inventory quantities. A turnover of 7 times equates with approximately 50 days sales in accounts receivable.997 . or approximately 30 days sales in accounts receivable. Accounts receivable turnover for 2002 was approximately equal to the industry average. Although the current ratio appears adequate when compared with the preceding year and with the industry average. Identify the deficiencies in the following audit workpaper: TRAMWAY ENTERPRISES Bank Reconciliation 12/31/2003 Balance per bank Add deposit in transit Deduct outstanding checks: 4455 4477 4478 $67 & 180 & 1. 71. This suggests a short-term liquidity problem.
Adjusted balance should be $5. Audit adjustment of $706 not explained.300 (706) $5. 2. . Initials of preparer and reviewer and dates of preparation and review are missing. Subtraction error. 4.594 ===== $6. 5.694 rather than $5. Audit legends not explained.594.59 Chapter 4 Audit Evidence and Audit Programs 4479 33 & 1.594 ====== Adjusted balance Balance per ledger Adjustment to correct Adjusted balance as above SOLUTION: 1. 3.303 $5. Name of bank account being reconciled is omitted.