Lei Zheng September 20, 2010 Auditing Case Study NO.

30 PART 1 For each of the following ten pairs of assertions, indicate whether a or b typically would have the higher inherent risk and state why: 1. a. Existence of Inventory b. Existence of building Existence of inventory would have a higher inherent risk. It is easier to include fake inventory in the financial statement than include a fake building. Also, the large volume of inventory makes it a higher inherent risk. 2. a. Valuation of cash b. Valuation of deferred income taxes. Valuation of cash would have a higher inherent risk because the high volume of cash and bank transaction contributes a significant level of inherent risk for cash balance assertion. 3. a. Existence of account payable b. Completeness of account payable Completeness of account payable would have a higher inherent risk because understatement of liabilities will exaggerate the financial strength of a company in the same way as an overstatement of assets. Therefore, the auditors' substantive procedures primarily focus on the objective of determining the completeness of recorded amounts. 4. a. Right and Obligations of accrued wages payable b. Right and Obligations of liability under warranty Right and Obligations of liability under warranty would have a higher inherent risk.So, the auditor needs to focus on authenticity or titleof the liability under warranty. 5. a. Presentation and disclosure of repairs and maintenance expenses b. Presentation and disclosure of telephone expense Presentation and disclosure of repairs and maintenance expenses would have a higher inherent risk. The treatment of repairs and maintenance costs involves a question that whether a cost should be capitalized or expensed. 6. a. Valuation of long-term investment b. Valuation of land Valuation of long-term investment would have a higher inherent risk because the investment might fluctuate over time. 7. a. Existence of account receivable

Valuation of cash Existence of cash would have a higher inherent risk because cash balances may not be material. 15. a. 12. Completeness of account receivable Existence of account receivable would have a higher inherent risk because overstatement of assets will exaggerate the financial strength of a company.b. higher inherent risk of fraud. Inherent risk Inherent risk Inherent risk Control risk and Detection risk Inherent risk Control risk and Detection risk Inherent risk Inherent risk Control risk and Detection risk Inherent risk . 17.Note payable to bank involved bank as a third party. 8. Valuation of receivable due from affiliate b. 16. the high volume of transactions poses risk particularly for existence and completeness 9. Valuation of note payable to bank Valuation of receivable due from affiliatewould have a higher inherent risk. 18. Therefore. Allocation of depreciation expense Valuation of allowance for doubtful account would have a higher inherent risk because there might be a higher risk that the company would understate the account balance. but the volume of transactions through the account almost always is ± additionally. PART B 11. a. 13. Also. so it has a lower inherent risk. 14. 19. Existence of cash b. 10. 20. Valuation of allowance for doubtful account b. the auditors' substantive procedures primarily focus on the objective of determining the existence of account receivable. a.

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