AUDIT

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Released by AICPA
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2013
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Task 527_01

Selection list
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SOLUTION AND EXPLANATION:

1.

Account balance—A/R

Assertion—Completeness

Procedure—Trace sales invoice and shipping documents just before year-end to

customer account transactions

The completeness assertion is tested by going from the supporting documents to the
financial statement records. An auditor may test accounts receivable for completeness
by tracing sales invoices (source) and shipping documents (source) just before year-
end to customer account transactions (accounting records).

Note: Reviewing confirmation of accounts receivable balances does not provide

evidence of completeness (i.e., customers may not report understatement errors).

2.
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Account balance—Inventory

Assertion—Valuation and allocation

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Procedure—Examine invoices from suppliers

An auditor would examine invoices from suppliers to make sure that inventory is valued
at the correct amount.

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Account balance—Fixed assets

Assertion—Rights and obligations

Procedure—Vouch fixed asset acquisitions to purchase invoices

An auditor would examine invoices related to fixed assets acquired during the year to
confirm ownership of fixed assets.
4.

Account balance—Accounts payable

Assertion—Completeness

Procedure—Examine invoices paid subsequent to year-end and trace to subsidiary

ledger

Completeness is tested by going from the supporting documents to the financial

statement records. When testing completeness of accounts payable, the auditor is
looking for items that should have been recorded at the balance sheet date, but were
not. Therefore, an auditor can test accounts payable for completeness by examining
invoices paid subsequent to year-end (support) to the subsidiary ledger (accounting
records).

5.

Account balance—Cash

Assertion—Existence
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Procedure—Agree cash balance per bank reconciliation to year-end bank statement

Existence is tested by going from the financial statements records to the supporting
documents. An auditor can test existence of cash by agreeing the cash balance per
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bank reconciliation (per accounting records) to year-end bank statement (source

document).
Task 1921_01

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Selection List

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SOLUTION AND EXPLANATION:

Days' sales in accounts receivable

Sales managers are recording fraudulent sales to receive larger commissions.

The formula for "Days sales in accounts receivable" is:

Average net receivables x (365 / Net credit sales)

The ratio increased in Year 2 as compared in Year 1. This ratio indicates the average
number of days required to collect accounts receivable increased. An increase in
average net receivables would result in an increase in the ratio. If sales managers are
recording fraudulent sales this would result in a larger amount of accounts receivables
as fictitious customers do not pay their account receivables balance.

Inventory turnover

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Due to an economic downturn, buyers have shifted to economy cars.

The formula for inventory turnover is:

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Cost of goods sold / Average inventory

The ratio decreased in Year 2 as compared to Year 1. This can result from a decrease
in cost of goods sold and/or an increase in average inventory. If buyers have shifted to
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economy cars this means that fewer luxury cars are being sold in Year 2, resulting in a
lower cost of goods sold as well as an increase in average inventory. (The journal entry
when inventory is sold is a debit to cost of goods sold and a credit to inventory.)

Debt to equity

In Year 2, the company made a required principal payment on its long-term debt.

The formula for debt to equity is:

Total liabilities / Common shareholders' equity

The ratio decreased in Year 2 as compared to Year 1. This can result due to a
decrease in total liabilities and/or an increase in common shareholders' equity. If the
company made a required payment on long-term debt this would decrease total
liabilities. Note that an increase in dividends to shareholders or a buyback of stock
would decrease shareholders' equity.

Return on assets

Due to an economic downturn, buyers have shifted to economy cars.

The formula for return on assets is:

(Net income / Net sales ) * (Net sales/ Average total assets)

or

Net income / Average total assets

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The ratio decreased in Year 2 as compared to Year 1. This may result from a decrease
in net income and/or an increase in average total assets. If buyers have shifted to
buying economy cars instead of luxury cars this would result in a decrease in net
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income as a result of lower sales. Also, average total assets may have increased as a
result of higher inventory levels.
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Net fixed assets to equity

In Year 2, the company reclassified its international production factories to held

for sale.

The formula for net fixed assets to equity is:

Net fixed assets / Equity

The ratio decreased in Year 2 as compared to Year 1. This can result due to a
decrease in net fixed assets and/or an increase in equity. If the company reclassified its
international production facilities to held for sale, this would result in a decrease in net
fixed assets because long-lived assets classified as held for sale are presented
separately from other assets. (Items held for sale get their own individual line item on
the balance sheet.)

Note that there would be no change in assets when a company removed fully
depreciated machinery from its books.
Task 3837_01

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SOLUTION AND EXPLANATION:

Source of answer for this question:

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ET 54.03

Keyword: Integrity