Michelle Adrianna / 2201733616 / LA55

TUGAS GSLC

Multiple Choice
11-17. A. Receive a customer purchase order.
11-18. D. All of the above.
11-19. D. All of the above.
11-20. A. Sales contracts may contain unusual terms, and revenue recognition is
often complex.
11-21. D. All of the above.
11-22. C. Not record cost of goods sold nor reduce inventory.
11-23. B. An agreement is signed with the supplier whereby the supplier agrees to
ship merchandise according to the production schedule set by the
manufacturer.
11-24. D. Both a and c.
11-25. D. All of the above are reasonable expected relationships.
11-26. A. Unexpected increases in gross margin.
11-27. B. 50% tests of details, 30% analytics, 20% tests of controls.
11-28. D. 20% tests of details, 40% substantive analytics, 40% tests of controls.
11-29. C. Evidence of proper payment is not necessary for each purchase and
payment but is necessary for those that are material.
11-30. D. Both a and c.
11-31. C. Review the client’s proposed physical inventory procedures to determine
whether they are likely to result in a complete and correct physical inventory.
11-32. E. All of the above.

Essay
11-38. Assume that you are conducting the audit of College Ware, a publicly
held manufacturer and distributor of printed, embroidered, and
embossed speciality clothing and gift items marketed to college students
with school-specific logos. The company pays licensing fees and
manufactures products in advance of the fall and winter peak sales
periods. The stores that sell the company’s products have a contractual
agreement that they may return a percentage of unsold merchandise.
During the current audit year, many stores in the University of
Wisconsin and University of Illinois markets canceled orders just before
the start of the school year because of changes in school logos. In
addition, the percentage of unsold merchandise, and associated returns,
was higher than normal for these stores. As a result, College Ware has
made an adjusting entry to record a loss caused by market decline of
inventory (Dr. Loss because of market decline of inventory; Cr
Allowance to reduce inventory to market value for $40,000). As the
auditor, you have conducted a physical inventory of the products, and,
based upon sales data collected from College Ware’s competitors, you
are convinced that the write-down should be for $90,000 (a materially
higher amount).
Another issue in the College Ware audit is that the company has
started implementing plans to change its marketing strategy to include
more sales of general-purpose clothes and gift items to mass-
merchandising retailers. These retailers are larger, and the initial
receivables payments indicate that they present a more reliable pattern
of payments, with fewer uncollectible amounts. As such, management
has argued that the allowance for doubtful accounts should be reduced
and has made the associated adjusting entry (Dr. allowance for doubtful
accounts; Cr. other revenue for $40,000).
In the past, you had questioned College Ware management about
its steady increase in the allowance for doubtful accounts, which had
risen by about 3% per year for each of the past five years even though
the rate of customer default on receivables had remained steady over
that time. However, you had never insisted that management revise its
allowance downward because you considered management’s estimates to
be conservative (i.e., it reduced income rather than increased income). In
your opinion, the allowance for doubtful accounts probably should be
reduced, although it is hard to judge exactly the amount by which the
reduction should be recorded because of the relatively recent change in
the marketing strategy. In other words, it is difficult for you to dispute
whether management’s current adjusting entry is recorded at the correct
amount.
a. Comment on why management of College Ware may have an
incentive to reduce the allowance for doubtful accounts this year.
The reason why management has an incentive to reduce the
allowance for doubtful accounts in the current year is because there is
an effect of inventory reduction on net income in the current year.
Management is increasing their reserves and needs to utilize the
reserves in the current period to manage their earnings. So far
management is using a conservative approach.

b. The overly conservative accounting estimates used by

management in its valuation of accounts receivable represent
what is commonly referred to as cookie jar reserves. Using this
financial reporting strategy, management sets aside money in
allowance accounts that it plans to remove later to cover future
losses. In doing so, management allows itself discretion to report
income at smoother levels than would otherwise be achieved had
the cookie jar reserves not been put in place. Comment on the
implications of management’s financial reporting strategy.
 The management’s reporting method is hiding the present loss
in inventory and will cause the display of the financials to be untrue,
which will benefit shareholders. This method of reporting goes
against reporting standards.

c. Use the ethical decision making framework introduced in Chapter

4 to address the dilemmas the auditor faces regard-ing what the
auditor should require the client to do regarding the client’s
inventory and accounts receivable balances. Recall that the steps
in the framework are as follows:
 Identify the ethical issue(s).
Ethical issues in this scenario is that there is not a lot of
evidence to show that the allowance for doubtful accounts
should be at such a high level, even though management is
just trying to offset the loss.

 Determine the affected parties and identify their rights.

The affected parties in this situation are;
1. The shareholders, they have the right to receive
information that is true
2. Management, they have the right to feel that the
information provided will be kept confidential, unless
there are violations of standards that need to be
reported
3. The auditor, the auditor has the right to uphold the
professional code of conduct.

 Determine the most important rights.

The most important rights are that the shareholders
receive appropriate information about the financial situation
of a company, so that their investments are not in jeopardy.

 Develop alternative courses of action.

Alternative courses of action that can be taken here are;
1. Reduce the amount in the allowance for doubtful
accounts, with the auditors estimate of what should be
wrote off at that time.
2. Only allow high level of write-off in allowance for
doubtful accounts if proof can be provided of the
amounts.
3. The auditor should use skepticism when reviewing
other sections of the financial information for this
company, to ensure that management has not over
stated any other information.
  Determine the likely consequences of each proposed
course of action.
Likely consequences of the alternative actions listed
above are unknown. It would be my thought that there would
be no consequences if the write-off was done properly. For
the auditor using a stronger professional skepticism on this
audit, the consequences for the company may be that more
misleading information is found.

 Assess the possible consequences, including an estimation

of the greatest good for the greatest number. Determine
whether the rights framework would cause any course of
action to be eliminated.
The greater good is that by using the more appropriate
estimates, the financial statements will have a more accurate
account of the financials for this company. The rights
framework would cause the high amount in allowance for
doubtful accounts to be adjusted to more appropriate number
for that time frame, and to ensure that evidence is provided
for that write-off.

 Decide on the appropriate course of action.

The appropriate course of action in this audit is that the
auditor be on a heightened alert to possess professional
skepticism where management has recorded estimated
financial information. The auditor should also work closely
with the management team to make sure that the accounts are
appropriately stated for the evidence provided. The evidence
and the accounts should match more closely.

11-39. List at least five common fraud schemes in the acquisition and payment
cycle.
a. Employees schemes involving fictitious vendors as means to transfer
payments to themselves
b. Inventory shrinkage – the reduction in inventory presumed to be due
to physical loss or theft
c. Large manual adjustments to inventory accounts
d. Schemes to classify expenses as assets
e. Theft of inventory by employee

11-42. Following is a list of controls in the acquisition and payment cycle for
inventory and cost of goods sold. Match each control with the following
activities in this cycle: (1) requisition for goods and services, (2) purchase
of goods and services, (3) receipt of, and accounting for, goods and
services, (4) approval of items for payment, and (5) cash disbursements.
No List of controls Activities
.
a. The receiving department electronically scans bar (3) receipt of, and
codes on the goods received to record quantity and accounting for, goods
visually inspects for quality. and services
b. Computer-generated purchase orders are reviewed (1) requisition for
by the purchasing department. goods and services
c. Management approves contracts with suppliers. (2) purchase of goods
and services
d. Management reviews payments and compares them (5) cash
to data such as production budgets. disbursements
e. Management requires competitive bids for large (2) purchase of goods
purchases. and services
f. An individual in a position of authority reviews the (5) cash
com-pleteness of supporting documentation prior to disbursements
signing a check for payment.
g. A policy exists and is enforced whereby purchase (2) purchase of goods
agents are rotated across product lines. and services
h. A requisition form is forwarded to the purchasing (1) requisition for
department by a supervisor. goods and services
i. A policy exists and is enforced whereby employees (2) purchase of goods
cannot purchase from vendors outside an authorized and services
vendor database.
j. Controls exist to ensure that only authorized goods (3) receipt of, and
are received. accounting for, goods
and services
k. Controls exist to ensure that goods meet order (3) receipt of, and
specifications. accounting for, goods
and services
l. The receiving department prepares prenumbered (3) receipt of, and
receiving documents to record all receipts. accounting for, goods
and services
m. A three-way match is made between the invoice, (4) approval of items
the purchase order, and the receiving report. for payment
n. Limits on the purchase of inventory can be (2) purchase of goods
exceeded only on specific approval by a manager. and services
o. Supporting documentation is canceled on payment (5) cash
to avoid duplicate payments. disbursements
p. Management monitors inventory and purchase (2) purchase of goods
levels. and services
q. Vendor disputes about payments are handled by (5) cash
individuals outside the purchasing department. disbursements
r. An agreement exists with the supplier whereby the (1) requisition for
supplier agrees to ship merchandise (just in time) goods and services
according to the production schedule set by the
manufacturer.