ACCT 555 Week 7 – Assignment. Multiple Choice Answers Indicated and Essay Answers.

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ACCT 555 Week 7 – Assignment By: May O. Duque 18-17 (Objective 18-6) Distinguish between FOB destination and FOB origin. What procedures should the auditor follow concerning acquisitions of inve... ntory on an FOB origin basis near year-end? 18-20 (Objective 18-3, 18-6) The following questions concern the audit of accounts payable. • a. For effective internal control, the accounts payable department generally should o (1) stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. o (2) ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee. o (3) omit information about the quantity ordered on the copy of the purchase order forwarded to the receiving department prior to receipt of goods. o (4) establish the agreement of the vendor’s invoice with the receiving report and purchase order. • b. When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely is o (1) vendors with whom the entity has previously done business. o (2) amounts recorded in the accounts payable subsidiary ledger. o (3) payees of checks drawn in the month after year-end. o (4) invoices filed in the entity’s open invoice file. 21-17 (Objective 21-1) The following questions concern internal controls in the inventory and warehousing cycle. Choose the best response. • a. Which of the following controls will most likely justify a reduced assessed level of control risk for the occurrence assertion for purchases of inventory? o (1) Receiving reports for inventory additions are accounted for and entry of received goods into the purchases system is verified by accounting clerks. o (2) The purchases system automatically updates the perpetual inventory master file when transactions are entered into the purchases journal. o (3) The perpetual inventory system will not allow an addition of inventory to be posted without entry of a valid receiving report number. o (4) At the close of each day, the system reconciles the perpetual inventory master file to the inventory general ledger account and generates an exception report when differences exist. • b. For control purposes, the quantities of materials ordered may be omitted from the copy of the purchase order that is o (1) returned to the requisitioner. o (2) forwarded to the receiving department. o (3) forwarded to the accounting department. o (4) retained in the purchasing department’s files. • c. Which of the following procedures will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars? o (1) Maintain a perpetual inventory master file of only the more valuable items with frequent periodic verification of the validity of the perpetuals. o (2) Have an independent CPA firm prepare an internal control report on the effectiveness of the administrative and accounting controls over inventory. o (3) Have separate warehouse space for the more valuable items with sequentially numbered tags. o (4) Require an authorized officer’s signature on all requisitions for the more valuable items. 21-18 (Objectives 21-1, 21-3) The following questions concern testing the client’s internal controls for inventory and warehousing. Choose the best response. • a. When an auditor tests a client’s cost accounting records, the auditor’s tests are primarily designed to determine that o (1) costs have been correctly assigned to finished goods, work-in-process, and cost of goods sold. o (2) quantities on hand have been computed based on acceptable cost accounting techniques that reasonably approximate actual quantities on hand. o (3) physical inventories are in substantial agreement with book inventories. o (4) the internal controls are in accordance with accounting standards and are functioning as planned. • b. The accuracy of perpetual inventory master files may be established, in part, by comparing perpetual inventory records with o (1) purchase requisitions. o (2) receiving reports. o (3) purchase orders. o (4) vendor payments. • c. Which of the following sets of duties related to inventory and warehousing causes the greatest concern about inadequate segregation of duties? o (1) Individuals in charge of approving disbursements related to inventory purchases have “read-only” ability to view the list of vendors in the pre-approved vendor master file. o (2) Purchasing agents who arrange for shipment of raw materials from vendors are responsible for verifying actual receipt of the inventory items at the receiving dock. o (3) The receiving department has access to copies of the purchase orders that exclude information about quantities ordered. o (4) Accounts payable personnel have access to receiving reports and purchases orders in addition to vendor invoices for inventory purchases. 21-19 (Objectives 21-1, 21-4, 21-5, 21-6) The following questions deal with tests of details of balances and analytical procedures for inventory. Choose the best response. • a. Which of the following procedures is the auditor least likely to perform on the actual date the physical inventory count is observed? o (1) Examine inventory to make sure that it is tagged by client count teams. o (2) Watch for inventory items that are rust- or dust-covered or otherwise damaged. o (3) Observe client count teams to determine if they are conducting the physical inventory count in accordance with client policies and procedures. o (4) Examine documentation supporting the acquisition of highly material inventory items on hand at the count date. • b. An inventory turnover analysis is useful to the auditor because it may detect o (1) inadequacies in inventory pricing. o (2) methods of avoiding cyclical holding costs. o (3) the existence of obsolete merchandise. o (4) the optimum automatic reorder points. • c. A CPA auditing inventory may appropriately apply attributes sampling to estimate the o (1) average price of inventory items. o (2) percentage of slow-moving inventory items. o (3) dollar value of inventory. o (4) physical quantity of inventory items. 21-20 (Objectives 21-1, 21-3, 21-5, 21-6, 21-7) Items 1 through 8 are selected questions typically found in questionnaires used by auditors to obtain an understanding of internal control in the inventory and warehousing cycle. In using the questionnaire for a client, a “yes” response to a question indicates a possible internal control, whereas a “no” indicates a potential deficiency. • 1. Is a detailed perpetual inventory master file maintained for raw materials inventory? a. Accuracy. For accuracy and current record of inventory b. Examine receiving and requisition documents and observe maintenance of perpetual records c. Misstatement of inventory d. Compare physical count to perpetual inventory record • 2. Are physical inventory counts made by someone other than storekeepers and those responsible for maintaining the perpetual inventory master file? • 3. Is the clerical accuracy of the final inventory compilation checked by a person independent of those responsible for preparing it? • 4. Does the receiving department prepare prenumbered receiving reports and account for the numbers periodically for all inventory received, showing the description and quantity of materials? • 5. Is all inventory stored under the control of an inventory custodian in areas where access is limited? • 6. Are all shipments to customers authorized by prenumbered shipping documents? • 7. Are standard cost records used for raw materials, direct labor, and manufacturing overhead? • 8. Is there a stated policy with specific criteria for writing off obsolete or slow-moving goods? Required o a. For each of the preceding questions, state the purpose of the internal control. o b. For each internal control, list a test of control to test its effectiveness. o c. For each of the preceding questions, identify the nature of the potential financial misstatement(s) if the control is not in effect. o d. For each of the potential misstatements in part c, list a substantive audit procedure to determine whether a material misstatement exists. 24-22 (Objective 24-2) The following questions deal with contingent liabilities. Choose the best response. • a. The audit step most likely to reveal the existence of contingent liabilities is o (1) a review of vouchers paid during the month following the year-end. o (2) an inquiry directed to legal counsel. o (3) accounts payable confirmations. o (4) mortgage-note confirmation. • b. Which of the following would be least likely to be included in a standard inquiry to the client’s attorney? o (1) A list provided by the client of pending litigation or asserted or unasserted claims with which the attorney has had some involvement. o (2) A request for the attorney to opine on the correct accounting treatment associated with an outstanding claim or pending lawsuit outcome. o (3) A request that the attorney provide information about the status of pending litigation. o (4) A request for the attorney to identify any pending litigation or threatened legal action not identified on a list provided by the client. • c. When a contingency is resolved subsequent to the issuance of audited financial statements, which correctly contained disclosure of the contingency in the footnotes based on information available at the date of issuance, the auditor should o (1) take no action regarding the event. o (2) insist that the client issue revised financial statements. o (3) inform the audit committee that the report cannot be relied on. o (4) inform the appropriate authorities that the report cannot be relied on. 24-23 (Objectives 24-5, 24-7) The following questions concern communications between management, those charged with governance, and the auditor. Choose the best response. • a. A principal purpose of a letter of representation from management is to o (1) serve as an introduction to company personnel and an authorization to examine the records. o (2) discharge the auditor from legal liability for the audit. o (3) confirm in writing management’s approval of limitations on the scope of the audit. o (4) remind management of its primary responsibility for financial statements. • b. The date of the management representation letter should coincide with the o (1) balance sheet date. o (2) date of the auditor’s report. o (3) date of the latest subsequent event referred to in the notes to the financial statements. o (4) date of the engagement agreement. • c. Which of the following is not a required item to be communicated by the auditor to the audit committee or others charged with governance? o (1) Information about the auditor’s responsibility in an audit of financial statements. o (2) Information about the overall scope and timing of the audit. o (3) Recommendations for improving the client’s business. o (4) Significant findings arising from the audit. • d. A management letter o (1) is the auditor’s report on significant deficiencies and material weaknesses in internal control. o (2) contains management’s representations to the auditor documenting statements made by management to the auditor during the audit about matters affecting the financial statements. o (3) is mandatory in all audits and must be dated the same date as the audit report. o (4) contains recommendations from the auditor designed to help the client improve the efficiency and effectiveness of its business. 24-27 (Objective 24-2) In an audit of the Marco Corporation as of December 31, 2011, the following situations exist. No entries have been made in the accounting records in relation to these items. • 1. During the year 2011, the Marco Corporation was named as a defendant in a suit for damages by the Dalton Company for breach of contract. An adverse decision to the Marco Corporation was rendered and the Dalton Company was awarded $4,000,000 damages. At the time of the audit, the case was under appeal to a higher court. • 2. On December 23, 2011, the Marco Corporation declared a common stock dividend of 1,000 shares with a par value of $1,000,000 of its common stock, payable February 2, 2012, to the common stockholders of record December 30, 2011. • 3. The Marco Corporation has guaranteed the payment of interest on the 10-year, first mortgage bonds of the Newart Company, an affiliate. Outstanding bonds of the Newart Company amount to $5,500,000 with interest payable at 5% per annum, due June 1 and December 1 of each year. The bonds were issued by the Newart Company on December 1, 2009, and all interest payments have been met by that company with the exception of the payment due December 1, 2011. The Marco Corporation states that it will pay the defaulted interest to the bondholders on January 15, 2012. Required • a. Define contingent liability. 1. Contingent liability is potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. • b. Describe the audit procedures you would use to learn about each of the situations listed. 1. Situation 1  Discuss the existence and nature of possible contingent liabilities with management and obtain appropriate written representation.  Review the minutes of directors’ and stockholders’ meetings for indication of lawsuits or other contingency.  Analyze legal expense for the period under audit and review invoices and statements of legal counsel for indication of contingent liability. Obtain letters from all major attorneys performing legal services for the client as to the status of pending litigation or other contingent liability.  Lawsuit judgement, no additional procedures 2. Situation 2  Discuss the existence and nature of possible contingent liabilities with management and obtain appropriate written representation.  Review the minutes of directors’ and stockholders’ meetings for indication of lawsuits or other contingency.  Analyze legal expense for the period under audit and review invoices and statements of legal counsel for indication of contingent liability. Obtain letters from all major attorneys performing legal services for the client as to the status of pending litigation or other contingent liability.  Confirm details of stock transactions with registrar and transfer agent  Review records of unusual journal entries subsequent to year end. 3. Situation 3  Discuss the existence and nature of possible contingent liabilities with management and obtain appropriate written representation.  Review the minutes of directors’ and stockholders’ meetings for indication of lawsuits or other contingency.  Analyze legal expense for the period under audit and review invoices and statements of legal counsel for indication of contingent liability. Obtain letters from all major attorneys performing legal services for the client as to the status of pending litigation or other contingent liability.  Discuss specifically any related party transactions with management and include information in letter of representation.  Review financial statement of affiliate and where related party transactions are apparent, make direct inquiries of affiliate management and perhaps even examine records of affiliate if necessary. • c. Describe the nature of the adjusting entries or disclosure, if any, you would make for each of these situations. 24-28 (Objective 24-3) In analyzing legal expense for the Boastman Bottle Company, Mary Little, CPA, observes that the company has paid legal fees to three different law firms during the current year. In accordance with her CPA firm’s normal operating practice, Little requests standard attorney letters as of the balance sheet date from each of the three law firms. On the last day of field work, Little notes that one of the attorney letters has not yet been received. The second letter contains a statement to the effect that the law firm deals exclusively in registering patents and refuses to comment on any lawsuits or other legal affairs of the client. The third attorney’s letter states that there is an outstanding unpaid bill due from the client and recognizes the existence of a potentially material lawsuit against the client but refuses to comment further to protect the legal rights of the client. Required • a. Evaluate Little’s approach to sending the attorney letters and her follow-up on the responses. • b. What should Little do about each of the letters? [Show More]

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