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1)  You are auditing the accounts receivable balance of a cable television provider. Individual accounts receivables tend to be
similar in amount to each other and cover one or two months of service charges. The client has a computerized billing system
that makes it easy to access individual customer’s records. The total accounts receivable balance makes
up 23% of the firm’s total assets. You
did the audit for the firm last year and found few errors in their accounts
receivable balance.
a)  What test of balance procedure
would you use to test the individual (i.e., customer) account balances and why? Make sure you are clear about what balance
audit objective(s) your test would cover and how.

b)
Given the test that you
selected in a), answer the following questions and explain your answer.
i)
Would you use a sampling
technique to execute the test or not?

ii)
Assume that you would use a
sampling technique, would you use a statistical or non-statistical method?

iii)
Assuming you used a statistical
sampling approach, which method would you use MUS or VS?

2)
Your client is All’s Fair
Appliance Company, an appliance wholesaler.
Select the most appropriate audit procedure from the following list and
enter the number in the appropriate place on the grid. “”Most appropriate”” means only the
best one and so there should be only one entry per row. Provide an explanation of how the audit
procedure would support the audit objective listed in the row. An audit procedure may be selected once, more
than once, or not at all. The audit
procedures are:
1.
Review of bank confirmations
and loan agreements
2.
Review of drafts of the
financial statements
3.
Selection of a sample of
revenue transactions and determination that they have been included in the
sales journal and accounts receivable subsidiary ledger.
4.
Selection of a sample of
shipping documents for a few days before and after year-end.
5.
Confirmation of accounts
receivable
6.
Review of aging of accounts
receivable with the credit manager

Audit Objective

Audit Procedure

Explanation

a. Ensure that
the entity has legal title to accounts receivable (rights and obligations)

b. Confirm
that recorded accounts receivable include all amounts owed the client
(completeness)

c. Verify that
all accounts receivable are recorded in the correct period (cutoff)

d. Confirm
that the allowance for uncollectable accounts is properly stated (valuation
and allocation)

e. Confirm that recorded accounts receivable
are valid (existence)

3)
The following table contains a
list of typical audit procedures for purchasing activities. For each procedure, classify them as either
substantive analytical procedures (AP), tests of details of account balances
(TB), substantive tests of transactions (TT), or tests of controls (TC). Finally, list one audit objective that the
test is designed to support and include an explanation of how the test supports
that objective. Make sure your objective
matches the test you select.

Procedure

Classification

Audit Objective and Explanation

1. Test a
sample of purchase requisitions for proper authorization.

2. Review the
results of confirmations of selected accounts payable balances.

3. Compare
payables turnover or days payables to previous year’s data.

4. Obtain selected vendor’s statements and
reconcile to vendor accounts.

5. Compare purchase returns and allowances as
a percentage of revenue or cost of sales to industrial data.

6. Test a
sample of check request vouchers for supporting documents (i.e., purchase
order, receiving report, and invoice)

4)
You are auditing XYZ company
for the year ended 12/31/2014 and will be expressing an opinion on their
financial statements as of that date.
You have not completed your audit field work and report when these facts
come to your attention. For each of the
following, independent scenarios, describe how they should affect the financial
statements for 12/31/2014 and why.
Assume all the items are material.
a)
A large accounts receivable
from ABC to XYZ (material to the financial statements) was considered fully
collectible at 12/31/14. However, ABC
suffered a plant explosion on 1/25/15.
Because ABC was uninsured, it is not likely that the account will be
paid.

b)
On 1/15/15, a major investment
advisor issued a negative report on XYZ’s future prospects. The market price of XYZ’s common stock
subsequently fell by 40%.

c)
The tax court ruled in favor of
XYZ on 1/26/15. The case involved
deductions XYZ claimed on their 2006 and 2007 tax returns. In accruing taxes payable as of 12/31/14, XYZ
provided for the full amount of the potential disallowances. The IRS has indicated it will not appeal the
court’s decision.

d)
XYZ’s manufacturing division,
whose assets constituted 45% of XYZ’s total assets, was sold on 2/1/15. The new owner assumed the bonded indebtedness
associated with the division.

5)
Why do auditors obtain
management representation letters from their audit clients at the end of every
audit? Your answer should include a
general statement of the overall purpose of management representation letters
as well as two examples of the representations auditors ask the auditee
client’s management to make in a management representation letter.

6)
The following is a description
of an incident that occurred between an employee of a firm (Jane) and her
friend (Mike) when the two were visiting the firm just before Thanksgiving.
One day before Thanksgiving, Jane was
giving Mike a tour of her firm’s data processing facilities. The facility was located on the top floor of
the firm’s headquarters in an interior room that did not have any windows. Jane was a systems analyst for the firm and
had been in the data processing room on several occasions with others, but had
not been given the access code needed to enter the room. As they approach the door, Jane quickly
entered the correct access code and the two entered the room. Mike asked Jane how she knew the code and she
replied that the code was the owner’s birth date and hadn’t been changed in
years.

As they entered the room, they saw a group
of people hectically working at a terminal.
Mike wanted to know what was so urgent, and so Jane asked the people
involved, who she knew very well. The
group consisted of a programmer, another systems analyst, and one of the
computer operators. They were working to
complete corrections to the firm’s payroll system, which had failed the day
before. They wanted to complete the
corrections that day so that they could take Thanksgiving off to be with their
families. The operator, however, was
scheduled to work Thanksgiving Day anyway since the firm always had one
operator on duty to maintain systems that needed to run 24/7.

Jane showed Mike around the facility and
just before they left, they heard a loud “”hurrah”” from the group
working on the payroll system. Jane
asked them what had happened and they excitedly told her that they had fixed
the payroll program. However, since it was
getting late, they were going to implement the changes after only testing them with
a limited set of test data. They felt
that since the operator would be working Thanksgiving and the day after, when
the weekly payroll was run, he could fix any bugs they had not detected with
their test data. To make sure the
operator could do so, they were going to leave the source code (hard copy and
uncompiled version of the software) with the operator so he could make any
needed changes. In addition, since
backup copies of the data and software were kept in the facility, the operator
should have all the resources he needed to run the new program and fix any
problems without the programmer or analyst having to come in over the
holiday. Both the programmer and
analyst, however, agreed to be “”on call”” if the operator ran into any
problems he couldn’t handle.

Based on this conversation, identify three
control weaknesses and recommend control procedures that should be made to the
clients control system to mitigate those weaknesses. You can suggest controls at either the general
or application levels, but your answers should address specific weaknesses in
the scenario above. Also, be sure you
are clear on why the control weakness is a weakness and how your control
procedure will mitigate the weakness.
Use the table on the following page to fill in your answers.

Control Weakness

Potential Control Procedures

1)
You are auditing the accounts
receivable balance of a cable television provider. Individual accounts receivables tend to be
similar in amount to each other and cover one or two months of service charges. The client has a computerized billing system
that makes it easy to access individual customer’s records. The total accounts receivable balance makes
up 23% of the firm’s total assets. You
did the audit for the firm last year and found few errors in their accounts
receivable balance.a)
What test of balance procedure
would you use to test the individual (i.e., customer) account balances and why? Make sure you are clear about what balance
audit objective(s) your test would cover and how. b)
Given the test that you
selected in a), answer the following questions and explain your answer. i)
Would you use a sampling
technique to execute the test or not? ii)
Assume that you would use a
sampling technique, would you use a statistical or non-statistical method?iii)
Assuming you used a statistical
sampling approach, which method would you use MUS or VS?2)
Your client is All’s Fair
Appliance Company, an appliance wholesaler.
Select the most appropriate audit procedure from the following list and
enter the number in the appropriate place on the grid. “”Most appropriate”” means only the
best one and so there should be only one entry per row. Provide an explanation of how the audit
procedure would support the audit objective listed in the row. An audit procedure may be selected once, more
than once, or not at all. The audit
procedures are:1.
Review of bank confirmations
and loan agreements2.
Review of drafts of the
financial statements3.
Selection of a sample of
revenue transactions and determination that they have been included in the
sales journal and accounts receivable subsidiary ledger.4.
Selection of a sample of
shipping documents for a few days before and after year-end.5.
Confirmation of accounts
receivable6.
Review of aging of accounts
receivable with the credit managerAudit ObjectiveAudit ProcedureExplanationa. Ensure that
the entity has legal title to accounts receivable (rights and obligations)b. Confirm
that recorded accounts receivable include all amounts owed the client
(completeness)c. Verify that
all accounts receivable are recorded in the correct period (cutoff)d. Confirm
that the allowance for uncollectable accounts is properly stated (valuation
and allocation)e. Confirm that recorded accounts receivable
are valid (existence)3)
The following table contains a
list of typical audit procedures for purchasing activities. For each procedure, classify them as either
substantive analytical procedures (AP), tests of details of account balances
(TB), substantive tests of transactions (TT), or tests of controls (TC). Finally, list one audit objective that the
test is designed to support and include an explanation of how the test supports
that objective. Make sure your objective
matches the test you select. ProcedureClassificationAudit Objective and Explanation1. Test a
sample of purchase requisitions for proper authorization.2. Review the
results of confirmations of selected accounts payable balances.3. Compare
payables turnover or days payables to previous year’s data.4. Obtain selected vendor’s statements and
reconcile to vendor accounts.5. Compare purchase returns and allowances as
a percentage of revenue or cost of sales to industrial data.6. Test a
sample of check request vouchers for supporting documents (i.e., purchase
order, receiving report, and invoice)4)
You are auditing XYZ company
for the year ended 12/31/2014 and will be expressing an opinion on their
financial statements as of that date.
You have not completed your audit field work and report when these facts
come to your attention. For each of the
following, independent scenarios, describe how they should affect the financial
statements for 12/31/2014 and why.
Assume all the items are material.a)
A large accounts receivable
from ABC to XYZ (material to the financial statements) was considered fully
collectible at 12/31/14. However, ABC
suffered a plant explosion on 1/25/15.
Because ABC was uninsured, it is not likely that the account will be
paid.b)
On 1/15/15, a major investment
advisor issued a negative report on XYZ’s future prospects. The market price of XYZ’s common stock
subsequently fell by 40%.c)
The tax court ruled in favor of
XYZ on 1/26/15. The case involved
deductions XYZ claimed on their 2006 and 2007 tax returns. In accruing taxes payable as of 12/31/14, XYZ
provided for the full amount of the potential disallowances. The IRS has indicated it will not appeal the
court’s decision.d)
XYZ’s manufacturing division,
whose assets constituted 45% of XYZ’s total assets, was sold on 2/1/15. The new owner assumed the bonded indebtedness
associated with the division.5)
Why do auditors obtain
management representation letters from their audit clients at the end of every
audit? Your answer should include a
general statement of the overall purpose of management representation letters
as well as two examples of the representations auditors ask the auditee
client’s management to make in a management representation letter.6)
The following is a description
of an incident that occurred between an employee of a firm (Jane) and her
friend (Mike) when the two were visiting the firm just before Thanksgiving.One day before Thanksgiving, Jane was
giving Mike a tour of her firm’s data processing facilities. The facility was located on the top floor of
the firm’s headquarters in an interior room that did not have any windows. Jane was a systems analyst for the firm and
had been in the data processing room on several occasions with others, but had
not been given the access code needed to enter the room. As they approach the door, Jane quickly
entered the correct access code and the two entered the room. Mike asked Jane how she knew the code and she
replied that the code was the owner’s birth date and hadn’t been changed in
years. As they entered the room, they saw a group
of people hectically working at a terminal.
Mike wanted to know what was so urgent, and so Jane asked the people
involved, who she knew very well. The
group consisted of a programmer, another systems analyst, and one of the
computer operators. They were working to
complete corrections to the firm’s payroll system, which had failed the day
before. They wanted to complete the
corrections that day so that they could take Thanksgiving off to be with their
families. The operator, however, was
scheduled to work Thanksgiving Day anyway since the firm always had one
operator on duty to maintain systems that needed to run 24/7. Jane showed Mike around the facility and
just before they left, they heard a loud “”hurrah”” from the group
working on the payroll system. Jane
asked them what had happened and they excitedly told her that they had fixed
the payroll program. However, since it was
getting late, they were going to implement the changes after only testing them with
a limited set of test data. They felt
that since the operator would be working Thanksgiving and the day after, when
the weekly payroll was run, he could fix any bugs they had not detected with
their test data. To make sure the
operator could do so, they were going to leave the source code (hard copy and
uncompiled version of the software) with the operator so he could make any
needed changes. In addition, since
backup copies of the data and software were kept in the facility, the operator
should have all the resources he needed to run the new program and fix any
problems without the programmer or analyst having to come in over the
holiday. Both the programmer and
analyst, however, agreed to be “”on call”” if the operator ran into any
problems he couldn’t handle.Based on this conversation, identify three
control weaknesses and recommend control procedures that should be made to the
clients control system to mitigate those weaknesses. You can suggest controls at either the general
or application levels, but your answers should address specific weaknesses in
the scenario above. Also, be sure you
are clear on why the control weakness is a weakness and how your control
procedure will mitigate the weakness.
Use the table on the following page to fill in your answers.Control WeaknessPotential Control Procedures”