ACCT 555 Week 6 Homework

14-21 (Objectives 14-3, 14-4, 14-5, 14-6)

The following questions deal with internal controls in the sales and collection cycle. Choose the best response.

a. The accounting system will not post a sales transaction to the sales journal without a valid bill of lading number. This control is most relevant to which transaction-related objective for sales?

b. The accounting system automatically obtains the unit price based on scans of bar codes for merchandise sold. This control is most relevant to which transaction-related objective for sales?

c. Which of the following controls would be most effective in detecting a failure to record cash received from customers paying on their accounts?

d. A key internal control in the sales and collection cycle is the separation of duties between cash handling and record keeping. The objective most directly associated with this control is to verify that

14-22 (Objectives 14-3, 14-4)

For each of the following types of misstatements (parts a through d), select the control that should have prevented the misstatement:

a. A manufacturing company received a substantial sales return in the last month of the year, but the credit memorandum for the return was not prepared until after the auditors had completed their testing. The returned merchandise was included in the physical inventory.

b. Which of the following controls most likely will be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

c. A sales invoice for $5,200 was computed correctly but, by mistake, was entered as $2,500 to the sales journal and posted to the accounts receivable master file. The customer remitted only $2,500, the amount on his monthly statement.

d. Shipments occurring in December 2011 did not get recorded until the first few days of January 2012.

14-23 (Objectives 14-1, 14-3)

The following questions deal with audit evidence for the sales and collection cycle. Choose the best response.

a. An auditor is performing substantive tests of transactions for sales. One step is to trace a sample of debit entries from the accounts receivable master file back to the supporting duplicate sales invoices. What will the auditor intend to establish by this step?

b. To verify that all sales transactions have been recorded, a substantive test of transactions should be completed on a representative sample drawn from

c. Which audit procedure is most effective in testing credit sales for overstatement?

DISCUSSION QUESTIONS AND PROBLEMS

14-24 (Objectives 14-2, 14-3, 14-4, 14-5)

Items 1 through 9 are selected questions of the type generally found in internal control questionnaires used by auditors to obtain an understanding of internal control in the sales and collection 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. Are customer orders evaluated for credit approval by someone independent of sales?
2. Are online sales automatically recorded in the sales system?
3. Are unit prices obtained from a pre-approved and restricted master file of unit prices?
4. Is the bill of lading information forwarded in a timely fashion to accounting to ensure recording in the sales journal?
5. Is the numerical sequence of bills of ladings accounted for to identify duplicates or missing documents?
6. Are entries in the sales journal restricted to those that are supported by a valid bill of lading?
7. Are sales invoice amounts independently verified for correctness?
8. Are individuals responsible for handling cash collections independent of accounting and shipping functions?
9. Are entries in the sales journal timely recorded in the accounts receivable master file?

15-22 (Objectives 15-5, 15-7)

The following items apply to determining sample sizes using random sampling from large populations for attributes sampling. Select the most appropriate response for each question.

a. If all other factors specified in a sampling plan remain constant, changing the ARACR from 5% to 10% will cause the required sample size to

b. If all other factors specified in a sampling plan remain constant, changing the TER from 9% to 6% will cause the required sample size to

c. Of the four factors that determine the initial sample size in attributes sampling (population size, tolerable exception rate, acceptable risk of assessing control risk too low, and expected population exception rate), which factor has the least effect on sample size?

d. The sample size of a test of controls varies inversely with:

15-24 (Objectives 15-1, 15-2)

The following questions concern sampling for attributes. Choose the best response.

a. An advantage of statistical sampling over non-statistical sampling is that statistical sampling helps an auditor

b. Which of the following best illustrates the concept of sampling risk?

c. For which of the following tests would an auditor most likely use attribute sampling?

15-25 (Objective 15-3)

a. In each of the following independent problems, design an unbiased random sampling plan, using an electronic spreadsheet or a random number generator program. The plan should include defining the sampling unit and establishing a numbering system for the population. After the plan has been designed, select the sample using the computer. Assume that the sample size is 75 for each of (1) through (4).

b. Using systematic sampling, select the first five sample items for populations (1) through (3) from part a, using the random starting points shown. Recall that the sample size is 75 in each case.

16-20 (Objective 16-2)

The following questions concern analytical procedures in the sales and collection cycle. Choose the best response.

a. As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The auditor should

b. After a CPA has determined that accounts receivable have increased as a result of slow collections in a “tight money” environment, the CPA will be likely to

c. In connection with his review of key ratios, the CPA notes that Pyzi had accounts receivable equal to 30 days’ sales at December 31, 2010, and to 45 days’ sales at December 31, 2011. Assuming that there have been no changes in economic conditions, clientele, or sales mix, this change most likely will indicate

16-21 (Objective 16-4)

The following questions deal with confirmation of accounts receivable. Choose the best response.

a. The negative form of accounts receivable confirmation request is useful except when

b. The return of a positive confirmation of accounts receivable without an exception attests to the

c. In confirming a client’s accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation responses. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year’s audit, the auditor will most likely choose

16-22 (Objective 16-3)

The following questions concern audit objectives and management assertions for accounts receivable. Choose the best response.

a. When evaluating the adequacy of the allowance for uncollectible accounts, an auditor reviews the entity’s aging of receivables to support management’s balance-related assertion of

b. Which of the following audit procedures will best uncover an understatement of sales and accounts receivable?

c.The confirmation of customers’ accounts receivable rarely provides reliable evidence about the completeness assertion because

16-24 (Objective 16-3)

The following misstatements are sometimes found in the sales and collection cycle’s account balances:

1. The accounts receivable trial balance total does not equal the amount in the general ledger.

2. Several accounts receivable in the accounts receivable master file are not included in the aged trial balance.

3. One account receivable in the accounts receivable master file is included on the aged trial balance twice.

4. A shipment made in the subsequent period is recorded as a current period sale.

5. The allowance for uncollectible accounts is inadequate because of the client’s failure to reflect depressed economic conditions in the allowance.

6. Several accounts receivable is in dispute as a result of claims of defective merchandise.

7. The pledging of accounts receivable to the bank for a loan is not disclosed in the financial statements.

8. Goods shipped and included in the current period sales were returned in the subsequent period.

9. Long-term interest-bearing notes receivable from affiliated companies are included in accounts receivable.

DISCUSSION QUESTIONS AND PROBLEMS

17-28 (Objective 17-2)

You are planning to use non-statistical sampling to evaluate the results of accounts receivable confirmation for the Meridian Company. You have already performed tests of controls for sales, sales return and allowances, and cash receipts, and they are considered excellent. Because of the quality of the controls, you decide to use an acceptable risk of incorrect acceptance of 10%. There are 3,000 accounts receivable with a gross value of $6,900,000. The accounts are similar in size and will be treated as a single stratum. An overstatement or understatement of more than $150,000 is considered material.

1. Calculate the required sample size. Assume your firm uses the following non-statistical formula to determine sample size:
2. Assume that instead of good results, poor results were obtained for tests of controls and substantive tests of transactions for sales, sales returns and allowances, and cash receipts. How will this affect your required sample size? How will you use this information in your sample size determination?
3. Regardless of your answer to part a, assume you decide to select a sample of 100 accounts for testing. Indicate how you will select the accounts for testing using systematic selection.
4. Assume a total book value of $230,000 for the 100 accounts selected for testing. You uncover three overstatements totaling $1,500 in the sample. Evaluate whether the population is fairly stated.