Week three textbook questions

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Tiffanie Page
Dennis McGukian
May 5, 2015
(5-29) (Assertions) In planning the audit of a client’s inventory, an auditor identified the following issues that need audit attention.
1. Inventories are properly stated at the lower of cost or market. Account balance assertion (Valuation) 2. Inventories included in the balance sheet are present in the warehouse on the balance sheet date. Account balance (existence); transaction-level assertion (occurrence) 3. Inventory quantities include all products, materials, and supplies on hand. Account balance assertion (completeness) 4. Liens on the inventories are properly disclosed in notes to the financial statements. Disclosure assertion (understandability) 5. The client has legal title to the inventories. Account balance (rights and obligations) 6. The financial statements disclose the amounts of raw materials, work in progress, and finished goods. Presentation and disclosure (accuracy)

7. Inventories include all items purchased by the company that are in transit at the balance sheet date and that have been shipped to customers on consignment. Account balance (completeness) 8. Inventories received on consignment from suppliers have been excluded from inventory. Account balance (right and obligations); Presentation and disclosure (accuracy) 9. Quantities times prices have been properly extended on the inventory listing, the listing is properly totaled, and the total agrees with the general ledger balance for inventories. Account balance (valuation) 10. Slow-moving items included in inventory have been properly identified and priced. Account balance (valuation) 11. Inventories are properly classified in the balance sheet as current assets. Transaction level assertion (classification)

(6-22) (Audit evidence) During the course of an audit, the auditor examines a wide variety of documentation. Listed below are some forms of documentary evidence and the sources from which they are obtained.

1. Bank statement sent directly to the auditor by the bank.
Directly from outsiders
2. Creditor monthly statement obtained from client’s files. Indirectly from outsiders
3. Vouchers in client’s unpaid voucher file.
Entirely Internal
4. Duplicate sales invoices in filled order file.
Entirely internal
5. Time tickets filed in payroll department.
Entirely Internal
6. Credit memo in customer’s file.
Entirely internal
7. Material requisitions filed in storeroom.
Entirely internal
8. Bank statement in client’s files.
Indirectly from outsiders
9. Management working papers in making accounting estimates. Entirely internal
10. Paid checks returned with bank statement in (1) above.
Internally but validated externally
11. Letter in customer file from collection agency on collectibility of balance. Indirectly from outsiders
12. Memo in customer file from treasurer authorizing the write-off of the account. Entirely internal
a. Classify the evidence by source into one of four categories: (1) directly from outsiders, (2) indirectly from outsiders, (3) internal but validated externally, and (4) entirely internal. b. Comment on the reliability of the four sources of documentary evidence. According to the AICPA (AU 326-04), “The reliability of audit evidence is influence by its source and by its nature and is dependent on the individual circumstances under which it is obtained”. AU 326-04 also state that evidence received from knowledgeable outside sources is more reliable. We can conclude form this that the ranking should be, (1) directly from outsiders, (2) indirectly from outsiders, (3) internal but validated externally, (4) entirely internal.

(7-22) (Understanding the entity and its environment) You have just been assigned as in-charge accountant on HipStar, Inc. a new audit client in the recording industry. HipStar is an emerging growth company that finds new recording artists, records their music, and distributes the music directly to consumers...
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