7- 29 ( Objective 7- 4) List two examples of audit evidence the auditor can use in support of each of the following: a . Recorded amount of entries in the acquisitions journal b . Physical existence of inventory c . Accuracy of accounts receivable d . Ownership of fixed assets e . Liability for accounts payable f . Obsolescence of inventory g . Existence of petty cash
7- 33 ( Objective 7- 4) The following audit procedures were performed in the audit of inventory to satisfy specific balance- related audit objectives as discussed in Chapter 6. The audit procedures assume that the auditor has obtained the inventory count sheets that list the client’s inventory. The general balance- related audit objectives from Chapter 6 are also included. Audit Procedures 1. Trace selected quantities from the inventory list to the physical inventory to make sure that it exists and the quantities are the same. 2. Compare the quantities on hand and unit prices on this year’s inventory count sheets with those in the preceding year as a test for large differences. 3. Test extend unit prices times quantity on the inventory list, test foot the list, and compare the total to the general ledger. 4. Question operating personnel about the possibility of obsolete or slow- moving inventory. 5. Send letters directly to third parties who hold the client’s inventory, and request that they respond directly to the auditors. 6. Select a sample of quantities of inventory in the factory warehouse and trace each item to the inventory count sheets to determine if it has been included and if the quantity and description are correct. 7. Examine sales invoices and contracts with customers to determine whether any goods are out on consignment with customers. Similarly, examine vendors’ invoices and contracts with vendors to determine whether any goods on the inventory listing are owned by vendors. General Balance- Related Audit Objectives Existence Cutoff Completeness Detail tie- in Accuracy Realizable value Classification Rights and obligations a . Identify the type of audit evidence used for each audit procedure. b . Identify the general balance- related audit objective or objectives satisfied by each audit procedure.
8- 29 ( Objective 8- 3) In your audit of Canyon Outdoor Provision Company’s financial statements, the following transactions came to your attention: 1. Canyon Outdoor’s operating lease for its main store is with York Properties, which is a real estate investment firm owned by Travis Smedes. Mr. Smedes is a member of Canyon Outdoor’s board of directors. 2. One of Canyon Outdoor’s main suppliers for kayaks is Hessel Boating Company. Canyon Outdoor has purchased kayaks and canoes from Hessel for the last 25 years under a long- term contract arrangement. 3. Short- term financing lines of credit are provided by Cameron Bank and Trust. Suzanne Strayhorn is the lending officer assigned to the Canyon Outdoor account. Suzanne is the wife of the largest investor of Canyon Outdoor. 4. Hillsborough Travel partners with Canyon Outdoor to provide hiking and rafting adventure vacations. The owner of Hillsborough Travel lives in the same neighborhood as the CEO of Canyon Outdoor. They are acquaintances, but not close friends. 5. The board of directors consists of several individuals who own stock in Canyon Outdoor. At a recent board meeting, the board approved its annual dividend payable to shareholders effective June 1. a . Define what constitutes a “ related party.” b . Which of the preceding transactions would most likely be considered to be a related party transaction? c . What financial statement implications, if any, would each of the above transactions have for Canyon Outdoor? d . What procedures might auditors consider to help them identify potential related party transactions for clients like Canyon Outdoor?
8- 32 ( Objectives 8- 5, 8- 7, 8- 8) You are auditing payroll for the Morehead Technologies company for the year ended October 31, 2013. Included next are amounts from the client’s trial balance, along with comparative audited information for the prior year. Audited Balance Preliminary Balance 10/ 31/ 2012 10/ 31/ 2013 Sales $ 51,316,234 $ 57,474,182 Executive salaries 546,940 615,970 Factory hourly payroll 10,038,877 11,476,319 Factory supervisors’ salaries 785,825 810,588 Office salaries 1,990,296 2,055,302 Sales commissions 2,018,149 2,367,962 You have obtained the following information to help you perform preliminary analytical procedures for the payroll account balances. 1. There has been a significant increase in the demand for Morehead’s products. The increase in sales was due to both an increase in the average selling price of 4 percent and an increase in units sold that resulted from the increased demand and an increased marketing effort. 2. Even though sales volume increased there was no addition of executives, factory supervisors, or office personnel. 3. All employees including executives, but excluding commission salespeople, received a 3 percent salary increase starting November 1, 2012. Commission salespeople receive their increased compensation through the increase in sales. 4. The increased number of factory hourly employees was accomplished by recalling employees that had been laid off. They receive the same wage rate as existing employees. Morehead does not permit overtime. 5. Commission salespeople receive a 5 percent commission on all sales on which a commission is given. Approximately 75 percent of sales earn sales commission. The other 25 percent are “ call- ins,” for which no commission is given. Commissions are paid in the month following the month they are earned. a . Use the final balances for the prior year included above and the information in items 1 through 5 to develop an expected value for each account, except sales. b . Calculate the difference between your expectation and the client’s recorded amount as a percentage using the formula ( expected value - recorded amount)/ expected value