Case1: You are auditing SAB, which has a December 31st year-end. On December 24th, the person responsible for processing receiving reports and recording the receipt of inventory became very ill and was out of the office for a week. Due to the company’s small staff and the holiday season, a number of the receiving reports were not processed on a timely basis.
As an auditor, on which assertion would you place a high importance for this entity and how would you test for it? (5 marks)
Answer:
Case 2: Below is information relating to the inventory management of Green Sell. (10 marks)
2018 2019 Industry Average
Inventory $16,500 $26,250 $25,000
Inventory Turnover 12 9 18
Required:
Using analytical procedures identify and discuss any concerns you have about misstatements in the financial statements.
Answer:
Case 3: The Art Appreciation Society operates a museum for the benefit and enjoyment of the community. During the hours the museum is open to the public, two clerks who are positioned at the entrance collect a five-dollar admission fee from each nonmember patron. Members of the Art Appreciation Society are permitted to enter free of charge upon presentation of their membership cards.
At the end of each day one of the clerks delivers the proceeds to the treasurer. The treasurer counts the cash in the presence of the clerk and places it in a safe. Each Friday afternoon the treasurer and one of the clerks deliver all cash held in the safe to the bank and receive an authenticated deposit slip, which provides the basis for the weekly entry in the cash receipts journal.
The board of directors of the Art Appreciation Society has identified a need to improve the internal control system over cash admission fees. The board has determined that the cost of installing turnstiles or sales booths or otherwise altering the physical layout of the museum would greatly exceed any benefits that might be derived. However, the board has agreed that the sale of admission tickets must be an integral part of its improvement efforts.
Samer has been asked by the board of directors of the Art Appreciation Society to review the internal control over cash admission fees and suggest improvements.
Required:
Indicate seven weaknesses in the existing internal control system over cash admission fees, which Samer should identify, and recommend one improvement for each of the weaknesses identified. (20 marks)
Answer:
Case 4: You are auditing cash for Moka, Inc. In meeting with the CFO during the planning stages of the audit, she indicated that there was a high risk of misstatement due to fraud in the cash account, given the lack of proper segregation of duties.
Required:
As the auditor, what tests could you perform to detect fraudulent activities in the cash account? (10 marks)
Answer:
Case 5: You are the auditor for KWC Corporation. You gathered comparative information for inventory and accounts payable and calculated the days purchases in accounts payable.
2018 2019
Inventory $34,270 $57,921
Accounts payable $ 8,295 $10,628
Days purchases in accounts payable (365 days/payables turnover) 44.2 days 44.6 days
Required:
Prepare a list of possible concerns that you might have about potential misstatements in both accounts. (10 marks)
Answer:
Case 6: For each analytical procedure listed below, identify a potential misstatement in the property management accounts it could help find.
Compute the ratio of depreciation expense to the related property, plant, and equipment accounts and compare to prior years’ ratios. (5 marks)
Compare monthly or annual repairs and maintenance with previous years. (5 marks)
Compute ratio of insurance expense to the related property, plant, and equipment accounts and compare to prior years’ ratios. (5 marks)
Answer:
Case 7: Hamad, an independent auditor, was engaged to examine the financial statements of Wing Construction, Inc., for the year ended December 31. Wing’s financial statements reflect a substantial amount of mobile construction equipment used in the firm’s operations. The equipment is accounted for in a subsidiary ledger. Hamad developed an understanding of internal control and set the control risk at moderate.
Required:
Identify the substantive audit procedures Hamad should utilize in examining mobile construction equipment and related depreciation in Wong’s financial statements. (15 marks)
Answer:
Case 8: Abel Corporation does not conduct a complete annual physical count of purchased parts and supplies in its principal warehouse but instead uses statistical sampling to estimate the year-end inventory. Abel maintains a perpetual inventory record of parts and supplies and believes that statistical sampling is highly effective in determining inventory values and is sufficiently reliable to make a physical count of each item of inventory unnecessary.
Required:
A. Identify the audit procedures that should be used by the independent auditor that change, or are in addition to, normal required audit procedures when an entity utilizes statistical sampling to determine inventory value and does not conduct a 100 percent annual physical count of inventory items. (10 marks)
B. List at least 10 normal audit procedures that should be performed to verify physical quantities whenever an entity conducts a periodic physical count of all, or part, of its inventory.
(5 marks)
Answer:
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