Karen L. Spencer
ACC/491 Contemporary Auditing I
December 3, 2012
Kimberly Jordan, MBA
Individual Text Assignment Chapters 5, 6, and 7
(Assertions) In planning the audit of a client’s financial statements, an auditor identified the following issues that need attention.
Identify the assertion for items 1 through 11.
1. The allowance for doubtful accounts is fairly presented in amount. Valuation and allocation
2. All accounts payable owed as of the balance sheet date are included in the financial statements. Completeness
3. All purchase returns recorded in the general ledger are valid. Existence and occurrence
4. There is a risk that purchases made in the last week of the month might be recorded in the following period. Completeness
5. The client may have factored accounts receivable. Rights and obligations
6. The client has used special-purpose entries to finance a building. Neither the building nor the debt is included in the financial statement. Completeness
7. A retail client values its inventory using the retail method of accounting. Valuation and allocation
8. A construction client uses the percentage of completion method for recognizing revenues. Existence and occurrence
9. A client has a defined benefit pension plan and does not have competent employees to write footnote disclosures. Presentation and disclosure
10. A client acquired a subsidiary company and paid a high amount of goodwill when the stock market, and resulting values, were at all-time highs. Valuation and allocation
11. A client financed the acquisition of assets using preferred stock that pays a 3 percent dividend and must be redeemed from the shareholders next year. Presentation and disclosure
(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.
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. __1___ 1. Bank Statements sent directly to the auditor by the bank. __2___ 2. Creditor monthly statements obtained from client’s files. __4___ 3. Vouchers in client’s unpaid voucher file.
__4___ 4. Duplicate sales invoices in filled order file.
__4___ 5. Time tickets filed in payroll department.
__3___ 6. Credit memo in customer’s file.
__4___ 7. Material requisitions filed in storeroom.
__2___ 8. Bank statement in client’s files.
__4___ 9. Management working papers in making accounting estimates. __3___ 10. Paid checks returned with bank in (1) above.
__3___ 11. Letter in customer file from collection agency on collectability of balance. __4___ 12. Memo in customer file from treasurer authorizing the write-off of the account. b. Comment of the reliability of the four sources of documentary evidence.
The most reliable sources of evidence are obtained by the auditor from an outside source, meaning the bank, customer, or vendor. The next reliable source of evidence is that which is obtained indirectly from outsiders, meaning original documents in the client’s files or something that is created internally but validated externally. The least reliable evidence is that which is entirely internal. The greatest assurance of reliability is found when the evidence is obtained from an independent source.
(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 artist, records their music, and distributes the...