16-23 1. Detail tie-in c. Realizable value (if cash receipts relate to older accounts) c. Realizable value (if cash receipts relate to older accounts)
16-27 a. Ordinarily, a shipment is considered a sale when it is shipped, picked up, or delivered by a common carrier.
b.
INVOICE NO.
SHIPPING
DOCUMENT
NO.
MISSTATEMENT
IN SALES CUTOFF
OVERSTATEMENT OR
UNDERSTATEMENT OF
AUG. 31 SALES
August sales
4326
4329
4327
4328
4330
September sales
4332
4331
4333
4335
4334
2164
2169
2165
2168
2166
2163
2167
2170
2171
2172 none
1,914.30 none
620.22 none
2,534.52
4,641.31
106.39 none none none
4,747.70
2,213.18 overstatement overstatement understatement understatement
Adjusting entry
Accounts receivable
Sales
2213.18
2213.18
c. After making the type of cutoff adjustments shown in part b, current year sales would be overstated by:
2168
2169
2170
2171
2172
Amount of sale
620.22
1,914.30
852.06
1,250.50
646.58
5,283.66
The best way to discover the misstatement is to be on hand on the balance sheet date and record in the audit working papers the last shipping document issued in the current period. d. The following procedures are usually desirable to test for sales cutoff.
1. Determine the shipping document number for the last shipment made in the current year. Record that number in the working papers.
2. During year-end field work, select a sample of shipping documents preceding and succeeding those selected in procedure 1.
3. During year-end field work, select a sample of sales from the sales journal recorded in the last few days of the current period, and a sample of those recorded for the first few days in the subsequent period. e. The following are effective controls and related tests of controls to help prevent cutoff misstatements.
CONTROL
(1) Prenumbered shipping documents.
(2) Policy requiring the issuance of shipping documents sequentially.
(3) Record sales invoices in the same sequence as shipping documents.
(4) Policy requiring dating of shipping documents, immediate recording of sales, and dating sales on the same date as the shipment.
(5) Use of perpetual inventory records and reconciliation of differences between physical and perpetual records.
TEST OF CONTROL
Examine documents for prenumbering.
Observe issuance of documents, examine document numbers and inquiry.
Observe recording of documents, examine document numbers and inquiry.
Observe dating of shipping documents and sales invoices, and timing of recording.
Examine worksheets reconciling physical counts and perpetual records.
24-27 a. A contingent liability is a potential future obligation to an outside party for an unknown amount resulting from activities that have already taken place. The most important characteristic of a contingent liability is the uncertainty of the amount; if the amount were known it would be included in the financial statements as an actual liability rather than as a contingency. b. Audit procedures to learn about these items would be as follows:
The following procedures apply to all three items:
Discuss with management and obtain appropriate written representations.
Review the minutes of directors' and stockholders' meetings.
Analyze legal expense.
Obtain letters from all major attorneys.
The following are additional procedures for individual items:
Lawsuit Judgment - no additional procedures; see above list of procedures applicable to all three items.
Stock
Confirm details of stock transactions with registrar and transfer agent.
Review records for unusual journal entries subsequent to year- end.
Guarantee
Discuss, specifically, any related party transactions with management and include information in letter of representation.
Review financial statements of affiliate, and where related party transactions are apparent, make direct inquiries of affiliate management, and perhaps even examine records of affiliate if necessary. c. Nature of adjusting entries or disclosure, if any, would be as follows:
1. The lawsuit should be described in a footnote to the balance sheet. A current liability will be set up as soon as a final decision is rendered or if an agreement as to damages is reached.
2. The declaration of such a dividend does not create a liability that affects the aggregate net worth in any way. No entry is necessary, but an indication of the action taken, and that such a transfer will subsequently be made, should be shown as a footnote or as a memorandum to Retained Earnings and Common Stock in the balance sheet.
3. If payment by Newart is uncertain, the $3,750 interest liability for the period June 2 through December 1, 2007, could be reflected in the Marco Corporation's accounting records by the following entry:
Interest Payments for Newart Company $3,750
Accrued Interest Payable - Newart Bonds $3,750
The the balance sheet should be footnoted to the effect that the
Marco Corporation is contingently liable for future interest payments on Newart Company bonds in the amount of $60,000.
If the interest has been paid by the time the audit is completed , or if for other reasons it seems certain that the payment will be made by Newart on January 15, no entry should be made by
Marco. In this circumstance a footnote disclosing the contingent liability of $63,750 and the facts as to the $3,750 should be included with the statements.
24-28 a. 3 - c. 1 - d. 2 - g. 4 - h. 2 -
17-28 a.
Excel command: =RANDBETWEEN(1,207295)
NOTE: Random dollar items are matched with population item numbers where the cumulative book value of the population includes the random dollar selected. b.
Interval = Number of items selected
=
10
Using 1857 as a starting point, we have:
1
2
3
4
5
6
7
8
9
10
1,857
22,586
43,315
64,044
84,773
105,502
126,231
146,960
167,689
188,481
2
6
8
8
15
20
26
30
30
35
NOTE: Systematic dollar items are related to population item numbers in the same manner as for part a above.
c. All items larger than the interval will be automatically included.
The same is not necessarily true for random number selection, but the probability is high. d. There is no significant difference in ease of selection between computer generation of random numbers and systematic selection. e. Monetary unit sampling would be used because (1) it is efficient and (2) it focuses on large dollar items.
17-29 a.
Items 2 and 7 are not misstatements, but only timing differences.
ITEM
RECORDED
VALUE
AUDITED
VALUE
1
3
4
5
$2,728.00
3,890.00
791.00
548.00
$2,498.00
1,190.00
815.00
1,037.00
6 3,115.00 3,190.00
Upper misstatement bound before adjustment:
NO. OF
MISSTATE-
MENTS
RECORDED
VALUE x CUER
PORTION x
MISSTATE-MENT
$ 230.00
2,700.00
(24.00)
(489.00)
(75.00)
MISSTATE-
MENT %
ASSUMPTION
MISSTATE-MENT/
RECORDED VALUE
.084
.694
(.030)
(.892)
(.024)
=
MIS-STATE-MENT
BOUND
1.000
.694
.084
$45,425
21,930
2,323
$69,678
0
1
$1,975,000
1,975,000
.023
.016
2 1,975,000 .014
.053
Lower misstatement bound before adjustment:
NO. OF
MISSTATE-
MENTS
RECORDED
VALUE x CUER
PORTION x
0
1
2
3
$1,975,000
1,975,000
1,975,000
1,975,000
.023
.016
.014
.013
.066
MISSTATE-
MENT %
ASSUMPTION
1.000
.892
.030
.024
=
MIS-
STATE-MENT
BOUND
$45,425
28,187
830
616
$75,058
Point estimate for understatement amounts =
= (.892 + .030 + .024) x (1,975,000 / 100)
= .946 x 19,750
Adjusted bound = initial bound - point estimate for understatement amounts
= 69,678 - 18,684
Point estimate for overstatement amounts = sum of misstatement percents x recorded value/sample size
= (.694 + .084) x (1,975,000 / 100)
= .778 x 19,750
Adjusted bound = initial bound - point estimate for overstatements
= 75,058 - 15,366
b. The population is not acceptable as stated because both the lower misstatement bound and upper misstatement bound exceed materiality.
In this situation, the auditor has the following options:
Segregate specific type of misstatement and test it separately (for the entire population). The sample would then not include the specified type of misstatement since it is being tested separately.
2. Increase the sample size.
3. Adjust the account balance (i.e., propose an adjustment).
4. Request the client to review and correct the population. refuses to correct the problem.
6. Consider the criteria used in the test, possibly in connection with additional audit work in areas outside of accounts receivable.
Segregating these items, testing cutoff more extensively, and eliminating them from the sample would result in the following bounds
:
Upper misstatement bound:
NO. OF
MISSTATE-
MENTS
RECORDED VALUE x CUER
PORTION x
MISSTATE-
MENT %
ASSUMPTION
=
MIS-
STATE-
MENT
BOUND
0
1
$1,975,000
1,975,000
.023 1.000
.016
.039
.084
Less adjustment [(.030 + .024) (19,750)]
$45,425
2,654
$48,079
(1,067)
$47,012
Lower misstatement bound:
NO. OF
MISSTATE-
MENTS
RECORDED VALUE X CUER
PORTION x
MISSTATE-
MENT %
ASSUMPTION
0
1
2
$1,975,000
1,975,000
1,975,000
.023 1.000
.016
.014
.053
.030
.024
Less adjustment [(.084) (19,750)]
=
MIS-
STATE-
MENT
BOUND
$45,425
948
664
$47,037
(1,659)
$45,378