Question

DQ 1:

The following are various management assertions related to sales and account receivable.

Required:

1. For each assertion, indicate whether it is an assertion about classes of transactions and events or an assertion about account balances.

2. Indicate the name of the assertion made by management.

MANAGEMENT ASSERTION	CATEGORY OF MANAGEMENT ASSERTION	NAME OF ASSERTION
a.   Recorded accounts receivable exist.
b.   Disclosures related to sales are relevant and understandable.
c.   Recorded sales transactions have occurred.
d.   There are no liens or other restrictions on accounts receivable.
e.   All sales transactions have been recorded.
f.    Receivables are appropriately classified as to trade and other receivables in the financial statements and are clearly described.
g.   Sales transactions have been recorded in the proper period.
h.   Accounts receivable are recorded at the correct amounts.
i.   Sales transactions have been recorded in the appropriate accounts.
j.   All required disclosures about accounts receivables have been made.
k. All accounts receivable have been recorded.
l.   Disclosures related to receivables are at the correct amounts.
m. Sales transactions have been recorded at the correct amounts.

DQ 2:

Below are 12 audit procedures. Classify each procedure according to the following types of audit evidence: (1) physical examination, (2) confirmation, (3) inspection,                 (4) observation, (5) inquiry of the client, (6) recalculation, (7) reperformance, and (8) analytical procedure.

Type of Evidence	Audit Procedures
	1. Watch client employees count inventory to determine whether company procedures are being followed.
	2. Count inventory items and record the amount in the audit files.
	3. Trace postings from the sales journal to the general ledger accounts.
	4. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year.
	5. Obtain information about the client's internal controls by asking questions of client personnel.
	6. Trace column totals from the cash disbursements journal to the general ledger.
	7. Examine a piece of equipment to make sure a recent purchase of equipment was actually received and is in operation.
	8. Review the total of repairs and maintenance for each month to determine whether any month's total was unusually large.
	9. Compare vendor names and amounts on purchase invoices with entries in the purchases journal.
	10. Foot entries in the sales journal to determine whether they were correctly totaled by the client.
	11. Make a surprise count of petty cash to verify that the amount of the petty cash fund is intact.
	12. Obtain a written statement from the client's bank stating the client's year-end balance on deposit.

DQ 3:

The following are various audit procedures performed to satisfy specific transaction-related audit objectives as discussed in Chapter 6.

Required:

1. Identify the type of audit evidence used for each audit procedure.

2. Identify the general transaction-related audit objective or objectives satisfied by each audit procedure.

AUDIT PROCEDURE	TYPE OF AUDIT EVIDENCE	TRANSACTION- RELATED AUDIT OBJECTIVE
1.    Trace from receiving reports to vendors’ invoices and entry in the acquisitions journal.
2.    Add the sales journal for the month of July and trace amounts to the general ledger.
3.    Examine expense voucher packages and related vendors’ invoices for approval of expense account classification.
4.    Observe opening of cash receipts to determine that cash receipts are promptly deposited and recorded.
5.    Ask the accounts payable clerk about procedures for verifying prices, quantities, and extensions on vendors’ invoices.
6.    Vouch entries in sales journal to sales invoices and related shipping documents.
7.    Examine the footnotes about the company’s policies for recording revenue transactions to determine whether the disclosures are reasonable.

Answer 1

Q 1:

c. NAME OF ASSERTION Completeness Classification and understandability Valuation and allocation Cutoff Classification b. CATEGORY OF MANAGEMENT MANAGEMENT ASSERTION ASSERTION a. All sales transactions have been Classes of recorded. transactions b. Receivables are appropriately Presentation and classified as to trade and other disclosure receivables in the financial statements and are clearly described. c. Accounts receivable are recorded Account balances at the correct amounts. d. Sales transactions have been Classes of recorded in the proper period. transactions e. Sales transactions have been Classes of recorded in the appropriate transactions accounts. f. All required disclosures about Presentation and sales and receivables have been disclosure made. g. All accounts receivable have Account balances been recorded. h. There are no liens or other Account balances restrictions on accounts receivable. i. Disclosures related to accounts Presentation and receivable are at the correct disclosure amounts. Recorded sales transactions Classes of have occurred. transactions k. Recorded accounts receivable Account balances exist 1. Sales transactions have been Classes of recorded at the correct amounts. transactions m. Disclosures related to sales and Presentation and receivables relate to the entity. disclosure Completeness Completeness Rights and obligations Accuracy and valuation Occurrence Existence Accuracy Occurrence and rights and obligations

Q 2:

ANSWER:- Each procedure according to the following types of audit evidence are as:-

1)Watch client employees count inventory to determine whether company procedures are been followed:- Observation audit evidence.

2)Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross margin relative to the preceding year:-Analytical procedure audit evidence.

3)Obtain information about the client’s internal controls by asking questions of client personnel:- Inquiry of client audit evidence.

4)Examine a piece of equipment to make sure a recent purchase of equipment was actually received and is in operation:-Physical examination audit evidence.

5)Compare vendor names customer and amounts on purchases invoices with entries in the purchases journal:-Documentation audit evidence.

6)Obtained a written statement from the client’s bank stating the client’s year-end balance on deposit:-Confirmation audit evidence.

7) Reposting from the sales journal to the general ledger account:- Reperformance type audit evidence.

Q 3:

a. b. TRANSACTION- RELATED AUDIT OBJECTIVE Completeness Posting and summarization Classification TYPE OF AUDIT PROCEDURE AUDIT EVIDENCE 1. Trace from receiving reports to Documentation vendors' invoices and entry in the acquisitions journal. 2. Add the sales journal for the Recalculation month of July and trace amounts to the general ledger. 3. Examine expense voucher Documentation packages and related vendors invoices for approval of expense account classification. 4. Observe opening of cash Observation receipts to determine that cash receipts are promptly deposited and recorded. 5. Ask the accounts payable clerk Inquiries of client about procedures for verifying prices, quantities and extensions on vendors invoices. 6. Vouch entries in sales journal Documentation to sales invoices and related shipping documents. Timing Accuracy Occurrence