Question

We considered broad "accounting systems" involving the Sales Cycle AND Inventory Observation to illustrate the direction of testing involving testing for overstatement or understatement. Requirements:

1. Consider THREE ADJACENT pieces of the sales cycle and DISCUSS the proper direction of testing for Sales for UNDERstatement.

2. In an Inventory Observation, discuss the proper direction for taking test counts to test for OVERstatement of inventory?

3. The double-entry accounting system conceptually can be used to gain audit efficiencies. Use “journal entries” and explain how by testing another account one can also test (A) Accounts receivable for UNDERstatement; and how by testing another account one can test(B) a liability account (name the account) for OVERstatement.

4. Discuss briefly the type of audit evidence used to test sales for UNDERstatement?

1. Sales for UNDERstatement

2. Physical Inventory testing for OVERstatement

3A. JE & Discussion. Accounts Receivable and another account.

3B. JE & Discussion. A Liability and another account.

4. Sales for Understatement. The type of evidence is ____. Discuss