Chapter 12 Assigned

8/10/2019 Chapter 12 Assigned

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C HAPTER 12

A UDIT P ROCEDURES IN R ESPONSE TO A SSESSED R ISKS : S UBSTANTIVE T ESTS

12-19. (Estimated time - 15 minutes)

Example Risk Factor Audit Strategy1. The company is in an industry that is experiencing

economic difficulty and intense price competition.2. The company has recently changed the nature of its

product and is bundling soft are ith other ser!icesto customi"e and implement soft are and related

controls.#. $nalytical procedures for a manufacturer sho a

significant increase in both profit margins andin!entory turn days.

%. $nalytical procedures for a retailer sho significantdecreases in both profit margins and in!entory turndays.

5. &enior management has sent a !ery strong message'and offered increased incenti!es' to middlemanagers to meet financial targets.

. $n employee in a small to medium si"ed businessresponsible for cash disbursements did not recei!ean expected promotion and pay increase.

. $ construction industry client uses the percentage of completion method to recogni"e re!enue andexpense on current pro*ects.

+. $ company is experiencing or,ing capital andgoing-concern problems.

9. The client has a strong control en!ironment andgood controls o!er the existence of in!entory.

1 . The client has ea, computer general controlsincluding poor controls o!er the appro!al of systemchanges.

1. rimarily &ubstanti!e $pproach


#. rimarily &ubstanti!e $pproach

%. rimarily &ubstanti!e $pproach


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. rimarily &ubstanti!e $pproach

+. rimarily &ubstanti!e $pproach

9. $ /o er $ssessed /e!el of 0ontrol is,$pproach

1 . rimarily &ubstanti!e $pproach


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12-2 . (Estimated Time # minutes)

Example Risk Factor Type of PotentialMisstatement

Audit Strategy

1. The client has a strong control

en!ironment and good controls o!er theexistence of in!entory.

0ontrols are rele!ant to the

existence of in!entory

$ lo er assessed le!el of

control ris, approach

2. The client is in an industry that has bothsignificant regulatory o!ersight andcomplex regulations.

3isstatements may occur inmany assertions or accounts

$ primarily substanti!eapproach.

#. The client has recently experiencedturno!er in its information technologygroup resulting in decreased segregationof duties and a deterioration of computergeneral controls.

3isstatements may occur inmany assertions or accounts


%. The client is a pri!ate uni!ersity ith primarily full time students' a smallamount of recei!ables at year-end' and

good internal controls o!er re!enues.

4ssues relate primarily to theoccurrence of re!enues andthe existence of recei!ables.

redictability oftransactions may allo for aresponse to lo er inherent

ris, and analytical procedures.

5. $ company s business plans aredependent on the success of entering neforeign mar,ets ith existing products.

4ssues relate primarily to theoccurrence of re!enues andthe existence of recei!ables.


. The client has used significant borro ingto fund expansion in a competiti!eindustry and has a narro tolerance rangeregarding debt co!enants.

4ssues relate both to thedisclosure assertion for long-term debt and to otherassertions affected by debtco!enants.


. $nalytical procedures for a manufacturersho significant increases in both profitmargins and in!entory turn days.

The existence of in!entory. $ primarily substanti!eapproach.

+. 4n!entory items are small in si"e and highin !alue.

The existence of in!entory. $ primarily substanti!eapproach.

9. The telecommunications client is in acapital intensi!e industry and fixed assetsadditions in!ol!e complex accountingissues.

6aluation and allocation forfixed assets.


1 . The audit team has experience se!eralattempts by management to *ustifymarginal or inappropriate accounting onthe basis of immateriality.

4ssues may ha!e a per!asi!eimpact on multiple assertions


11. $nalytical procedures for a manufacturersho significant increases in both re!enuegro th and accounts recei!able turn days.

e!enue recognition or thenet reali"able !alue ofrecei!ables.


12-2%. (Estimated Time 25 minutes)

Objecti e Assertion Objecti e Assertion1. 7$8 - 0 +. 7$8 -02. 7$8 E 9. 7$8 - E#. 8 0:8 1 . $8


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0:;%. 7$8 - 6$ 11. 7$8 - 6$5. 7$8 - 6$ 12. $8 - 0;

. 7$8 - 8 1#. $8 - 0;

. 7$8 - 8 1%. $8 - 0;

12-25. (Estimated Time 2 minutes)

uired to list only one type of test' type of e!idence' and assertion for eachauditing procedure. 4n some cases' alternati!e ans ers are indicated in the tabulation belo .

Audit Procedure Type of Test Audit Objecti e1. 0ount cash on hand T of of balances 7$8 - Existence'

0ompleteness' 6aluation andallocation

2. 0onfirm accounts recei!able. T of of balances 7$8 - Existence

#. 6ouch plant asset additions to purchase documents.

T of of transactions T$8 - 8ccurrence' $ccuracy

%. ecalculate accrued interest onnotes payable.

T of of balances 7$8 - Existence'0ompleteness' 6aluation andallocation

5. 4n>uire of management about pledging of plant assets assecurity for long-term debt.

T of of disclosures $8 - 0ompleteness (ofdisclosures)' $8 8ccurrence and ights and8bligations

. 0ompute in!entory turno!erratio.

$nalytical procedure 7$8 - Existence'completeness' !aluation andallocation

. 6ouch ending in!entory pricingto purchase in!oices.

T of of balances 7$8 - 6aluation andallocation

+. e!ie client-prepared ban,reconciliation.

T of of balances 7$8 - Existence'0ompleteness' ights andobligations' 6aluation andallocation

9. 6erify accuracy of accountsrecei!able balance andagreement ith subsidiaryledger.

4nitial procedures 7$8 - 6aluation andallocation

1 . 8btain details of accountsrecei!able subsidiary ledger andreconcile to the general ledger.

4nitial procedures 7$8 - 6aluation andallocation

11. 0ompare statement disclosuresfor leases ith ?$$ .

T of of disclosures $8 0ompleteness'0lassification and

;nderstandability12. e!ie ade>uacy of client s pro!ision for uncollectibleaccounts.

Tests of accountingestimates

7$8 - 6aluation andallocation

1#. Examine certificates of title fordeli!ery e>uipment.

T of of7alances

7$8 - ights and obligations

1%. 0onfirm recei!ables. T of of balance 7$8 - Existence'0ompleteness' 6aluation andallocation

15. Trace bad-debt rite-off T of of transactions T$8 - 0ompleteness'


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Audit Procedure Type of Test Audit Objecti eauthori"ations to accountsrecei!able.

$ccuracy

1 . 8bser!e client s in!entoryta,ing.

T of of balances 7$8 - Existence'0ompleteness'

1 . Trace unpaid !endors in!oicesto accounts payable at year-end.

Test of details oftransactions

T$8 0ompleteness

1+. 0ompare pension disclosures toa disclosure chec, list.

T of of disclosures $8 - 0ompleteness of presentation and disclosure'8ccurrence and rights andobligations of disclosures

12-2 . (Estimated time - 25 minutes)

Assertion Substanti e Test1. 7$8 - 6aluation or allocation 0' @2. 7$8 - 0ompleteness $' 7' E' A

#. 7$8 - Existence 0' %. 7$8 - 6aluation or allocation 4' B 5. $8 0lassification :

;nderstandability/

. 7$8 Existence $' 7

. 7$8 ights and obligations $' 7' E' C' 4+. $8 0lassification :

;nderstandability3

9. 7$8 - 0ompleteness 7' E' C1 . 7$8 - ights and obligations E' C11. 7$8 - 0ompleteness A12. $8 0lassification :

;nderstandability/

1#. 7$8 - 0ompleteness E1%. $8 0lassification :

;nderstandability/

15. 7$8 - 6aluation or allocation 4' B

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