AC 410 AC410 AC410 Unit 7 Homework
Assignment
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Questions Requiring Analysis 14-30
Early
in your first audit of Star Corporation, you notice that sales and year-end
inventory are almost unchanged from the prior year. However, cost of goods sold
is less than in the preceding year, and accounts payable also are down
substantially. Gross profit has increased, but this increase has not carried
through to net income because of increased executive salaries. Management
informs you that sales prices and purchase prices have not changed
significantly during the past year, and there have been no changes in the
product line. Star Corporation relies on the periodic inventory system. Your
initial impression of internal control is that several weaknesses may exist.
Suggest
a possible explanation for the trends described, especially the decrease in
accounts payable while sales and inventory were constant and gross profit
increased. Explain fully the relationships involved.
For
this question, you’ll need to look at the ratios presented and analyze the
trends. What do the trends mean?
Problem
14-38
The
following are typical questions that might appear on an internal control
questionnaire for accounts payable.
1.
Are monthly statements from vendors reconciled with the accounts payable
listing?
Monthly
statements from vendors should be reconciled to the payables ledger.
2.
Are vendors’ invoices matched with receiving reports before they are approved
for payment?
The
two procedures are test controls that provides auditors the evidence to access
control risk of financial statements.
Required:
a.
Describe the purpose of each of the above internal control activities.
b.
Describe the manner in which each of the above procedures might be tested.
c.
Assuming that the operating effectiveness of each of the above procedures is
found to be inadequate, describe how the auditors might alter their substantive
procedures to compensate for the increased level of the risk of material
misstatement.
Questions
Requiring Analysis 15-30
You
are retained by Columbia Corporation to audit its financial statements for the
fiscal year ended June 30. Your consideration of internal control indicates a
fairly satisfactory condition, although there are not enough employees to
permit an extensive separation of duties. The company is one of the smaller
units in its industry, but it has realized net income of about $500,000 in each
of the last three years.
Near
the end of your fieldwork, you overhear a telephone call received by the
president of the company while you are discussing the audit with him. The
telephone conversation indicates that on May 15 of the current year the
Columbia Corporation made an accommodation endorsement of a 60-day $430,000
note issued by a major customer, Brill Corporation, to its bank. The purpose of
the telephone call from Brill was to inform your client that the note had been
paid at the maturity date. You had not been aware of the existence of the note
before overhearing the telephone call.
Questions
Requiring Analysis 15-31
Valley
Corporation established a stock option plan for its officers and key employees
this year. Because the options granted have a higher option price than the
stock’s current market price, the company has not recognized any cost for the
options in the financial statements. However, a note to the financial
statements includes all required disclosures.
a.
Do you believe that Valley’s management has appropriately accounted for the
stock option plan? Explain your answer.
b.
What responsibility do the auditors have for the information in the notes to
the financial statements?
c.
List the audit procedures, if any, which you believe should be applied to the
stock option plan.
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