Pembahasan Soal Uts Aduting Ii.docx

Distinguish between accuracy tests of gross accounts receivable and tests of the realizable value of receivables. The purpose of the accuracy tests of gross accounts receivable is to determine the correctness of the total amounts receivable from customers. These tests normally consist of confirmation of accounts receivable or examination of shipping documents in support of the shipment of goods to customers. The purpose of the test of the realizable value of receivables is to estimate the amount of the accounts receivable balance that will not be collected. To estimate this amount, the auditor normally reviews the aging of the accounts receivable, analyzes subsequent cash payments by customers, discusses the collectibility of individual accounts with client personnel, and examines correspondence and financial statements of significant customers. Evaluate the following statement: “In many audits in which accounts receivable is material, the requirement of confirming customer balances is a waste of time and would not be performed by competent auditors if it were not required by auditing standards. When internal controls are excellent and there are a large number of small receivables from customers who do not recognize the function of confirmation, it is a meaningless procedure. Examples include well-run utilities and retail stores. In these situations, tests of controls and substantive tests of transactions are far more effective than confirmations.” The value of accounts receivable confirmation as evidence can be visualized more clearly by relating it to tests of controls and substantive tests of transactions. If the beginning balance in accounts receivable can be assumed to be correct and careful tests of the controls have been performed, the auditor should be in an excellent position to evaluate the fairness of the ending balance in accounts receivable. Confirmations are typically more effective than tests of controls and substantive tests of transactions for discovering certain types of misstatements. These include invalid accounts, disputed amounts, and

uncollectible accounts resulting from the inability to locate the customer. Although confirmations cannot guarantee the discovery of any of these types of misstatements, they are more reliable than tests of controls and substantive tests of transactions, because tests of controls and substantive tests of transactions rely upon internally created documents, whereas confirmations are obtained from independent sources. There are two instances in which confirmations are less likely to uncover omitted transactions and amounts than tests of controls and substantive tests of transactions. First, in order to send a confirmation, it is necessary to have a list of accounts receivable from which to select. Naturally, an omitted account will not be included in the population from which the auditor is selecting the sample. Second, if an account with an omitted transaction is confirmed, customers are less likely to respond to the confirmation, or, alternatively, will state that it is correct. Tracing shipping documents or sales orders to the related duplicate sales invoice and the accounts receivable master file is an effective method of discovering omitted transactions. Clerical errors in billing customers and recording the amounts in the accounts can be effectively discovered by confirmation, tests of controls, or substantive tests of transactions. Confirmations are typically more effective in uncovering overstatement of accounts receivable than understatements, whereas tests of controls and substantive tests of transactions are effective for discovering both types. The important concept in this discussion is the existence of both a complementary and a substitute relationship between tests of controls and substantive tests of transactions, and confirmations. They are complementary in that both types of evidence, when combined, provide a higher level of overall assurance of the fair presentation of sales, sales returns and allowances, and accounts receivable than can result from either type considered separately. The strengths of tests of controls and substantive tests of transactions combined with the strengths of confirmation result in a highly useful combination. The two types of evidence are substitutes in the sense that the auditor can obtain a given level of assurance by decreasing the 1

tests of controls and substantive tests of transactions if there is an offsetting increase in the confirmation of accounts receivable. The extent to which the auditor should rely upon the tests of controls and substantive tests of transactions is dependent upon his or her evaluation of the effectiveness of internal controls. If the auditor has carefully evaluated internal control, tested internal controls for effectiveness, and concluded that the internal controls are likely to provide correct results, it is appropriate to reduce the confirmation of accounts receivable. On the other hand, it would be inappropriate to bypass confirmation altogether. In the situation being addressed in this problem, the auditor will want to put more emphasis on tests of controls and substantive tests of transactions than confirmations because of the nature of the customers and the effectiveness of internal control. Nevertheless, both types of tests should be used. Explain why the emphasis in auditing property, plant, and equipment is on the current period acquisitions and disposals rather than on the balances in the account carried forward from the preceding year. Under what circumstances will the emphasis be on the balances carried forward? The reason for the emphasis on current period acquisitions in auditing property, plant, and equipment is that there is an expectation that permanent assets will be kept and maintained on the records for several years. The assets carried over from the preceding years can be assumed to have been verified in the prior years' audits. If tests of controls and substantive tests of transactions do not show that all disposals have been recorded, additional testing of the prior balance could be required. A first year audit also necessitates tests of the beginning balance. Define monetary unit sampling and explain its importance in auditing. How does it combine the features of attributes and variables sampling?

Monetary unit sampling is a method whereby the population is defined as the individual dollars (or other currency) making up the account balance. A random sample is drawn of these individual monetary units and the physical audit units containing them are identified and audited. The results of auditing the physical audit units are applied, pro rata, to the random monetary units, and a statistical conclusion about all population monetary units is derived. Monetary unit sampling is the most commonly used method of statistical sampling for tests of details of balances. This is because it uses the simplicity of attributes sampling yet still provides a statistical result expressed in dollars. It does this by using attribute tables to estimate the total proportion of population dollars misstated, based on the number of sample dollars misstated, and then modifies this amount by the amounts of misstatements found. This latter aspect gives monetary unit sampling its "variables" dimension, although normal distribution theory is not used; rather an arbitrary rule of thumb is applied to make the adjustment. What audit procedures are most likely to be used to verify accounts receivable written off as uncollectible? State the purpose of each of these procedures. The audit procedures most likely to be used to verify accounts receivable charged off as uncollectible and the purpose of each procedure are as follows: a. Examine approvals by the appropriate persons of individual accounts charged off. The purpose is to determine that charge-offs are approved. b. Examine correspondence in client's files that indicates the uncollectibility of the accounts for a selected number of write-offs. The purpose is to determine that the account appears to be uncollectible. c. Examine Dun and Bradstreet credit records as an indication of the uncollectibility of an account. The purpose is the same as the previous procedure. 2

d.

Consider the reason for the charge-off compared to the company policy for writing off uncollectible accounts. The purpose is to determine whether or not company policy is being followed.

Evaluate the following comment by an auditor: “My job is to determine whether the payroll records are fairly stated in accordance with accounting standards, not to find out whether they are following proper hiring and termination procedures. When I conduct an audit of payroll, I keep out of the human resources department and stick to the time cards, journals, and payroll checks. I don’t care whom they hire and whom they fire, as long as they properly pay the ones they have.” The auditor should be concerned with whether the human resources department is following the proper hiring and termination procedures. An obvious reason for this would be to ensure that there are adequate safeguards against hiring and retaining incompetent and untrustworthy people. The ramifications of hiring such people can range from simple inefficiency and waste to outright fraud or theft. More importantly, though, it is necessary for the auditor to assure himself or herself that the client is hiring and terminating according to operations standards and procedures. It is necessary to see if the internal controls are working as planned before they can be effectively evaluated. To say that the auditor doesn't care who is hired and who is fired is to suggest that he or she doesn't care if the internal controls work according to any standards. Failure to follow proper termination procedures could lead to fraudulent payments for work not performed. What is meant by an attribute in sampling for tests of controls and substantive tests of transactions? What is the source of the attributes that the auditor selects? An attribute is the definition of the characteristic being tested and the exception conditions whenever audit sampling is used. The attributes of interest are determined directly from the audit program. In a test of control, that attribute is evidence of the operation of the control

consistent with the design. In a substantive test, the attribute is the absence of monetary misstatement. In connection with his audit of the financial statements of Knutson Products Co., an assembler of home appliances, for the year ended May 31, 2011, Ray Abel, CPA, is reviewing with Knutson’s controller the plans for a physical inventory at the company warehouse on May 31, 2011. Finished appliances, unassembled parts, and supplies are stored in the warehouse, which is attached to Knutson’s assembly plant. The plant will operate during the count. On May 30, the warehouse will deliver to the plant the estimated quantities of unassembled parts and supplies required for May 31 production, but there may be emergency requisitions on May 31. During the count, the warehouse will continue to receive parts and supplies and to ship finished appliances. However, appliances completed on May 31 will be held in the plant until after the physical inventory. The following procedures should be established to insure that the inventory count includes all items that should be included and that nothing is counted twice: 1. All materials should be cleared from the receiving area and stored in the appropriate space before the count. 2. Incoming shipments of unassembled parts and supplies should be held in the receiving area until the end of the day and then inventoried. 3. If possible, the day's shipments of finished appliances should be taken to the shipping area before the count. (Unshipped items remaining in the shipping area should be inventoried at the end of the day.) 4. Great care must be exercised over goods removed from the warehouse itself. These may be unassembled parts and supplies requisitioned on an emergency basis or unscheduled shipments of finished appliances. Alternative methods for recording these removals are: 3

5. 6. 7.

8.

a. Keep a list of all items removed and indicate on the list whether the item had been counted. b. Record the removal on the inventory tag if the item has been inventoried. c. Indicate on the material requisition or the shipping order that the item had been inventoried. For any of these alternatives, a warehouse employee or the perpetual inventory clerk must adjust the recorded counts. The finished appliances remaining in the warehouse should be inventoried at the end of the day. The warehouse should be instructed to date all documents as of the day the materials are received, issued, or shipped. The inventory clerk should post the May 31 production and shipment of finished goods to the inventory record based upon the dates shown on the plant production report and the shipping report. This will provide a proper cutoff because provisions have been made to adjust all counts for goods manufactured and shipped on May 31. The listing of inventory differences should be reviewed by the controller and warehouse supervisor prior to booking the adjustment. Abnormal differences should be investigated, and recounts (with appropriate reconciliation) should be made where appropriate.

4