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Discuss the appropriateness of sending the 20 additional confirmations to the customers




Question 1: 16-21 on page 530 of the textbook (20 marks);Because of the small size of the company and the limited number of accounting personnel, Dry Goods Wholesale Company Ltd. initially records all acquisitions of goods and services at the time that cash disbursements are made. At the end of each quarter when financial statements for internal purposes are prepared, accounts payable are recorded by adjusting journal entries. The entries are reversed at the beginning of the subsequent period. Except for the lack of a purchasing system, the controls over acquisitions are excellent for a small company. (There are adequate prenumbered documents for all receipt of goods, proper approvals, and adequate internal verification wherever possible.);Before the auditor arrives for the year-end audit, the bookkeeper prepares adjusting entries to record the accounts payable as of the balance sheet date. The aged trial balance is listed as of the year end, and a manual schedule is prepared adding the amounts that were entered in the following month. Thus, the accounts payable balance equals the aged trial balance plus the following month?s journal entry for invoices received after the year end. All vendors? invoices supporting the journal entry are retained in a separate file for the auditor?s use.;In the current year, the accounts payable balance has increased dramatically because of a severe cash shortage. (The cash shortage apparently arose from expansion of inventory and facilities rather than lack of sales.) Many accounts have remained unpaid for several months, and the client is getting pressure from several vendors to pay the bills. Since the company had a relatively profitable year, management is anxious to complete the audit as early as possible so that the audited statements can be used to obtain a larger bank loan.;REQUIRED;a. Explain how the lack of a complete aged accounts payable trial balance will affect the auditor?s tests of controls for acquisitions and cash disbursements.;b. What should the auditor use as a sampling unit in performing tests of acquisitions?;c. Assume that no misstatements are discovered in the auditor?s tests of controls for acquisitions and cash disbursements. How will that assumption affect the verification of accounts payable?;d. Discuss the reasonableness of the client?s request for an early completion of the audit and the implications of the request from the auditor?s point of view.;e. List the audit procedures that should be performed in the year-end audit of accounts payable to meet the cutoff objective.;f. State your opinion as to whether it is possible to conduct an adequate audit in these circumstances.;Question 2: 17-15 on page 551 of the textbook (20 marks);In connection with her examination of the financial statements of Knutson Products Co. Ltd., an assembler of home appliances, for the year ended May 31, 2012, Raymonde Mathieu, public accountant, is reviewing with Knutson?s controller the plans for a physical inventory at the company warehouse on May 31, 2012.;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.;REQUIRED;What procedures should the company establish to ensure that the inventory count includes all items that should be included and that nothing is counted twice?;Question 3: 13-25 on page 446 of the textbook (10 marks);You have been assigned to the confirmation of aged accounts receivable for the audit of the Blank Paper Company Ltd. You have tested the trial balance and selected the accounts for confirmation. Before the confirmation requests are mailed, the controller asks to look at the accounts you intend to confirm in order to determine whether she will permit you to send them.;She reviews the list and informs you that she does not want you to confirm six of the accounts on your list. Two of them have credit balances, one has a zero balance, two of the other three have a fairly small balance, and the remaining balance is highly material. The reason she gives is that she feels the confirmations will upset these customers because ?they are kind of hard to get along with.? She does not want the credit balances confirmed because it may encourage the customers to ask for a refund.;In addition, the controller asks you to send an additional 20 confirmations to customers she has listed for you. She does this as a means of credit collection for ?those who won?t know the difference between a public accountant and a credit collection agency.?;REQUIRED;a. Is it acceptable for the controller to review the list of accounts you intend to confirm? Discuss.;b. Discuss the appropriateness of sending the 20 additional confirmations to the customers.;c. If the auditor complies with the controller?s requests, what additional audit work is required?;d. Assuming the auditor complies with all of the controller?s requests, what is the effect on the auditor?s opinion?


Paper#24041 | Written in 18-Jul-2015

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