Resource: Modern Auditing;Prepare answers to the following assignments;Ch. 8: Comprehensive Questions: Analytical procedures;8-15 (Analytical procedures) In audit planning the audit of Construction Industry Resources,Inc., a building supply company. You have completed analytic procedures relevant to purchasesand inventory. The results of these procedures are included in Figure 8-13.;Required;Analytical procedures show that inventory turnover decreased from 31?34 days to 27 days,and gross margins declined to the lowest level in five years. What might this indicate aboutthe risk of misstatement with respect to inventory and inventory purchases?;(Analytical procedures) In audit planning the audit of Circuits Technology, Inc. (CTI). CTIresells, installs, and provides computer networking products (client software, gatewayhardware and software, and twinax hardware) to other businesses. Figure 8-14 providessome summary information from CTI?s financial statements.;Required;a. Calculate purchases, gross margin, inventory turn days, accounts receivable turn days,and accounts payable turn days for the years ended 20x2, 20x3, 20x4, 20x5.;b. Describe the trends identified by performing analytical procedures in the gross operatingcycle, the net operating cycle, and gross margin.;c. If tolerable misstatement is $45,000 for inventory, develop an expectation range forinventory turn days.;d. With respect to inventory, what might these trends indicate about the potential misstatementin inventory?;Ch. 10: Comprehensive Questions: Components of internal control;10-31 (Components of internal control) The chapter identified five components of internal control.;Listed below are specific control policies and procedures prescribed by Suntron Company.;1. Management gives careful consideration to the requisite knowledge and skills personnelneed at all levels of the organization.;2. General controls and application controls are established in the electronic data processingdepartment.;3. Management acts to reduce or eliminate incentives and temptations that might leadindividuals to engage in dishonest or illegal acts.;4. Management is alert to complaints received from customers about billing errors.;5. Management gives special consideration to the risks that can arise from the use of informationtechnology in the accounting system.;6. Employees? responsibilities are assigned so as to avoid any individual?s being in a positionto both commit an error or irregularity and then conceal it.;7. IT management has designed controls to prevent unauthorized use of IT equipment,data files, and computer programs.;8. The processing of payroll includes a check on the total number of hours submitted. Ifmore than 65 hours are reported in a weekly pay period, the transaction is printed onan exception report and put in a suspense file for additional review or additionalauthorization.;9. Suntron?s internal audit staff periodically assesses the effectiveness of various ICScomponents.;10. Policy manuals, accounting and financial reporting manuals, and a chart of accountshave been developed and implemented.;Required;a. Identify the components of internal control to which each policy or procedure relates.;b. For each item, identify one other policy or procedure for that internal control componentthat is not on the preceding list.;10-32 (Components of internal control) Internal controls can be categorized using the followingframework.;1. Control environment;2. Risk assessment;3. Information and communication;4. Control activities;4.1. Authorization;4.2. Segregation of duties;4.3. Information processing controls;4.3.1. Computer general controls;4.3.2. Computer application controls;4.3.3. Controls over the financial reporting process;4.4. Physical controls;4.5. Performance reviews;4.6. Controls over management discretion in financial reporting;5. Monitoring;6. Antifraud programs and controls;Following is a list of controls prescribed by Waterfront, Inc.;a. Management has established a code of conduct that includes rules regarding conflicts ofinterest for purchasing agents.;b. Waterfront has established a disclosure committee to review the selection of newaccounting policies.;c. Any computer program revision must be approved by user departments after testing theentire program with test data.;d. The managers of each of Waterfront?s manufacturing departments must review allexpenditures charged to their responsibility center weekly.;e. The CEO, CFO, and controller review the financial consequences of business risks annuallyto ensure that controls are in place to address significant business risks.;f. Human resources focuses on ensuring that accounting personnel have adequate qualificationsfor work performed in billing and accounts receivable.;g. Security software limits access to programs and data files, and keeps a log of programsand files that have been accessed, which is then reviewed by the security manager daily.;h. A computer program prints a daily report of all shipments that have not yet been billedto customers.;i. The controller reviews sales and collections bimonthly.;j. The computer compares the information on the sales invoice with underlying shippinginformation.;k. Customer billing complaints are directed to internal audit for followup and resolution.;l. The documentary transaction trail for all credit sales is documented in company policymanuals.;m. A committee of the board of directors evaluates and monitors business risks.;n. Access to spreadsheets used in the financial reporting process is limited and spreadsheetsare tested with test data on a quarterly basis.;Required;a. Indicate the category of internal control applicable to each procedure using the frameworkabove.;b. Identify an assertion to which each procedure pertains (some procedures may have apervasive impact on multiple assertions).;Chapter 10: Comprehensive Questions: Components of internal Control;a. Management has established a code of conduct that includes rules regarding conflicts of interest for purchasing agents.;1;Pervasive;b. Waterfront has established a disclosure committee to review the selection of new accounting policies.;4.6;DAO ? Accuracy and Valuation, DAO ? Classification and Understandability;c. Any computer program revision must be approved by user departments after testing the entire program with test data.;4.3.1;Any assertion;d. The managers of each of Waterfront?s manufacturing departments must review all expenditures charged to their responsibility center weekly.;5;TAO ? Occurrence, Completeness, Accuracy, Cutoff;e. The CEO, CFO, and controller review the financial consequences of business risks annually to ensure that controls are in place to address significant business risks.;2;Pervasive;f. Human resources focuses on ensuring that accounting personnel have adequate qualifications for work performed in billing and accounts receivable.;1;Any Assertion;g. Security software limits access to programs and data files, and keeps a log of programs and files that have been accessed, which is then reviewed by the security manager daily.;4.3.1;Any Assertion;h. A computer program prints a daily report of all shipments that have not yet been billed to customers.;4.3.2;BAO - Completeness;i. The controller reviews sales and collections bimonthly.;4.5;TAO - Valuation, Completeness, BAO - existence, Completeness;j. The computer compares the information on the sales invoice with underlying shipping information.;4.3.2;TAO - Occurrence, accuracy;k. Customer billing complaints are directed to internal audit for follow-up and resolution.;5;TAO ? Accuracy and Occurrence;l. The documentary transaction trail for all credit sales is documented in company policy manuals.;3;Any Assertion;m. A committee of the board of directors evaluates and monitors business risks.;2;Any Assertion;n. Access to spreadsheets used in the financial reporting process is limited and spreadsheets are tested with test data on a quarterly basis.;4.3.3;Any Assertion;Ch. 11: Comprehensive Questions: Assessing control risk;11-21 (Assessing control risk) An auditor is required to obtain a sufficient understanding of eachof the components of an entity?s system of internal control to plan the audit of the entity?sfinancial statements and to assess control risk for the assertions embodied in the accountbalance, transaction class, and disclosure components of the financial statements.;Required;a. Explain the reasons an auditor may assess control risk at the maximum level for one ormore assertions embodied in an account balance.;b. What must an auditor do to support assessing control risk at less than the maximumlevel when the auditor has determined that controls have been placed in operation?;c. What should an auditor consider when seeking a further reduction in the plannedassessed level of control risk?;d. What are an auditor?s documentation requirements concerning an entity?s system ofinternal control and the assessed level of control risk?;AICPA (adapted);Chapter 11: Comprehensive Questions: Assessing control risk (11-21);a. An auditor may assess control risk at the maximum level if;- Controls are unlikely to pertain to an assertion.;- Controls are unlikely to be effective;- Inefficient if the auditor where to evaluate te effectiveness of an organizations controls.;b. Assessing control risk at less than the maximum and auditor should;- Identify specific controls that affect specific financial statements assertions;- Perform test to evaluate the effectiveness of controls already in place;- Give a conclusion as to the assesssed level of control risk.;c. Considering a reduction in the planned assessed level of control risk;- Test controls will provide evidence, or give suggestions;d. Auditors documentation requiremenst in terms of internal control risk level;- Auditor must document the control assesssment and level of risk in a conclusion, at a high level of risk no evidence is required to justify such a conclusion.;- Below the maximum level the auditor is required to document the control risk, at a minimum in the auditors conclusion but no document is required.;I. Have a description of the test controls that have been performed;II. The results gathered, and any notes pertaining to the results.;III. Auditors evaluation of the effectiveness of the internal controls in place.
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