Leah Pasternak

Auditing I ACC403
Homework Submission
Chapter 10 Problems
10-34
A.

B.

Control
1. Recorded sales are supported by authorizing
shipping documents and approved customer
orders
2. Shipping documents are pre-numbered and
accounted for on a weekly basis
3. Sales transactions are internally verified
4. Separation of duties exist among billing,
recording of sales, and handling of cash receipts
5. Separation of duties exist

6. Shipping documents are pre-numbered and

accounted for on a weekly basis; Separation of
duties exist among billing, recording of sales, and
handling of cash receipts; Sales transactions are
internally verified
7. Shipping documents are forwarded to billing
daily and are billed the subsequent day; sales
transactions are internally verified
8. Transactions are internally verified
9. Computer automatically posts transactions to
the accounts receivable subsidiary records and to
the general ledger

Sales transaction-related audit objective

Recorded sales are for shipments actually made to
non-fictitious customers
Existing sales transactions are recorded
Sales transactions are correctly classified
Recorded sales are for shipments actually made to
non-fictitious customers; Existing sales
transactions are recorded
Recorded sales are for shipments actually made to
non-fictitious customers; Existing sales
transactions are recorded
Recorded sales are for shipments actually made to
non-fictitious customers; Existing sales
transactions are recorded; Sales transactions are
correctly classified
Recorded sales are for shipments actually made to
non-fictitious customers; Sales transactions are
correctly classified
Transactions are correctly classified
Sales transactions are correctly included in the
accounts receivable master file and are correctly
summarized

10-36
A.
Controls
1. Sufficient records, documents
and checks independently on
performance
2. Appropriate authorization of
transactions and proper

B.
Transaction-related Objective
Transactions are recorded at
appropriate amounts
Recorded transactions exist

C.
Deficiency Correction
Reviews are made for changes to
the prices of computer master
file when it is updated
Involve a control within the
software of accounts payable

records/documents

3. Sufficient records and

documents, physical control over
the records and assets, and
checks independently on
performance

Recorded transactions exist

4. Checks independently on
performance

Transactions are documented at

appropriate amounts

5. Appropriate authorization of
activities and transactions

Transactions are documented at

appropriate amounts

6. Sufficient records and

documents

Records transactions exist

7. Sufficient records and

documents, independent checks
on performance

Transactions documented at
appropriate amounts

8. Proper separation of duties

Existence of recorded
transactions

which necessitates the input of a

valid number of receiving report
before the software will process
the payment
Fence the facilities and prohibit
strictly to persons from parking
inside the fencing; necessitate
the accounting department to
keep perpetual inventory
records and count of beef on a
periodic basis
Counts by qualified person and
checks independently on
performance
Confirm that sales man has
updated price list; necessitate
independent approval of all
required transactions, involving
the price, before shipment
Payments should be made on
original invoices only, a receiving
report should be attached to the
invoice before payment
Coordinate the inventorys
physical count on the last date
with the sales recording to
confirm the counted inventory
has been billed and billed
inventory has been counted
Restrict the clerk of accounts
payable from being able to
modify the master file of
approved vendors. Only one
person should be authorized to
modify and make input changes
to the master file

10-38
A. The size of a company does have a material effect on the nature of the internal controls that should
exist. In terms of a small company, they have less staff, and therefore struggle with the internal control
of separation of duties as well as finding justification for their audit staff. Just because a company is
small does not mean that their internal controls are completely flawed. One good internal control of a
small company is that the owner of the company is usually actively involved. The owner of the small
company also plays an important role of developing close relationships with his employees, so trust and
knowledge are more evident than it would be in a larger firm. A larger company does not have this type
of internal control. Of course, in a large company some internal controls are more evident such as;

separation of duties, proper authorization of transactions and activities, adequate records and
documents, physical control over assets and records, independent checks on performance. That is not to
say, however, that a small company cannot contain these internal controls. It is merely more difficult for
them.
B. Both the views of Pherson and Collier are completely opposite views. Pherson should utilize more
tests for the small firms because the standard internal control questionnaire that his audit firm uses may
be inefficient for small companies. By ignoring the internal controls of a small company, Collier is not
fulfilling her code of professional standards and therefore chooses to ignore any chances of a major
deficiency that could exist within a small companys internal controls. How will she be able to deliver a
report about the material weaknesses within a nonpublic or smaller company if she at first does not
evaluate the internal controls?
C. Colliers approach is definitely not an acceptable approach under existing auditing standards. Collier is
supposed to have a good understanding of ICFR. It is important to assess whether deficiencies exist
within the internal controls, and when it is found that they do, to then perform tests on the existing
controls in order to conclude whether or not the main controls over the financial reporting are working
properly.
D. Phersons procedures are good, but when he audits a public company he really should expand those
procedures to go further than just a general questionnaire and flowcharts. He will need to make sure
that he gathers additional information about the design of the internal controls and put this information
in the operation status report of the internal controls.
Chapter 11 Problems
11-24
A. The purpose of the brainstorming session is to exchange and interchange ideas related to how and
where the team thinks the financial statements of the client may be exposed to increased misstatement
due to fraud. It is also important to brainstorm about how the management can execute and hide
financial reporting having to due to the fraud and how the organization can embezzle assets.
B. The brainstorm session should be held during the planning phase of an audit before the audit plan is
finalized. The session should include the key individuals of the team including the partners working on
the engagement. Other audit experts should also be included such as members from other offices like IT
specialists.
C. The two staff auditors are responsible for providing a fresh outlook on any methods that
management may utilize for committing fraud. They should help in raising the skepticism while
performing the audit.
D. The responsibility of the auditor is to plan as well as perform the audit to have a practical assurance
about whether or not the financial statements include significant misstatements. The misstatements
may be clues to either errors or fraud. An auditor is just as responsible for detecting fraud as they are
for detecting errors.

11-27
A. Type of Misstatement
1. Error

2. Fraud

3. Error

B. Preventative Internal
Controls
Internal review and verification
of account classification by an
independent person
The prelisting of cash receipts
should be compared to the
postings in the accounts
receivable master file and to the
validated bank deposit slip
Sales invoices are not recorded
until receipt of shipping
document indicating that the
goods have been shipped

4. Error

No merchandise may leave the

plant without the preparation of
a pre-numbered bill of lading

5. Fraud

Internal verification of invoice

preparation and posting by an
independent person
Independent verification of
packing slip

6. Fraud

7. Fraud

Appropriate separation of duties

and independent checks

C. Audit Evidence
Test accuracy of invoice
classification
Trace cash receipts from
prelisting to cash receipts
journal, confirm accounts
receivable
For sales before and after year
end, examine shipping
documents to verify the sale was
recorded in the proper period,
confirm accounts receivable at
year end
Trace credit entries in the
perpetual inventory records to
bills and lading and the sales
journal, confirm accounts
receivable at year end
Test clerical accuracy of sales
invoices
Reconcile inventory items on
hand to perpetual inventory
records and investigate any
shortages
Reconcile sales receipts to cash
receipts

11-30
A. The auditor must perform the audit for detecting errors as well as fraud including embezzlement that
is significant to the financial statements. Although it is difficult to detect embezzlements in comparison
to the majority of errors that could occur, it is still a major responsibility of the auditor. The auditor of a
public company should also take into account the effect of any major deficiencies while using the report
on internal controls related to financial reporting.
B. The deficiencies that exist in the clients internal control are; employee who handles the bank
reconciliations is not comparing the payee on checks with the cash disbursement journal, signing of
blank checks by the president leading to no control over expenditures, and no check over invoices to
assess whether they are cancelled at the time of payment.

C. Evidences that the auditor can use to uncover the fraud include; comparing the payee on checks with
the journal of cash disbursements and having follow up on all checks that are outstanding and have not
cleared the bank.