-Just paraphrase question 38 answer. And make sure that is correct.-I attached the question and the answer.- In part two of the question, say what are the events. Because in the answer attached its not that clear.-Try to not change the key words.
Microsoft Word - SMChap016.doc Chapter 16 - Auditing Operations and Completing the Audit 16-1 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. CHAPTER 16 Auditing Operations and Completing the Audit Review Questions 16–1 Revenue accounts that are verified during the audit of balance sheet accounts are the following (only three required): Balance Sheet Item Revenue Accounts receivable Sales Notes receivable Interest Securities and other investments Interest, dividends, gains on sale, share of investee's income Property, plant, and equipment Rent, gains on sales Intangible assets Royalties 16–2 Many analytical procedures are used in the verification of revenue. Typical are the following: (1) Comparison of this year's revenue to last year's. (2) Comparison of month-by-month revenue increments in the current year. (3) Comparison of revenue for each of the current year's months with the revenue of the prior year's comparable months. (4) Comparison of budgeted to actual revenue for each month of the current year. (5) Comparison of revenue to sales or production in units of product. Any unusual variations developed in the above comparisons should be thoroughly investigated and the reasons therefore obtained. 16–3 Items often misclassified as miscellaneous revenue include the following (only three required): (1) Collections on previously written-off receivables; these should be credited to the allowance for doubtful accounts and notes receivable. (2) Write-offs of old outstanding checks or unclaimed wages; in states having unclaimed property laws these write-offs should be credited to a liability account. Chapter 16 - Auditing Operations and Completing the Audit 16-2 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. (3) Proceeds from sale of scrap; these are generally applied to reduce cost of goods sold. (4) Rebates or refunds of insurance premiums; these should be offset against the related insurance expense or unexpired insurance. (5) Proceeds from sales of plant assets; these should be accounted for in the determination of gain or loss on the assets sold. 16–4 Expense accounts that are verified during the audit of balance sheet accounts are the following (only three required): Balance Sheet Item Expense Accounts and notes receivable Uncollectible accounts and notes expense Inventories Purchases and cost of goods sold Property, plant, and equipment Depreciation, repairs and maintenance, and depletion Intangible assets Amortization Accrued liabilities Related expenses, such as commissions, fees, bonuses, product warranty expenses, and others Interest bearing debt Interest 16–5 For income tax returns, the auditors should obtain or prepare analyses of officers' salaries and expenses, directors' fees, travel and entertainment, taxes, contributions, and casualty losses. 16–6 The department heads and other supervisors who direct operations and authorize expenditures should participate in the development of each year's budget and should receive frequent reports comparing actual revenue and cost data with the budget figures. When the budget is used in this way, it serves as a goal and as a measure of performance. The department head who helps set the budget figures for a department feels a personal responsibility for achieving the planned results. Regular reports keep the supervisor informed on variances between the budget and operating results and draw attention to matters requiring managerial attention. 16–7 The reasonableness of selling, general, and administrative expenses may be ascertained by obtaining or preparing comparative analyses of monthly expenses, including expenses expressed as percentages of net sales for both the current and preceding years. Study of the monthly and yearly relationship of individual expense accounts to net sales should reveal any material variation requiring detailed investigation. 16–8 Performing analytical procedures for expenses includes the following four steps: Develop an expectation of the amount of the expense balance by considering amounts such as budgeted amounts, prior year audited amounts, industry averages, and amounts developed by expected relationships among financial data or relevant nonfinancial data. Determine, based on materiality, the amount of the difference from expectations that can be accepted without investigation. Compare the amount of the expense to the expectations. Investigate any significant deviation from the expectation. Chapter 16 - Auditing Operations and Completing the Audit 16-3 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 16–9 The functions of (1) employment (human resources), (2) timekeeping, (3) payroll preparation and recordkeeping, and (4) distribution of pay to employees should be lodged in separate departments to achieve maximum internal control over payroll. 16–10 If wages are paid in cash, it is particularly important that the person compiling the payroll not be responsible for filling the pay envelopes or distributing them to employees. Segregation of the functions of timekeeping, payroll preparation, and payroll distribution is essential to effective internal control. 16–11 Unclaimed wages should be deposited in the bank and credited to a special liability account. When the employee calls for unclaimed pay, a new check is drawn and a receipt obtained from the employee. If the paymaster or cashier is permitted to retain unclaimed wages, an incentive to payroll padding is created along with an opportunity for intermingling these with other funds and thus concealing shortages. 16–12 The "tests of controls over payroll transactions" includes tracing names and wage rates to human resources department records, tracing hours to time reports, tracing deductions to employee authorization forms, testing extensions and footings, comparing amounts to labor cost records, testing reconciliations of the payroll bank account, investigating the handling of unclaimed wages, and comparing of payroll data with payroll tax returns. 16–13 A complete review by the auditor of all correspondence in the client's files is usually out of the question. This would consume an enormous count of time and would yield only incidental benefits. The auditor's use of the correspondence files will usually be limited to a request for letters bearing on issues arising during the examination of other records. These are generally letters to banks and other financial institutions, attorneys, and governmental agencies. 16–14 Analytical procedures performed as a part of the overall review assist the auditors in assessing the validity of the conclusions reached, including the opinion to be issued. The final review may identify areas that need to be examined further as well as provide a consideration of the adequacy of the data gathered in response to unusual or unexpected relationships during the audit. 16–15 The audit procedures that are completed near the end of fieldwork include: (1) Search for unrecorded liabilities. (2) Review the minutes of meetings. (3) Perform final analytical procedures. (4) Perform procedures to identify loss contingencies. (5) Perform the review for subsequent events. (6) Obtain the representation letter. 16–16 Loss contingencies are possible losses, stemming from past events, which will be resolved as to existence and amount by some future event. Prior to the occurrence of the future event, uncertainty exists not only as to the amount of the loss, but also as to whether any loss has actually been sustained. Loss contingencies should be disclosed in notes to the financial statements whenever it is reasonably possible that a loss has been sustained (or when disclosure is warranted by tradition). If both (1) it is probable that a loss has been incurred and (2) the amount of the loss may be reasonably estimated, loss contingencies should be recognized as actual losses in the financial statements. 16–17 The usual procedure followed by the independent auditors in obtaining evidence regarding pending and threatened litigation against the client is a letter of inquiry (or lawyer's letter) sent to the client's legal counsel. The auditors obtain from management a list of such litigation and ask the client's attorney to Chapter 16 - Auditing Operations and Completing the Audit 16-4 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. comment on this list, add any items to make it complete, and indicate any differences of opinion with management regarding the probable outcome. 16–18 An unasserted claim is a potential legal claim for which no claimant has demonstrated an intent to pursue legal remedies. Often, however, it is merely a matter of time before an unasserted claim becomes pending litigation. It is not the act of litigation being filed which creates a loss contingency for the defendant. Rather, it is having performed the acts which provide the basis for that litigation. To illustrate an unasserted claim involving the likelihood of loss, assume an airliner crashes in a populated area. For a short period of time, no claimant may exhibit intent to sue. In the long run, however, litigation is inevitable. FASB ASC 450 requires disclosure of unasserted claims when it is (1) probable that a claim will be asserted and (2) reasonably