2'75

MODULE 3 EVIDENCE
4.
/ott"tt
V Problem I

(15 to 25 minutes)

Kane,CPA, is auditingStarWholesalingCompany's
financial statementsand is aboutto perform substantive
on Star'stradeaccountspayablebalances.
auditprocedures
After obtainingan understandingof Star's internalcontrol
control risk at nearthe
for accountspayable,Kane assessed
maximum. Kane requestedand receivedfrom Star a schedule of the tradeaccountspayablepreparedusing the trade
accountspayablesubsidiaryledger(voucherregister).

5.

6.

7.

Required:
Kaneshould
auditprocedures
Describethe substantive
apply to Star's tradeaccountspayablebalances.Do not
that would be appliedonly in the audit
includeprocedures
payables,amountswithheldfrom employof related-party
suchas pensionsandinterest.
ees,andaccruedexpenses

,[,oarc^z

(15 to 25 minutes)

Larkin,CPA, hasbeenengagedto auditthe financial

of VernonDistributors,Inc.,a continuingaudit
statements
30, 200L After obclient,for the yearendedSeptember
ofVernon's internalcontrol,
tainingan understanding
controlrisk at the maximumlevel for all
Larkin assessed
conceminginvestments'
assertions
financialstatement
that Vernonis unableto exercisesignifiLarkin determined
cantinfluenceover any investeeandnonearerelatedparties.
Larkin obtainedfrom Vernondetailedanalysesof its
in domesticsecuritiesshowing:
investments
.
betweenculrentandnoncurrent
The classification
portfolios;
.
A descriptionofeach security,includingthe interestrateandmaturitydateof bondsandpar valueanddividendrateon stocks;
.
A notationofthe locationofeach security,either
custodian;
in the Treasurer'ssafeor held by an independent
.
The numberof sharesof stock or face amountof
bondsheld at the beginningandendof the year;
.
The beginningandendingbalancesat costandat
premiumor discounton bonds;
market,andthe unamortized
.
Additions to and salesfrom the portfolios for the
year,includingdate,numberof shares,faceamountof
andrealizedgainor loss;
bonds,cost,proceeds,
.
Valuationallowancesat the beginningandend of
therein:
theyearandchanges
.
Accruedinvestmentincomefor eachinvestmentat
the beginningandend of the year,andincomeeamedand
duringtheyear.
collected
Larkin then preparedthe following partial audit program of substantiveauditingprocedures:
l.
2.
3.

Foot andcrossfootthe analyses.

Tracethe endingtotals to the generalledgerand financial statements.
Tracethe beginningbalancesto the prior year's working papers.

8.

Obtain positive confirmationas of the balancesheet

dateof the investmentsheld by any independentcustodian.
Determinethat incomefrom investmentshasbeenproperly recordedas accruedor collectedby referenceto
publishedsources,by computation,andby tracingto
recordedamounts.
in nonpublicentities,comparecarrying
For investments
valueto informationin the mostrecentlyavailableauditedfinancialstatements.
Determinethat all transfersbetweenthe currentand
noncurrentportfolios havebeenproperly authorized
and recorded.
declinein the
Determinethat any other-than-temporary
priceof an investmenthasbeenproperlyrecorded.

Required:
assertionrelaa. Identifythe primaryfinancialstatement
by eachof the
that would be addressed
tive to investments
procedures
#4 through#8 anddescribethe primaryaudit
objectiveof performingthatprocedure.Usethe formatillustratedbelow.

auditingproceb. Describethreeadditionalsubstantive
investVernon's
duresLarkin shouldconsiderin auditing
ments.

,,[,,o*^,

(15 to 25 minutes)

to be apYoung,CPA, is consideringthe procedures

relatingto
plied concerninga client'slosscontingencies
litigation,claims,andassessments.
Required:
shouldYoung apply
auditprocedures
What substantive
to litigation,
relating
whentestingfor losscontingencies
claims,and assessments?

1[,oo*^o

( 1 5t o 2 5 m i n u t e s )

Edwards,CPA, is engagedto auditthe financialstatementsof MatthewsWholesalingfor the yearendedDeceman underber 31, 2001. Edwardsobtainedanddocumented
standingof internalcontrolrelatingto the accountsreceivcontrolrisk relatingto accountsreceivable
ableandassessed
andobtained
at the maximumlevel. Edwardsrequested
schedulelisting
receivable
from Matthewsan agedaccounts
December31'
of
as
customer
by
each
owed
the total amount
2001,and sentpositiveconfirmationrequeststo a sampleof
the customers.
Required:
What additionalsubstantiveaudit proceduresshould
Edwardsconsiderapplying in auditingthe accountsreceivable?

MODULE 3 EVIDENCE

276
Problem5

(15 to 25 minutes)

consistof evaluationsof finanAnalyticalprocedures

cial informationmadeby a studyof plausiblerelationships
amongboth financialandnonfinancialdata. They range
to the useof complexmodelsinfrom simplecomparisons
andelementsof data. They involving manyrelationships
of recordedamounts,or ratiosdeveloped
volve comparisons
developedby the
from recordedamounts,to expectations
auditors.
Required:
a.

Describethe broadpurposesofanalyticalprocedures.

Problem 9

(15 to 25 minutes)

Cole & Cole,CPAs,areauditingthe financialstateIndustriesCo. for the yearended

mentsof Consolidated
December31, 2001. On April 2,2002, an inquiry letterto J.
outsideattorney,was draftedto
J. Young,Consolidated's
corroboratethe informationfurnishedto Cole by managelitigation,claims,
mentconcerningpendingandthreatened
assessments'
and
claims
andunasserted
and assessments,
Chief FinanBrown,
Consolidated's
C.
R.
May
6,2002,
On
cial Officer,gaveCole a draftofthe inquiry letterbelowfor
Cole'sreviewbeforemailingit to Young.
Required:

b. Identifythe sourcesof informationfrom which an audiexpectations.

tor develops

Describethe omissions,ambiguities,and inappropriate

andterminologyin Brown's letterbelow.
statements

c. Describethe factorsthat influencean auditor'sconsiderationof the reliabilityof datafor purposesof achieving

auditobiectives.

J. J. Young.Attorneyat Law
123Main Street
Anytown,USA

,/,,o*^u

( 1 5t o 2 5 m i n u t e s )

Bell, CPA, wasengagedto auditthe financialstatementsof Kent Company,a continuingauditclient. Bell is

aboutto auditKent'spayrolltransactions.Kent usesan into computepayrolldataand prehousepayrolldepartment
pareanddistributepayrollchecks.
During the planningprocess,Bell determinedthatthe
of payrollexpenseis high. In
inherentrisk of overstatement
of internalcontrol
addition,Bell obtainedan understanding
controlrisk at the maximumlevelfor payrolland assessed
relatedassertions.
Required:
Bell shouldconsiderperDescribethe auditprocedures
to adformingin the auditof Kent'spayrolltransactions
Do not discussKent's indressthe risk of overstatement.
ternalcontrol.

Problem 7 appearson the following page.

Problem E

(15 to 25 minutes)

of
Green,CPA, is auditingthe financialstatements
Taylor Corporationfor the yearendedDecember31, 2001.
Greenplansto completethe fieldworkandsign the auditor's
report aboutMay 10, 2002. Greenis concernedabout
occurringafterDecember31, 2001,
eventsandtransactions
that may affect the 2002 financial statements.
Required:
a. What arethe generaltypesof subsequenteventsthat
andevaluation?
requireGreen's consideration
b. What arethe auditing proceduresGreenshouldconsiderperformingto gatherevidenceconcerningsubsequent
events?

DearJ.J.Young:
In connectionwith an auditof our flnancialstatements
at December3 I , 200| , andfor the yearthenended,managementof the Companyhasprepared,andfumishedto our
Anytown,
Cole& Cole,CPAs,456Broadway,
auditors,
USA, a descriptionandevaluationof certaincontingencies,
includingthosesetforth below involvingmatterswith respectto which you havebeenengagedandto which you
attentionon behalfof the Comhavedevotedsubstantive
panyin the form of legalconsultationor representation.
shouldincludemattersthatexistedat DeYour response
200
I . Becauseof the confidentialityof all these
3
I
cember ,
may be limited.
matters,your response
In November2001,an actionwasbroughtagainstthe
allegingbreachof conCompanyby an outsidesalesman
andpleadinga secondcauseof
tractfor salescommissions
actionfor an accountingwith respectto claimsfor feesand
commissions.The causesof actionclaim damagesof
$300,000,but the Companybelievesit hasmeritoriousdefensesto the claims. The possibleexposureof the Company
judgmenton behalfof the plaintiff is slight.
to a successfut
In July 199'7,an actionwasbroughtagainstthe Contpanyby IndustrialManufacturingCo. (Industrial)alleging
patentinfringementand seekingdamagesof $20,000,000.
The actionin US DistrictCourtresultedin a decisionon
October16,2001,holdingthatthe Companyinfringed
sevenIndustrialpatentsandawardeddamagesof
$14,000,000.The Companyvigorouslydeniestheseallegationsandhasfiled an appealwith the US Courtof Appealsfor the FederalCircuit. The appealprocessis expectedto take approximatelytwo years,but thereis some
chancethat Industrialmay ultimatelyprevail.
Pleasefurnishto our auditorssuchexplanation,if any,
the foregoing
to supplement
that you considernecessary
information,including an explanationof thosemattersas to
which your views may differ from thosestatedand an identification of the omissionof any pendingor threatenedlitithatthe list of
or a statement
gation,claims,andassessments
may be quotedor
suchmattersis complete.Your response
referredto in the financial statementswithout further correwith you.
spondence

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262

MODULE 3 EVIDENCE

. OTHEROBJECTIVEOUESTIONS

[/( T

'

(15 to 25 minures)

Problem I

In obtainingevidentialmatterin supportoffinancial statement

assertions,
the auditordevelopsspecificauditobjectivesin
light ofthoseassertions.Audit procedures
arethenselectedto accomplishauditobjectives.
Required:
Your clientis Hillmart,a retaildepartmentstorethat doesno production.For eachspecificinventoryauditobjectivelisted
below selectthe mostcloselyrelatedfinancialstatement
assertionandthe mostappropriate
auditprocedure.Financialstatementassertions
and auditprocedures
may be selectedonce,morethanonce,or not at all.
1.
2.
3.
4.
5.

F inancial statementassertion
A. Completeness
B. Existenceor Occurrence
C. Presentation
andDisclosure
D. RightsandObligations
E. Valuationor Allocation

Problem 2

Specificaudit obiective
The entity haslegaltitle to inventories.
Recordedinventoryquantitiesincludeall productson hand.
Inventoriesarereduced,whenappropriate,
to replacement
costor net realizablevalue.
Costof inventoriesis properlycalculated.
The majorcategories
of inventoriesandtheirbasisof valuation areadequately
reportedin the financialstatements.
Audit procedure
F. Examinecurrentvendors'pricelists.
G. Reviewdraftsof the financialstatements.
H. Selecta sampleof itemsduringthe physicalinventorycountanddetermine
thatthey havebeenincludedon countsheets.
L Selecta sampleof recordeditemsandexaminesupportingvendors'invoices
andcontracts.
J. Selecta sampleofrecordeditemson countsheetsduringthe physicalinventory countanddeterminethat itemsareon hand.
K. Testreasonableness
of directlaborrates.

( 1 5t o 2 5 m i n u t e s )

To supportfinancialstatement
assertions,
an auditordevelopsspecificauditobjectives.The auditorthendesignssubstantive teststo satisfyor accomplisheachobjective.
Required:
Items I through 10 represent
auditobjectivesfor the investments,
accountsreceivable,andpropertyandequipmentaccounts.To the right of eachsetof auditobjectivesis a listing of possibleauditprocedures
for that account.For eachauditobjective,selectthe auditprocedurethat would primarilyrespondto the objective.Selectonly oneprocedurefor eachauditobjective. A proceduremay be selectedonly once,or not at all.
Items to be answered
l.

Audit obiectivesJbr investments

Investments
areproperlydescribedandclassifiedin
the financialstatements.
Recordedinvestments
representinvestments
actually
ownedat the balancesheetdate.

3. Trading investmentsare properly valuedat fair market

valueat the balancesheetdate.

Audit n rocedures .for investments

Traceopeningbalancesin the subsidiaryledgerto
prior year'sauditworkingpapers.
Determinethatemployeeswho areauthorizedto sell
investments
do not haveaccessto cash.
Examinesupportingdocumentsfor a sampleof investment transactionsto verifv that orenumbereddocumentsareused.
Determinethatany impairmentsin the priceof investmentshavebeenproperly recorded.
Verify that transfersfrom the currentto the noncurrent
investmentportfolio havebeenproperly recorded.
Obtainpositiveconfirmationsas of the balancesheet
dateof investments
held by independent
custodians.
Traceinvestmenttransactions
to minutesof the Board
of Directorsmeetingsto determinethat transactions
wereproperlyauthorized.

MODALE 3 EVIDENCE
Audit objectivesfor accountsreceivable
4. Accountsreceivablerepresentall amountsowed to the
entity at the balancesheetdate.
The entity haslegal right to all accountsreceivableat
the balancesheetdate.
6.

A.

B.

Accountsreceivablearestatedat netrealizablevalue.
Accountsreceivableare properly describedand presentedin the financialstatements.

C.
D.

E.
F.
G.

propertv& equipment
Audit obiectives.for
right
to propertyandequipment
has
legal
8. The entity
acquiredduringthe year.
assetsthat
9. Recordedpropertyandequipmentrepresent
actuallyexistat the balancesheetdate.

10. Net propertyandequipmentareproperlyvaluedat the

C.

balancesheetdate.

D.
E.
F.
G.

Problem 3

263

Audit Droceduresfor accountsreceivable

Analyze the relationshipof accountsreceivableand
for preceding
salesandcompareit with relationships
periods.
Performsalescutoff teststo obtain assurancethat sales
entriesfor inventories
andcorresponding
transactions
andcostofgoods sold arerecordedin the sameand
properperiod.
Reviewthe agedtrial balancefor significantpastdue
accounts.
ofthe businesspurposeof
Obtainan understanding
that resultedin accountsreceivablebaltransactions
ances.
for indicationsof whether
Reviewloan agreements
accountsreceivablehavebeenfactoredor pledged.
Reviewthe accountsreceivabletrial balancefbr
amountsduefrom officersandemployees.
betweenmonthlyacAnalyzeunusualrelationships
monthlyaccountspayand
balances
countsreceivable
ablebalances.
Audit proceduresfor propert! & eauipment
to
Traceopeningbalancesin the summaryschedules
the prior year'sauditworkingpapers.
expenseand
Reviewthe provisionfor depreciation
livesandmethodsusedin
determinethatdepreciable
the currentyearareconsistentwith thoseusedin the
prior year.
Determinethat the responsibilityfor maintainingthe
propertyand equipmentrecordsis segregatedfrom the
responsibilityfbr custodyof propertyandequipment.
Examinedeedsandtitle insurancecertificates.
Performcutofftests to verify that propertyand equipmentadditionsarerecordedin the properperiod.
Determinethatpropertyandequipmentis adequately
insured.
Physicallyexamineall majorpropertyandequipment
additions.

(15 to 25 minutes)

arean importantpartofthe auditprocess.They consistofevaluationsoffinancial informationmade

Analyticalprocedures
may be performed
amongboth financialand nonfinancialdata. Analyticalprocedures
by a studyof plausiblerelationships
test,or as a partofthe overallreviewofan audit'
duringplanning,as a substantive
Required:
is mostaccurateusingthe following replies:
For items I through 10, selectthe stageof the auditfor which the statement
A.
B.
C.
D.

Planningthe audit.
Substantivetesting.
Overallreview.
is not correctconcerninganalyticalprocedures.
Statement

Each responsemay be selectedonce,more than once,or not at all.

Items to be answeredconcerning analyticalprocedures
1. Not requiredto be performedduring this stage.
andeventsthat have
ofthe client'sbusinessandthe transactions
2. Shouldfocuson enhancingthe auditor'sunderstanding
occurredsincethe lastauditdate.
3. Shouldfocus on identifying areasthat may representspecificrisks relevantto the audit.

MODULE 3

EVIDENCE

269

Statements,questions,excerpts,and comments

11. We haveno plans or intentionsthat may materiallyaffect the canying value or

classificationof assetsandliabilities.
the Companyhashad
12. As discussedin Note 14 to the financialstatements,
controlledby, andpeoplewho arerelated
numerousdealingswith businesses
to, the officersof the Company.

13. Therewere unreasonabledelaysby managementin permitting the commencementof the auditandin providingneededinformation.
is not correct,pleasewrite promptly,usingthe enclosedenve14. If this statement
lope,andgive detailsof any differencesdirectlyto our auditors.
recurringlossesfrom operationsandhasa net
15. The Companyhassuff'ered
doubtaboutits ability to continueas a
capitaldeficiencythatraisessubstantial
going concern.

Problem 10

( 1 5t o 2 5 m i n u t e s )

Required:
enmay considerperformingin separate
that an accountant
a seriesof unrelatedprocedures
Items I through 15 represent
of
a
nonfinancial
statements
(a
the
compile
review)
and
to
nonpublic
entity
of
a
gagements
to reviewthe tlnancialstatements
publicentity (a compilation).Select,as the bestanswerfor eachitem,whetherthe procedureis required(&l or not required
for eachitem.
Make two selections
i'N , for both reviewandcompilationengagements.
l.

2.

Procedures
representashouldobtaina management
9. The accountant
with
an understanding
shouldestablish
The accountant
tion letterfrom the entity
the entity regardingthe natureand limitationsof the servicesto be perfbrmed.
of the fishouldstudythe relationships
10. The accountant
to
that
would
be
expected
elements
nancial
statement
actions
inquiries
concerning
make
should
The accountant
conform to a predictablepattern.
takenat the boardof directors'meetings.
to the entity'ssenThe accountantshouldcommunicate
acts
discoveredby the
illegal
employee
ior management
thatareclearlyinconsequential.
accountant

3.

accountant,
as the entity'ssuccessor
The accountant,
to
accountant
with the predecessor
shouldcommunicate
workingpapers.
obtainaccessto the predecessor's

ll.

4.

shouldobtaina levelof knowledgeof the

The accountant
accountingprinciplesandpracticesof the entity'sindustry.

shouldmakeinquiriesabouteventssub12. The accountant

that would
sequentto the dateof the financialstatements
havea materialeffecton the financialstatements.

5.

ofthe
The accountantshouldobtainan understanding
entity'sinternalcontrol.

6.

shouldperformanalyticalprocedures
The accountant
that appearto be undesignedto identifyrelationships
usual.

reportif
shouldmodify the accountant's
13. The accountant
thereis a changein accountingprinciplesthat is adequatelydisclosed.

7.

ofcontrol
shouldmakean assessment
The accountant
risk.

8.

shouldsenda letterofinquiry to the enThe accountant

the informationfurnishedby
tity's attomeyto corroborate
management
concerninglitigation.

Problemrt /

14. The accountantshouldsubmita hardcopy of the finanreportwhenthe finanandaccountant's

cial statements
reportaresubmittedon
andaccountant's
cial statements
a computerdisk.
15' The accountantshouldperfbrm specificproceduresto
doubtaboutthe enevaluatewhetherthereis substantial
tity's abilityto continueasa goingconcern.

(15 to 25 minutes)

Required:
Items I through L2 representpossibleerrorsand irregularitiesthat an auditor suspectsare present. The accompanyingllsl
of Auditing Proceduresrepresentsproceduresthat the auditor would considerperformingto gatherevidenceconcerningpossible errorsand irregularities. For eachitem, selectone or two procedures,as indicated,that the auditor most likely would perform to gatherevidencein supportofthat item. The procedureson the list may be selectedonce,more than once,or not at all.

270

MODULE 3 EVIDENCE
Possiblemisstatements
due to errors and fraud

1. The auditorsuspects
that a kiting schemeexistsbecausean accountingdepartment
employeewho canissueandrecord
checksseemsto be leadingan unusuallyluxuriouslifestyle. (Selectonly L procedure)
2. The auditor suspectsthat the controllerwrote severalchecksand recordedthe cashdisbursementsjustbeforeyear-endbut
did not mail the checksuntil after the first week of the subsequentyear. (Selectonly L procedure)
3. The entity borrowedfunds from a financial institution. Although the transactionwas properly recorded,the auditor suspectsthatthe loancreateda lien on the entity'sreal estatethat is not disclosedin its financialstatements.(Selectonly 1
procedure)
4. The auditordiscoveredan unusuallylargereceivablefrom oneofthe entity'snew customers.The auditorsuspects
that the
receivablemay be fictitiousbecausethe auditorhasneverheardof the customerandbecausethe auditor'sinitial attemptto
confirmthe receivablehasbeenignoredby the customer.(Selectonly 2 procedures)
5. The auditorsuspects
thatfictitiousemployeeshavebeenplacedon the payrollby the entity'spayroll supervisor,
who has
(Selectonly I procedure)
accessto payrollrecordsandto the paychecks.
6. The auditorsuspects
that selectedemployeesof the entity receivedunauthorized
raisesfrom the entity'spayrollsupervisor,
who hasaccessto payrollrecords.(Selectonly I procedure)
7 . T h e e n t i t y ' s c a s h r e c e i p t s o f t h e f i r s t f e w d a y s o f t h e s u b s e q u e n t y e a r w e r e p r o p e r l y d e p o s i t e doi npiet sr ag tei n g
ea
r aclcountafterthe year-end.However,the auditorsuspects
that the entity recordedthe cashreceiptsin its booksduringthe
lastweekofthe yearunderaudit.(Selectonly I procedure)
8. The auditorsuspects
that voucherswerepreparedandprocessed
by an accountingdepartment
employeefor merchandise
that wasneitherorderednor receivedby the entity. (Selectonly 1 procedure)
9. The detailsof invoicesfbr equipmentrepairswerenot clearlyidentifiedor explainedto the accountingdepartment
employees. The auditorsuspects
thatthe bookkeeperinconectlyrecordedthe repairsas fixed assets.(Selectonly I procedure)
10. The auditorsuspects
that a lappingschemeexistsbecausean accountingdepartment
employeewho hasaccessto cashreceiptsalsomaintainsthe accountsreceivableledgerandrefusesto takeany vacationor sick days.(Selectonly 2 procedures)
I l. The auditorsuspects
thatthe entity is inappropriately
increasingthe cashreportedon its balancesheetby drawinga check
on one accountand not recordingit as an outstanding
checkon that accountandsimultaneously
recordingit as a depositin
a secondaccount.(Selectonly I procedure)
12. The auditorsuspects
thatthe entity'scontrollerhasoverstated
salesand accountsreceivableby recordingfictitioussalesto
regularcustomers
in the entity'sbooks.(Selectonly 2 procedures)

B.

C.
D.
E.
F.
G.
H.
I.
J.
K.

List of audi
Comparethe detailsof the cashreceiptsjournal entrieswith
the detailsofthe correspondingdaily depositslips.
Scanthe debits to the fixed assetaccountsand vouch selectedamountsto vendors' invoicesand manasement'sauthorization.
Perform analytical proceduresthat compare documented
authorizedpay ratesto the entity's budget and forecast.
Obtain the cutoff bank statementand compare the cleared
checksto the year-endbank reconciliation.
Preparea bank transferschedule.
Inspectthe entity's deedsto its real estate.
Make inquiriesof the entity's attorneyconcerningthe details of real estatetransactions.
Confirm the terms of borrowing arrangementswith the
lender.
Examine selectedequipment repair orders and supporting
documentationto determinethe propriety of the charges.
Sendrequeststo confirm the entity's accountsreceivableon
a surprise basis at an interim date.
Send a secondrequest for confirmation of the receivable to
the customerand make inquiriesof a reputablecredit
concerninsthe customer'screditworthiness.

res
L. Examine the entity's shippingdocumentsto verify that the
merchandisethat producedthe receivablewas actually sentto
the customer.
M. Inspectthe entity's correspondence
files for indicationsof
customerdisputesfor evidencethat certainshipmentswere
on consignment.
N. Perform edit checksof data on the payroll transactiontapes.
O. Inspectpayroll check endorsements
for similar handwriting.
P. Observepayroll checkdistributionon a surprisebasis.
Q. Vouch data in the payroll registerto documentedauthorized
pay ratesin the human resourcesdepartment'sfiles.
R. Reconcilethe payroll checkingaccountand determineif
there were unusualtime lags betweenthe issuanceand payment ofpayroll checks.
S. Inspect the file ofprenumbered vouchers for consecutive
numbering and proper approval by an appropriate employee.
T. Determine that the details of selectedprenumberedvouchers
match the relatedvendors' invoices.
U. Examine the supportingpurchaseordersand receivingreports fbr selectedpaid vouchers.

MODALE 3 EVIDENCE
Problem 12

271

(15 to 25 minutes)

ovalson the
This consistsof 19 items. Selectthe bestanswerfor eachitem. Use a No. 2 pencilto blackenthe appropriate
Answer Sheetto indicateyour answers.Answer all items. Your gradewill be basedon the total numberof correct
"OrO,J;.",J.t.
Required:
questions,
excerpts,andcommentstakenfrom variousparts
Items I through 19 representa seriesofunrelatedstatements,
questions,
excerpts,
of an auditor'sworkingpaperfile. On the nextpagethereis a list of the likely sourcesof the statements,
andcomments.Select,as the bestanswerfor eachitem,the mostlikely source.Selectonly one sourcefor eachitem. A source
may be selectedonce,morethanonce,or not at all.
inventoryfrom loss,damage,andmisapl. During our auditwe discoveredevidenceof the company'sfailureto safeguard
propriation.
to be temporary.
2. The companyconsidersthe declinein valueof equitysecuritiesclassifiedas available-for-sale
personnelandthe
3. Was the differenceof opinionon the accruedpensionliabilitiesthat existedbetweenthe engagement
with firm policy and appropriately
documented?
actuarialspecialistresolvedin accordance
that,in ourjudgment,could havea mateassurance
of detectingmisstatements
4. Our auditis designedto providereasonable
detectall misstateour auditwill not necessarily
takenas a whole. Consequently,
rial effbcton the financialstatements
of assets.
mentsthatexistdue to efTor,fraudulentfinancialreporting,or misappropriation
with or deficienciesin financial
fiom regulatoryagenciesconcerningnoncompliance
5. Therehavebeenno communications
reportingpractices.
6. Nothingcameto our attentionthatcausedus to believethat at October3 I , 2000,therewasany changein the capitalstock,
equityascomparedwith the
in consolidated
netcurrentassetsor stockholders'
increasein long-termdebt,or decrease
sheet.
consolidated
balance
30.
2000
unaudited
condensed
shown
in
the
September
amounts
is nominalin amount.
7. It is our opinionthatthepossibleliabilityto thecompanyin thisproceeding
the companyexperienced
a net lossfor the yearendedJuly 3 l , 2000,
8. As discussedin Note4 to the financialstatements,
a n d i s c u r r e n t l y i n d e f a u l t u n d e r s u b s t a n t i aol fl iytas ldl e b t a g r e e m e n tI sn .a d d i t i o n , o n S e p t e m b e r 2 5 , 2 0 0 0 , t h e c o m p a n y
voluntarypetitionfbr relief underChapterI I of the US BankruptcyCode. Thesemattersraisesubfiled a prenegotiated
stantialdoubtaboutthecompany'sabilityto continueasa goingconcern.
consultedwith Better& Best,CPAs. The purposeof this
9. During the yearunderaudit,we wereadvisedthat management
consultationwas to obtainanotherCPA firm's opinionconcerningthe company'srecognitionof certainrevenuethat we
did
believeshouldbe deferredto futureperiods.Better& Best'sopinionwasconsistentwith our opinion,so management
not recognizethe revenuein the currentyear.
that havebeendeferredto futureperiodswill be recoverable.
10. The companybelievesthat all materialexpenditures
judgmentandthe assessment
of auditrisk andmaterialityfor the purposeof our auditmeanthat
11. Our useof professional
asto the suffidifferentlyby you. We makeno representation
mattersmay haveexistedthat would havebeenassessed
of the informationin our workingpapersfbr your purposes.
ciencyor appropriateness
please
12. Indicatein the spaceprovidedbelowwhetherthis informationagreeswith your records.If thereareexceptions,
provideany informationthat will assistthe auditorin reconcilingthe difference.
machine.Blank checksandthe check13. Blank checksaremaintainedin an unlockedcabinetalongwith the check-signing
of funds.
locationsto preventthe embezzlement
signingmachineshouldbe lockedin separate
14. Our auditcannotbe relieduponto disclosesignificantdeficienciesin the designor operationofinternalcontrol. Nevertheto you all reportableconditionsandpotentialareasfor improvementthatwe becomeawareof
less,we will communicate
duringthe courseof our audit.
consideringthe failureof the company'spersonto completeour auditwasunreasonable
15. The timetablesetby management
information.
on a timely basisanddelaysin providingnecessary
nel to completeschedules
16. Severalemployeeshavedisabledthe antivirusdetectionsoftwareon their PCsbecausethe softwareslowsthe processing
of dataandoccasionallyringsfalsealarms.The companyshouldobtainantivirussoftwarethatrunscontinuouslyat all
personnel.
systementrypointsandthat cannotbe disableby unauthorized
hasprepared,andfurnishedto our auditors,a descripmanagement
17. In connectionwith an auditof our financialstatements,
tion andevaluationof certaincontinsencies.

MODALE 3 EVIDENCE

272

of assetsandliabili18. The companyhasno plansor intentionsthat may materiallyaffectthe carryingvalueor classification

ties.
givento the relationshipof the sampleto the audit
consideration
19. In planningthe samplingapplication,was appropriate
objectiveandto preliminaryjudgmentsaboutmaterialitylevels?
List of Sources

assertion
A . Practitioner's
reporton management's
aboutan entity'scompliancewith specifiedrequirements.
on reoortableconditions.
B . Auditor'scommunications
C . Audit inquiry letterto legalcounsel.

I.

Letter fbr underwriters.

J.

Accountsreceivableconfirmationrequest.

K. Requestfor bankcutoff statement.

L.

ofan auditor'sreporton fiExplanatoryparagraph

nancialstatements.

to auditinquiry letter.
D . Lawyer'sresponse

reviewnoles.
engagement
M . Partner's

to the auditor.
E . Audit committee'scommunication

representation
letter.
N . Management

F.

to the auditcommittee
Auditor'scommunication
(otherthanwith respectto reportableconditions).

G . Reporton the applicationofaccountingprinciples.

letter.
H . Auditor'sengagement

Problem13

o.

with predecessor
auditor'scommunication
Successor
auditor.

auditor'scommunicationwith successor
P. Predecessor
auditor.

(15 to 25 minutes)

Required:
in audil
pertbrmedor commentsdocumented
tick marks(symbols)that indicateprocedures
a. Items I through 10 represent
procedures/comments
below,
the
Inc. Select,from the list of
ing the Long-term debt accountof AmericanManufacturers,
was
made
point
where
a
tick
mark
of
the
audit
at each
procedure/comment
thatthe auditormostlikely performed/documented
procedure/comment
once
or not
may
be
selected
procedure/comment
item.
A
papers.
for
each
on the working
Selectonly one
papers
working
tbot
and
crossfoot.
Assume
that
the
at all.
in aupertbrmedor commentsdocumented
tick marks(symbols)that indicateprocedures
b. Items l1 through 18 represent
Inc. During
diting the Property, plant, and equipmentandAccumulateddepreciationaccountsof AmericanManufacturers,
an addition
andconstructed
purchased
new computersdirectlyfrom wholesalers
the yearunderaudit,AmericanManuf'acturers
s .m t h e l i s t
t o o n e o f i t s b u i l d i n g sT. h e c o m p a n y ' s e m p l o y e e s a l s o r e f u r b i s h e d t h e f i x t u r e s o f s e v e r a l o l d e rSbeuliel dcitn, fgi o
at eachpoint of the
that the auditormostlikely performed/documented
below,the procedure/comment
of procedures/comments
for eachitem. A proceauditwherea tick mark wasmadeon the workingpapers.Selectonly oneprocedure/comment
papers
foot
and
crossfbot.
may be selectedonceor not at all. Assumethat the working
dure/comment

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