AC 410 Unit 6 Homework Assignment NEW

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Homework Assignment Questions Requiring Analysis
12-21 Nolan Manufacturing Company retains you on
April 1 to perform an audit for the fiscal year
ending June 30. During the month of May, you make
extensive studies of internal control over
inventories. All goods purchased pass through a
receiving department under the direction of the
chief purchasing agent. The duties of the
receiving department are to unpack, count, and
inspect the goods. The quantity received is
compared with the quantity shown on the receiving
department's copy of the purchase order. If
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there is no discrepancy, the purchase order is
stamped OKReceiving Dept. and forwarded to the
accounts payable section of the accounting
department. Any discrepancies in quantity or
variations from specifications are called to the
attention of the buyer by returning the purchase
order to him with an explanation of the
circumstances. No records are maintained in the
receiving department, and no reports originate
there. As soon as goods have been inspected and
counted in the receiving department, they are
sent to the factory production area and stored
alongside the machines in which they are to be
processed. Finished goods are moved from the
assembly line to a storeroom in the custody of a
stock clerk, who maintains a perpetual inventory
record in terms of physical units, but not
in dollars. What weaknesses, if any, do you see
in the internal control over inventories? Problem
12-35 Described below are potential financial
statement misstatements that are encountered by
auditors. 1. Inventory is understated because
warehouse personnel overlooked several racks of
parts in taking the physical inventory. 2.
Inventory is overstated because warehouse
personnel included inventory items received
subsequent to year-end while recording the
purchase in the subsequent year to hide inventory
shortages.
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3. Inventory is overstated because management
instructed computer personnel to make changes in
the file used to price inventories. Questions
Requiring Analysis 13-31 You are part of the
audit team that is auditing Happy Chicken, Inc.,
a company that franchises Happy Chicken family
restaurants. During the current year, management
of Happy Chicken purchased for 2 million one of
its franchised locations, a store that was having
financial difficulties. In performing its
analysis for impairment of assets at year-end,
management of Happy Chicken determined that the
carrying value of the asset may not be
recoverable. As a result, management developed an
estimate of the fair value of the location using
a discounted cash flow model. The estimated fair
value of the location was determined to be 1.5
million, which resulted in an impairment loss of
about 500,000. The undiscounted future cash
flows are equal to 1.7 million. Problem 13-34 1.
The following are typical questions that might
appear on an internal control questionnaire
relating to plant and equipment 2. Are
subsidiary ledgers for plant and equipment
regularly reconciled with general ledger
controlling accounts? 3. State the purpose of
each of the above controls. 4. Describe the
manner in which each of the above procedures
might be tested.
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5. Assuming that the operating effectiveness of
each of the above procedures is found to be
inadequate, describe how the auditors might alter
their substantive procedures to compensate for
the increased level of risks of material
misstatements.
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