AC 410 Unit 7 Homework Assignment NEW

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Homework Assignment Questions Requiring Analysis
14-30 Early in your first audit of Star
Corporation, you notice that sales and year-end
inventory are almost unchanged from the prior
year. However, cost of goods sold is less than in
the preceding year, and accounts payable also are
down substantially. Gross profit has increased,
but this increase has not carried through to net
income because of increased executive salaries.
Management informs you that sales prices and
purchase prices have not changed significantly
during the past year, and there have been no
changes in the product line. Star
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Corporation relies on the periodic inventory
system. Your initial impression of internal
control is that several weaknesses may
exist. Suggest a possible explanation for the
trends described, especially the decrease in
accounts payable while sales and inventory were
constant and gross profit increased. Explain
fully the relationships involved. For this
question, you'll need to look at the ratios
presented and analyze the trends. What do the
trends mean? Problem 14-38 The following are
typical questions that might appear on an
internal control questionnaire for accounts
payable. 1. Are monthly statements from
vendors reconciled with the accounts payable
listing? Monthly statements from vendors should
be reconciled to the payables ledger. 2. Are
vendors' invoices matched with receiving
reports before they are approved for payment? The
two procedures are test controls that provides
auditors the evidence to access control risk of
financial statements. Required a. Describe the
purpose of each of the above internal control
activities. b. Describe the manner in which each
of the above procedures might be tested. c.
Assuming that the operating effectiveness of each
of the above procedures is found to be inadequate,
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describe how the auditors might alter their
substantive procedures to compensate for the
increased level of the risk of material
misstatement. Questions Requiring Analysis 15-30
You are retained by Columbia Corporation to audit
its financial statements for the fiscal year
ended June 30. Your consideration of internal
control indicates a fairly satisfactory
condition, although there are not enough
employees to permit an extensive separation of
duties. The company is one of the smaller units
in its industry, but it has realized net income
of about 500,000 in each of the last three
years. Near the end of your fieldwork, you
overhear a telephone call received by the
president of the company while you are discussing
the audit with him. The telephone conversation
indicates that on May 15 of the current year the
Columbia Corporation made an accommodation
endorsement of a 60-day 430,000 note issued by a
major customer, Brill Corporation, to its bank.
The purpose of the telephone call from Brill was
to inform your client that the note had been paid
at the maturity date. You had not been aware of
the existence of the note before overhearing the
telephone call. Questions Requiring Analysis
15-31 Valley Corporation established a stock
option plan for its officers and key employees
this year. Because the options granted have a
higher option price than the stock's current
market price, the company has not recognized any
cost for the options in the financial
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statements. However, a note to the financial
statements includes all required disclosures. a.
Do you believe that Valley's management has
appropriately accounted for the stock option
plan? Explain your answer. b. What responsibility
do the auditors have for the information in the
notes to the financial statements? c. List the
audit procedures, if any, which you believe
should be applied to the stock option plan.
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