Chapter 7: Problems 7-29(a-g) and 7-33(a-b) Chapter 8: Problems 8-29(a-d) and 8-32(a-b)
Classify each of the preceding items according to the eight types of audit evidence: (1) physical examination, (2) confirmation, (3) inspection, (4) analytical procedures, (5) inquiries of the client, (6) recalculation, (7) reperformance, and (8) observation.
7-29 (Objective 7-4) List two examples of audit evidence the auditor can use in support of each of the following: a. Recorded amount of entries in the acquisitions journal b. Physical existence of inventory c. Accuracy of accounts receivable d. Ownership of fixed assets e. Liability for accounts payable f. Obsolescence of inventory g. Existence of petty cash
7-33 (Objective 7-4) The following audit procedures were performed in the audit of inventory to satisfy specific balance-related audit objectives as discussed in Chapter 6. The audit procedures assume that the auditor has obtained the inventory count sheets that list the client’s inventory. The general balance-related audit objectives from Chapter 6 are also included.
Audit Procedures: 1. Trace selected quantities from the inventory list to the physical inventory to make sure that it exists and the quantities are the same. 2. Compare the quantities on hand and unit prices on this year’s inventory count sheets with those in the preceding year as a test for large differences. 3. Test extend unit prices times quantity on the inventory list, test foot the list, and compare the total to the general ledger. 4. Question operating personnel about the possibility of obsolete or slow-moving inventory. 5. Send letters directly to third parties who hold the client’s inventory, and request that they respond directly to the auditors. 6. Select a sample of quantities of inventory in the factory warehouse and trace each item to the inventory count sheets to determine if it has been included and if the quantity and description are correct. 7. Examine sales invoices and contracts with customers to determine whether any goods are out on consignment with customers. Similarly, examine vendors’ invoices and contracts with vendors to determine whether any goods on the inventory listing are owned by vendors.
General Balance-Related Audit Objectives: Existence Cutoff Completeness Detail tie-in Accuracy Realizable value Classification Rights and obligations
a. Identify the type of audit evidence used for each audit procedure. b. Identify the general balance-related audit objective or objectives satisfied by each audit procedure.
8-29 (Objective 8-3) In your audit of Canyon Outdoor Provision Company’s financial statements, the following transactions came to your attention: 1. Canyon Outdoor’s operating lease for its main store is with York Properties, which is a real estate investment firm owned by Travis Smedes. Mr. Smedes is a member of Canyon Outdoor’s board of directors. 2. One of Canyon Outdoor’s main suppliers for kayaks is Hessel Boating Company. Canyon Outdoor has purchased kayaks and canoes from Hessel for the last 25 years under a long-term contract arrangement. 3. Short-term financing lines of credit are provided by Cameron Bank and Trust. Suzanne Strayhorn is the lending officer assigned to the Canyon Outdoor account. Suzanne is the wife of the largest investor of Canyon Outdoor. 4. Hillsborough Travel partners with Canyon Outdoor to provide hiking and rafting adventure vacations. The owner of Hillsborough Travel lives in the same neighborhood as the CEO of Canyon Outdoor. They are acquaintances, but not close friends. 5. The board of directors consists of several individuals who own stock in Canyon Outdoor. At a recent board meeting, the board approved its annual dividend payable to shareholders effective June 1.
a. Define what constitutes a “related party.” b. Which of the preceding transactions would most likely be considered to be a related party transaction? c. What financial statement implications, if any, would each of the above transactions have for Canyon Outdoor? d. What procedures might auditors consider to help them identify potential related party transactions for clients like Canyon Outdoor?