The following are three situations, all involving private companies, in which the auditor is required to develop an appropriate overall audit strategy and approach: 1. The client has inventory at approximately 50 locations in a three-province region. The inventory is difficult to count and can be observed only by travelling by automobile. The internal controls over acquisitions, cash disbursements, and perpetual records are considered effective. This is the fifth year that you have done the audit, and audit results in past years have always been excellent. The client is in excellent financial condition. 2. This is the first year of an audit of a medium-sized company that is considering selling its business because of severe underfinancing. A review of the acquisition and payment cycle indicates that controls over cash disbursements are excellent but controls over acquisitions cannot be considered effective. The client lacks receiving reports and a policy as to the proper timing to record acquisitions. When you review the general ledger, you observe that there are many large adjusting entries to correct accounts payable. 3. You are doing the audit of a small loan company with extensive loans receivable from customers. Controls over granting loans, collections, and loans outstanding are considered effective, and there is extensive follow-up of all outstanding loans weekly. You have recommended a new computer system for the past two years, but management believes the cost is too great, given the company’s low profitability. Collections are an ongoing problem because many of the customers have severe financial problems. Because of adverse economic conditions, loans receivable have significantly increased and collections are less than normal. In previous years, you have had relatively few adjusting entries. REQUIRED a. For Audit 1, recommend a mix of audit procedures for the audit of inventory and cost of goods sold. Justify your answer. Include in your recommendations both tests of controls and substantive tests. b. For Audit 2, recommend a mix of audit procedures for the audit of the acquisition and payment cycle, including accounts payable. Justify your answer. c. For Audit 3, recommend a mix of audit procedures for the audit of outstanding loans. Justify your answer.
The following are three situations, all involving private companies, in which
the auditor is required to develop an appropriate overall audit strategy and approach:
1. The client has inventory at approximately 50 locations in a three-province region. The
inventory is difficult to count and can be observed only by travelling by automobile. The
internal controls over acquisitions, cash disbursements, and perpetual records are considered effective. This is the fifth year that you have done the audit, and audit results in past
years have always been excellent. The client is in excellent financial condition.
2. This is the first year of an audit of a medium-sized company that is considering selling its
business because of severe underfinancing. A review of the acquisition and payment cycle
indicates that controls over cash disbursements are excellent but controls over acquisitions cannot be considered effective. The client lacks receiving reports and a policy as
to the proper timing to record acquisitions. When you review the general ledger, you
observe that there are many large
3. You are doing the audit of a small loan company with extensive loans receivable from
customers. Controls over granting loans, collections, and loans outstanding are considered effective, and there is extensive follow-up of all outstanding loans weekly. You have
recommended a new computer system for the past two years, but management believes
the cost is too great, given the company’s low profitability. Collections are an ongoing
problem because many of the customers have severe financial problems. Because of
adverse economic conditions, loans receivable have significantly increased and collections are less than normal. In previous years, you have had relatively few adjusting entries.
REQUIRED
a. For Audit 1, recommend a mix of
goods sold. Justify your answer. Include in your recommendations both tests of controls
and substantive tests.
b. For Audit 2, recommend a mix of audit procedures for the audit of the acquisition and
payment cycle, including accounts payable. Justify your answer.
c. For Audit 3, recommend a mix of audit procedures for the audit of outstanding loans.
Justify your answer.
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