Chapter 13, Problem 26DQP

a.

To determine

Identify the transaction cycle that is audited for each audit procedure

Explanation of Solution

Audit procedure	Transaction cycle
Collection of evidence related to internal verification of price, extensions and quantities by examining sales invoice	Revenue
Examine the items in company’s warehouse by selecting items from client’s perpetual inventory records	Inventory and warehousing
Using audit software to foot and cross foot the cash disbursements journal and trace the balance to the general ledger	Acquisition and payment
Determine whether the management has included key disclosures in the footnotes to the financial statements by examining loan agreement for important information	Capital acquisition and repayment
Determine the existence of entries by tracing sample entries in the acquisition journal to the related vendor’s invoice	Acquisition and payment
Determine whether the acquisition transactions are recorded in proper period by examining documentation before and after the balance sheet date	Acquisition and payment
Compute inventory turnover for major products and compare with previous years	Inventory and warehousing
Confirm sample of note payable balances, collateral and interest rates with lenders	Capital acquisition and repayment
Use audit software to foot the accounts receivable trial balance and compare the balance with the general ledger	Revenue

Table (1)

b.

To determine

Identify the type of evidence for each audit procedure enlisted

Explanation of Solution

Audit procedure	Evidence type
Collection of evidence related to internal verification of price, extensions and quantities by examining sales invoice	Inspection
Examine the items in company’s warehouse by selecting items from client’s perpetual inventory records	Physical Examination
Using audit software to foot and cross foot the cash disbursements journal and trace the balance to the general ledger	Recalculation
Determine whether the management has included key disclosures in the footnotes to the financial statements by examining loan agreement for important information	Confirmation
Determine the existence of entries by tracing sample entries in the acquisition journal to the related vendor’s invoice	Inspection
Determine whether the acquisition transactions are recorded in proper period by examining documentation before and after the balance sheet date	Inspection
Compute inventory turnover for major products and compare with previous years	Analytical Procedure
Confirm sample of note payable balances, collateral and interest rates with lenders	Confirmation
Use audit software to foot the accounts receivable trial balance and compare the balance with the general ledger	Recalculation

Table (2)

c.

To determine

Identify whether the audit procedures are test of control or substantive test

Explanation of Solution

Audit procedure	Type of procedure
Collection of evidence related to internal verification of price, extensions and quantities by examining sales invoice	Test of control
Examine the items in company’s warehouse by selecting items from client’s perpetual inventory records	Substantive
Using audit software to foot and cross foot the cash disbursements journal and trace the balance to the general ledger	Substantive
Determine whether the management has included key disclosures in the footnotes to the financial statements by examining loan agreement for important information	Substantive
Determine the existence of entries by tracing sample entries in the acquisition journal to the related vendor’s invoice	Test of control or substantive
Determine whether the acquisition transactions are recorded in proper period by examining documentation before and after the balance sheet date	Substantive
Compute inventory turnover for major products and compare with previous years	Substantive
Confirm sample of note payable balances, collateral and interest rates with lenders	Substantive
Use audit software to foot the accounts receivable trial balance and compare the balance with the general ledger	Substantive

Table (3)

d.

To determine

Identify whether the audit procedures enlisted are substantive test of transactions, test of details of balances or a substantive analytical procedure.

Explanation of Solution

Audit procedure	Evidence type
Collection of evidence related to internal verification of price, extensions and quantities by examining sales invoice	Not applicable
Examine the items in company’s warehouse by selecting items from client’s perpetual inventory records	Test of details of balances
Using audit software to foot and cross foot the cash disbursements journal and trace the balance to the general ledger	Substantive test of transactions
Determine whether the management has included key disclosures in the footnotes to the financial statements by examining loan agreement for important information	Test of details of balances
Determine the existence of entries by tracing sample entries in the acquisition journal to the related vendor’s invoice	Substantive test of transactions
Determine whether the acquisition transactions are recorded in proper period by examining documentation before and after the balance sheet date	Substantive test of transaction
Compute inventory turnover for major products and compare with previous years	Analytical Procedure
Confirm sample of note payable balances, collateral and interest rates with lenders	Test of details of balances
Use audit software to foot the accounts receivable trial balance and compare the balance with the general ledger	Test of details of balances

Table (4)

e.

To determine

Identify transaction related audit objectives being satisfied for each substantive test or test of control of transaction procedure

Explanation of Solution

Audit procedure	Objectives satisfied
Collection of evidence related to internal verification of price, extensions and quantities by examining sales invoice	Accuracy
Examine the items in company’s warehouse by selecting items from client’s perpetual inventory records	Not applicable
Using audit software to foot and cross foot the cash disbursements journal and trace the balance to the general ledger	Not applicable
Determine whether the management has included key disclosures in the footnotes to the financial statements by examining loan agreement for important information	Accuracy
Determine the existence of entries by tracing sample entries in the acquisition journal to the related vendor’s invoice	Occurrence
Determine whether the acquisition transactions are recorded in proper period by examining documentation before and after the balance sheet date	Not applicable
Compute inventory turnover for major products and compare with previous years	Not applicable
Confirm sample of note payable balances, collateral and interest rates with lenders	Not applicable
Use audit software to foot the accounts receivable trial balance and compare the balance with the general ledger	Not applicable

Table (5)

f.

To determine

Identify the balance related audit objectives being satisfied for each test of details of balance procedure or substantive analytical procedure.

Explanation of Solution

Audit procedure	Objectives satisfied
Collection of evidence related to internal verification of price, extensions and quantities by examining sales invoice	Not applicable
Examine the items in company’s warehouse by selecting items from client’s perpetual inventory records	Existence
Using audit software to foot and cross foot the cash disbursements journal and trace the balance to the general ledger	Detail tie in
Determine whether the management has included key disclosures in the footnotes to the financial statements by examining loan agreement for important information	Accuracy
Determine the existence of entries by tracing sample entries in the acquisition journal to the related vendor’s invoice	Existence
Determine whether the acquisition transactions are recorded in proper period by examining documentation before and after the balance sheet date	Not applicable
Compute inventory turnover for major products and compare with previous years	Realizable value
Confirm sample of note payable balances, collateral and interest rates with lenders	Existence and accuracy
Use audit software to foot the accounts receivable trial balance and compare the balance with the general ledger	Detail tie in

Table (6)