ASSIGNMENT
As auditor of the Star Manufacturing Company, you have obtained a trial balance taken from the books of Star one month before year end:
Dr. (Cr.) Dr. (Cr.)
Cash in bank $ 87,000 Mortgages payable (400,000)
Trade accounts receivable 345,000 Capital stock (300,000)
Notes receivable 125,000 Retained earnings (510,000)
Inventories 317,000 Sales (3,130,000)
Land 66,000 Cost of sales 2,300,000
Buildings, net 350,000 General and administrative expenses 622,000
Furniture, fixtures, and equipment, net 325,000 Legal and professional fees 3,000
Trade accounts payable (235,000) Interest expense 35,000
There are no inventories consigned either in or out.
All notes receivable are due from outsiders and held by Star.
Which accounts should be confirmed with outside sources? Briefly describe from whom
they should be confirmed and the information that should be confirmed. Organize your
answer in the following format*:
Account Name
From Whom
Confirmed
Information to Be
Confirmed
The following are various audit procedures performed to satisfy specific transaction-related audit objectives as discussed in Chapter 6. The general transaction-related audit objectives from Chapter 6 are also included.
Audit Procedures
1. Trace from receiving reports to vendors’ invoices and entries in the acquisitions
journal.
2. Add the sales journal for the month of July and trace amounts to the general ledger.
3. Examine expense voucher packages and related vendors’ invoices for approval of
expense account classification.
4. Observe opening of cash receipts to determine that cash receipts are promptly
deposited and recorded.
5. Ask the accounts payable clerk about procedures for verifying prices, quantities,
and extensions on vendors’ invoices.
6. Vouch entries in sales journal to sales invoices and related shipping documents.
7. Examine the footnotes about the company’s policies for recording revenue transactions to determine whether the disclosures are understandable.
General Transaction-Related Audit Objectives
Occurrence Posting and Summarization Presentation
Completeness Classification
Accuracy Timing
a. Identify the type of audit evidence used for each audit procedure.
b. Identify the general transaction-related audit objective or objectives satisfied by each
audit procedure.
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.
1. Select a sample of inventory items in the factory warehouse and trace each item to the
inventory count sheets to determine whether it has been included and whether the
quantity and description are correct.
2. Trace selected quantities from the inventory list to the physical inventory to make
sure that it exists and the quantities are the same.
3. 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.
4. Read the footnote disclosures related to the company’s accounting policies for valu- ing inventory to make sure the information provided correctly reflects the method
used to value inventory.
5. Test the extension of unit prices times quantity on the inventory list for a sample of
inventory items, test foot the list, and compare the total to the general ledger.
6. Send letters directly to third parties who hold the client’s inventory, and request that
they respond directly to the auditors.
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.
8. Question operating personnel about the possibility of obsolete or slow-moving
inventory.
General Balance-Related Audit Objectives
Existence Classification Realizable value
Completeness Cutoff Rights and obligations
Accuracy Detail tie-in Presentation
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.
