Solution manual aswers auditing theory by cabrera chapter 14 ans

Current-year files contain working papers prepared to support the assertions embodied in the financial statements.. The lead schedule, especially on larger engagements, is designed to br

AUDIT WORKING PAPERS

I Review Questions

1 Refer to page 522, 3rd paragraph of the textbook

2 The major function of audit workpapers is to provide evidence of conformance with generally accepted auditing standards As a body, the workpapers are the principal record of the evidence which the auditor has gathered and evaluated in support of the audit opinion

3 Refer to pages 524 to 525 of the textbook

4 Refer to page 524, 2nd paragraph of the textbook

5 With electronic spreadsheets, audit adjustments need only be entered once – in the supporting schedule The adjustments are then automatically reflected in lead schedules and in the working trial balance through equations entered in appropriate cells The cell equations “link” the workpapers such that an adjustment need be entered only once in order for all affected workpapers to be automatically updated

6 Permanent files contain information that is of a continuing interest to the auditor

A permanent file typically contains (1) copies or abstracts of significant company documents and (2) auditor- or client-prepared information on accounts Current-year files contain working papers prepared to support the assertions embodied in the financial statements

7 Client personnel may prepare working papers to reduce the time spent by the auditor on the engagement When client personnel prepare working papers, the auditor should give the client personnel detailed instructions Working papers prepared by the client should be identified as PBC (prepared by client) and should involve no decision making The auditor should test completed working papers against underlying documentation

8 The lead schedule, especially on larger engagements, is designed to bridge the gap between the working trial balance and the general ledger by listing all general ledger accounts that are reported as one account in the financial statements Supporting schedules is a term for working papers that support the amounts presented in the financial statements by providing support for a detailed

account on a lead schedule Supporting schedules represent the bulk of working papers

9 In general, a properly prepared working paper should meet firm policy, have a proper heading, clearly indicate the work performed, clearly meet the audit objective for which it was designed, and clearly state the auditors’ conclusion

10 The prior year’s audit working papers are a useful guide to staff assistants because the audit procedures performed in the prior year usually are similar to those of the current year By referring to last year’s working papers, the assistant can see how the procedures were documented and is given a possible format for organizing the current year’s working paper In addition, exceptions noted in last year’s working papers may alert the assistant to possible problems

in the current year Finally, the prior year’s working papers contain information substantiating the beginning balances for the current year

11 The more common types of audit working papers and their principal purposes may be summarized as follows:

(1) Audit administrative working papers – aid the auditors in planning and

administration of the audit, and include such items as the audit programs, questionnaires and flowcharts, decision aids, time budgets, and engagement letters

(2) Working trial balance – represents the backbone of the auditors’ working

papers, for it contains the balances of the ledger accounts, the adjustments and reclassifications deemed necessary by the auditors, and the adjusted amounts that appear in the financial statements It also contains references

to all supporting schedules and analyses, thus serving to control the other types of working papers

(3) Lead schedules – working papers that serve to combine similar general

ledger accounts, the total of which appears on the working trial balance

(4) Adjusting journal entries – material misstatements in the accounts

disclosed by the auditors’ investigation are corrected by means of adjusting journal entries These appear on the auditors’ working trial balance, and in addition, a list of such entries is turned over to the client at the conclusion

of the audit with the request that they be approved and entered in the accounting records

(5) Reclassification entries – entries necessary to properly reflect financial

results but not representing misstatements in the financial records of the client

(6) Supporting schedules – although the term schedule is at times applied to

various types of working papers, the preferred usage is to designate a listing of the details or elements comprising the balance in an account at a

specified date Preparation of such a listing is often an essential step in determining the nature of an account

(7) Analyses – consist of working papers showing the changes which occurred

in an account during a given period By analyzing an account, the auditors determine its nature and contents

(8) Reconciliations – working papers that prove the relationship between two

amounts obtained from different sources

(9) Computational working papers – used to verify such data as interest

expense, income taxes, and earnings per share

(10) Corroborating documents – working papers that provide support for

specific representations made in the financial statements, such as letters of representations from clients, lawyers’ letters, audit confirmations, and copies of the contracts

12 Audit working papers are the property of the auditor; however, they must not violate the confidential relationship between client and auditors by making the papers available to outsiders or even to the client’s employees without specific permission from the client

13 Refer to page 535, 1st and 2nd paragraphs of the textbook

14 Refer to page 535, 3rd paragraph of the textbook

II Multiple Choice Questions

III Comprehensive Cases

Case 1 a (1) The functions of audit working papers are to aid the CPA in the conduct

of his work and to provide support for his opinion and his compliance with auditing standards

(2) Working papers are the CPA’s records of the procedures performed, and conclusions reached in the audit

b The factors that affect the CPA’s judgment of the type and content of the working papers for a particular engagement include:

1 The nature of the auditor’s report

2 The nature of the client’s business

3 The nature of the financial statements, schedules or other information upon which the CPA is reporting and the materiality of the items included therein

4 The nature and condition of the client’s records and internal controls

5 The needs for supervision and review of work performed by assistants

c Evidence which should be included in audit working papers to support a CPA’s compliance with generally accepted auditing standard includes:

1 Evidence that the financial statements or other information upon which the auditor is reporting were in agreement or reconciled with the client’s records

2 Evidence that the client’s system of internal control was reviewed and evaluated to determine the nature, timing, and extent of audit procedures

3 Evidence of the auditing procedures performed in obtaining evidential matter for evaluation

4 Evidence of how exceptions and unusual matters disclosed by auditing procedures were resolved or treated

5 Evidence of the auditor’s conclusions on significant aspects of the engagement with appropriate commentaries

d The CPA should perform an adequate examination at minimum cost and effort and the preceding year’s programs will aid in doing this The preceding year’s audit programs ordinarily contain information useful in the current examination (such as descriptions of the unique features of a client’s operations or records, a formalized sequence of audit steps in logical order, and approximate time requirements to perform various phases of the work) The auditor should decide whether to use the old program or prepare a new one

Case 2 In general, the working paper is not set up in a logical manner to show what the

auditor wants to accomplish The primary objective of the working paper is to verify the ending balance in notes receivable and interest receivable A secondary objective is to account for all interest income, cash received and cash disbursed for new notes, collateral as security, and other information about the notes for disclosure purposes

Specific deficiencies of the working paper presented in the question are:

a.

1 Tick mark explanation “tested”

does not indicate specifically

what was done

Should have separate tick marks meaning:

 Agreed to confirmation

 Traced to cash receipts journal

 Recomputed, etc

2 Explanation of some tick marks is

not given Explain all tick marks on the same page of the working paper

3 Classification of long-term

portion indicates no verification

Recompute portions of notes which are long-term

4 Paid-to-date row is confusing Column should say “date paid to” and

this should be confirmed

5 Due dates are missing for C.C

Co., P Pablo and Tetra Co Include due dates on working paper for these notes

c SPREADSHEET SOLUTION

The purpose of using an Excel spreadsheet in this problem is to give the student some experience in preparing a simple working paper using an Excel spreadsheet It should be explained to students that this type of working paper may or may not be prepared in actual practice, and that often templates are used to prepare more time-consuming working papers Also, whether or not tick marks are computerized is a matter to be decided The advantage is that the completed audit work can then be stored and reviewed electronically, a direction many firms are going On the other hand, it may

be more efficient to indicate audit work manually as it is performed, and a contrast in the color of the tick marks through use of a colored pencil may

be desirable

The formulas used are self-evident, so no listing is provided Two items deserve comment:

1 An advantage of using a spreadsheet program for these types of analyses is that footing and crossfooting are done automatically

2 When auditor tick marks are done by computer, a problem arises as

to how to place them on the worksheet One could use narrow

columns inserted between the scheduled client data, or, as done here, the tick marks are placed in blank rows beneath the related data

FOURTH PACIFIC COMPANY Schedule N-1 Date

Maker

Date Made / Due

Interest Rate / Date Paid to AmountFace SecurityValue of 12/31/02Balance Additions Payments 12/31/03Balance Receivable12/31/02 Earned Received Receivable12/31/03

(P200/Mo.)

(P1000/Mo.)

(P400/Mo.)

Legend of Auditor’s Tick Marks

tp Traced to prior year working papers

wtb Traced total to working trial balance

op Traced total to operations working paper – OP6

* Examined note for payee, made and due dates, interest rate, face amount, and value of

security No exceptions noted.

c Received confirmation, including date interest paid to, interest rate, interest paid during 2003,

note balance, and security No exceptions noted.

r Traced to cash receipts journal

< Recomputed for the year

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