Listed below are several misstatements of inventory, accounts payable, and accru
ID: 2601967 • Letter: L
Question
Listed below are several misstatements of inventory, accounts payable, and accrued liabilities accounts. For each of the following misstatements, design a substantive audit procedure that provides reasonable assurance of detecting the misstatement.
1. Bonuses awarded to senior management have not been recorded.
2. Several suppliers that the company had not purchased from prior to this year were omitted from the accounts payable listing.
3. When employees counted the physical inventory, included were a number of items that were consigned to the company by a client company.
4. There was no disclosure in the nancial statements of a material account payable to a related party.
5. The year-end payroll accrual was understated.
6. One-third of the dollar amount of diamond jewelry inventory is actually cubic zirconia or white sapphires.
7. The accounts payable prepared checks to pay a vendor’s invoice twice. The invoice is still shown as an outstanding account payable.
8. Company personnel, conducting an inventory, informed the auditors that underground petroleum tanks contained high-octane gasoline when they actually contained water.
9. The accounting department of the client failed to record warranty expenses incurred after year-end applicable to prior year sales.
10. Inventory in one remote area of the warehouse was overlooked and thus not included in the client’s physical inventory count.
Explanation / Answer
Following is the audit procedure to detect the misstatements:
1. Bonuses awarded to senior management have not been recorded.
Answer: Confirm the year end balance in bank account the and other custodians of cash equivalents. The auditor should balance the cash balance as per the cash records with the documents like bank statement, etc.
Confirm the bank balance to the cash book balance
2. Several suppliers that the company had not purchased from prior to this year were omitted from the accounts payable listing.
Answer: The auditor needs to check for the list of suppliers with whom the company does business and checks for any zero balance in the payables, and check for payables if it is understated or the receivables is overstated.
3. When employees counted the physical inventory, included were a number of items that were consigned to the company by a client company.
Answer: The auditor needs to make sure the audit procedure is appropriately done in compliance with the company policies.
4. There was no disclosure in the nancial statements of a material account payable to a related party.
Answer: The auditor collects samples from the list of vendors and confirm with the ledger balances. Either it can be completely zero for the period, or accounts receivable is overstated or accounts payable is understated.
5. The year-end payroll accrual was understated.
The auditors responsibilities and duties include complete audit of the transactions of the income statementall the income and expenses should be reviewed accounts to be audited in completeness. The accounts with higher disclosure and which are of extensive in nature requires higher disclosure and presents a higher presentation and disclosure audit risk. The payroll records is to be audited and matched with the expenses records in the income statement.
6. One-third of the dollar amount of diamond jewelry inventory is actually cubic zirconia or white sapphires.
The nature of the business and the products dealt determines the inventory and management assertions. Audit procedures vary with the nature of the busiiness.
7. The accounts payable prepared checks to pay a vendor’s invoice twice. The invoice is still shown as an outstanding account payable.
Accounts payable records is to be matched with the payment records. The auditor needs to collect sample of records with whom it does the business in a given period, with regards to the amount in payables. If at all the subsidiary account is zero, it may be because the company would have omitted to record the payment.
An account payable is understated by the amount which is actually owed.
8. Company personnel, conducting an inventory, informed the auditors that underground petroleum tanks contained high-octane gasoline when they actually contained water.
Answer: the nature of business and products dealt determines the complexity and importance of the inventory management and recording assertions. the management assertions of entities that the purchase of goods reflect the physicall security, documentary controls and changes in the market value of inventory.
9. The accounting department of the client failed to record warranty expenses incurred after year-end applicable to prior year sales.
For transactions aggregated in the income statement, the occurrence and completeness assertions are targets of audit activities. An assertion relevant to all financial statement components is proper and complete presentation and disclosure. However, from an audit risk perspective, accounts that require extensive and complex disclosures present a higher presentation and disclosure audit risk
10. Inventory in one remote area of the warehouse was overlooked and thus not included in the client’s physical inventory count.
The nature of a company’s industry and business model determines the importance of inventory and the relevant management assertions. Consequently, the substantive audit procedures vary widely depending on the nature of the business. The management assertions of entities that purchase goods to resell them reflect physical security, documentary controls, and changes in the market value of inventory. This describes important aspects for a retail or wholesale merchandise distributor.
Conffirmation of account balance with customer
Enquiry and review of minutes of Board of Directors meetings and loan agreements for evidence of pledging
Existence of the problemConfirm the bank balance to the cash book balance
Rights Enquiry and review of board of director minutes and loan documents in regards to evidence Completeness Check with all the associated banks for the bank account is active or not Valuation Not Applicable Presentation Enquiry and review of Board of director minutes for evidence of escrow account and compensating balalncesRelated Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.