Chapter 14 - Answer PDF

CHAPTER14
DESIGNINGANEFFECTIVE
RESPONSETOASSESSEDRISKS
Questions
1.
Inspection techniques include physical examination of assets, examination of

documents and records, performance of mechanical accuracy tests, and
analytical procedures.
2.
Vouching and tracing are two types of commonly performed documentation.

Vouching involves the examination of documents that served as a basis for
recording the transaction. Vouching usually starts with a recorded transaction
and works back to the documents and addresses existence. Tracing involves
determining whether source documents have been recorded properly in the
accounting records. By tracing, an auditor can obtain evidence that the
recording of the transaction is complete.
3.
An inquiry involves requesting information from client personnel and receiving

their response. The request and response may be either written or oral. A
confirmation is a response a third party makes directly to the auditor on the
request of a client.
The response includes information about certain
transactions, relationships, and/or balances that have an impact on a specific
financial statement assertion.
4.
Confirmations are usually considered more reliable because they are from
outside parties, while inquiries are made of client personnel.
5.
When equivalent procedures are available to satisfy the need for evidence, an
auditor may consider cost in selecting among the alternatives.
6.
Vouching is relevant to testing the existence of sales; tracing is not. Tracing is

relevant to testing the completeness of sales, but vouching is not.
Multiple Choice Questions

1.
2.
c
d
3.
4.
c
a
5.
6.
c
c
7.
8.
a
d
9.
14-2
Solutions Manual Public Accountancy Profession
Cases
1.
2.
Types of procedures used by auditors in general, with examples:

1.
Recalculation by the auditor

* recomputing the clients calculation of depreciation expense
2.
Observation by the auditor

* observation, test-counting of clients physical inventory-taking
3.
Confirmation by letter
* obtaining accounts receivable confirmations
* obtaining clients lawyers letter
4.
Inquiry and written representations

* ask client personnel about accounting events
* complete an internal control questionnaire
* obtain written client representation letter
5.
Vouching
* find brokers invoices and cancelled checks showing agreement with
record amounts for securities investments
6.
Tracing
* select a sample of shipping documents and trace them to sales invoices,
sales journal recording and posting to general ledger
7.
Scanning
* scan expense accounts for credit entries
* scan payroll check lists for unusually large checks
8.
Analytical procedures any example that fits one of these:

* compare financial information with prior periods
* compare financial information with budgets and forecasts
* study predictable financial information patterns (e.g., ratio analysis)
* compare financial information to industry statistics
* study financial information in relation to nonfinancial information
a.
A material decline in sales may indicate unrecorded sales; a decrease in cost

of goods sold may be due to unrecorded purchases; and an increase in cost
of good sold may be the result of omissions from the ending inventory. An
increase or decrease in gross profit will result from any one or a
combination of the above omissions.
Designing an Effective Response
14-3
b.
A decline in the miscellaneous revenue account balance, or the absence of a

previously existing source of miscellaneous revenue, could be attributable
to a failure to record miscellaneous revenue.
c.
Unrecorded accounts payable at year-end would cause an increase in

calculated accounts payable turnover.
d.
An apparent increase in accounts receivable turnover may, in fact, be the

result of failure to record credit sales transactions.
e.
A higher than average operating return may be indicative of unrecorded

purchases or operating expenses; a lower than average return could result
from unrecorded sales.

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CHAPTER14

Inspection techniques include physical examination of assets, examination of

Vouching and tracing are two types of commonly performed documentation.

An inquiry involves requesting information from client personnel and receiving

Vouching is relevant to testing the existence of sales; tracing is not. Tracing is

Multiple Choice Questions

Solutions Manual Public Accountancy Profession

Types of procedures used by auditors in general, with examples:

Recalculation by the auditor

Observation by the auditor

Inquiry and written representations

Analytical procedures any example that fits one of these:

A material decline in sales may indicate unrecorded sales; a decrease in cost

Designing an Effective Response

A decline in the miscellaneous revenue account balance, or the absence of a

Unrecorded accounts payable at year-end would cause an increase in

An apparent increase in accounts receivable turnover may, in fact, be the

A higher than average operating return may be indicative of unrecorded

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