c.

A successor would most likely make speci fi c inquiries of the predecessor auditor regarding
(1) specialized accounting principles of the client's industry.
(2) the competency of the client's internal audit staff.
(3) the uncertain ty inherent in applying sampling procedures.
(4) disagreements wi th man agement as to audi ting procedures.
8· 27 (Objectives 8-5, 8-6, 8-7, 8-8) The fo llowing questions concern the use of analyt ical
procedures du ring the planni ng phase of an audit. Select the best response.
a. Analytical proced ures used in pla nn ing an aud it should focus on identifying
( I) material weaknesses of in ternal con trol.
(2) the predictability of fi nancial data from individual transact ions.
(3) the various assertions Ihal arc embodied in the fi nancial statemen ts.
(4) arcas that may represent specific risks relevant to the aud it.
b. For all audits of fina ncial statements made in accorda nce with generally accepted
auditing sta ndards. the use of analytical procedures is required to somc extent
In the As a In the
Planning Stage SubstantlYe Test Completion Stage

(I) Yes No Yes

(2) No Yes No
(3) No Yes Yes
(4) Yes No No
c. Which of Ihe following is least likely to be comparable between sim ilar corporations
in the same industry line ofbusincss?
(I) Accoun ts receivable turnover
(2) Earnings per share
(3) Gross profi t percent
(4) Return o n assets before interest and taxes
d. Which of the followi ng sit uat ions has the best chance o f being detected when a CPA
com pares 2009 revenues and expenses with the prio r year and investigates all changes
exceeding a fi xed percent?
( I) An increase in property tax ra tes has not been recognized in the com pany's 2009
accrual.
(2) The cashier began lapping accounts receivable in 2009.
(3) Because of worsening economic conditions. the 2009 provision for uncollectible
accounts was inadequate.
(4) The company changed its capitaliza tion policy for small tools in 2009.

8-28 (Objectives 8-2. 8-3. 8-4, 8-5) T he follow ing are various activities an auditor does
during audi t planning.
I. Send an engagement letter to the client.
2. Tour the cl ient's plant and offices.
3. Compare key ratios fo r the compa ny to indust ry compet itors.
4. Review management's risk management controls and procedures.
5. Identify potential related parties that may require disclosure.
6. Identify whether any specialists are required for th e engagement.
7. Review accounting principles unique to the clien t's indust ry.
8. Determine the likely users of the financia l statements.
For each procedu re. indicate which of the firs t four parts of audit planni ng the proced ure Required
primarily relates to: ( I) accept client and perform in itial audit plan ning; (2) understand the
client 's business and ind ustry; (3) assess cl ienl busi ness risk; (4) perform preli minary
analytical procedures.

CHAPTER 8/ AUDIT PlANNING AND ANALYTICAL PROCEDURES 237

 Assume that ou know the material related party transactions occurred an~ wer.e
g. transacted at :igni ficantly less favorable terms than ordinar!ly occur whe~ bus, ~ess~s
done wit h indepe ndent parties. The cl iel~t . r.e~us~es to d isclose these acts In t e
fi nancial statemen ts. What are you r responslblhtles.
8-11 (Objectives 8-5, 8-7, 8-8) You are auditing payroll for the Goodview:anu~act~ri~~
company fo r the year ended September 10, 2009. I nclu~ed next arc ~mounts om t e c len s
trial balance, along with comparative audited informatIon for the pnor year.
lWo.\'l.eo. ~a.\a.f\te ~ 1~\)I'l.~'6 1h~\\~\"""" %~\""w:.t. ~ (3.<1 (1.<1<19
$44,622,812 $57.117,199
Sales
Executive salaries 475,600 535,626
Factory hourly payroll 8,729,458 10,453,6 18
Factory supervisors' salaries 683,326 704.859
()\\\c:Io ,",,\"110~ \. ,'~,t)~1 \ ,18.1 :l.\<l
Sales commlssWns 1,754,9 12 2,059,097

You have obtained the following infor mation to help you perfor m prelim inary analytical
proced ures for th e payroll account b:llances.
1. There has been a significant increase in the dema nd for Goodview's prod ucts. The
increase in sales was due to both an increase in the average selling price of 10 percent
and an increase in units sold that resulted from the increased demand and an increased
marketing effort.
2. Even though sales volume increased there was no addi tion of executives, facto ry
supervisors, or office personnel.
1. All employees including executives. but excluding commission salespeople, received
a 3 percent salary increase starting October 1,2008. Commission salespeople receive
their increased compensation through the increase in sales.
4. The increased number of fac tory hourly employees was accomplished by recalling
employees th at had bee n laid off. They receive the same wage rate as existing
employees. Goodview docs not permit overtime.
5. Comm ission salespeople receive a 6 percent com mission on all sales on which a
commission is given. Approximately 75 percen t of sales ea rn sales comm ission. The
other 25 percen t are "call-ins", for which no commission is given. Commissions are
pai.d i.n the mon\h fo\\owing the. month they are earned.
Required a. Use the final balances for the prior year and the information in items I through 5 to
develop an expected value for each account included above, except sales.
b. Calculate the difference between your expectatio n and the client's recorded amount as
a percentage using the formula (expected value-recorded amount)/expected value.
8-32 (Objective 8-6) Analytical procedu res are an important part of the audit process and
consist of the evaluation of financial information by the study of plausible relationships
among fi nancial and nonfinancial data. Analytical procedures may be done during planning,
as a substantive test, or as a part of the overall review of an audit.
The following are various statemen ts regarding the use of analytical proced ures:
I. Not required du ring this stage.
2. Should focus on en hancing the auditor's understanding of the client's busi ness and
the transactions and even ts that have occurred since the last audit date.
3, Should focus on identifying areas that may represent specific risks relevant to the audit.
4. Do not result in detection of misstatements.
5. Designed to obtain eviden tial matter abou t particu lar assertions related to account
ba lances or classes of transactions.
6. Generally use data aggregated at a lower level than the other stages.
7. Should include readi ng the financ ial statements and notes to consider the adequacy
of evidence gathered.
8. Involve reconciliation of confi rmation replies with recorded book amounts.
9. Use the preliminary or unadjusted working trial balance as a source of data.
10. Expected to result in a red uced level of detection risk.

240 PART TWO I THE AUDIT PROCESS

For each of the 10 statements, select the stage of the audit for which the statemen t is most Required
accurate using the following responses:
1. Planning the audit
2. Substantive testing
3. Overall review
4. Statement is not correct concerning analytical procedures. '
8-33 (Objectives 8-3,8-7,8-8) You've been asked to review the gross margin percent for
Erie Books for the years 2006 through 2009. You fin d there's been a significant decline
during this time. Here are the numbers:
2009 2008 2007 2006

Sates (thousands) $4 7,175 $44,039 $37.073 $35,035

CGS (thousands) 30.314 27,998 23.43 1 22,072
Gross margin $16,861 $16,041 $13,642 $12,963
Percent 35.7 36.4 36.8 37.0

Your discussion wit h Erin O'Keefe, t he controller, brings to light two possible
explanations. She informs you that the indust ry gross profit percent in the retail book
industry declined fai rly steadily for 3 years as more people purchase books online, which
accounts for part of th e declin e. She also believes th at on line shoppi ng and discount
bookstores prevent the co mpany from ra pidly expandi ng its no n-book items, such as
magazines, candy, music, DVDs, and many other items sold. O'Keefe feels strongly that
these two factors are the cause of the decline.
The following additional information is obta ined from independent sources and the
cl ien t's records as a means of investigating the cont roller's explanations:
Industry Gross
Erie Books (S In thousands)
Profit Percent for
Non-book Book Cost of Non·book Cost Retailers of Books
Year Book Sales Sales Goods Sold of Goods Sold and Related Products

2009 $21 ,500 $25,675 $13,169 $17.145 39.8

2008 20,472 23,567 12,197 15.801 39.9
2007 17,851 19,222 10,543 12.888 40.0
2006 16,995 18,040 9,96 1 12,111 40.4

a. Evaluate the explanatio n provid ed by O'Keefe. Show calculat ions to suppor t your Required
conclusions.
b. Which specific aspects o f the client's fi nancial statements require intensive investi-
gation in this audit?
8-34 (Objectives 8-7, 8-8) In the audit of the Worldwide Wholesale Company, you did extensive
ralio and trend analysis. No material exceptions were discovered except fo r the following:
I. Commission expense as a percent of sales has stayed consta nt fo r several years but
has inc reased significantly in the current year. Commission rates have not cha nged.
2. The rate of invento ry turnover has steadily decreased for 4 years.
3. Inventory as a percent of cu rrent assets has steadily increased for 4 years.
4. The number of days' sales in accounts receivable has steadi ly increased for 3 years.
5. Allowance for uncollectible accounts as a percent of accounts receivabl e has stead ily
decreased for 3 years.
6. The abso lute amounts of depreciat ion expense and depreciat io n expense as a
percent of gross fixed assets are significantly smaller than in the preceding year.
a. Evaluate the potentia l significa nce of each of the exceptions just listed for the fair Required
presentation of financi al statements.
b, State the follow-up procedures you would use to determin e the possibil ity of material
misstatements .
• A1CPA adapted.

CHAPTER 8/ AUDIT PLANNING AND ANALYTICAL PROCEDURES 241