Gale Gordon, CPA, has found ratio and trend analysis relatively

Gale Gordon, CPA, has found ratio and trend analysis relatively useless as a tool in conducting audits. For several engagements, he computed the industry ratios for his clients and compared them with industry averages. For most engagements, the client’s business was significantly different from the industry data, and the client automatically explained away any discrepancies by attributing them to the unique nature of its operations. In cases in which the client had more than one branch in different industries, Gordon found the ratio analysis to be no help at all. How can Gordon improve the quality of his analytical procedures?

As the in-charge senior auditor on the audit engagement for

As the in-charge senior auditor on the audit engagement for JA Tire Manufacturing for the year ended December 31, 2019, you are responsible for performing risk assessment procedures related to the sales cycle. JA Tire has four sales divisions within the U.S. and sells primarily to large tire companies with regional warehouses that subsequently distribute to local retailers. Based on some of the risk assessment procedures already performed, you identified risks related to the fact that salespersons receive a commission on sales to distributors and the commission is calculated on a monthly basis. Your manager has asked you to perform analytical procedures as a part of audit planning to review sales information by sales division and by month to identify potential risk areas that might warrant further audit procedures related to sales. 

Required:

1. Visit the textbook website to download the file “JATireSales.xls” provided to your audit firm by the company. This file contains sales transaction information for the year ended December 31, 2019. If you have not already done so, read the JA Tire Manufacturing system description provided on the first tab of the Excel file before attempting this assignment to familiarize yourself with the sales process and the relevant worksheets and terminology. Using the “Invoices” and “Sales Order” tabs in the Excel spreadsheet, perform the procedures in requirements 2 through 4 using either Excel, Tableau, or audit software such as ACL or IDEA. 

2. Summarize sales by month and sales division using a pivot table in Excel (put divisions in columns, months in rows) or using a graph or chart in Tableau. If you are using Excel to summarize, you will first need to add a column to the Excel worksheet and extract the “month” portion of the shipping date in order to summarize by month. If you are using Excel, use the “graph” feature to graph the pivot table data. Identify any divisions or months that you believe should be examined further, and document your rationale. 

3. For any divisions identified in step 2 for follow-up, summarize sales by customer and month using a pivot table in Excel or graph or chart in Tableau. You can use a “filter” in Excel or Tableau to limit the analysis to one or more divisions. Identify any months that you want to examine further, and document your rationale. 

4. Summarize your findings in a brief memo to the manager and include the charts or graphs generated in steps 2 and 3 above as support for your findings. Discuss your recommendations for performing further audit procedures.

The following are examples of documentation typically obtained by auditors: 1.

The following are examples of documentation typically obtained by auditors: 

1. Duplicate sales invoices 

2. Receiving reports 

3. Minutes of the board of directors 

4. Signed W-4s 5. Subsidiary accounts receivable records 6. Vendors’ invoices 

7. General ledgers 

8. Title insurance policies for real estate 

9. Notes receivable 

10. Bank statements 

11. Cancelled payroll checks 

12. Cancelled notes payable 

13. Payroll time cards 

14. Purchase requisitions 

15. Articles of incorporation 

16. Remittance advices 

17. Signed lease agreements 

18. Duplicate copies of bills of lading 

Required 

a. Classify each of the preceding items according to type of documentation: 

(1) internal or (2) external. 

b. Explain why external evidence is more reliable than internal evidence.

Regulators are taking advantage of advances in technology to fulfill

Regulators are taking advantage of advances in technology to fulfill their oversight responsibilities. Visit the website of the Securities and Exchange Commission (SEC) (www.sec.gov) to locate the speech given at the OpRisk North America 2017 Conference by Scott W. Bauguess, Acting Director and Acting Chief Economist in the Division of Economic and Risk Analysis. Read the speech to answer the following: 

Required:

a. What data analysis technique did the SEC use as one of its initial attempts to i ntegrate machine learning into its analysis of public company filings at the SEC? 

b. What is latent dirichlet allocation (LDA) and how has it been used by the SEC? 

c. Describe the magnitude and scale of data for one day of the Option Reporting Authority (OPRA) and highlight how advanced technologies allow analysis of data sets of that size. 

d. To what extent might advanced technologies replace humans in the SEC enforcement process?

The following questions concern audit evidence and audit documentation. Choose

The following questions concern audit evidence and audit documentation. Choose the best response. 

a. According to PCAOB audit standards, audit documentation must be retained for 

b. Which of the following types of audit evidence is generally the most reliable? 

(1) One year. 

(2) Three years. 

(3) Five years. 

(4) Seven years. 

(1) A bank confirmation 

(2) A bank statement 

(3) Analytical procedures 

(4) Inquiries of the audit committee 

c. An auditor most likely would apply analytical procedures in the overall review stage of an audit to 

(1) Identify unusual or unexpected balances that were not previously identified. 

(2) Obtain an understanding of high-risk areas. 

(3) Evaluate the design and implementation of internal control. 

(4) Identify related party transactions that may not have been previously identified.

The following questions concern the use of analytical procedures during

The following questions concern the use of analytical procedures during an audit. Select the best response. 

a. For all audits of financial statements made in accordance with auditing standards, the use of analytical procedures is required to some extent 

b. Which of the following situations has the best chance of being detected when a CPA compares 2019 revenues and expenses with the prior year and investigates all changes exceeding a fixed percent? 

(1) An increase in property tax rates has not been recognized in the company’s 2019 accrual. 

(2) The cashier began lapping accounts receivable in 2019. 

(3) Because of worsening economic conditions, the 2019 provision for uncollectible accounts was inadequate. 

(4) The company changed its capitalization policy for small tools in 2019. 

c. Which of the following would not be considered to be an analytical procedure? 

(1) Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked 

(2) Projecting the error rate by comparing the results of a statistical sample with the actual population characteristics 

(3) Computing accounts receivable turnover by dividing credit sales by the average net receivables 

(4) Developing the expected current-year sales based on the sales trend of the prior 5 years

As part of the engagement team for the audit of

As part of the engagement team for the audit of JA Tire Manufacturing for the year ended December 31, 2019, you are responsible for auditing the sales and collection cycle. Visit the textbook website to download the data file “JATireSales.xls” provided to your audit firm by the company. The manager has instructed you to read the JA Tire Manufacturing system description provided on the first tab of the Excel file before attempting this assignment to familiarize yourself with the sales process and the relevant worksheets and terminology. This file contains sales transaction information for the year ended December 31, 2019. You will use this data file to perform the following audit procedures. 

a. Open the data file and review the contents for each of the worksheets (Sales Order, Bills of Lading, Invoice, Cash Receipts, Customer Master, and Product Master). You will work with the Invoice, Sales Order, Bill of Lading, and Customer Master worksheets for this problem. What columns are included in both the Invoice and Sales Order worksheets? What columns are different between these two worksheets? 

b. One of the audit objectives you are testing is the occurrence audit objective for sales. Use functions in Excel to determine whether any of the following are present, and if present, identify which observations: 

i. Duplicate invoice numbers in the Invoice worksheet 

ii. Duplicate customer purchase order numbers in the Sales Order worksheet 

iii. Bills of lading and invoices with repeated sales order numbers in the Bill of Lading and Invoice worksheet, respectively 

iv. Sales orders in the Sales Order worksheet without a customer purchase order, but that were shipped (as evidenced by a bill of lading in the Bill of Lading worksheet) 

v. Invoice numbers in the Invoice worksheet with a voided sales order number in the Sales Order worksheet 

vi. Sales orders in the Sales Order worksheet with a customer number that is not on the approved customer list 

c. Summarize your findings. What is your overall conclusion about the occurrence audit objective?

The following questions deal with management assertions. Choose the best

The following questions deal with management assertions. Choose the best response. 

a. An auditor reviews aged accounts receivable to assess likelihood of collection to support management’s assertion about account balances of 

(1) Existence. 

(2) Completeness. 

(3) Accuracy, valuation, and allocation. 

(4) Rights and obligations. 

b. An auditor will most likely review an entity’s periodic accounting for the numerical sequence of shipping documents to ensure all documents are included to support management’s assertion about classes of transactions of 

(1) Occurrence. 

(2) Classification. 

(3) Accuracy. 

(4) Completeness. 

c. In the audit of accounts payable, an auditor’s procedures will most likely focus primarily on management’s assertion about account balances of 

(1) Existence. 

(2) Completeness. 

(3) Accuracy, valuation, and allocation. 

(4) Classification.

The following questions concern the reasons auditors do audits. Choose

The following questions concern the reasons auditors do audits. Choose the best response. 

a. The major reason an independent auditor gathers audit evidence is to 

(1) Form an opinion on the financial statements. 

(2) Detect fraud. 

(3) Evaluate management. 

(4) Assess control risk. 

b. Which of the following best describes the reason why an independent auditor reports on financial statements? 

(1) A misappropriation of assets may exist, and it is more likely to be detected by independent auditors. 

(2) Different interests may exist between the company preparing the statements and the persons using the statements. 

(3) A misstatement of account balances may exist and is generally corrected as the result of the independent auditor’s work. 

(4) Poorly designed internal controls may be in existence. 

c. Because of the risk of material misstatement, an audit should be planned and performed with an attitude of 

(1) Professional skepticism. 

(2) Independent integrity. 

(3) Objective judgment. 

(4) Impartial conservatism.

The following questions concern auditor responsibilities in an audit of

The following questions concern auditor responsibilities in an audit of financial statements. Choose the best response. 

a. The auditor’s responsibility regarding material misstatements caused by fraud is 

(1) Less than the auditor’s responsibility regarding material misstatements caused by error. 

(2) Greater than the auditor’s responsibility regarding material misstatements caused by error. 

(3) The same as the auditor’s responsibility regarding material misstatements caused by error. 

(4) Either less than or greater than the auditor’s responsibility regarding material misstatements caused by error, depending on the circumstances. 

b. Which of the following would not have a direct impact in determining the sufficiency of evidence gathered during an audit? (1) The cost-benefit relationship of obtaining the audit evidence 

(2) The quality of audit evidence obtained 

(3) The auditor’s professional judgment 

(4) The risk of material misstatement 

c. When determining the auditor’s or management’s responsibility for compliance with laws and regulations during an audit, which of the following statements below would be incorrect? 

(1) The auditor is not responsible for preventing noncompliance with laws and regulations. 

(2) Management and those charged with governance are responsible for ensuring that the company’s operations are conducted in accordance with all applicable laws and regulations. 

(3) The auditor provides reasonable assurance that the financial statements are free of material misstatement due to noncompliance with laws and regulations. 

(4) The auditor is expected to detect the client’s noncompliance with all laws and regulations affecting transaction cycles under review during the audit itself.