UDEN SUPPLY COMPANY

Comparative Income Statements

Years Ended December 20X1, 20X2, and 20X3

(Thousands)

20X1 Audited

20X2 Audited

20X3 Audited

20X4 Expected

Sales

15,000

15,600

16,200

Cost of goods sold

10,350

10,770

11,210

Gross profit

4,650

4,830

4,990

Sales commissions

1,050

1,090

1,130

Advertising

300

310

320

Salaries

1,166

1,208

1,250

Payroll taxes

205

219

233

Employee benefits

188

202

216

Rent

81

83

85

Depreciation

81

83

85

Supplies

47

49

51

Utilities

42

44

46

Legal and accounting

55

57

59

Miscellaneous

33

35

37

Interest expense

462

480

492

Net income before taxes

940

970

986

Income taxes

212

218

222

Net income

728

752

764

Read the overview below and complete the activities that follow.

Auditors must gather a combination of many types of audit evidence to best reduce their audit risk. There are seven major types of audit evidence: 1) accounting information system, 2) documentary evidence, 3) third-party representation, 4) physical evidence, 5) computations, 6) data interrelationships, and 7) client representations.

CONCEPT REVIEW:

Audit evidence is any information that corroborates or refutes the auditors' premise that the financial statements present fairly the client's financial position and operating results
 

Types of Audit Evidence

Read the overview below and complete the activities that follow.

Auditors must gather a combination of many types of audit evidence to best reduce their audit risk. There are seven major types of audit evidence: 1) accounting information system, 2) documentary evidence, 3) third-party representation, 4) physical evidence, 5) computations, 6) data interrelationships, and 7) client representations.

CONCEPT REVIEW:

Audit evidence is any information that corroborates or refutes the auditors' premise that the financial statements present fairly the client's financial position and operating results.

Read the case and answer the questions that follow.

Audit standards require analytical procedures at two stages during the audit: at the risk assessment (planning) phase and again at the end of the audit. They are optionally used as a substantive procedure during the course of an audit.

CONCEPT REVIEW:

While analytical procedures are similar in structure in both phases (or substantive testing, if used) of the audit, they have different purposes and often different conclusions. It is critical that the auditors recognize and respond to these differences.

Read the case. Then answer the questions based on it.

BACKGROUND:

Audit standards require that auditors use analytical procedures at two stages in the audit: at the planning, or risk assessment, level and at the final, or concluding, stages of the audit. In addition, the auditor may decide to use analytical procedures during the substantive testing phase, to obtain evidence about specific accounts to be audited. While analytical procedures may involve similar types of procedures in both the planning and final review phases of the audit, they meet different objectives and require different conclusions and actions on the part of the auditor based on the results. In the planning phase, they are used to help the auditors identify unusual transactions or amounts to highlight the risk of material misstatement. In the final phase of the audit, they are used to assist the auditor in forming the ending conclusions and to ensure all necessary conclusions have been reached.

Woo Industries was being audited by BK&D CPAs. Analytical procedures were performed as part of the risk assessment procedures and helped to identify increased accounts receivable balances as the result of loosened credit policies prompted by heightened competition. As a result, BK&D decided to increase their assessment of inherent risk relative to accounts receivable and sent an increased number of confirmations. Analytical procedures were also used during the substantive testing phase to audit the increases in property, plant, and equipment. After the testing, BK&D determined that they had met the audit standard requirements as they had performed two sets of analytical procedures.

a.

What step did BK&D CPAs fail to perform?

b.

Why do audit standards require the second (final) set of analytical procedures?

c.

Does it make a difference that analytical procedures were performed in testing property, plant, and equipment, as indicated by BK&D CPAs?

Analytical Procedures

Read the case and answer the questions that follow.

Audit standards require analytical procedures at two stages during the audit: at the risk assessment (planning) phase and again at the end of the audit. They are optionally used as a substantive procedure during the course of an audit.

CONCEPT REVIEW:

While analytical procedures are similar in structure in both phases (or substantive testing, if used) of the audit, they have different purposes and often different conclusions. It is critical that the auditors recognize and respond to these differences.

Read the comprehension case and answer the questions that follow.

Workpapers are required to be reviewed at every supervisory level of a CPA firm. Senior auditors review the work of staff, managers of senior auditors, and partners of managers.

CONCEPT REVIEW:

Senior reviewers are charged with the most technical review--ensuring that audit procedures have been performed and that conclusions are appropriate and documented well. Managers and partners review at a higher, less detailed level. They are looking for conclusions, compliance with GAAS, and appropriate documentation. All reviews need to be well documented, signed off, and dated.

Read the comprehension case and answer the questions that follow.

BACKGROUND:

Audit standards require that several levels of review occur. The senior accountants' review is required to ensure that the staff has performed the required audit procedures and that findings and conclusions are well documented. Managers and partners review at a higher level. Their intent is to ensure that GAAS has been applied and met, that conclusions are appropriate, and that the working papers all tie together and no open items exist. A second partner is required to ensure that the quality control process has been met and to provide another opinion on the application and meeting of GAAS requirements.

EKH Industries was audited by BK&D CPAs. Four different individuals performed reviews of the working papers: Sarah A., Emily R., Laura B., and Joe J. Emily's review comments included inconsistent amounts between working papers for the same accounts; for example, the gain on the sale of assets did not match between the property working papers and the cash flow support. Laura's comments indicated inconsistent trends--some working papers talked about rising labor costs while others discussed layoffs of plant personnel. Joe documented that cutoff was not properly tested for cash accounts and that accounts receivable testing was missing a conclusion. Sarah indicated that signoffs were not appropriate, the working papers were not dated appropriately, and the drafts had been issued too early.

1.

Who is the BK&D CPA senior auditor in this case?

2.

Who is the BK&D CPA concurring (second) partner in this case?

3.

Who at BK&D CPA is reviewing the work of Joe J. in this case?

4.

Who at BK&D CPA is the engagement partner in this case?

Reviewing Working Papers

Read the comprehension case and answer the questions that follow.

Workpapers are required to be reviewed at every supervisory level of a CPA firm. Senior auditors review the work of staff, managers of senior auditors, and partners of managers.

CONCEPT REVIEW:

Senior reviewers are charged with the most technical review--ensuring that audit procedures have been performed and that conclusions are appropriate and documented well. Managers and partners review at a higher, less detailed level. They are looking for conclusions, compliance with GAAS, and appropriate documentation. All reviews need to be well documented, signed off, and dated.