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Comment on the statement: "Offline and online retail are very different industries. There is a
huge disparity between the two, particularly in terms of IT expertise, supply chain structure,
human capital management, and marketing. Offline retailers that want to build an online channel
are essentially starting from scra

Describe the pitfalls associated with McDonald's having too many products.

Explain the differences and similarities between franchising and cooperatives from a retailer's

List ten different types of customer data that Chico can obtain from its customer loyalty data

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Describe the special logistics of a Web-based merchant in China.

Discuss the pros and cons of a retailer's developing new stores in domestic markets instead of
China and India.

Evaluate the applicability of this research findings to a membership club such as BJ's.

How would you educate store employees to understand why the retailer carries local produce and
how they should explain these benefits to consumers?

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Describe the pros and cons of Perfumania's outsourcing its site selection and leasing operations
versus conducting these activities in-house.

Develop a merchandising program for a new private-label line of healthy snacks at a specialty
food store chain.

How can retailers address the impact of the game of chicken in the timing of their promotions?

Would the population characteristics of a small store's trading area differ from that of a larger
store? Why or why not?

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Describe the pros and cons of quantity discount-based promotions from a retailer's perspective.

Discuss the pros and cons of Family Dollar's reducing the number of brands but increasing the
selection within a brand.
Are there any disadvantages with Ahold having a high market share in some of its markets?

From the customer's perspective, evaluate Wal-Mart's "Wal-Mart to Go" and mobile shopping
multi-channel strategies.

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Discuss the pros and cons of a multi-channel retail strategy for Chinese retailers.

This case details the growth of FedEx's business in Asia. FedEx executives recognized very early
on the importance of China. Over the last 20+ years, FedEx has focused on this growing market
as the center of its plans for growth in Asia. As a result of early planning, efficient organization,
effective leadership and

List five tactics that retailers can use to reduce their inventory levels while keeping the chance of
stock outs low.

Develop a system for McDonald's to use to eliminate duplication among new and existing

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How could have Wal-Mart have foreseen and avoided the negative impact on revenues of
pruning its merchandise selection?

Discuss the concept of value and the value chain for Chocomize.

Evaluate Family Dollar's retail strategy. Will it work in both good and bad economic times?

Discuss the supply-chain implications of retailers having low inventory-to-sales ratios if the
inventory-to-sales ratios of manufacturers and wholesalers are high.

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How should a retailer motivate older workers to become better engaged?

From a merchandising perspective, what are the pros and cons of Forever 21's fast-growth

What information should Wal-Mart compile about smart phone transactions? How should it use
the information?

Discuss the pros and cons of Coach's "beachhead to a disperse location" strategy.

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What managerial roles are displayed in Johnson's actions?

Discuss appropriate cost reduction strategies for Ahold using the patronage builders, patronage
solidifiers, disappointers, and basics model in Figure 2-4.

Comment on Starbucks' introduction of VIA in its own stores before attempting to sell it in
grocery and drugstores.

Comment on Ahold's decision to grow its U.S. operations through adding stores and making
acquisitions rather than same store sales growth.

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Do you think the cash flow needs of small local produce firms are different from those from
large produce firms? What are the implications of your answer for retailers?

Describe Family Dollar's competitive advantages and disadvantages with respect to competition
from conventional supermarkets and box stores.

Discuss the pros and cons of a cooperative member comparing its financial performance against
national and group averages.

What customer-based criteria would you use to evaluate whether Wal-Mart succeeds with its
new efforts.

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How can Key Choice members better manage the inherent seasonality in their business? Look at
both demand and supply-related issues.

What major challenges have Heinz managers faced over the last 5 years?

Evaluate Starbucks' strategy of developing (saturating) existing foreign markets before

expanding into new countries.

Discuss the pros and cons of purchasing locally-grown produce from the perspective of the
retailer and from the perspective of the consumer.

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Discuss the concept of trading-area overlap from the perspective of small- versus large-store

What you recommend that Forever 21 due in the future to avoid the controversies cited in this

What are some other opportunities for partnerships between retailers and their suppliers in
Describe the pros and cons of Rue 21 not owning any real-estate.

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Describe the pros and cons of corporate versus franchisee ownership to 7-Eleven.

Should Rue 21 expand beyond the United States? Explain the complexities of doing so.

What managerial functions are evident in the actions taken by Johnson to improve his company's

Evaluate Tier 2 and 3 cities in contrast to Tier 1 Chinese cities from the perspectives of
economic base characteristics as well as the nature of competition and level of saturation.

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Comment on the conflicting goals of the European luxury retailer and Chocomize.

What is the effect of a retailer's strategy of extensive use of markdowns on its overall retail

Describe the pros and cons of growing via acquisitions as opposed to internal expansion to

Explain the implications of the different meanings of "local." What definition would you use?

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Comment on Perfumania's seeking a third location in Mall of America from the perspective of
trading-area overlap.

Discuss the pros and cons of McDonald's use of an everyday value pricing strategy versus a
constant stream of promotions.

From the customer's perspective, discuss the relative benefits of Wal-Mart's free delivery to
FedEx locations and its "pick up today online order to store service strategies."

What is the managerial significance of the higher level of worker engagement among workers
approaching retirement and retirement eligible employees?

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List appropriate products for Amazon to market with its Subscribe & Save program.

Evaluate the pros and cons of Amazon Mom's low price strategy.
Develop a research study proposal to evaluate the impact of mobile devices on a consumer's
information search behavior.

Under what circumstances should Chocomize have accepted the European retailer's initial offer?

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Describe the potential improvements in productivity that would warrant Chico's spending more
than one-third of its total capital budget on a new IT system.

How else could a foreign retailer exert additional power with its Chinese suppliers (and not face
government restrictions)?

What is the impact of a retailer's offering multiple versions of a private label on a manufacturer's
brand strategy?

Describe the potential improvements in productivity that would warrant Chico's spending more
than one-third of its total capital budget on a new IT system.

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Describe the location-based advantages of being a first mover into Tier 1 and Tier 2 cites.

Discuss the value of labor scheduling for a retailer such as Chico's.

Evaluate the pros and cons to Rue 21 of each location type: strip center, regional mall, and outlet

Explain the concept of diminishing satisfaction with each additional unit consumed.

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From the customer's perspective, discuss the pros and cons of giving franchisees more autonomy.

Explain the importance of the 7-Select private label program in 7-Eleven's consumer-centric
focus strategy.

Discuss the impact of "Christmas creep" on a retailer's overall promotional strategy.

Evaluate the appropriateness of the McCafé line of coffees and the fruit-and-maple oatmeal to
McDonald's overall merchandising strategy.

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How should a retailer respond to the findings of worker engagement being associated with
immediate supervisors who are supportive and that recognize the accomplishment of employees?
Bert Finney, CPA, was engaged to conduct an audit of the financial statements of Clayton Realty
Corporation for the month ending January 31, 2008.The examination of monthly rent
reconciliation is a vital portion of the audit engagement. The following rent reconciliation was
prepared by the controller of Clayton Realty

When might it be advisable to send the confirmation to the customer's personnel who is familiar
with the details of sales contracts rather than to the accounts payable department?

The existence and completeness assertions are complementary but require different audit
approaches. Required a. Why is it more difficult to test for the completeness than the existence/
occurrence of an account balance or a class of transactions? b. What procedures can an auditor
use to test the completeness of accoun

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What is an aged trial balance of accounts receivable? For what purposes does an auditor use it?
How does an auditor determine that it is correctly aged?

How can the auditor determine whether the allowance for doubtful accounts is reasonable?

What important control functions are served by mailing monthly statements to customers? Why
is it important to separate the duties of responding to customer complaints from the accounts
receivable and cash collection functions?

Avation is a public company and, therefore, the auditor is required to test controls and issue an
opinion on the effectiveness of the client's controls as well as the fairness of the financial
statements. Avation manufactures specialty clocks used for such things as sales promotions and
achievement awards. The auditor

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The following sales were selected for a cutoff test of Genius Monitors, Inc., for the December
31, 2007financial statements. All sales are credit sales and are FOB shipping point. They are
recorded on the billing date. Required a. What adjusting journal entries, if any, would you make
for each of these items? (Do no

Why might it be necessary to do some research in order to determine whether a client's revenue
recognition policies are proper?

The following information relates to a non-statistical sample used for a price test of inventory:
Required a. What is the best estimate of the total misstatement? b. Are these results acceptable
assuming tolerable misstatement is $15,000? Explain. c. If the results are not acceptable, what
possible courses of action

What are the internal control objectives in the revenue cycle?

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All invoicing for a company is done on a computer system from a price list table incorporated
into the system. Only the sales department can change the prices on the approval of the
department manager. One copy of the up-to-date price list is printed monthly for verification
purposes and is maintained in the sales depa

What methods are sometimes used to fraudulently inflate revenue?

What information is needed to design a PPS sample? Where does the auditor gather such

You are auditing FloorMart, a retailer with 200 stores around the country. It has two basic sizes
of stores—minimarts with 3,000 square feet and maxim arts with 7,500 square feet. Both types
of stores carry the same types of products. The client has provided an Excel file with the square
feet, sales, and inventory at

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Why is it important to directly test sales transactions as well as accounts receivable?

Why is it important to determine whether the difference between the customer's balance shown
in the client's records and the amount confirmed by the customer is the client's error or fraud, the
customer's error, or a timing difference? What are the implications of this determination on the
conduct of the audit and furt

What accounts are typically affected by transactions in the revenue cycle? Identify the
relationships among them.

During the year, Strang Corporation began to encounter cash flow difficulties, and a cursory
review by management revealed receivable collection problems. Strang's management engaged
Elaine Stanley, CPA, to perform a special investigation. Stanley studied the billing and collection
cycle and noted the following. The ac

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Are direct tests of account balances generally more effective in detecting overstatements or
understatements? Explain.

The following is a list of procedures performed in the audit of the revenue cycle: a. Take a block
of shipping orders and account for the invoicing of all items in the block and account for the pre-
numbering of the documents. b. Review the general access controls to the computer application
and the authorized ability t
Field, CPA, is auditing the financial statements of Miller Mail order, Inc. (MMI) for the year
ended January 31, 2008. Field has compiled a list of possible errors and irregularities that may
result in the misstatement of MMI's financial statements, and a corresponding list of internal
controls that, if properly design

What is basic precision, and how is it determined?

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What is the upper misstatement limit (UML), and how is it determined?

What alternative methods can be used to test the effectiveness of controls in the revenue cycle?

In confirming individual accounts receivable balances, your client's customers reported the
following exceptions. Required This of these exceptions should be considered misstatements for
evaluation purposes if misstatements are defined as: a. Differences that affect the account
balance b. Differences that affect preta

When using non-statistical sampling, how does the auditor: a. Determine the sample size b.
Select the sample c. Evaluate the sample results

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Computer accounting systems have the ability to generate exception reports that immediately
identify control procedure failures or transactions that are out of the norm, so that management
can determine whether any special action is needed. Required a. Identify how the auditor might
use each type of exception report n

Under what circumstances should an auditor consider confirming individual unpaid invoices as
opposed to confirming the customer's total balance?

The following is a list of controls typically implemented in the processing of sales transactions:
Required a. For each control identified, briefly indicate the financial misstatement that could
occur if the control is not implemented effectively. b. Identify an audit procedure to test for
effectiveness of the control

The auditor designed an audit procedure to test the following control procedures in the revenue
cycle of a company that makes large factory equipment: 1. Credit approval 2. Sale price taken
from authorized sales price list unless specifically approved by the division sales manager 3. A
shipping document existing for ea

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Monitoring controls are effective in alerting management to the potential breakdown of other
internal controls. Identify two or three monitoring controls that are applicable to the revenue

What are cutoff tests? What assertion(s) do they test?

Explain how the probability of selecting an item is proportional to its size in PPS sampling.

What alternatives are available to the auditor when a population contains a few items with
negative balances, such as credit balances in accounts receivable, and the auditor wishes to
utilize PPS sampling?

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Explain how audit evidence gathered about accounts receivable also provides evidence about
sales, and vice versa.

In assessing whether the controls are operating effectively, is it necessary for the auditor to re-
perform the work of the control itself? For example, if someone tests for the correctness of
computations and initials the bottom of a document to indicate that such a control procedure has
been performed, is it necessary

Why should auditors develop an understanding of a client's control environment as it affects the
accounts in the revenue cycle?

Based on the information in Problem 10-43, assume that your sampling interval is $100,000.
Required a. What is your statistical conclusion if no misstatements are found in the sample? Is
this acceptable? Explain. b. Calculate the most likely misstatement and upper misstatement limit
and prepare a summary like the one

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A client has a computerized credit approval process that incorporates various factors, such as: â€
¢ Previous credit history with the company • Current credit rating obtained online from Dun &
Bradstreet • Current account balance • Size of proposed credit balance • Last credit
review rating by the credit manager

Under what circumstances can a customer's confirmation be considered reliable?

If a confirmation is not returned by a customer, what follow-up work should the auditor perform
if it is a a. Positive confirmation b. Negative confirmation

The auditor must quantify the following parameters when using PPS sampling: 1. Tolerable
misstatement 2. Expected misstatement 3. Risk of incorrect acceptance Required Describe each
of these parameters and how they can be determined.
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Which confirmation form, the positive or the negative, is considered the more reliable? Why?

Your evaluation of a statistical sample indicates that there may be a material misstatement in the
population. Upon analyzing the detected misstatements, a common cause was discovered: most
of the misstatements were caused by the failure to record sales returns on a timely basis. That is,
sales were returned prior to D

What is a confirmation exception? Why is it important to investigate confirmation exceptions?

Drea Tech Company has been growing rapidly and has recently engaged your firm as its
auditors. It is actively traded over the counter (OTC) and believes it has outgrown the service
capabilities of its previous auditor. However, on contacting the previous auditor, you learn that a
dispute led to the firm's dismissal. Th

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What are some potential fraud indicators that may be identified by direct tests of revenue cycle
accounts? What audit procedures could be used to help determine if fraud actually occurred?

Define the following: a. Misstatement b. Population c. Tolerable misstatement d. Test of Details

(TD) risk

What are the major processes involved in generating and recording a sales transaction? What are
the major documents generated during each process?

Verona Shoe Company is considering automating its credit approval function. It manufactures a
brushed pigskin shoe and acts as a wholesaler by buying closeouts of other brands and selling
them to approximately 3,000 retail customers. The company has moved into new lines by
recently acquiring the U.S. distribution right

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What analytical procedures can help auditors identify areas of potential misstatements and design
appropriate audit procedures?

What is meant by haphazard sample selection? Can it be used for statistical sampling? Explain
why or why not.

Distinguish between the positive and negative forms of accounts receivable confirmation.

What is the effect on the nature, timing, and extent of substantive tests of accounts receivable
when the risk of material misstatement is assessed as being low instead of high?

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Why is it so important to specify the audit objective when planning a sample to test an account

Judgments about whether revenue should be recognized are among the most contentious that an
auditor faces. The following are situations in which the auditor will be required to either acquire
additional information or make decisions about the amount of revenue to be recognized.
Required a. Identify the primary criteri

What evidence do vouching cash collections after the balance sheet date provide?

Why is it important to project sample results to the population?

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In any sampling application, why is it important to project the sample results to the population
before drawing a conclusion about the population?

What is the relationship between audit objectives, account balance assertions, and audit

From what population should a sample be selected to test the completeness of recorded sales?
Explain your choice.

Stainless Steel Specialties (SSS) is a manufacturer of hot water-based heating systems for homes
and commercial businesses. The company has grown about 10% in each of the past five years.
The company has not made any acquisitions. Following are some of the statistics of the company
during the past five years: Additi

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An auditor audited a random sample of 60 cash disbursements and found one improperly
authorized disbursement (error).The achieved upper limit of control failures is 7.7% at a 5% risk
of assessing control risk too low. What does this achieved upper limit mean? How does the
auditor decide whether this result indicates th

How do auditors use their knowledge about the risk of material misstatement in designing
substantive tests?

The audit of the revenue cycle accounts of Acco, Inc. has been planned with a low preliminary
assessment of control risk related to each of the relevant assertions. A sample of sales
transactions was audited. Each of the following types of control or transaction processing
deviations uncovered in the sample was signifi

This case is to be used in conjunction with the facts in Problem 10-47 and can be completed
individually or in groups via classroom discussion. Part 1.Without regards to the dollar amount
of the calculated upper misstatement limit for accounts receivable in Problem 10-47, assume that
you have calculated that the upper

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All else being equal, what is the effect on a PPS sample size of an increase in the: a. Tolerable
misstatement b. Expected misstatement c. Allowable TD risk d. Population

One of your audit clients manufactures fishing boats and sells them all over the country. Boats
are sold to dealers who finance their purchases on a floor-plan basis with their banks. The banks
usually pay your client within two weeks of shipment. The company’s profits have been
increasing over the past several years

Describe the steps needed to plan a sample to test an account balance.

Why should auditors ordinarily consider revenue recognition as a fraud risk factor?

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What are the basic inherent risks associated with sales and accounts receivable?

What alternative courses of actions might an auditor take if the UML exceeds tolerable
misstatement in PPS sampling? Are these possible actions any different than those available
when using non-statistical sampling and the sample evaluation indicates a possible material
misstatement in the population?

What are the advantages and disadvantages of performing direct tests of account balances prior
to the balance sheet date?

What are the audit steps associated with assessing the risk of material misstatement for the
revenue cycle?

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MiniScribe Case (based on "Cooking the Books," The Wall Street Journal, September 11, 1989;
and "MiniScribe's Investigators Determine That 'Massive Fraud’ Was Perpetrated," The Wall
Street Journal, September 12, 1989). In October 1988, MiniScribe, a computer disk drive
manufacturer, announced its thirteenth consecuti

1. The auditor wants to gain assurance that all telephone orders received were shipped and billed
in a timely fashion. Which of the following audit procedures would be most effective in meeting
the auditor's objective? a. Use an integrated test facility and submit product orders to the ITF.
Compare the prices invoiced

a. When evaluating an attribute estimation sample, why is the focus on the upper limit rather than
on the failure rate in the sample? b. If the achieved upper limit of control failures exceeds the
tolerable rate in an attribute sampling application, what alternative courses of action are open to
the auditor?

What criteria has the SEC utilized to help determine if revenue can be recognized?

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The auditor is auditing accounts receivable. The company is a long-time client. Because of
problems encountered in previous years, the auditor has assessed control risk as moderate and
assigns a control risk assessment of 50% and a desired audit risk of 5%. Other factors considered
by the auditor: 1. The auditor believ

1. A manufacturing client received a substantial amount of goods returned during the last month
of the fiscal year and the first month after yearend. The client recorded the returns when credit
memos were issued (usually six to eight weeks after receipt of the goods).The control procedure
that would have led to timelie

Sales cutoff tests are performed to obtain evidence that sales are recorded in the proper period.
You are to perform a cutoff test of sales for a manufacturer that uses pre numbered bills of lading
and sales invoices. All sales are FOB shipping point. Required How would you perform the
cutoff test if the primary audit

You are planning the confirmation of accounts receivable. There are 2,000 customers with a total
book value of $5,643,200.Tolerable misstatement is set at $175,000 and expected misstatement
is $40,000.The allowable risk of incorrect acceptance (TD risk) is 30%. Required a. What is the
sampling interval? b. What is the

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You are performing a price test of inventory, which has a book value of $2,750,699 and 3,875
items. Tolerable misstatement is $150,000, expected misstatement is $30,000, and the TD risk is
10%. Required a. What sampling interval should be used for this sample? b. Without prejudice to
your answer in part (a), assume t

Mead, CPA, was engaged to audit Jiffy Co.'s financial statements for the year ended August 31,
2007. Mead is applying the following sampling procedures. During the prior years' audits, Mead
used classical variables sampling in performing tests of controls on Jiffy's accounts receivable.
For the current year Mead decide

Required a. The risk of assessing control risk too low is 10%. Determine the sample size for each
of the following controls: b. Explain why the sample sizes for controls 2 and 3 are different from
those for control 1. c. What is the general effect on sample size of using a 10% risk of assessing
control risk too low

What is OSPR? How does the auditor measure or estimate it?

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Multiple Choice Questions 1. Which of the following represents sampling risk? a. Improperly
assessing the risk of material misstatement b. Testing the wrong population to achieve the audit
objective c. Selecting a sample that is not representative of the population d. Inaccurately
identifying misstatements in a sample

During a discussion, one auditor noted that her approach to testing sales transactions was to
select a random sample of recorded sales and trace back through the system to supporting
documents, noting that all items billed were shipped and were invoiced at correct prices. She
stated that she then had good confidence ab

You are using attribute estimation sampling to test the controls over revenue recognition of the
Packet Corporation, a public company, and will use the results as part of the evidence on which
to base your opinion on its internal controls and to determine what additional audit procedures
should be performed on revenue

What sometimes motivates management to overstate revenue?

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When might an auditor consider using negative confirmations? What factors must be present in
the client-customer environment to justify the use of the negative confirmation form?

Explain the relationship between planning materiality and tolerable misstatement when using
PPS sampling.

Your audit client, Daman, Inc., has a fully computerized accounts receivable system. There are
two master files, a customer data file and an unpaid invoice file. The customer data file contains
the customer's name, billing address, shipping address, identification number, phone number,
purchase and cash payment history

How can the audit of revenue provide a good opportunity to test the completeness assertion for
both sales and accounts receivable?

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Sean Edwards, CPA, is engaged to audit the financial statements of Matthews Wholesaling for
the year ended December 31, 2007. Edwards obtained and documented an understanding of the
internal controls relating to the accounts receivable and assessed control risk relating to accounts
receivable at the maximum level. Edwa

Would an item with a zero balance be included in a PPS sample? If not, what is the effect of not
including the item in the sample?
Each year Susan Riley, president of Bargon Construction, Inc., takes a three-week vacation to
Hawaii and signs several checks to pay major bills during the period she is absent. Riley’s
vacation often occurs near the end of Bargon’s fiscal reporting period because it is a slack
time for the construction business. J

Multiple Choice Questions The auditor would send a bank confirmation to all banks with which
the client had business during the year, because a. The confirmation seeks information on
indebtedness that may exist even if the bank accounts are closed. b. Confirmations are essential
to detecting kiting schemes. c. Confirma

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You are auditing the revenue from membership fees of your local chapter of the Institute of
Management Accountants, of which you are not a member. The local chapter receives an
allocation of national dues. The remainder of the dues comes from chapter members. The chapter
maintains as detailed list of membership. Requi

Jason Co. accepts VISA and MasterCard for any sales transaction exceeding $50.The company
has not yet implemented online recording of the credit card transaction, but does have a toll-free
number to call for authorization for all sales over $50.The company has two cash registers, but
three clerks work during peak times

You are designing a PPS sample to determine how many accounts receivable confirmations to
send. There are 2,000 customer accounts with a total book value of $5,643,200.You estimate the
maximum misstatement to be $40,000 and tolerable misstatement is set at $175,000. Required a.
Complete the following table using the

The SEC alleged that many deficiencies occurred during the audit of CMH, as discussed in the
Auditing in Practice feature in this chapter. Among the complaints were the following: 1. The
audit firm "left the extent of various observations testing to the discretion of auditors, not all of
whom were aware of significant

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Under what circumstances might it be acceptable to use an audit procedure other than physically
examining marketable securities to verify their existence?

What controls should an organization implement if it wishes to become an investor in more

complex financial instruments? Explain the purpose of each control.

Explain how an automated matching process works regarding the payment of accounts payable.
What controls need to be implemented in the automated matching process to ensure that only
authorized payments are made for goods and services actually received, and that payment are
made at the authorized prices?
The following are some tests of transaction procedures frequently performed in the acquisition
and payment cycle. Each is to be done on a sample basis. Required a. State whether each
procedure is primarily a test of controls, a substantive test of transactions, or a dual-purpose test.
b. State the purpose(s) of each p

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Define and illustrate kiting. What procedures should the client institute to prevent it? What audit
procedures should the auditor utilize to detect kiting?

How would the absence of each of the following factors affect the auditor's assessment of the
control environment? Assume that the company's investment in marketable securities is material
to the financial statements. a. The board of directors is not actively involved in monitoring the
company's policies regarding mark

Assume that renumbered receiving documents are not used in an organization that has attempted
to automate much of the purchase and receiving function. What control objective is addressed by
having renumbered receiving documents? What compensating controls should the auditor expect
to find when renumbered receiving docu

You have been assigned to the audit of Technotrics, a company specializing in the wholesale of a
wide variety of electronic products. Its major product lines are stereo and similar electronic
equipment, as well as computers and computer add-ons such as hard disks, memory boards, and
so forth. The client has four major

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Explain how turnaround documents can improve the controls over the cash receipts process.
Does the existence of a turnaround document negate the need to assign a unique identification
number to each cash receipts transaction? Explain.

You are auditing inventory of HUSKY Corp. as of December 31, 2007.The inventory general
ledger balance is $8,124,998.66. HUSKY manufactures lawn and garden tractors, snowmobiles,
and supplies. Download the data file labeled “HUSKY 2007 Inventory” from the
books’ web site

Why is it important to coordinate the testing of cash and other liquid asset accounts?

How can cross-sectional analysis help the auditor identify potential inventory misstatements for a
multi-location retail client?

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What significant controls will a company such as General Motors implement in a partnering
arrangement with a major supplier to ensure that all goods received are (a) properly accounted
for, (b) of good quality, (c) within acceptable delivery and quality terms, and (d) paid for
properly? Explain how the auditor would ev

What assumptions must hold true if the auditor chooses to test the completeness of accounts
payable by examining subsequent disbursements and reviewing open accounts payable? What
options exist to discover unrecorded accounts payable?

One of the major controls over cash and cash transfers is to ensure that only authorized personnel
are handling cash, making cash transfers, or investing excess cash. Required a. For each of the
following situations, indicate the appropriate position of the individual who should be authorized
to initiate and implement

What important controls would an auditor expect to find in an accounts payable environment
when payments are automatically scheduled and checks or electronic transfers of cash are
generated by the computer program?

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What is a compensating balance? How does the auditor become aware of the existence of
compensating balances?

Toyco, a retail toy chain, honors two bank credit cards and makes daily deposits of credit card
sales in two credit card bank accounts (Bank A and Bank B). Each day Toyco batches its credit
card sales slips, bank deposit slips, and authorized sales return documents and sends them to data
processing for data entry. Each

The following audit procedures are found in audit programs addressing the acquisition and
payment cycle. Required For each audit procedure described: a. Identify the objective of the
procedure or the audit assertion being tested. b. Classify the procedure as primarily a substantive
test, a test of controls, or both. A

How might a company understate expenses?

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Why is it important that a quality control function be used for receiving important inventory
items? What is the financial statement risk if a manufacturing client does not use such a

How much evidence is needed to be persuasive? Each of the following scenarios describes the
auditor's findings of internal control. Required For each situation, indicate whether additional
evidence in the form of direct tests of account balances is required, and if so, the type and
amount of testing that should be per
The Northwood’s Manufacturing Company has automated its production facilities
dramatically during the last five years, to the extent that the number of direct-labor hours has
remained steady while production has increased fivefold. Automated equipment, such as robots,
has helped increase productivity. Overhead, previ

Identify the different ways in which the requisition process might be implemented. For each
method, indicate how the requisition is authorized and the evidence the auditor would gather to
determine authorization.

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Many organizations use the computer to generate purchase orders. Who is responsible for a
purchase when the computer generates the purchase order? How does the responsible individual
ensure that computer generated orders are correct and are generated only for purchases that
should be made?

The auditor has gathered shipping cutoff information for Johnny M. Golf Company in
conjunction with its December 31 year end. The auditor has observed the client’s year-end
physical inventory and is satisfied with the client’s inventory procedures. The client has
adjusted the year-end book value to the physical inv

You are the internal auditor for a company that started over 40 years ago as a local retailer of
major home appliances. The company has now grown to include 55 retail stores in 12
metropolitan areas. Because of rapid growth in the number of stores opened in the last three
years (46), a professional management team was

Badger Meter of Milwaukee, Wisconsin, designs and manufactures water meters, gasoline
meters, and other metering systems to measure and report the flow of liquid through various
lines. The company has three manufacturing plants: one in Milwaukee, Wisconsin, one in
Lucerne, France, and one in Bustof, Poland. The plant i

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Explain the purpose and risks associated with each of the following types of bank accounts: a.
General cash account b. Imprest payroll account

The auditor is always concerned that slow-moving or potentially obsolete inventory is included
in inventory, and that the goods should be reduced to a lower market value. Identify five
procedures the auditor might use to determine the existence of obsolete goods or goods whose
market value is less than cost.

What factors should be considered when planning the audit of cash and marketable securities?

The auditor often examines some expense accounts, such as legal expenses, in detail even if the
account balance is not material. Explain why.