Rename your file with your first name, last name, and “HW9.” Reminder

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Week 9 Homework Questions

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Rename your file with your first name, last name, and “HW9.”  Reminder – I do not allow direct quotes in student’s work in this class.  You need to paraphrase and cite your outside sources.  “Outside sources” do not include the text and so you don’t need to cite it.  Type your answers into this document, rename it, and upload it to the Homework assignment for Week 9. 

• For each of the following balance audit objectives, suggest a substantive procedure that could test the sales account balance and explain how your test would provide assurance for the assertion.

Hint:  This is a thought provoking question because the chapter covers accounts receivable testing and I want you to think about how you would test a sales account.  The two accounts are tightly related because most debits to accounts receivable are credits to sales.  Thus, some of the tests of accounts receivable will apply to sales.  However, I want to see if you can relate them to the audit objectives they would have to the sales account or develop some test not mentioned in the chapter that would test sales directly.

1. Existence –

1. Rights and obligations – (Hint: think about revenue recognition here.  A sales transactions needs to meet the revenue recognition rules for the auditee to have the right to recognize it in their income statement.)

1. Completeness –

1. Accuracy –

• Cash receipts, accounts receivable, and sales transactions are tightly related by double entry bookkeeping. Explain why:

Hint:  This question is similar to 1) in that it builds on the double entry relationship between cash receipts and accounts receivable.  That is the key here is to think about the transaction A/R payment transaction with cash and how missing one (completeness) might affect each balance and how injecting a false one (i.e., occurrence) into the accounting records would affect each balance. 

1. the cash receipts completeness transaction-related objective maps on to the accounts receivable existence balance objective

1. the cash receipts occurrence transaction-related objective maps on to the accounts receivable completeness balance objective

• Which sampling technique should an auditor use for testing accounts payable balance that consists of a large number of balances due of similar value, MUS or VS? Explain your answer in your own words.

Hint:  You can get what you need for this from the discussion questions about the biases, or lack thereof, of the two methods. 

• Provide an intuitive description (i.e., in your own words) of the major parameters used to calculate sample size for VS. Also, describe how variation (i.e., increase or decrease) in each parameter affects sample size.  Finally, see if you can map these onto the MUS parameters.  This last requirement is fairly thought provoking, but see what you can develop.

Hint:  For determining how these parameters affect sample size, review the MUS sample size equation on page 578 and the VS sample size formula on page 589.  However, you will need to review the composition of the confidence factor in the MUS formula since it combines two parameters.  VS has some additional parameters that MUS does not and you will need to think about why these differences exist.  For a complete answer, you will need to describe what each parameter measures, how it affects sample size, and how it differs, or not, between VS and MUS.

1. Population size

1. Risk of incorrect rejection

1. Risk of incorrect acceptance

1. Standard deviation

1. Tolerable misstatement

1. Expected misstatement