(7) Analyses – consist of working papers showing the changes which occurred in an account during a given period. By analyzing an account, the auditors determine its nature and contents.
(8) Reconciliations – working papers that prove the relationship between two amounts obtained from different sources.
(9) Computational working papers – used to verify such data as interest expense, income taxes, and earnings per share.
(10) Corroborating documents – working papers that provide support for specific representations made in the financial statements, such as letters of representations from clients, lawyers’ letters, audit confirmations, and copies of the contracts.
12. Audit working papers are the property of the auditor; however, they must not violate the confidential relationship between client and auditors by making the papers available to outsiders or even to the client’s employees without specific permission from the client.
13. Refer to page 820 of the textbook. 14. Refer to pages 820 to 822 of the textbook.
Multiple Choice Questions
1. d 9. b 17. d 25. b 2. d 10. b 18. c 26. d 3. c 11. a 19. c 27. d 4. a 12. d 20. d 28. c 5. d 13. d 21. b 29. d 6. c 14. b 22. d 30. c 7. c 15. d 23. a 31. d 8. d 16. d 24. b 32. d Cases
1. a. (1) The functions of audit working papers are to aid the CPA in the conduct of his work and to provide support for his opinion and his compliance with auditing standards.
(2) Working papers are the CPA’s records of the procedures performed, and conclusions reached in the audit.
b. The factors that affect the CPA’s judgment of the type and content of the working papers for a particular engagement include:
1. The nature of the auditor’s report. 2. The nature of the client’s business.
3. The nature of the financial statements, schedules or other information upon which the CPA is reporting and the materiality of the items included therein.
4. The nature and condition of the client’s records and internal controls. 5. The needs for supervision and review of work performed by assistants. c. Evidence which should be included in audit working papers to support a
CPA’s compliance with generally accepted auditing standard includes: 1. Evidence that the financial statements or other information upon which
the auditor is reporting were in agreement or reconciled with the client’s records.
2. Evidence that the client’s system of internal control was reviewed and evaluated to determine the nature, timing, and extent of audit procedures.
3. Evidence of the auditing procedures performed in obtaining evidential matter for evaluation
4. Evidence of how exceptions and unusual matters disclosed by auditing procedures were resolved or treated.
5. Evidence of the auditor’s conclusions on significant aspects of the engagement with appropriate commentaries.
d. The CPA should perform an adequate examination at minimum cost and effort and the preceding year’s programs will aid in doing this. The preceding year’s audit programs ordinarily contain information useful in the current examination (such as descriptions of the unique features of a client’s operations or records, a formalized sequence of audit steps in logical order, and approximate time requirements to perform various phases of the work). The auditor should decide whether to use the old program or prepare a new one.
2. In general, the working paper is not set up in a logical manner to show what the auditor wants to accomplish. The primary objective of the working paper is to verify the ending balance in notes receivable and interest receivable. A secondary objective is to account for all interest income, cash received and cash disbursed for new notes, collateral as security, and other information about the notes for disclosure purposes.
Audit Documentation 21-5
Specific deficiencies of the working paper presented in the question are: a.
DEFICIENCY
b. IMPROVEMENT 1. Tick mark explanation “tested”
does not indicate specifically what was done.
Should have separate tick marks meaning:
Agreed to confirmation Footed
Traced to cash receipts journal Recomputed, etc.
2. Explanation of some tick marks is not given.
Explain all tick marks on the same page of the working paper. 3. Classification of long-term
portion indicates no verification.
Recompute portions of notes which are long-term.
4. Paid-to-date row is confusing. Column should say “date paid to” and this should be confirmed.
5. Due dates are missing for C.C. Co., P. Pablo and Tetra Co.
Include due dates on working paper for these notes.
c. SPREADSHEET SOLUTION
The purpose of using an Excel spreadsheet in this problem is to give the student some experience in preparing a simple working paper using an Excel spreadsheet. It should be explained to students that this type of working paper may or may not be prepared in actual practice, and that often templates are used to prepare more time-consuming working papers. Also, whether or not tick marks are computerized is a matter to be decided. The advantage is that the completed audit work can then be stored and reviewed electronically, a direction many firms are going. On the other hand, it may be more efficient to indicate audit work manually as it is performed, and a contrast in the color of the tick marks through use of a colored pencil may be desirable.
The formulas used are self-evident, so no listing is provided. Two items deserve comment:
1. An advantage of using a spreadsheet program for these types of analyses is that footing and crossfooting are done automatically. 2. When auditor tick marks are done by computer, a problem arises as
to how to place them on the worksheet. One could use narrow columns inserted between the scheduled client data, or, as done here, the tick marks are placed in blank rows beneath the related data.
FOURTH PACIFIC COMPANY Schedule N-1 Date
A/C # 110 – NOTE RECEIVABLE Prepared by JD 1/21/14
12/31/13 Approved by PP 2/15/14
Account # 110 – Notes Receivable Interest
Maker Date Made / Due Interest Rate / Date Paid to Face Amount Value of Security Balance 12/31/12 Additions Payments Balance 12/31/13 Receivable 12/31/12 Earned Received Receivable 12/31/13
Alba Co. c * 6/15/12 / 5% / 5000 None 4000 0 1000 3000 114 175 0 279
6/15/14 None pd. tp r tp <
Barrios, Inc. c * 11/21/12 / 5% / 3591 None 3591 0 3591 0 0 112 112 0
Demand 12/31/13 tp r tp < r C.C. Co. c * 11/1/12 / 5% / 13180 24000 12780 0 2400 11380 24 577 601 0 4/1/18 12/31/13 tp r tp < r (P200/Mo.) P. Pablo c * 7/26/13 / 5% / 25000 50000 0 25000 5000 20000 0 468 200 268 8/1/15 9/30/13 r r < r (P1000/Mo.)
Martin Cruz c * 5/12/12 / 5% / 2100 None 2100 0 2100 0 0 105 105 0
Demand 12/31/13 tp r tp < r Tetra Co. c * 9/3/13 / 6% / 12000 10000 0 12000 1600 11400 0 162 108 54 2/1/16 11/30/13 r r < r (P400/Mo.) 22471 37000 15691 43780 128 1589 1116 601 f f f f, cf f f f f, cf tp wtb tb op wtb
Legend of Auditor’s Tick Marks
f Footed
cf Crossfooted
tp Traced to prior year working papers wtb Traced total to working trial balance op Traced total to operations working paper – OP6
* Examined note for payee, made and due dates, interest rate, face amount, and value of security. No exceptions noted.
c Received confirmation, including date interest paid to, interest rate, interest paid during 2013, note balance, and security. No exceptions noted.
r Traced to cash receipts journal