Assignment for Auditing II

Here are the answers to your auditing questions:

1. Activities an auditor undertakes in relation to the substantive test of cash transaction and balance:

   • Reconciling bank accounts to the general ledger.
   • Counting cash on hand and comparing it to records.
   • Confirming bank balances directly with financial institutions.

2. Primary objectives achieved when confirming receivables with debtors:

   • Existence of the receivables.
   • Accuracy of the recorded amounts.
   • Cutoff of sales and receivables transactions.

3. Major accounts of the capital acquisition and repayment cycle:

   • Debt accounts (e.g., notes payable, bonds payable).
   • Equity accounts (e.g., common stock, preferred stock, retained earnings).
   • Interest expense and dividends payable.

4. Primary objectives with regard to long-term liability account balance:

   • Completeness: Ensuring all long-term liabilities are recorded.
   • Existence: Verifying that recorded liabilities are valid obligations.
   • Accuracy: Confirming the correct amounts are recorded.
   • Valuation: Assessing if liabilities are properly valued.

5. General audit concerns for stockholders' equity:

   • Proper authorization of equity transactions (e.g., issuance, repurchase of shares).
   • Correct classification of equity components.
   • Adequate disclosure of equity information in financial statements.

6. Major control of capital stock transactions by the board of directors:

   • Authorization of all capital stock issuances, repurchases, and dividend declarations.

7. FOB shipping point and FOB destination in relation to audit perspective in verification of periodicity in inventory:

   • FOB Shipping Point: Ownership and risk transfer to the buyer when goods leave the seller's dock. Auditors verify that inventory in transit at year-end, shipped FOB shipping point, is included in the buyer's inventory.
   • FOB Destination: Ownership and risk transfer to the buyer when goods arrive at the buyer's dock. Auditors verify that inventory in transit at year-end, shipped FOB destination, is included in the seller's inventory. These terms are crucial for ensuring proper cutoff of inventory and related sales/purchases.

8. Three required conditions for a contingent liability to exist:

   • There is a potential future payment to an outside party or impairment of an asset.
   • There is uncertainty about the amount of the future payment or impairment.
   • The outcome will be resolved by some future event.

9. Three analytical procedures commonly used when auditing accounts in the inventory and warehousing cycle:

   • Compare gross profit percentage with previous years.
   • Compare inventory turnover with previous years and industry averages.
   • Compare extended inventory cost with previous years.