AUDITING DISSERTATION

Auditing
Exam 2
Short Essay Question (60 points)

Name__________________________________________ Exam ID_________

Section Possible Score Your Score
Multiple Choice Questions
120
Essay
60

Total
180

QUESTIONS

1. What is audit evidence (10 points)?
a. Define audit evidence? Provide three examples of audit evidence and explain why you believe that each example is audit evidence.

b. Discuss the two attributes of audit evidence and provide one or more examples of each attribute to complete your discussions. Be specific and thorough when discussing each attribute or criteria.

2. Analytical Procedure Problem.
Provided below is a set of financial statements (Balance Sheet and Income Statement) for Mavo, Inc, our new audit client. A blank sheet for calculating ratios with a formula sheet is also provided (you might be more efficient solving this part of the problem using the MS Excel template sheet provided).
Required:
1. Using the Balance Statement and the income statement, calculate the vertical and horizontal analysis for both the balance sheet and the income statement and insert your answers in the appropriate spaces provided (15 points).

2. Examine your vertical and horizontal analysis then identify and discuss:

TWO red flags or unusual fluctuations from the Balance Sheet
ONE red flag or unusual fluctuations from the Income Statement that come to your attention.
In discussing each red flag/unusual fluctuation, explain and integrate the potential implications for current year audit (15 points).

3. Calculate the financial ratios and insert your answers in the appropriate spaces provided for each ratio for the two years (10 points).

4. Select and discuss the ratios
a. Discuss any TWO unusual ratios you calculated and explain your reasoning, including potential implications for the current year audit. (10 points).

2014 2015
Table 1 – NKU, Inc. Vertical Analysis Vertical Analysis Change (Horizontal Analysis)
Assets Balance Percent Balance Percent Amount Percent
Cash 600,000 484000
Accounts Receivable 500,000 400000
Allowance for Doubtful accounts (40,000) (30,000)
Inventory 1,500,000 1,940,000
Total Current Assets 2,5600,000 2,794,000
Fixed Assets 3,000,000 4,000,000
Accumulated Depreciation (1,500,000) (1,800,000)
Total Assets 4,060,000 4,994,000
Liabilities
Accounts Payable 450,000 600,000
Bank Loans (11% interest) 0 750,000
Accrued Interest 50,000 40,000
Other Current liabilities 60,000 10,000
Total current liabilities 560,000 1,400,000
Long term liabilities 500,000 400,000
Total Liabilities 1,060,000 1,800,000
Capital Stock 2,000,000 2,000,000
Retained Earnings 1,000,000 1,194,000
Total Liabilities and Equity 4,060,000 4,994,000

Statement of Operations Income Statement 2014 Percent 2015
Sales (net) 9,000,000 8,100,000
Cost of goods sold 6,296,000 5,265,000
Gross Margin 2,704,000 2,835,000
General Expense 2,044,000 2,005,000
Depreciation Expense 300,000 300,000
Operating Income 360,000 530,000
Interest Expense 50,000 40,000
Income Taxes 124,000 196,000
Net Income 186,000 294,000 108,000 58,06%

Blank Sheet for Calculating Ratios
Table 2, NKU, Inc.
2014 2015
Current Ratio

Days’ sales in receivables

Days’ sales in inventory

Receivable Turnover

Inventory Turnover

Answers and Explanation

What is audit evidence (10 points)?
a. Define audit evidence? Provide three examples of audit evidence and explain why you believe that each example is audit evidence.

a)Audit Evidence– This  refers to the information or data that an auditor needs to prepare the “Audit report” and to check that financial statements are free from material misstatement. Audit evidence is obtained by auditor inorder to check whether company’s financial statements are true  as stated and not falsified .

Examples of Audit evidence: They  are :

(i): Receipts and Invoices–  These are  documents obtained to cross check whether the items and assets were purchased or not.They are audit evidence because they provide proof. 

(ii): Bank Statement- This is also one of the audit evidences that is used to check actual debit and credit in terms of cash, how much payment has been made and how much has been received. Auditor can confirm the checking accounts and loan balances.

(iii)- Physical examination–  This involves the auditor  physically examining the inventory and assets in the company.

(b): Attributes of Audit evidence:

(i): Relevant, Reliable and sufficient- Audit evidence should be relevant and reliable, It should be independent and effective too. It should be enough to provide the auditor’s opinion.

Example: Audit evidence that is obtained from customers, suppliers and banks is more reliable than audit evidence, obtained from clients or employees of the company.

(ii): Written preparations and documents- The evidence, prepared by auditor is more reliable, auditor should rely more upon written documents than the verbal information.

Example: Bank reconciliation, prepared by Auditor is more reliable and authentic than the same is prepared by Accountant of the company.