AC 410 AC410 AC410 Unit 7 Homework Assignment
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Questions Requiring Analysis 14-30
Early in your first audit of Star Corporation, you notice that sales and year-end inventory are almost unchanged from the prior year. However, cost of goods sold is less than in the preceding year, and accounts payable also are down substantially. Gross profit has increased, but this increase has not carried through to net income because of increased executive salaries. Management informs you that sales prices and purchase prices have not changed significantly during the past year, and there have been no changes in the product line. Star Corporation relies on the periodic inventory system. Your initial impression of internal control is that several weaknesses may exist.
Suggest a possible explanation for the trends described, especially the decrease in accounts payable while sales and inventory were constant and gross profit increased. Explain fully the relationships involved.
For this question, you’ll need to look at the ratios presented and analyze the trends. What do the trends mean?
The following are typical questions that might appear on an internal control questionnaire for accounts payable.
1. Are monthly statements from vendors reconciled with the accounts payable listing?
Monthly statements from vendors should be reconciled to the payables ledger.
2. Are vendors’ invoices matched with receiving reports before they are approved for payment?
The two procedures are test controls that provides auditors the evidence to access control risk of financial statements.
a. Describe the purpose of each of the above internal control activities.
b. Describe the manner in which each of the above procedures might be tested.
c. Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the...