Exam 10: Develop Risk Response: Audit Strategy and Audit Program

Restaurant Products Company (RPC)has been an audit client of your firm for many years.RPC has a March 31 fiscal year end.The company is a successful distributor of restaurant and food industry products such as trays,weigh scales,dishes,and cooking implements.The company sells to businesses only (not to end-consumers),with clients ranging from small restaurants to large food-service chains and hotels.The company has a perpetual inventory system but the current inventory system relies upon accurate data entry of receipts,shipments,and inventory adjustments from paper documents. RPC is looking to improve inventory management and maintain costs in the face of rising competition and growth.Accordingly,it is implementing RFID (radio frequency identification)technology for its inventory.RFID chips will be placed on warehouse shelf locations,boxes of products,and on high-cost individual products.At the same time,the company will implement a wireless mesh system throughout the warehouse,with wireless tracking of product movement.Effective January 31 of next year,a new inventory management system will be implemented to facilitate better decision making and access to online real-time inventory data.The new inventory management system will include a new database that will include internal records of inventory on hand,receipts and shipments of inventory,purchase order details,and payment details. Required:A)For each phase of the financial statement audit process,describe the phase,and explain how the audit process will be affected by the implementation of the new inventory management system.B)What is the impact of the implementation of RFID on the financial statement audit process? Note that these points must be different from those raised in requirement A.

A substantive procedure is used to

After finishing the procedures to obtain an understanding of internal control in an audit engagement,the auditor should perform substantive test of transactions on

When the auditor assesses the likelihood of material misstatement in the financial statements,the auditor will use

Describe a substantive audit strategy.

It is important that sales be billed and recorded in the journal as soon as possible after

Samru has been assigned the sales cycle as part of an audit team.He will be evaluating several key controls in the sales cycle and conducting tests of detail for accounts receivable.Samru has been told to look at 15 customers with respect to the credit limit approval process (a test of control).Then,he has been told to use dual purpose tests for the rest of his testing. Required: Explain the relationship between tests of controls,dual purpose tests,and tests of details.

A)There are seven types of audit evidence: inspection,observation,inquiries of the client,external confirmation,recalculation,reperformance,and analytical procedures.For each of the following types of audit tests,indicate the type(s)of evidence that can be obtained through the test: (1)tests of controls,(2)analytical procedures,and (3)substantive tests of balances.B)Contrast the circumstances in which the auditor would choose not to test controls with those in which he or she would perform tests of controls.C)Types of audit tests include tests of controls,analytical procedures,and tests of details of balances.Rank these types of tests from least costly to most costly.

The auditor would like to design a test of control to test that shipping documents are issued in numerical order by the computer and are accounted for weekly.Which of the following typical tests of controls would be suitable?

Control risk has been assessed at 100% for your client.What audit approach will you follow?

When considering the relationships between types of audit tests and evidence,which of the following procedures are used for both obtaining an understanding of internal control and for conducting tests of controls?

Discuss the purposes of tests of controls and tests of details of balances.Give an example of each.

The auditor has conducted tests of controls of the write-off of accounts receivable and found two exceptions.These exceptions are

CAS 240 requires which of the following to be considered a significant risk?

There will be heavy emphasis on tests of controls when

Jane is a sole practitioner operating out of a local office.She is part of a regional group of firms and occasionally does small audits with the assistance of one staff person.Using automated working paper software,she runs a standard set of analytical review calculations for each audit,then puts them in the working paper file.She does not look at the analytical review process again. Since most of her audit clients have no internal controls,she then calculates materiality and conducts a substantive audit.She prefers to do more substantive testing rather than having to do all kinds of work with internal controls. Required: What is wrong with Jane's audit approach?

The auditor would like to design a test of control to test that statements are mailed to all customers each month.Which of the following typical tests of controls would be suitable?

During a change to an entire IT system,if conversion controls are poor or are not documented,the auditor will need to

"This is really confusing! I've sat in on audit planning meetings for three different clients so far,and each one has gone differently.I've been responsible for the sales section each time.Sure the risks are all different,but in the first one I'm supposed to do flowcharts and detailed narrative for the sales systems,in the second one I'm supposed to use the firm's computerized system to answer detailed questions,and in the last one the partner only wants a brief description of the system in narrative form - no more than one page,he said." Required: Explain why it may be necessary to do different types of documentation to support an understanding of internal controls in the context of risks and evidence mix.

Last year the materiality for the client was $590 000.This year it is $400 000.All things being equal,how will this change in materiality affect the extent of tests of details?