Budgeting and Forecasting: Keys to Accounting Success

Published: 8 months ago

Budgeting and Forecasting: Keys to Accounting Success

Auditing in More Complex IT Environments

As organizations expand their use of IT, internal controls are often embedded in applications that are available only electronically. When traditional source documents such as invoices, purchase orders, billing records, and accounting records such as sales journals, inventory listings, and accounts receivable subsidiary records exist only electronically, auditors must change their approach to auditing. This approach is often called auditing through the computer. Table 12-4 illustrates some differences between auditing around the computer and auditing through the computer. Auditors use three categories of testing approaches when auditing through the computer: test data approach, parallel simulation, and embedded audit module approach. Test Data Approach In the test data approach, auditors process their own test data using the client’s computer system and application program to determine whether the automated controls correctly process the test data. Auditors design the test data to include transactions that the client’s system should either accept or reject. After the test data are processed on the client’s system, auditors compare the actual output to the expected output to assess the effectiveness of the application program’s automated controls. Figure 12-3 (p. 384) illustrates the use of the test data approach. When using the test data approach, auditors have three main considerations:

1. Test data should include all relevant conditions that the auditor wants tested. Auditors should design test data to test all key computer-based controls and include realistic data that are likely to be a part of the client’s normal processing, including both valid and invalid transactions. For example, assume the client’s payroll application contains a limit check that disallows a payroll transaction that exceeds 80 hours per week. To test this control, the auditor can prepare payroll transactions with 79, 80, and 81 hours for each sampled week and process them through the client’s system in a manner shown in Figure 12-3. If the limit check control is operating effectively, the client’s system should reject the transaction for 81 hours, and the client’s error listing should report the 81-hour transaction error.

2. Application programs tested by auditors’ test data must be the same as those the client used throughout the year. One approach is to run the test data on a surprise basis, possibly at random times throughout the year, even though doing so is costly and time consuming. Another method is to rely on the client’s

general controls in the librarian and systems development functions to ensure that the program tested is the one used in normal processing.

3. Test data must be eliminated from the client’s records. If auditors process test data while the client is processing its own transactions, auditors must elimi nate the test data in the client’s master files after the tests are completed to prevent master files and transaction files from being permanently contaminated by the auditor’s testing. Auditors can do this by developing and processing data that reverses the effect of the test data. Because of the complexities of many clients’ application software programs, auditors who use the test data approach often obtain assistance from a computer audit specialist. Many larger CPA firms have staff dedicated to assisting in testing client application controls. Parallel Simulation Auditors often use auditor-controlled software to do the same operations that the client’s software does, using the same data files. The purpose is to determine the effectiveness of automated controls and to obtain evidence about electronic account balances. This testing approach is called parallel simulation testing. Figure 12-4 shows a typical parallel simulation. Whether testing controls or ending balances, the auditor compares the output from the auditor’s software to output from the client’s system to test the effectiveness of the client’s software and to determine if the client’s balance is correct. A variety of software is available to assist auditors. Auditors commonly do parallel simulation testing using generalized audit software (GAS), which are programs designed specifically for auditing purposes. Commercially available audit software, such as ACL or IDEA, can be easily operated on auditors’

desktops or laptop computers. Auditors obtain copies of machine-readable client databases or master files and use the generalized audit software to do a variety of tests of the client’s electronic data. Instead of GAS, some auditors use spreadsheet software to do simple parallel simulation tests. Others develop their own customized audit software. Generalized audit software provides three advantages: it is relatively easy to train audit staff in its use, even if they have had little audit-related IT training, the software can be applied to a wide variety of clients with minimal customization, and it has the ability to do audit tests much faster and in more detail than using traditional manual procedures. Table 12-5 (p. 386) includes some of the common uses of generalized audit software. Two are examined in detail:

1. Generalized audit software is used to test automated controls. An auditor obtains copies of a client’s customer credit limit master file and a customer order file, and then instructs the auditor’s computer to list transactions that exceed the customer’s authorized credit limit. The auditor then compares the audit output to the client’s list of customer orders that were rejected for exceeding authorized credit limits.

2. Generalized audit software is used to verify the client’s account balances. An auditor can use the software to sum the master file of customer accounts receivable to determine whether the total agrees with the general ledger balance. Embedded Audit Module Approach When using the embedded audit module approach, auditors insert an audit module in the client’s application system to identify specific types of transactions. For example, auditors might use an embedded module to

identify all purchases exceeding $25,000 for follow-up with more detailed examination for the occurrence and accuracy transaction-related audit objectives. In some cases, auditors later copy the identified transactions to a separate data file and then process those transactions using parallel simulation to duplicate the function done by the client’s system. The auditor then compares the client’s output with the auditor’s output. Discrepancies are printed on an exception report for auditor follow-up. The embedded audit module approach allows auditors to continuously audit transactions by identifying actual transactions processed by the client as compared to test data and parallel simulation approaches, which only allow intermittent testing. Internal audit may also find this technique useful. Although auditors may use one or any combination of testing approaches, they typically use:

• Test data to do tests of controls and substantive tests of transactions

• Parallel simulation for substantive testing, such as recalculating transaction amounts and footing master file subsidiary records of account balances

• Embedded audit modules to identify unusual transactions for substantive testing.

13. Tanner-UNF Corporation acquired as a long-term investment $190 million of 8.0% bonds, dated July ...

Tanner-UNF Corporation acquired as a long-term investment $190 million of 8.0% bonds, dated July 1, on July 1, 2016. Company management has the positive intent and ability to hold the bonds until maturity The market interest rate (yield) was 10% for bonds of similar risk and maturity. Tanner-UNF paid $160.0 million for the bonds. The company will receive interest semiannually on June 30 and December 31. As a result of changing market conditions, the fair value of the bonds at December 31, 2016 was $170.0 million. Required: 1. & 2. Prepare the journal entry to record Tanner-UNF's investment in the bonds on July 1, 2016 and interest on December 31, 2016, at the effective (market) rate. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 2 decimal places (i.e., 5,500,000 should be entered as 5.50).) view transaction list view general journal Event General Journal Debit Credit 1 Investment in bonds 190.00 Discount on bond investment 30.00 Cash 160.00 2 Cash 7.60 Discount on bond investment 4.00 Interest revenue 8.00

14. A review of the ledger of Carmel Company at December A review of the ledger of Carmel Company at...

A review of the ledger of Carmel Company at December

A review of the ledger of Carmel Company at December 31, 2019, produces the following data pertaining to the preparation of annual adjusting entries.



1. Prepaid Insurance $10,440. The company has separate insurance policies on its buildings and its motor vehicles. Policy B4564 on the building was purchased on April 1, 2018, for $7,920. The policy has a term of 3 years. Policy A2958 on the vehicles was purchased on January 1, 2019, for $4,500. This policy has a term of 2 years.



2. Unearned Rent Revenue $429,000. The company began subleasing office space in its new building on November 1. At December 31, the company had the following rental contracts that are paid in full for the entire term of the lease.



Date Term(in months) Monthly Rent Number of Leases



Nov. 1………………9…………………$5,000…………………………5



Dec. 1………………6…………………$8,500…………………………4



3. Notes Payable $120,000. This balance consists of a note for 9 months at an annual interest rate of 9%, dated November 1.



4. Salaries and Wages Payable $0. There are eight salaried employees. Salaries are paid every Friday for the current week. Five employees receive a salary of $700 each per week, and three employees earn $500 each per week. Assume December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December.



Instructions



Prepare the adjusting entries at December 31, 2019.



 

A review of the ledger of Carmel Company at December

15 . Of the following errors, the one that will cause an inequality in the trial balance totals is: a....

Of the following errors, the one that will cause an inequality in the trial balance totals is:

a. incorrectly computing an account balance

b. failure to record a transaction

c. recording the same transaction more than once

d. posting a transaction to the wrong account

16. Which one is not a feature of budgetary control

Which one is not a feature of budgetary control:

a. A tool for management control.

b. An instrument of delegation and accountability.

c. An instrument for evaluating the overall performance.

d. A statement of budget and forecast.

17. A comparative balance sheet and income statement is shown for Cruz, Inc. CRUZ, INC. Comparative Bala

18. Pineapple Motor Company manufactures two types of specialty electric motors, a commercial motor a...

Pineapple Motor Company manufactures two types of specialty electric motors, a commercial motor and a residential motor, through two production departments, Assembly and Testing. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering using the multiple production department factory overhead rate method. The following factory overhead was budgeted for Pineapple:

assembly dept- 240,000

testing dept- 750,000

Total- 990,000

direct machine hours were estimated as follows:

Assembly dept- 3000 hrs

testing dept- 6000 hrs

total 9000 hrs

In addition, the direct machine hours (dmh) used to produce a unit of each product in each department were determined from engineering records, as follows:

A: Determine the per-unit factory overhead allocated to the commercial and residential motors under the single plantwide factory overhead rate method, using direct machine hours as the allocation base.

B. Determine the per-unit factory overhead allocated to the commercial and residential motors under the multiple production department factory overhead rate method, using direct machine hours as the allocation base for each department.

C. (1) Recommend to management a product costing approach, based on your analyses in (A) and (B). (2) Give a reason for your answer.

19. 71. Other things being equal, income computed by the variable costing method will exceed that...

71. Other things

being equal, income computed by the variable costing method will exceed that

computed by the full costing method if:

A.

Units

produced exceed units sold.

B. Units

sold exceed units produced.

C. Fixed

manufacturing costs increase.

D. Variable

manufacturing costs increase.

72. Home

Products Inc has failed to reach its planned activity level during its first

two years of operation. The following table shows the relationship between

units produced, sales, and normal activity for these years and the projected

relationship for Year 3. All prices and costs have remained the same for the

last two years and are expected to do so in Year 3. Income has been positive in

both Year 1 and Year 2.

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Because Home Products uses a full

costing system, one would predict operating income for Year 3 to be:

A.

Greater

than operating income under variable costing.

B. Less

than year 2.

C.

The

same as operating income under variable costing.

D. Less

than the operating income under variable costing.

73. A

company’s operating income was $70,000 using variable costing for a given

period. Beginning and ending inventories for that period were 45,000 units and

50,000 units, respectively. Ignoring income taxes, if the fixed overhead

application rate was $8.00 per unit, what would operating income have been

using full costing?

A.

$30,000.

B. $140,000.

C. $110,000.

D. $100,000.

E. Cannot

be determined from the information given.

74. A

company had income of $50,000 using variable costing for a given period.

Beginning and ending inventories for that period were 80,000 units and 90,000

units, respectively. If the fixed overhead application rate were $10.00 per

unit, what would operating income have been using full costing?

A.

$(50,000).

B. $170,000.

C. $150,000.

D. $0.

E. Cannot

be determined from the information given.

75. The

balanced scorecard is widely used in performance evaluation and management

control. In which regions around the world is it most and least, respectively,

commonly used?

A.

Europe,

Asia

B. U.S

and Canada, Africa

C. U.S.

and Canada, South and Central America

D. South

and Central America, Europe

76. Operating

income reported under full costing will exceed operating income reported under

variable costing for a given period if:

A.

Production

equals sales for that period.

B. Production

exceeds sales for that period.

C. Sales

exceed production for that period.

D. The

variable overhead exceeds the fixed overhead.

77.

A company’s operating income recently

increased by 30% while its inventory increased in a given year. Which of the

following accounting methods would be most likely to produce the favorable

income results?

A.

Full

costing.

B. Direct

costing.

C. Variable

costing.

D. Standard

direct costing.

78. During

January, Lang, Inc. produced 10,000 units of product with costs as follows:

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What is Lang’s unit cost for

January, calculated on the variable costing basis?

A.

$6.20.

B. $7.20.

C. $7.50.

D. $8.50.

E. $9.50.

79. In the

principal-agent model, the manager is modeled as having all of the following

elements except:

A. Risk aversion

B. Outcomes

of actions

C. Provides

effort

D. Decision

Making

80. During

October, Rover Industries produced 35,000 units of product with costs as

follows:

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What is Rover’s unit cost for

October, calculated on the variable costing basis?

A. $3.25.

B. $3.75.

C. $4.00.

D.

$4.50.

E. $5.00.