Accounting Modules: Your Path to Academic Achievement
Operational audits are usually performed by one of three groups: internal auditors, government auditors, or CPA firms. Internal Auditors Internal auditors are in such a unique position to perform opera - tional audits that some people use the terms internal auditing and operational auditing interchangeably. It is, however, inappropriate to conclude that all operational auditing is done by internal auditors or that internal auditors do only operational auditing. Many internal audit departments do both operational and financial auditing, often simultaneously. Because they spend all their time working for the company they are auditing, internal auditors have an advantage in doing operational audits. They can develop considerable knowledge about the company and its business, which is essential to effective operational auditing. To maximize their effectiveness for both financial and operational auditing, the internal audit department should report to the board of directors or president. Internal auditors should also have access to and ongoing communications with the audit com - mittee of the board of directors. This organizational structure helps internal auditors remain independent. If internal auditors report to the controller, it is difficult for them to do independent evaluations and make recommendations to senior manage ment about inefficiencies in the controller’s operations. Government Auditors Different federal and state government auditors perform operational auditing, often as a part of doing financial audits. As already discussed, the most widely recognized government auditor group is the GAO, but many state govern - ment auditors are also concerned with financial and operational audits. The Yellow Book defines and sets standards for performance audits, which are essentially the same as operational audits. Performance audits include the following:
• Economy and efficiency audits. The purpose of an economy and efficiency audit is to determine:
1. Whether the entity is acquiring, protecting, and using its resources economically and efficiently
2. The causes of inefficiencies or uneconomical practices
3. Whether the entity has complied with laws and regulations concerning matters of economy and efficiency
• Program audits. The purpose of a program audit is to determine:
1. The extent to which the desired results or benefits established by the legisla - ture or other authorizing body are being achieved
2. The effectiveness of organizations, programs, activities, or functions
3. Whether the entity has complied with laws and regulations applicable to the program The first two objectives of each of these types of performance audits are clearly opera - tional in nature, while the final objective concerns compliance. To illustrate specific operational activities of a state governmental audit, the following three examples are taken from an article in the publication Internal Auditor:
• A separate hospital with its own administrative staff occupied three buildings on the grounds of another state hospital. Our audit showed that the limited workload of the administrative activities of this separate hospital and its proximity to the offices of the main hospital would permit consolidation of the administrative functions of the two hospitals at a savings of $145,000 a year.
• A local school district exercised control over 29 individual facilities. Our audit showed that the unused classroom facilities amounted to about 28 percent or the equivalent of eight schools and that enrollment was continuing to decline. We recommended consolidating and closing of individual facilities to the extent possible. Such action would not only reduce costs but also provide greater flexi - bility in class sizes and course offerings.
• The outstanding accounts receivable at a teaching hospital increased from $7 million to $11 million during a two-year period. An audit showed that this serious situation was caused, in part, by a lack of aggressive follow-up action, insufficient supervision, and insufficient staff to keep up with an increasing workload.1 CPA Firms When a CPA firm does an audit of historical financial statements, part of the audit often consists of identifying operational problems and making recommen - dations that may benefit the audit client. The recommendations can be made orally, but they are typically included in a management letter. (For coverage of management letters, see pages 777–778 in Chapter 24.) The background knowledge about a client’s business, which an external auditor must obtain while doing an audit, often provides useful information for giving operational recommendations. For example, suppose that the auditor determined that inventory turnover for a client slowed considerably during the current year. The auditor should determine the cause of the slower turnover to evaluate the possibility of obsolete inventory that would misstate the financial statements. In determining the cause of the reduced inventory turnover, the auditor may identify operational causes, such as ineffective inventory acquisition policies, that can be brought to the attention of management. An auditor who has a broad business background and experience with similar businesses is more likely to be effective at providing clients with relevant operational recommendations than a person who lacks those qualities. Clients commonly engage a CPA firm to do operational auditing for one or more specific parts of its business. For example, a company can ask the CPA firm to evaluate the efficiency and effectiveness of its computer systems. Usually, management engages the CPA firm for these audits only when the company does not have an internal audit staff or if the internal audit staff lacks expertise in a certain area. In some cases, manage - ment or the board of directors outsources the entire internal audit function to a CPA firm or co-sources select internal audit activities, such as IT operational auditing activities, to be done jointly by a CPA firm and certain members of the company’s internal audit staff. In most cases, the CPA firm’s management consulting staff per - forms these services. Note that CPA firms cannot provide these services to their public company audit clients.
The two most important qualities for an operational auditor are independence and competence. The auditor should report to the appropriate level of management to ensure that investigation and recommendations are made without bias. Indepen - dence is seldom a problem for CPA firm auditors because they are not employed by the company being audited. The independence of internal auditors is enhanced by having the internal audit department report to the board of directors or president. Similarly, government auditors should report to a level above the operating depart - ments. The GAO, for example, reports directly to Congress as a means of enhancing inde pendence. The responsibilities of operational auditors can also affect their independence. The auditor should not be responsible for operating functions in a company or for correcting deficiencies when ineffective or inefficient operations are found. For example, it would negatively affect auditors’ independence when they audit an IT system for acquisitions if they designed the system or are responsible for correcting deficiencies they found during the audit. While it is acceptable for auditors to recommend changes in operations, operating personnel must have the authority to accept or reject those recommendations. If auditors had the authority to require implementation of their recommendations, their independence would be reduced.
6. 50. An example of a committed fixed cost is: A. a training program for salespersons. B. executive...
50.
An example of a committed fixed cost is:
A.
a training program for salespersons.
B.
executive travel
expenses.
C.
property taxes on the
factory building.
D.
new product research and development.
51.
In describing the cost formula equation Y = a + bX, which of the following
statements is correct?
A.
“X” is the dependent variable.
B.
“a” is the
fixed component.
C.
In the high-low method,
“b” equals change in activity divided by change in costs.
D.
As “X” increases “Y”
decreases.
52. Which
one of the following costs should NOT be considered a direct cost of serving a
particular customer who orders a customized personal computer by phone directly
from the manufacturer?
A.
The cost of the hard disk drive
installed in the computer.
B.
The cost of shipping the
computer to the customer.
C.
The cost of leasing a
machine on a monthly basis that automatically tests hard disk drives before
they are installed in computers.
D.
The cost of packaging the computer for
shipment.
53.
The term differential cost refers to:
A.
a difference in cost which results from
selecting one alternative instead of another.
B.
the benefit forgone by
selecting one alternative instead of another.
C.
a cost which does not
involve any dollar outlay but which is relevant to the decision-making process.
D.
a cost which continues to be incurred
even though there is no activity.
54.
Which of the following costs is often important in decision making, but is
omitted from conventional accounting records?
A.
Fixed cost.
Page
5 of 73
B.
Sunk cost.
C.
Opportunity cost.
D.
Indirect cost.
55.
When a decision is made among a number of alternatives, the benefit that is
lost by choosing one alternative over another is the:
A.
realized cost.
B.
opportunity cost.
C.
conversion cost.
D.
accrued cost.
56. The
following costs were incurred in September:
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Conversion costs
during the month totaled:
A.
$50,000
B.
$59,000
C.
$137,000
D.
$67,000
57.
The following costs were incurred in September:
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Prime costs
during the month totaled:
A.
$79,000
B.
$120,000
C.
$62,000
D.
$40,000
58.
In September direct
labor was 40% of conversion cost. If the manufacturing overhead for the month
was $66,000 and the direct materials cost was $20,000, the direct labor cost
was:
A.
$13,333
B.
$44,000
C.
$99,000
D.
$30,000
59. Aberge
Company’s manufacturing overhead is 60% of its total conversion costs. If
direct labor is $38,000 and if direct materials are $21,000, the manufacturing
overhead is:
A.
$57,000
B.
$88,500
C.
$25,333
D.
$31,500
7. Sandy Chen owns a small specialty store, named Chen’s Chattel,
Sandy Chen owns a small specialty store, named Chen’s Chattel, whose year-end is June 30. Determine the total amount that should be included in Chen’s Chattel’s year-end inventory. A physical inventory taken on June 30 reveals the following:
Cost of merchandise on the showroom floor and in the warehouse …………….. $37,800
Goods held on consignment (consignor is National Manufacturer) ……………….. 6,400
Goods that Chen’s Chattel, as the consignor, has for sale at the location of the Grand Avenue Vista ……………………………………………………………………….. 4,600
Sales invoices indicate that merchandise was shipped on June 29, terms FOB shipping point, delivered at buyer’s receiving dock on July 3 ……………………………….. 3,800
Sales invoices indicate that merchandise was shipped on June 25, terms FOB destination, delivered at buyer’s receiving dock on July 5 ……………………………………… 3,100
8. Prepare the balance sheet of Pin Corporation immediately after the acquisition...
Comparative balance sheets for Pin and San Corporations at December 31, 2010, are as follows (in thousands):PinSanCurrent assets520240Land200400Buildings---net1,200400Equipment---net880960Total assets2,8002,000Current liabilities200240Capital stock, $10 par2,000800Additional paid-in capital200560Retained earnings400400Total equities2,802,000 On January 2, 2011, Pin issues 60,000 shares of its stock with a market value of $40 per share for all the outstanding shares of San Corporation in an acquisition. San is dissolved. The recorded book values reflect fair values, except for the buildings of Pin, which have a fair value of $1,600,000, and the current assets of San, which have a fair value of $400,000. Pin pays the following expenses in connection with the business combination:
Costs of registering and issuing securities $60,000
Other direct costs of combination 100,000
REQUIRED: Prepare the balance sheet of Pin Corporation immediately after the acquisition.
9. A car dealer acquires a used car for $14,000, terms FOB shipping point. Additional costs in obtai...
A car dealer acquires a used car for $14,000, terms FOB shipping point. Additional costs in obtaining and offering the car for sale include $250 for transportation-in, $900 for import duties, $300 for insurance during shipment, $150 for advertising, and $1, 250 for sales staff salaries. For computing inventory, what cost is assigned to the used car?
10. Yumball Candies manufactures jaw-breaker candies in a fully automated process. The machine that...
Variable costs, fixed costs, relevant range. Yumball Candies manufactures jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 4,000 per month. The machine costs $6,000 and is depreciated using straight line depreciation over ten years assuming zero residual value. Rent for the factory space and warehouse, and other fixed manufacturing overhead costs total $1,000 per month.
Yumball currently makes and sells 3,000 jaw-breakers per month. Yumball buys just enough materials each month to make the jaw-breakers it needs to sell. Materials cost 10 cents per jawbreaker. Next year Yumball expects demand to increase by 100%. At this volume of materials purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same.
1. What is Yumball’s current annual relevant range of output?
2. What is Yumball’s current annual fixed manufacturing cost within the relevant range? What is the variable manufacturing cost?
3. What will Yumball’s relevant range of output be next year? How if at all, will fixed and variable manufacturing costs change next year?
11. *Problem 18-2A Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is s...
*Problem 18-2A Jorge Company bottles and distributes B-Lite, a diet soft drink. The beverage is sold for 50 cents per 16 ounce bottle to retailers, who charge customers 75 cents per bottle. For the year 2017, management estimates the following revenues and costs. $50,000 Sales $1,640,000 Selling expenses-variable Direct materials 420,000 Selling expenses fixed 70,000 Direct labor 30,000 350,000 Administrative expenses-variable 48,000 Manufacturing overhead-variable 380,000 Administrative expenses-fixed Manufacturing overhead fixed 208,250 Your answer is partially correct. Try again. Prepare a CVP income statement for 2017 based on management's estimates. JORGE COMPANY CVP Income Statement (Estimated) or the Year Ending December 31, 2017 640000 riable Expenses 1000400 st of Goods Sold 0000 lling Expense ministrative Expenses 0000 otal Variable Expense ntribution Margin xed Expenses st of Goods Sold ng Ex TUTotal Fixed Expenses et Income/(Loss) X Your answer is incorrect. Try again Calculate variable cost per bottle. (Round variable cost per bottle to 3 decimal places, e.g. 0.251.) Variable cost per bottle Your answer is incorrect. Try again
12. Assume that you are the accountant for Computer Consultants. Prior to this year, Computer...
Assume that you are the accountant for Computer Consultants. Prior to this year, Computer Consultants operated out of a leased office. However, the company purchased its own office building this year. The building is in an area where real estate values have been increasing an average of 6 percent per year.
The owner of Computer Consultants has asked why you recorded depreciation on the building if real estate values are appreciating. Write a response to the owner explaining why depreciation must be recorded on the company’s accounting records.
13. Diagram the sequence in which the following source documents are prepared.
Diagram the sequence in which the following source documents are prepared.
a. bill of materials
b. work order
c. sales forecast
d. materials requisition
e. move ticket
f. production schedule
g. route sheet
14. Sub Station and Planet Sub reported the following selected financial data ($ in thousands). Sub S...
Sub Station and Planet Sub reported the following selected financial data ($ in thousands). Sub Station’s business strategy is to sell the best tasting sandwich with the highest quality ingredients. Planet Sub’s business strategy is to sell the lowest cost sub on the planet.
Sub Station | Planet Sub | |||||||||||||
Net sales | $ 110,249 | $ 64,071 | ||||||||||||
Net income | 27,922 | 5,492 | ||||||||||||
Total assets, beginning | 77,183 | 42,399 | ||||||||||||
Total assets, ending | 120,371 | 48,533 | ||||||||||||
1. Calculate Sub Station’s return on assets, profit margin, and asset turnover ratio. (Enter your answers in thousands of dollars. (i.e. 123,000 should be entered as 123).) 2. Calculate Planet Sub's return on assets, profit margin, and asset turnover ratio. (Enter your answers in thousands of dollars. (i.e. 123,000 should be entered as 123).) 3-a. Which company has the higher profit margin?
3-b. Which company has the higher asset turnover?
3-c. Are the two ratios consistent with the primary business strategies of the two companies?
| ||||||||||||||
15. 9 . ) Prepare in good form an income statement for Virginia Slim Wear . Take your calculations all..
9.) Prepare in good form an income statement for Virginia Slim Wear. Take your calculations all the way to computing earnings per share.
Sales ..................................................................................................... $1,360,000
Shares outstanding ..............................................................................104,000
Cost of goods sold............................................................................... 700,000
Interest expense................................................................................... 34,000
Selling and administrative expense.................................................49,000
Depreciation expense..........................................................................23,000
Preferred stock dividends ..................................................................86,000
Taxes .................................................................................................... 100,000
24.) The Holtzman Corporation has assets of $400,000, current liabilities of $50,000, and long-term liabilities of $100,000. There is $40,000 in preferred stock outstanding; 20,000 shares of common stock have been issued.
a. Compute book value (net worth) per share.
b. If there is $22,000 in earnings available to common stockholders and Holtzman’s stock has a P/E of 18 times earnings per share, what is the cur- rent price of the stock?
c. What is the ratio of market value per share to book value per share?