AC 410 Unit 6 Homework Assignment

AC 410 Unit 6 Homework Assignment
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homework-assignment
Questions Requiring Analysis 12-21
Nolan Manufacturing Company retains you on April 1 to perform an
audit for the fiscal year ending June 30. During the month of May, you
make extensive studies of internal control over inventories.
All goods purchased pass through a receiving department under the
direction of the chief purchasing agent. The duties of the receiving
department are to unpack, count, and inspect the goods. The quantity
received is compared with the quantity shown on the receiving
department’s copy of the purchase order. If there is no discrepancy, the
purchase order is stamped “OK—Receiving Dept.” and forwarded to the
accounts payable section of the accounting department. Any
discrepancies in quantity or variations from specifications are called to
the attention of the buyer by returning the purchase order to him with
an explanation of the circumstances. No records are maintained in the
receiving department, and no reports originate there.

As soon as goods have been inspected and counted in the
receiving department, they are sent to the factory production area and
stored alongside the machines in which they are to be processed.
Finished goods are moved from the assembly line to a storeroom in the
custody of a stock clerk, who maintains a perpetual inventory record in
terms of physical units, but not in dollars.
What weaknesses, if any, do you see in the internal control over
inventories?
Problem 12-35
Described below are potential financial statement misstatements that
are encountered by auditors.
Inventory is understated because warehouse personnel overlooked
several racks of parts in taking the physical inventory.
Inventory is overstated because warehouse personnel included
inventory items received subsequent to year-end while recording the
purchase in the subsequent year to hide inventory shortages.
Inventory is overstated because management instructed computer
personnel to make changes in the file used to price inventories.
Questions Requiring Analysis 13-31
You are part of the audit team that is auditing Happy Chicken, Inc., a
company that franchises Happy Chicken family restaurants. During the
current year, management of Happy Chicken purchased for $2 million
one of its franchised locations, a store that was having financial
difficulties. In performing its analysis for impairment of assets at yearend,
management of Happy Chicken determined that the carrying value

of the asset may not be recoverable. As a result, management
developed an estimate of the fair value of the location using a
discounted cash flow model. The estimated fair value of the location
was determined to be $1.5 million, which resulted in an impairment
loss of about $500,000. The undiscounted future cash flows are equal
to $1.7 million.
Problem 13-34
The following are typical questions that might appear on an internal
control questionnaire relating to plant and equipment:
Are subsidiary ledgers for plant and equipment regularly reconciled
with general ledger controlling accounts?
State the purpose of each of the above controls.
Describe the manner in which each of the above procedures might be
tested.
Assuming that the operating effectiveness of each of the above
procedures is found to be inadequate, describe how the auditors might
alter their substantive procedures to compensate for the increased
level of risks of material misstatements.