The following are independent audit situations for which you are to recommend an appropriate audit report. For each situation, identify the appropriate audit report and briefly explain the rationale for selecting the report. Audit Situations: An audit client has a significant amount of loans receivable outstanding (40% of assets), but has an inadequate internal control system over the loans. The auditor cannot locate sufficient information to prepare an aging of the loans or to identify the collateral for about 75% of the loans, even though the client states that all loans are collateralized. The auditor sent out confirmations to verify the existence of the receivables, but only 10 of the 50 sent out were returned. The auditor attempts to verify the other loans by looking at subsequent payments, but only 8 had remitted payments during the month of January, and the auditor wants to wrap up the audit by February 15. The auditor estimates that if only 10 of the 50 loans were correctly recorded, loans would need to be written down by 7.5 million. During the audit of a large manufacturing company, the auditor did not observe all locations of physical inventory. The auditor chose a random number of sites to visit, and the company’s internal auditors visited the other sites. The auditor has confidence in the competence and objectivity of the internal auditors. The auditor personally observed only about 20% of the total inventory, but neither the auditor nor the internal auditors noted any exceptions in the inventory process. During the past year, Network Computer, Inc. devoted its entire research and development efforts to develop and market an enhanced version of its state-of-the-art telecommunications system. The costs, which were significant, were all capitalized as research and development costs. The company plans to amortize these capitalized costs over the life of the new product. The auditor has concluded that the research to date will likely result in a marketable product. A full description of the research and development, and the costs, is included in the note. The note also describes that basic research costs are expense as incurred, and the auditor has verified the accuracy of the statement.

The following are independent audit situations for which you are to recommend an appropriate audit report. For each situation, identify the appropriate audit report and briefly explain the rationale for selecting the report. Audit Situations: An audit client has a significant amount of loans receivable outstanding (40% of assets), but has an inadequate internal control system over the loans. The auditor cannot locate sufficient information to prepare an aging of the loans or to identify the collateral for about 75% of the loans, even though the client states that all loans are collateralized. The auditor sent out confirmations to verify the existence of the receivables, but only 10 of the 50 sent out were returned. The auditor attempts to verify the other loans by looking at subsequent payments, but only 8 had remitted payments during the month of January, and the auditor wants to wrap up the audit by February 15. The auditor estimates that if only 10 of the 50 loans were correctly recorded, loans would need to be written down by 7.5 million. During the audit of a large manufacturing company, the auditor did not observe all locations of physical inventory. The auditor chose a random number of sites to visit, and the company’s internal auditors visited the other sites. The auditor has confidence in the competence and objectivity of the internal auditors. The auditor personally observed only about 20% of the total inventory, but neither the auditor nor the internal auditors noted any exceptions in the inventory process. During the past year, Network Computer, Inc. devoted its entire research and development efforts to develop and market an enhanced version of its state-of-the-art telecommunications system. The costs, which were significant, were all capitalized as research and development costs. The company plans to amortize these capitalized costs over the life of the new product. The auditor has concluded that the research to date will likely result in a marketable product. A full description of the research and development, and the costs, is included in the note. The note also describes that basic research costs are expense as incurred, and the auditor has verified the accuracy of the statement.

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter10: Auditing Cash, Marketable Securities, And Complex Financial Instruments

Section: Chapter Questions

Problem 22RQSC

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Audit Situations:

An audit client has a significant amount of loans receivable outstanding (40% of assets), but has an inadequate internal control system over the loans. The auditor cannot locate sufficient information to prepare an aging of the loans or to identify the collateral for about 75% of the loans, even though the client states that all loans are collateralized. The auditor sent out confirmations to verify the existence of the receivables, but only 10 of the 50 sent out were returned. The auditor attempts to verify the other loans by looking at subsequent payments, but only 8 had remitted payments during the month of January, and the auditor wants to wrap up the audit by February 15. The auditor estimates that if only 10 of the 50 loans were correctly recorded, loans would need to be written down by 7.5 million.
During the audit of a large manufacturing company, the auditor did not observe all locations of physical inventory. The auditor chose a random number of sites to visit, and the company’s internal auditors visited the other sites. The auditor has confidence in the competence and objectivity of the internal auditors. The auditor personally observed only about 20% of the total inventory, but neither the auditor nor the internal auditors noted any exceptions in the inventory process.
During the past year, Network Computer, Inc. devoted its entire research and development efforts to develop and market an enhanced version of its state-of-the-art telecommunications system. The costs, which were significant, were all capitalized as research and development costs. The company plans to amortize these capitalized costs over the life of the new product. The auditor has concluded that the research to date will likely result in a marketable product. A full description of the research and development, and the costs, is included in the note. The note also describes that basic research costs are expense as incurred, and the auditor has verified the accuracy of the statement.

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