Problem 5-26, page 126

1. Problem 5-26, page 126 The following are two balance-related audit objectives in the audit of accounts payable. • All accounts payable included on the list represent amounts due to valid vendors. • There are no unrecorded accounts payable. The list referred to in the objectives is the aged accounts payable balance produced using the supplier master file. The total of the list equals the accounts payable balance on the general ledger. REQUIRED • Explain the difference between theses two balance-related audit objectives • For the audit of accounts payable, which of these two balance-related audit objectives would usually be more important? Explain.

2. Solution to Problem 5-26 • The first objective (existence) concerns the possibility that there are included on the list of accounts payable, amounts that should not be included because there is no payable to such vendor. The objective concerns only the overstatement of accounts payable. The second objective (completeness) concerns the possibility of accounts payable that should be included but that have not been included. This objective concerns only the possibility of understated accounts payable. • For accounts payable, the auditor is usually most concerned about understatements. An understatement of accounts payable is considered, by most auditors, more important than overstatements because of potential legal liability. The completeness objective is therefore normally more important in the audit of accounts payable. The auditor is also concerned about overstatements of accounts payable. The existence objective is also therefore important in accounts payable, but usually less so than the completeness objective.

3. Problem 5-27, page 126 The following (1 through 17) are the balance-related, transaction-related, and presentation- and disclosure-related audit objectives.

4. Problem 5-27, page 126 - continued REQUIRED Identify the audit object (1 through 17) of each of the following audit procedures for the audit of sales accounts receivable., and cash receipts for the current fiscal year. • Examine a sample of duplicate sales invoices to determine whether each one has a shipping document attached. • Add all customer balances in the accounts receivable trial balance and agree the account to the general ledger. • For a sample of sales transactions selected from the sales journal, verify that the amount of the transaction has been recorded in the correct customer account in the accounts receivable total field of the customer master file. • Inquire of the client whether any accounts receivable balances have been pledged as collateral on long-term debt and determine whether all required information is included in the footnote description for long-term debt. • For a sample of shipping documents selected from shipping records, trace each shipping document to a transaction recorded in the sales journal. • Discus with credit department personnel the likelihood of collection of all accounts with a balance greater then $100,000 and greater than 90 days old as of the year-end. • Examine sales invoices for the last five sales transactions recorded in the sales journal in the current year and examine shipping documents to determine that they are recorded in the correct period. • For a sample of customer accounts receivable balances at the year-end, examine subsequent cash receipts in the following month to determine whether the customer paid the balance due. • Determine whether all risks related to accounts receivable are adequately disclosed. • Foot the sales journal for the month of July (hallway through the fiscal year and trace posting to the general ledger. • Send letters to a sample of accounts receivable customers to verify whether they have an outstanding balance at the fiscal year-end. • Determine whether long-term receivables and related party receivables are reported separately in the financial statements.

5. Solution to Problem 5-27