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Chapter 5
Group 4 (Telolet) Accounting Class 4:
Amellia Samantha / 008201500036
Fajar Widya Kusumah / 008201400035
Ginsi Trianesti / 008201500117
Lyra Raisa / 008201500122
Muhammad Ihsan / 008201500124
Exercise 5-10
What are the purposes for using preliminary analytical procedures.
The purposes for using analytical procedures at the planning stage
of an audit are
(1) to enhance the auditor’s understanding of the client’s business
and the transactions and events that have occurred since the last
audit
(2) to identify areas that may represent risks relevant to the audit.
Exercise 5-12
Significant differences between the auditor’s expectation an the client’s book value
require explanation through quantification, corroboration, and evaluation.
Quantification involves determining whether the explanation or
error can explain the observed difference. This may require the
recalculation of the expectation after considering the additional
information. For example, a client may offer the explanation that the
inventory account increased by a certain percentage as compared
to the prior year due to a 12 percent increase in raw materials prices.
The auditor should compute the effects of the raw materials price
increase and determine the extent to which the price increase
explains (or does not explain) the increase in the inventory account.
Exercise 5-12
Corroboration: Auditors must corroborate explanations for
unexpected differences by obtaining sufficient appropriate audit
evidence linking the explanation to the difference and substantiating
that the information supporting the explanation is reliable. This
evidence should be of the same quality as the evidence obtained to
support tests of details. Common corroborating procedures include
examination of supporting evidence, inquiries of independent
persons, and evaluating evidence obtained from other auditing
procedures
Evaluation involves the effective use of professional scepticism,
combined with the desire to obtain sufficient appropriate audit
evidence, similar to other auditing procedures. The auditor should
evaluate the results of the substantive analytical procedures to
conclude whether the desired level of assurance has been
achieved. If the auditor obtains evidence that a misstatement exists
and can be sufficiently quantified, the auditor makes note of his or
her proposed adjustment to the client’s financial statements.
Exercise 5-13
Why does the ‘audit testing hierarchy’ begin with tests of controls
and substantive analytical procedures.
The Audit Testing Hierarchy starts with tests of controls and
substantive analytical procedures because they are generally both
more effective and more efficient than starting with tests of details
(i.e. substantive tests of transactions and substantive tests of account
balances and disclosures).
Exercise 5-15
List and discuss the four categories of financial ratios that are
presented in the chapter.
Short-term liquidity ratios are indicators of the entity’s ability to meet its
current obligations when they become due.
Activity ratios indicate how effectively the entity's assets are
managed.
Profitability ratios are indicators of the entity’s success or failure for a
given period.
Coverage ratios provide information on the long-term solvency of the
entity, including the ability of the entity to continue as a going
concern.
Exercise 5-22
Months Monthly Sales Historical Estimated
(in 000s) $ Return Rate Returns
July 73,300,000 0.004 293,200
August 82,800,000 0.006 496,800
September 93,500,000 0.01 935,000
October 110,200,000 0.015 1,653,000
November 158,200,000 0.025 3,955,000
December 202,500,000 0.032 6,480,000
13,813,000
Gross Margin % x 0.425
Auditor $€5,870,525
expectation
Exercise 5-22
B. We can establish a tolerable difference by applying a
percentage (50-75%) to the planning materiality set for
EarthWear of €1,788,000. This results in a tolerable
difference of €894,000.