Solution manual aswers auditing theory by cabrera chapter 14 ans

CHAPTER 14
AUDIT WORKING PAPERS
I.

Review Questions
1.

Refer to page 522, 3rd paragraph of the textbook.

2.

The major function of audit workpapers is to provide evidence of conformance
with generally accepted auditing standards. As a body, the workpapers are the
principal record of the evidence which the auditor has gathered and evaluated in
support of the audit opinion.

3.

Refer to pages 524 to 525 of the textbook.

4.

Refer to page 524, 2nd paragraph of the textbook.

5.

With electronic spreadsheets, audit adjustments need only be entered once – in
the supporting schedule. The adjustments are then automatically reflected in
lead schedules and in the working trial balance through equations entered in
appropriate cells. The cell equations “link” the workpapers such that an
adjustment need be entered only once in order for all affected workpapers to be

automatically updated.

6.

Permanent files contain information that is of a continuing interest to the auditor.
A permanent file typically contains (1) copies or abstracts of significant
company documents and (2) auditor- or client-prepared information on accounts.
Current-year files contain working papers prepared to support the assertions
embodied in the financial statements.

7.

Client personnel may prepare working papers to reduce the time spent by the
auditor on the engagement. When client personnel prepare working papers, the
auditor should give the client personnel detailed instructions. Working papers
prepared by the client should be identified as PBC (prepared by client) and
should involve no decision making. The auditor should test completed working
papers against underlying documentation.

8.

The lead schedule, especially on larger engagements, is designed to bridge the
gap between the working trial balance and the general ledger by listing all
general ledger accounts that are reported as one account in the financial
statements. Supporting schedules is a term for working papers that support the
amounts presented in the financial statements by providing support for a detailed


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9.

Solutions Manual - Assurance Principles, Professional Ethics…
account on a lead schedule. Supporting schedules represent the bulk of working
papers.
In general, a properly prepared working paper should meet firm policy, have a
proper heading, clearly indicate the work performed, clearly meet the audit
objective for which it was designed, and clearly state the auditors’ conclusion.

10. The prior year’s audit working papers are a useful guide to staff assistants
because the audit procedures performed in the prior year usually are similar to
those of the current year. By referring to last year’s working papers, the
assistant can see how the procedures were documented and is given a possible
format for organizing the current year’s working paper. In addition, exceptions
noted in last year’s working papers may alert the assistant to possible problems
in the current year. Finally, the prior year’s working papers contain information
substantiating the beginning balances for the current year.
11. The more common types of audit working papers and their principal purposes
may be summarized as follows:
(1) Audit administrative working papers – aid the auditors in planning and
administration of the audit, and include such items as the audit programs,
questionnaires and flowcharts, decision aids, time budgets, and
engagement letters.
(2) Working trial balance – represents the backbone of the auditors’ working
papers, for it contains the balances of the ledger accounts, the adjustments
and reclassifications deemed necessary by the auditors, and the adjusted
amounts that appear in the financial statements. It also contains references
to all supporting schedules and analyses, thus serving to control the other
types of working papers.
(3) Lead schedules – working papers that serve to combine similar general
ledger accounts, the total of which appears on the working trial balance.

(4) Adjusting journal entries – material misstatements in the accounts
disclosed by the auditors’ investigation are corrected by means of adjusting
journal entries. These appear on the auditors’ working trial balance, and in
addition, a list of such entries is turned over to the client at the conclusion
of the audit with the request that they be approved and entered in the
accounting records.
(5) Reclassification entries – entries necessary to properly reflect financial
results but not representing misstatements in the financial records of the
client.
(6) Supporting schedules – although the term schedule is at times applied to
various types of working papers, the preferred usage is to designate a
listing of the details or elements comprising the balance in an account at a


Audit Working Papers

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specified date. Preparation of such a listing is often an essential step in
determining the nature of an account.
(7) Analyses – consist of working papers showing the changes which occurred
in an account during a given period. By analyzing an account, the auditors
determine its nature and contents.
(8) Reconciliations – working papers that prove the relationship between two
amounts obtained from different sources.
(9) Computational working papers – used to verify such data as interest
expense, income taxes, and earnings per share.
(10) Corroborating documents – working papers that provide support for
specific representations made in the financial statements, such as letters of
representations from clients, lawyers’ letters, audit confirmations, and

copies of the contracts.
12. Audit working papers are the property of the auditor; however, they must not
violate the confidential relationship between client and auditors by making the
papers available to outsiders or even to the client’s employees without specific
permission from the client.
13. Refer to page 535, 1st and 2nd paragraphs of the textbook.
14. Refer to page 535, 3rd paragraph of the textbook.
II. Multiple Choice Questions
1.
2.
3.
4.
5.
6.
7.
8.

d
d
c
a
d
c
c
d

9.
10.
11.
12.

13.
14.
15.
16.

b
b
a
d
d
b
d
d

17.
18.
19.
20.
21.
22.
23.
24.

d
c
c
d
b
d
a

b

25.
26.
27.
28.
29.
30.
31.
32.

b
d
d
c
d
c
d
d

III. Comprehensive Cases
Case 1. a.

(1) The functions of audit working papers are to aid the CPA in the conduct
of his work and to provide support for his opinion and his compliance
with auditing standards.
(2) Working papers are the CPA’s records of the procedures performed, and
conclusions reached in the audit.

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Solutions Manual - Assurance Principles, Professional Ethics…
b.

The factors that affect the CPA’s judgment of the type and content of the
working papers for a particular engagement include:
1. The nature of the auditor’s report.
2. The nature of the client’s business.
3. The nature of the financial statements, schedules or other information
upon which the CPA is reporting and the materiality of the items
included therein.
4. The nature and condition of the client’s records and internal controls.
5. The needs for supervision and review of work performed by assistants.

c.

Evidence which should be included in audit working papers to support a
CPA’s compliance with generally accepted auditing standard includes:
1.
2.
3.
4.
5.

d.

Evidence that the financial statements or other information upon which
the auditor is reporting were in agreement or reconciled with the
client’s records.

Evidence that the client’s system of internal control was reviewed and
evaluated to determine the nature, timing, and extent of audit
procedures.
Evidence of the auditing procedures performed in obtaining evidential
matter for evaluation
Evidence of how exceptions and unusual matters disclosed by auditing
procedures were resolved or treated.
Evidence of the auditor’s conclusions on significant aspects of the
engagement with appropriate commentaries.

The CPA should perform an adequate examination at minimum cost and
effort and the preceding year’s programs will aid in doing this. The
preceding year’s audit programs ordinarily contain information useful in the
current examination (such as descriptions of the unique features of a client’s
operations or records, a formalized sequence of audit steps in logical order,
and approximate time requirements to perform various phases of the work).
The auditor should decide whether to use the old program or prepare a new
one.

Case 2. In general, the working paper is not set up in a logical manner to show what the
auditor wants to accomplish. The primary objective of the working paper is to
verify the ending balance in notes receivable and interest receivable. A
secondary objective is to account for all interest income, cash received and cash
disbursed for new notes, collateral as security, and other information about the
notes for disclosure purposes.


Audit Working Papers

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Specific deficiencies of the working paper presented in the question are:

1.

2.
3.
4.

a.
DEFICIENCY
Tick mark explanation “tested”
does not indicate specifically
what was done.

Explanation of some tick marks is
not given.
Classification of long-term
portion indicates no verification.
Paid-to-date row is confusing.

5.

Due dates are missing for C.C.
Co., P. Pablo and Tetra Co.

c.

SPREADSHEET SOLUTION

b.
IMPROVEMENT
Should have separate tick marks
meaning:
 Agreed to confirmation
 Footed
 Traced to cash receipts journal
 Recomputed, etc.
Explain all tick marks on the same
page of the working paper.
Recompute portions of notes which are
long-term.
Column should say “date paid to” and
this should be confirmed.
Include due dates on working paper
for these notes.

The purpose of using an Excel spreadsheet in this problem is to give the
student some experience in preparing a simple working paper using an
Excel spreadsheet. It should be explained to students that this type of
working paper may or may not be prepared in actual practice, and that often
templates are used to prepare more time-consuming working papers. Also,
whether or not tick marks are computerized is a matter to be decided. The
advantage is that the completed audit work can then be stored and reviewed
electronically, a direction many firms are going. On the other hand, it may
be more efficient to indicate audit work manually as it is performed, and a
contrast in the color of the tick marks through use of a colored pencil may
be desirable.
The formulas used are self-evident, so no listing is provided. Two items
deserve comment:

1.

An advantage of using a spreadsheet program for these types of
analyses is that footing and crossfooting are done automatically.

2.

When auditor tick marks are done by computer, a problem arises as
to how to place them on the worksheet. One could use narrow


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Solutions Manual - Assurance Principles, Professional Ethics…
columns inserted between the scheduled client data, or, as done
here, the tick marks are placed in blank rows beneath the related
data.


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Solutions Manual - Principles of Auditing and Other Assurance Services

FOURTH PACIFIC COMPANY
A/C # 110 – NOTE RECEIVABLE
12/31/03

Schedule
Prepared by
Approved by

Account # 110 – Notes Receivable

Maker
Alba Co.

c*

Barrios, Inc.

c*

C.C. Co.

c*

P. Pablo

c*

Martin Cruz

c*

Tetra Co.

c*

Date
Interest
Made /

Rate /
Due
Date Paid to
6/15/02 /
5% /
6/15/04
None pd.
11/21/02 /
5% /
Demand
12/31/03
11/1/02 /
5% /
4/1/08
12/31/03
(P200/Mo.)
7/26/03 /
5% /
8/1/05
9/30/03
(P1000/Mo.)
5/12/02 /
5% /
Demand
12/31/03
9/3/03 /
6% /
2/1/06
11/30/03
(P400/Mo.)

Balance
12/31/02
4000
tp
3591
tp
12780
tp

Value of
Security
None

3591

None

13180

24000

25000

50000

0

25000
r

5000
r

20000

2100

None

0

10000

12000
r

2100
r
1600
r

0

12000

2100
tp
0
22471

37000

f
tp

f

0
0

Payments
1000
r
3591
r
2400
r

Date
1/21/04
2/15/04

Interest

Face
Amount
5000

Additions

0

N-1
JD
PP

Balance
12/31/03
3000

Receivable
12/31/02
104
tp
0
tp
24
tp

Receivable
12/31/03
279

Earned
175
<
102
<
577
<

Received
0
102
r
601
r

0

0

468
<

200
r

268

105
<
162
<

105
r
108
r

0

10400

0
tp
0

15691

43780

128

1589

1116

601

f

f, cf
wtb

f
tb

f
op

f

f, cf
wtb

0
10380

Legend of Auditor’s Tick Marks
f
Footed
cf
Crossfooted
tp
Traced to prior year working papers
wtb
Traced total to working trial balance
op
Traced total to operations working paper – OP6
*
Examined note for payee, made and due dates, interest rate, face amount, and value of
security. No exceptions noted.
c
Received confirmation, including date interest paid to, interest rate, interest paid during 2003,
note balance, and security. No exceptions noted.
r
Traced to cash receipts journal
<
Recomputed for the year

0

54


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Solutions Manual - Principles of Auditing and Other Assurance