Accounting Theory

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CHAPTER 8, QUESTIONS 31 & 32 (P.166)
31. What analytical procedures could be used to examine possible understatement (i.e. completeness; valuation and allocation) of allowance for doubtful debts (ADD)?  Compare ADD as % of Accounts Receivable (AR) with previous year/s, industry average  Compare write-off of uncollectible accounts as % of AR (AR) with previous year/s  Compare ageing of debtors (30, 60, 90 days overdue, etc.) as % of AR with previous year/s  Compare Accounts Receivable turnover days and ratio with previous year/s and industry average 32. What analytical procedures could be useful in identifying problems in the valuation of inventory?  Compare Gross Margin % with previous year/s, industry average  Compare Inventory turnover with previous year/s, industry average  Compare Current Ratio with Quick Ratio

CHAPTER 8, QUESTIONS 42 & 44 (P.167)
42. Outline the main factors that would determine your reliance on the internal audit department of MNO?      Organisational status Scope of function Technical competence Due professional care Relevant factors to consider re MNO: Chief IA has 11 years’ experience in profession (3 in IA), is former Big 4 manager, reports directly to board, developed audit manuals, making improvements to company’s internal controls, experience and qualification of IA assistants

44. Provide examples of where an auditor may use an independent expert. What procedures would be undertaken in order to rely on the expert’s work? • Valuation of complex financial instruments, land and buildings, plant and machinery, jewellery, works of art, antiques, intangible assets • Estimation of oil and gas reserves • Valuation of environmental liabilities, and site clean-up costs, etc. (Ref. ASA620.A1)  Evaluate expert’s competence, capabilities and objectivity  Obtain sufficient understanding of field of expertise to evaluate adequacy…...

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