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Analytical Procedures Homework 1
Due Week 8
This assignment is due on Monday of Week 8 at 8PM. Your answers should be completed in a
separate Word file. Make sure each of your answers is clearly labeled. It should be submitted via
the Assignments section in the Week 8 folder, and should be saved using the following naming
format: Wk8FirstName_LastName_AP2.
Short Problems:
1. Below are listed possible misstatements that could occur in the sales and collections cycle.
Provide the analytical procedure that would be most useful in detecting the possible
misstatement.
a. Overstatement of sales and accounts receivable
b. Uncollectible accounts receivable that have not been provided for (i.e., the allowance for
doubtful accounts and bad debt expense are understated)
c. Overstatement of sales returns and allowances 2. List 3 different analytical procedures that could be used in the audit of prepaid insurance and
insurance expense. Write each as an audit procedure that could be performed by an audit
staff. Document over which audit objective(s) each test will provide you comfort.
3. Given the following information about your audit client, perform analytical procedures and
comment on your findings. Specifically document what you did (calculations and
comparisons) and your conclusion on what audit objective(s) might be at risk for this
account. Inventory
Cost of Sales 2010
$20,000
$240,000 2011
$32,000
$320,000 Industry Average
$25,000
$400,000 Long Problem:
You are auditing payroll and salaries for Morehead Technologies for the year ended December
31, 2011. Below are the payroll related balances from the client’s trial balance along with
comparative audited information for the prior year: Sales1
Executive Salaries
Factory Hourly Payroll
Factory Supervisors’ Salaries
Office Salaries
Sales Commissions Audited Balance
12/31/2010
$51,316,234
546,940
10,038,877
785,825
1,990,296
2,018,149 Unaudited Balance
12/31/2011
$57,474,182
615,970
11,476,319
810,588
2,055,302
2,367,962 You have obtained the following information to help you perform preliminary analytical
procedures for the payroll account balances.
1. There has been a significant increase in the demand for Morehead’s products. The
increase in sales was due to both an increase in the average selling price of 4 percent and
an increase in units sold that resulted from the increased demand and an increased
marketing effort.
2. Even though sales volume increased, there was no addition of executives, factory
supervisors, or office personnel.
3. All employees including executives, but excluding commission salespeople, received a 3
percent salary increase starting January 1, 2011. Commission salespeople receive their
increased compensation through the increase in sales.
4. There was an increase in the number of factory hourly employees, which was
accomplished by recalling employees that had been laid off. They receive the same wage
rate as existing employees. Morehead does not permit overtime.
5. Commission salespeople receive a 5 percent commission on all sales on which a
commission is given. Approximately 75 percent of sales earn sales commission. The
other 25 percent are “call-ins” for which no commission is given. Commissions are paid
in the month following the month they are earned.
Requirements
a. Use the final balances for the prior year and the information in items 1 through 5 to
develop an expected value for each of the payroll accounts (not sales). Provide details of
your calculations and explanations of your assumptions.
b. Calculate the difference between your expectation and the client’s recorded amount as a
percentage using the formula: (expected-recorded)/expected. 1 The sales numbers are provided to help you with your expectations of salaries and payroll. You can assume that the
current year unaudited balance is reasonably accurate because it has already been audited by other members of your
audit team.

 


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