Reference no: EM132504353

Task 1

You have been assigned to the audit of Processing Solutions, Inc., a privately held corporation that develops and sells computer systems. The systems are sold under one- to five-year contracts that provide for a fixed price for licensing, delivery, and setup of the systems and maintenance and technical support for the life of the contract. Your review Page of the working papers reveals that premature revenue recognition is a risk that must be addressed in the audit.

Question 1. Summarize the guidance of the FASB regarding recognition of revenue on contracts.

Question 2. Describe two techniques that management of Processing Solutions might use to overstate revenue.

Question 3. For the two techniques identified in requirement (b), describe an auditing procedure that might be employed by the auditors to detect the overstatement of revenue.

Task 2

Hale Nelson, CPA, is engaged to audit the financial statements of Hollis Manufacturing, Inc. Hollis engages in very complex sales agreements that create issues with respect to revenue recognition. As a result, Nelson has identified revenue recognition as an audit area of significant risk that requires special audit consideration.

Question 1. Describe the implications of Nelson's identification of revenue recognition as an area of significant risk.

Question 2. Describe how Nelson might decide to react to the significant risk related to revenue recognition.

Task 3

An assistant on the Carter Company audit has been working in the revenue cycle and has compiled a list of possible errors and fraud that may result in the misstatement of Carter Company's financial statements and a corresponding list of controls that, if properly designed and implemented, could assist in preventing or detecting the errors and fraud.

For each possible error and fraud numbered a through o, select one internal control from the following answer list that, if properly designed and implemented, most likely could assist management in preventing or detecting the errors and fraud. Each response in the list of controls may be selected once, more than once, or not at all.

Task 4
Nolan Manufacturing Company retains you on April 1 to perform an audit for the fiscal year ending June 30. During the month of May, you make extensive studies of internal control over inventories.

All goods purchased pass through a receiving department under the direction of the chief purchasing agent. The duties of the receiving department are to unpack, count, and inspect the goods. The quantity received is compared with the quantity shown on the receiving department's copy of the purchase order. If there is no discrepancy, the purchase order is stamped "OK-Receiving Dept." and forwarded to the accounts payable section of the accounting department. Any discrepancies in quantity or variations from specifications are called to the attention of the buyer by returning the purchase order to him with an explanation of the circumstances. No records are maintained in the receiving department, and no reports originate there.

As soon as goods have been inspected and counted in the receiving department, they are sent to the factory production area and stored alongside the machines in which they are to be Page 562processed. Finished goods are moved from the assembly line to a storeroom in the custody of a stock clerk, who maintains a perpetual inventory record in terms of physical units but not in dollars.

What weaknesses, if any, do you see in the internal control over inventories?

Task 5

For each of the independent situations described below select the appropriate inherent risk factor described and the effect of the inherent risk factor on the company's net income using the following:

Attachment:- Exercise.rar