Q1. Choose three ratios from the liquidity, profitability, leverage, operating efficiency, and market measures category (figure 5.1, p. 213) in the "Understanding Financial Statements text. Discuss the ratios and what information can be provided by each.
Q2. In digging deeper auditors can use analytical procedures to help detect undisclosed bill-and-hold practices. Comparing current-year monthly sales with those of the preceding year might uncover significant fluctuations. For example, an unusual decrease might result from the reversal of fraudulent bill-and-hold transactions in a subsequent period. Also, inspecting documents supporting sales transactions might disclose bill-and-hold practices. For example, bills of lading might be signed and dated by company employees rather than a shipping company employee; shipments might be to warehouses rather than to the customer's regular address; and shipping information might be missing on invoices. Auditors should review special notations on invoices to see whether they reveal bill-and-hold transactions. Any though?
Q3. Confirmation of accounts receivable is a generally accepted auditing procedure. It is generally presumed that evidence obtained from third parties will provide the auditor with higher-quality audit evidence than is typically available from within the entity. Thus, there is a presumption that the auditor will request the confirmation of accounts receivable during an audit unless one of the following is true:
Accounts receivable are immaterial to the financial statements.
The use of confirmations would be ineffective.
The auditor's combined assessed level of inherent and control risk is low, and the assessed level, in conjunction with the evidence expected to be provided by analytical procedures or other substantive tests of details, is sufficient to reduce audit risk to an acceptably low level for the applicable financial statement assertions. In many situations, both confirmation of accounts receivable and other substantive tests of details are necessary to reduce audit risk to an acceptably low level for the applicable financial statement assertions.
An auditor who has not requested confirmations in the examination of accounts receivable should document how he or she overcame this presumption.