Go to www .cengage.com/accounting/rittenberg for the Ford and Toyota materials. Source and
Reference
Ford 10-K, Toyota 20-F
----------·-----~--------------·-·-··----· Ford 10-K, Toyota 20-F Chapter 8 Ford!
Toyota Appendix Materials Ford 10-K Question 1. What are the key acquisition and inventory cycle accounts for Ford? What
are the critical accounting policies for these accounts?
------·------- .. --------·----·------·-·-·- -.---··-------· .. ·-··------- - -------·-· -·----------·------------·-2. Compare Ford and Toyota's footnotes on inventory. Calculate the
percentage of finished products that each company holds in inventory.
What inferences do you draw from this analysis? How could this ratio be
used to understand slow-moving inventory, e.g., by geographic region or
product line? ••·M __ , ___, 3a. Use the financial ratios provided in an earlier chapter appendix for Ford and
Toyota. What are the ratios most relevant to the acquisition and inventory
cycle?
3b. Think creatively, and develop additional ratios or comparisons that would
help you understand this transaction cycle for these automotive companies.
In addressing this question, it will be helpful to think about the general ratios
that you calculated in Chapter 8, but to then tailor them to this unique
industry and business setting.
4. Ford lists a variety of risk factors associated with its business. Review those
and identify which relate most to the acquisition and inventory cycle. What
evidence might the auditor gather to understand how those risks may affect
the financial statement line items associated with the acquisition and
inventory cycle?
5. As an auditor, what is your obligation regarding the statements that
management makes in its management discussion and analysis? 657 Module VI: Sales and Purchases
Cutoff Tests
Along with Richard Derick and the rest of the audit team, you observed
Biltrite's December 31, 2009, physical inventory. Derick is satisfied with the
inventory-taking procedures and has considerable confidence in the reliability
of the ending inventory quantities. He is concerned, however, with the methods used to value the ending inventories (especially the disposition of unfavorable budget variances) and with possible misstatements relating to sales and
purchases cutoff. With regard to cutoff, Derick is particularly interested in learning why customers could not confirm details of sales transactions recorded by
Biltrite on December 31, 2009. In response to the confirmation and cutoff concerns, he has asked you to examine the appropriate books of original entry and
underlying documentation for a few days before and after the balance sheet
date. Specifically, you are interested in the following:
1. Were purchases and sales recorded in the proper accounting period?
2. Were purchases recorded at year end included in the physical inventory?
3. Were all materials and purchased parts included in inventory recorded as
purchases?
4. Were the finished goods inventory accounts properly relieved for all
recorded sales?
You download Biltrite's December voucher register and sales summary. These
are partially reproduced in Exhibits BR. 7 and BR.8 referred to in Module II.
Using these as a focal point, you requested that the client provide you with the
documentation supporting certain of the recorded transactions. You now are
prepared to record any necessary audit adjustments and reclassifications. Requirements
1. 2. Using the spreadsheet program and downloaded data, retrieve the file
labeled "Cutoff" Study WP 6.4, "Inventory Cutoff," and compare it
with the voucher register and sales summary portions reproduced in
Exhibits BR.13 and BR.14 in Module II. Comment on any cutoff
misstatements that you detect and determine their effect on net income.
Do the misstatements appear to be intentional or unintentional? Explain.
Draft any audit adjustments suggested by the analysis performed in
requirement (1). (Remember that Biltrite maintains perpetual inventory
records and adjusts its perpetual inventory to the physical inventory through
the appropriate "Cost of Goods Sold" accounts.)
1. 658 Print the completed document with the proposed cutoff audit
adjustments. Module VII: Search fo r Unrecorded Liabilities Module VII: Search for
Unrecorded Liabilities
An important part of every audit is examining vendors' invoices processed after
year end. Related to cutoff, as discussed in Module VI, this set of procedures has
the purpose of determining that no significant invoices pertaining to the year
being audited have been omitted from recorded liabilities. Derick has asked
that you examine the document prepared by Cheryl Lucas and entitled "Search
for Unrecorded Liabilities," and review it for necessary audit adjustments. Requirements
1. 2. 3. Using the spreadsheet program and downloaded data, retrieve the file
labeled "Liab." Comment on the adequacy of the procedures performed by
Lucas.
Assuming that you found the following additional unrecorded charges pertaining to 2009, draft Audit Adjustment 6 at the bottom of WP 15.1:
a. Sales commissions $366,900
b. Employer's payroll taxes: FICA $94,000, state unemployment $126,000
c. Printing and copying $27,800
d. Postage $22,300
e. Office supplies $18,6002
Print the document. 659 LEARNING OBJECTIVES
The overriding objective of this textbook is to build a foundation wi1h which to analyze current professional issues and adapt audit
approaches to business and economic complexities. Through studying this chapter, you will be able to:
Describe the accounts involved in the audit of cash
and other liquid assets and identify the relevant
financial statement assertions concerning cash
and other liquid assets.
2 Describe the approach an auditor would take to
perform an integrated audit of cash.
3 Describe why cash is an inherently risky asset and
identify risks related to cash. Consider issues
involving materiality, inherent risk, and various cash
management techniques.
4 Identify controls typically present in cash accounts
and articulate how auditors gain an understanding
of internal controls over cash.
1 5 Identify tests of controls over cash and related
accounts.
6 Describe the substantive audit procedures that
should be used to test cash.
7 Identify types of marketable securities and other
financial instruments, articulate the risks and
controls typically associated with these accounts,
and outline an audit approach for these accounts.
8 Apply the decision analysis and ethical decisionmaking frameworks to situations involving the audit
of cash and other liquid assets. CHAPTER OVERVIEW
Cash needs to be controlled for organizations to function effectively. In this chapter, we examine
approaches that organizations take to control their cash assets and apply those concepts to the
evaluation of control risk over the accounts and to audits of account balances. In terms of the
audit opinion formulation process, this chapter involves Phases Ill and IV, that is, obtaining evidence about controls and substantive evidence about assertions concerning the audit of cash
and other liquid assets. Even though a high volume of transactions flows through the cash
account, it usually has a relatively small balance. However, because of the vulnerability to error
or misappropriation, organizations and auditors usually emphasize the quality of controls over the
cash transactions.
We also consider issues concerning the
The increase in the variety of financial
risks to organizations. The auditor must
by the organization, the risks inherent in 660 audit of marketable securities and financial instruments.
instruments, particularly derivatives, presents additional
understand the nature of the financial instruments used
them, and the business purpose of the instruments.
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