AUD Study Group Q1 2017
December 25, 2016 at 8:10 am #1400012
@forem004 I hear ya! I'm going through this adaptive learning thing and I'm doing better than expected. I have to say it confuses me that I'm doing this well. I don't feel like I know this stuff at all.December 25, 2016 at 2:25 pm #1400064
Watch this video.. always helps me to get motivated to study! Especially after I failed FAR!
You are only one exam far to be CPA, and nothing you'll review is new to you so just keep up and remind yourself that you want to be done before the new exam launch. Good luck and I am sure I'll see you in (“Official “I Passed!!! I'm Done!!!” Thread”) version of Q1! You and I will post our celebration and experiences including how to get motivated to be a CPA! I truly can see that..December 26, 2016 at 9:50 pm #1400541
Every time I get burnt out and complain to my Mom, she questions if I'm studying too much. Is that even possible for this exam?December 27, 2016 at 11:53 am #1400697
I don't think I could study too much!!
Has anyone had an issue with the authoritative literature in the sims? I can't get anything to show on the right side.December 27, 2016 at 4:27 pm #1400922
Future_CPA?ParticipantDecember 28, 2016 at 1:30 am #1401122
Looking for some clarification on this situation I encountered in a SIM on ratio analysis and the adjustment's impact on Inventory Turnover and Return on Equity.
Failure to record a materials in transit accrual for late supplier/vendor invoices, and the necessary adjustment's impact on the ratios in question.
The explanation has the necessary adjsutment as:
DR – Inventory
CR – COGS
And the effect on ratios as
Inventory Turnover Ratio – Decrease
ROE – Increase
I'm in complete agreement with the Inventory Turnover Ratio, pretty straightforward there. As per the explanation:
Cost of goods sold = Beginning inventory + Purchases − Ending inventory. Cost of Goods Sold (COGS) remains constant because Purchases will increase in the exact same amount as Ending Inventory when the correction for the materials in transit accrual is entered. As the Average Inventory (denominator) increases, the ratio will decrease.
It's the proposed adjustment and stated impact on ROE that has me confused. Here is the explanation:
Net income increases because COGS decreases and the stockholders' equity does not change, so the ratio increases.
Now correct me if I'm wrong, but wouldn't said adjustment be:
DR – Inventory
CR – A/P
Why would COGS be credited? It has nothing to do with a procurement function, COGS is purely sales related. Notice in bold in the explanation above that it states that COGS remains the same, so why does it suddenly decrease in relation to the ROE ratio analysis? Am I missing something, or is there a problem with this SIM?
Thanks in advance, and apologies for such a lengthy post. I'm hoping this may ultimately help some other folks out as well.December 28, 2016 at 7:28 am #1401146December 28, 2016 at 11:53 am #1401284
Okay I found the simulation. It's #78 on NINJA.
The bold type is saying the entries to purchases and inventory will wash the each other in relation to COGS, not that the entries shouldn't be coded to that account.
The entry should be to COGS and it should reduce the balance, and that would increase net income. The A/P aspect of your question didn't occur to me because the question is only asking about the omission of inventory in this scenario and the adjustment to correct the balance.December 28, 2016 at 12:17 pm #1401312
Test Your Might (AUD) – MCQ Giveaway on FacebookDecember 28, 2016 at 6:26 pm #1401935
Hi, HRSexton. Thanks for your response.
I'm still not getting it. Could you post the sequence of entries?
I'm hung up on the fact that you're not hitting any liability account and thus not establishing any claim for the incoming inventory. By going straight to an expense account you're not recognizing the vendor's claim on the merchandise you haven't paid for yet.December 28, 2016 at 8:23 pm #1401999
I'm with HRSexton on not considering AP because it only mentions the inventory costs. Also, you're in complete agreement on Inv TO, so why do you want to change the AJE for ROE?December 28, 2016 at 9:35 pm #1402052
Starting my studies for AUD on 2/13 and I need a pass! This is my last exam and I only have two windows left. I REALLY don't want to have a retake in Q2 and not know if I lost FAR for 10 weeks while I wait for scores. Gotta nail this one, but motivation to study isn't coming easy…here's to a rough 6 weeks!December 28, 2016 at 10:07 pm #1402085
Beginning Inventory + Purchases – Ending Inventory = COGS
This is not the adjusting entry, it's only a way to calculate COGS from inventory balances and purchases when COGS is not given. It's only the relationship between transactions and account balances. Accordingly, there is no account titled “Purchases.”
What happens when you make a purchase? Typically:
DR – Asset Account (in this case Inventory)
CR – Either a liability or Cash
This is the same entry that should be made in an accrual of Inventory in Transit. The only difference is that you're moving the recognition of the inventory to an earlier date so it can be recognized in the proper period.
Let's take it to the extreme.
Consider that you just started business, and you had a great first year and sold everything, and ending inventory on 12/31 is $0. Therefore:
COGS = Purchases (because both Beginning Inventory and Ending Inventory are $0)
As per the example, this is how you have been recording your purchases all year:
DR – Inventory
CR – COGS
Now each time you make a sale, these are your entries:
DR – COGS
CR – Inventory
DR – AR
CR – Sales
And ultimately when you collect cash:
DR – Cash
CR – AR
Notice anything missing from this cash conversion cycle? That's right, no AP cycle. No liabilities nor cash outflows related to inventory were recognized for the entire year.
Now the implications. COGS will be $0 because each time you made a purchase, you reduced COGS by the corresponding amount (I suppose in this case it should be called “Donated Value of Goods Sold”). Your first purchase will put COGS into a negative balance, and your last sale will zero it out. You'll basically be running a negative balance in COGS all year, something that is definitely not conceptually sound.
Gross Profit is 100%, sweet! (Gross Profit = Net Sales – COGS) The only drawback is that tax bill is going to be a hefty one, but that won't matter because all your inventory was FREE! Now that's a profitable business model!
Don't take me wrong, I'm not trying to ridicule or make fun, but rather go through a proofing and test the reasoning. This is how I test assumptions whenever I have doubt; take it to the extreme and see if it still holds water (I learned this from the Controller at my company, hehe).
I still don't see how COGS would ever be associated with an accrual. If someone can set me straight on this one, I would truly appreciate it!!!
BTW, this is an interesting read on this subject (under the Goods in Transit header):
http://accounting-financial-tax.com/2009/09/inventory-ownership-a-detail-overview/December 28, 2016 at 10:54 pm #1402100
This is how I saw it based on the other two questions, this simulation is all about inventory and nothing else, really. Being that it said in transit was just the way of letting us know that the inventory was forgotten about because it wasn't on hand. Almost like the original entry would've been DR Inventory CR AP, then the count would've adjusted the inventory through COGS to tangible inventory, leaving out in transit goods but leaving the payable recorded. So…the adjustment would've been reversed once the mistake was discovered.December 29, 2016 at 12:15 am #1402128
Hi all –
I'm doing my final review – take my 4th (and hopefully last) try at Audit.
I'm going over my simulations that I've gotten wrong or scored poorly in. I can't seem to find an easy way to review some of these questions easily without jumping through major hoops to find when I originally answered the question.
So – if I scored 16% the 1st time on a question, I have to go through all questions in the session results and then do a “find”, hoping I find “16”. Well, this time around, I'm combing through 16 many many times (given the year – 2016) before I can even find the question. I could never find it….grrr!!!
I really want to review my weakest simulations, but Ninja doesn't seem to have an easy way to do this.
Thoughts?December 29, 2016 at 1:11 am #1402146
Have you tried looking at your progress report on the dashboard?December 29, 2016 at 1:04 pm #1402350
I am having difficulty with the ratio sections. Does anyone know of any good sources to really help me understand each ratio. I want to know how each ratio is affected based on different circumstances. Thanks!December 29, 2016 at 4:47 pm #1402551
I am taking Audit for the 4th time on 01/16/2017. I have had worst luck with Audit and this is my LAST window before two of my exams expire
If I don't get it this time, I lose everything. It will be busy season(TAX) and FAR will expires too. #PrayingtotheCPAGodsDecember 29, 2016 at 11:40 pm #1402800
rc5190ParticipantDecember 30, 2016 at 7:33 am #1402856
@rc5190 I don't think so. I'd like to know this as well because I plan on starting to study for FAR 1/10.December 30, 2016 at 3:29 pm #1403160
Help PLEASE! Ok I am working on inherent risk and control risk. I am not sure if you have a increase/decrease in one of the risk it will affect the other. I have just seen a simulation that had control risk and inherent risk and a situation and you had to say if it increased, decreased, or didn't effect this risk. Is it a situation by situation determination or can it safely be said if it affect one it will not affect the other?
Thanks in advance!
This one got me on my last attempt and I am not letting it get me again.December 30, 2016 at 5:31 pm #1403348
Audit Risk = Risk of Material Misstatement * Detection Risk
Audit Risk = Inherent Risk * Control Risk * Detection Risk
The overall purpose of an audit is to reduce audit risk to a low level, so you can look at it from a numbers perspective too. So if inherent risk is a high number or it is increasing, control risk has to be lower, so the overall probability is lower. Otherwise by just increasing inherent risk, the entire audit risk increases which defeats the purpose of an audit.
If you remember from math class 1,000,000 * .001 = a small number.
Hope that makes a little sense to you. Cheers!December 30, 2016 at 5:51 pm #1403355December 30, 2016 at 6:41 pm #1403367
What exactly do you mean by increasing inherent risk since thaTs out of our control?December 30, 2016 at 6:59 pm #1403373
I was just approaching it from a numbers perspective..the formula is too conceptual.
So if we are assuming our judgement of inherent risk increases( crappy internal control) then to maintain the same numerical value of audit risk, then control risk has to decrease
AR = IR*CR*DR
(.006) = .1*.3* .2 (numbers assumed)
if in our judgement we think inherent risk is higher (now .3 instead of .1,then to maintain the same .006 for audit risk then
.006 = .3*.1*.2 so now control risk has to decrease if we increase judgement for inherent risk.
Sorry for the long winded post, but does it make sense?
P.S. I am so sick of studying for Audit and I just started… I would rather take FAR againDecember 30, 2016 at 7:28 pm #1403381
Yes. I thought you were saying as “we” increase it. I loved studying this for the first bit. But then I had a Terrible exam and I'm sick of studying too!December 30, 2016 at 9:46 pm #1403423
does anyone know why “auditors first cause on Balance Sheet accounts, then associated Income Statement items”?
I remember from the ninja MCQ that there were questions saying that income statement items are more predictable, so its better to use those items first because of that reason. why should auditors first focus on balance sheet accounts?December 30, 2016 at 10:10 pm #1403427
Inherent Risk and Control Risk are independent in the way that you're asking. An increase in IR will not increase CR, nor vice versa. IR x CR is actually the Risk of Material Misstatement (RMM). Now and increase in IR or CR will increase both RMM and Audit Risk (AR).
Inherent risk is how likely a relevant assertion is to be materially misstated in the absence of internal controls.
Control risk is the risk that the Control Activities won't prevent or detect those misstatements.
Put another way, IR is the likelihood that a misstatement will occur, while CR is the likelihood that Internal Controls won't prevent or detect the misstatement when it does occur.
An increase in Inherent Risk would not affect Control Risk, but it is part of the consideration in determining the N,T,E of the audit procedures to obtain evidence that controls are working properly.
Remember, the auditor can only change Detection Risk in response to IR and CR. This is done through Substantive Procedures. Higher IR x CR (RMM), the more reliable, relevant evidence you need to reduce your Detection Risk. One trick to remember this is to rearrange the audit risk formula to isolate DR, like this:
AR/IRxCR = DR
This also helps to demonstrate the inverse relationship DR has to both IR and CR.
IR and CR are given, they exist as part of the client's business. AR is a judgment call by the auditing firm. It's how much risk they're willing to take that they will sign off on materially misstated financial statements. If the nature and environment of the client's business is risky, and their Internal Control is weak, the only thing the auditor can do in response is modify the Nature, Timing, and Extent of their audit procedures to reduce both DR and AR.
Hope this helps!December 31, 2016 at 12:15 pm #1403652December 31, 2016 at 5:56 pm #1403853
@ HRSexton – you can do it. I did it 5 questions at a time….little by little and then *poof* you're done!
What are you trending at now?
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