5-36 Comment on the reliability of each of the following examples of audit evidence. Arrange your answer in the form of a separate paragraph for each item. Explain fully the reasoning employed in judging the reliability of each item.a.Copies of client's sales invoices.Sales invoice s are a lower quality of reliability. The invoices are created within the organization and are not reviewed outside the company. Reliability comes within the organizations internal control.b.Auditors' independent computation of earnings per share.Auditors recalculate key financial figures from the financial statements. The computations are used to prove accuracy from the client’s computations of the sameitems. (Whittington, Ray, Pany, 148)c.Paid checks returned with a bank statement.Paid checks are endorsed and processed outside of the company and are highly reliable. Auditors are provided with electronic records from a third party and are used to confirm reconciled information. (Whittington, Ray, Pany, 2013) This is a highly reliable use of evidence.d.Response from customer of client addressed to auditors' office confirming amount owed to client at balance sheet date.Auditors are provided with a cut-off bank statement. This information is to confirmreconciliation has been complete and cleared in a timely manner. These documents are provided from an outside company directly to the auditor and are highly reliable. e.Representation letter signed by controller of client company stating that all liabilities of which she has knowledge are reflected in the company's accounts.The representation letter is obtained at the end of the audit. This information includes all financial data, documents provided, and oral representation is summarized made during the audit. These are not highly reliable and are only used for asserting original documents are correct. (Whittington, Ray, Pany, 2013)5-47
Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below: Product Additional Processing Costs Selling Price A $63,000 $20 per pound B $80,000 $13 per pound C $36,000 $32 per gallon Required: 1) Which product or products should be sold at the split-off point and which product or products should be processed further? Show computations. Answer: 1. A B C Selling price after further processing $20 $13 $32 Selling price at the split-off point 16 8 25 Incremental revenue per pound or gallon $ 4 $ 5 $ 7 Total quarterly output in pounds or gallons ×15,000 ×20,000 ×4,000 Total incremental revenue $60,000 $100,000 $28,000 Total incremental processing costs 63,000 80,000 36,000 Total incremental profit or loss $(3,000 ) $ 20,000 $(8,000 ) Therefore, only product B should be processed further. Chapter 14 Exercise 14-10 Net Present Value Analysis of Two Alternatives [L01] Perit Industries has $100,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are: Project A Project B Cost of equipment required $100,000 $0 Working capital investment requires $0 $100,000 Annual cash flow $21,000 $16,000 Salvage value of equipment in six years $8,000 $0 Life of the project 6 years 6 years The working capital needed for project B will be released at the end of six years for investment elsewhere. Perit Industries' discount rate is 14%.