Maria Alvarez, a beginning accounting student, believes debit balances are favorable and credit balances are unfavorable. Upon what does Maria make this assumption? If you choose one over the other, what is your rationale?© BrainMass Inc. brainmass.com October 25, 2018, 6:41 am ad1c9bdddf
Maria makes this assumption because assets carry a normal debit balance. When an asset account is debited, such as cash, inventory, or accounts receivable, the account balance increases from the debit. When an account is credited, the balance decreases. For example, when a sale is made on credit, the asset account is ...
This solution provides a detailed explanation of why a beginning accounting student would believe that debit balances are favorable and credit balances are unfavorable. This discusses what this assumption would be based upon.
You are currently reviewing the audit file before planning the audit for the financial year ending 31 December 2010. As per the previous year auditor's findings, last year there were no major audit problems and inherent risks were assessed as relatively low and the control environment was considered satisfactory.
The description of the purchase system as updated in the last year's audit file reads as follows:
â?¢ Requisitioning: Department heads have authority to issue requisitions for- non capital purchases up to $5000. Stock requisitions are automatically issued by the computer when predetermined reorder levels are reached.
â?¢ Ordering: All requisitions pass through the purchasing office which checks the authority of the requisitioner identifies suitable suppliers and obtain quotes where necessary. The purchasing office then opens up an order against the supplier which is recorded in the supplier master file on the computer. The computer assigns an order number. A copy of the order is printed out and sent to the supplier.
Goods Inward: Deliveries are accepted only at the centralised goods inwards dock. The goods inward clerk accesses the order on the computer and checks the goods are in agreement with the order and ore in good condition. The goods inward clerk then updates the computer record order with receiving information.
Recording: Purchase invoices are numbered on receipt. The purchase ledger clerk checks the invoice arithmetically, verifies it against the computer record of the order ensuring the records confirm the receipt of the goods. These checks are evidenced on the invoice together with the account coding specified on the order. Receipt of the invoice also noted on the order record to prevent accidental acceptance of a duplicate invoice. Invoices are batched daily by the purchase ledger clerk for computer processing and a control sheet is prepared for each batch listing the total payable. The assistant accountant approves each invoice before passing the batch to the computer operator.
Payment: At the end of each month the computer prints out cheques for the balance owing to each supplier together with a remittance advice itemising the mark-up of the balance. A copy of the remittance advice is also printed out.
The assistant accountant reconciles the total payable with the daily batch control information, checks creditors with suppliers' statements , approves the copy of remittance advices for payment, has the cheques signed and passes them directly to the mail room.
You note that previous auditor completed an internal control evaluation checklist and used the results to justify assessing control risk as low for all purchase and payment transaction assertions associated with creditors.
A) What are the key purchase and payment transaction assertions associated with creditors would have been affected, if your client's control system had not been efficient (it is just an assumption about the current control system)? Why?
B) Outlining the control procedures operating in the purchasing system of Best Furniture Ltd
C) Commenting on the extent to which you can accept the previous auditor's assessment of the control environment
D) Describing further work you would plan to undertake to assess the inherent risk and the control environment during the current year's audit