MAC 830

ACL Hand-In Case Study

Important Note: Before you start this case study, you need to complete the ACL
Tutorial (refer to handout) that we started in class.
Assume that you are a senior in a Big 4 Firm and have been assigned the Accounts
Receivable section of the NSG audit. Specifically, you must refer to the information
attached and complete the requirements. (You will also need to download specific
NSG data files that can be found on Canvas. Note that you are working with
Confirmation File B.)
The case is due April 11th by 12pm in my office (4538) and must include the
requirements as listed on the attached sheet, as well as a cover page with the
names of your group members in alphabetical order. (Your group must have a
minimum of 2 members and a maximum of 4 members). When completed, your
submission should resemble an audit file.
Please note the following:
1. You will need to use the attached Audit Program and fill in the columns
appropriately (you can use individual group member initials under Done By
or select one set of initials to use for all procedures).
2. It is important that you carefully number and cross- reference all workpapers
including specific information contained within individual workpapers Note
that each workpaper must have a heading (name of client, workpaper and
client y/e date) as well as clear indications of any audit work performed or
conclusions reached. Please use a workpaper referencing protocol of B-1, B2, B-3 etc. If you have supporting workpapers for B-1, use B-1.1, B-1.2 etc.
3. Your submission will be graded in the following areas (this case accounts for
30% of total course grade):
a. Appropriate completion and documentation (with clear, hardcopy
evidence) of all required audit program procedures (Audit Program
steps 1-7). Please print out copies of the steps/results of the steps
completed using ACL.
b. The quality of your concluding memo which includes a clear and
concise summarization of your results/findings, conclusions reached
and identification of additional procedures (if any) required. (Step 8)
c. Overall presentation of your A/R audit file (including neatness,
appropriate page numbering, cross-referencing etc.)

ACL NSG Case Study Information

You are working on the A/R section of the audit of NSG Manufacturing Company
(NSG) for the year ended 12/31/2007. NSG manufactures and sells slippers, casual
and athletic shoes, and skis for children, women, and men. It has two
manufacturing plants, one in Knoxville, Tennessee and the other in China.
Following is information from the prior-year audit and the clients records for the
current year.
12/31/2007

12/31/2006

Sales

$321,557,486

$298,514,657

Sales Returns

6,004,359

4,658,119

Cost of Goods Sold

168,153,229

156,103,359

Net Income

10,514,967

9,761,464

Accounts Receivable

21,567,378

19,841,978

Inventory

14,959,739

13,567,115

Total Assets

144,817,500

132,508,016

Sales are shipped FOB shipping point with credit terms n/45. A member of your
audit team has verified that the last shipping number used in 2007 was 261,336
and that they were used in numerical order. Detection risk for A/R has been set at
moderate (resulting in a TD risk of 10%). No substantive analytical procedures are
planned for A/R. Tolerable misstatement is set at $500,000 for accounts
receivable. You will need to access/download the following NSG data files (located
on Canvas) in order to conduct your A/R tests:
NSG Unpaid (all unpaid invoices at 12/31/2007)
NSG Shipping (shipping number for each unpaid invoice)
NSG Credit (credit limit for each customer)
NSG Confirmations (results of the confirmation sample tested)
Required:
1. Use ACL to perform, or help perform, the procedures in the A/R audit program attached.
2. Submit your audit documents in the following order (properly number each document and crossreference as appropriate)
a. The audit program with your initials and w/p references filled in for each procedure
b. A detailed memo summarizing your audit findings (including the dollar impact of actual
or potential misstatements) and identifying any additional procedures the results indicate
should be performed. Be sure to provide cross-references to supporting w/ps /printouts.
c. Indexed ACL printouts that contain typed or handwritten narrative explanations of each
printout and its significance to assist the reviewer in understanding the printouts. (Print

out only the information of significance; not, for example, the complete unpaid invoice
file.)
NSG
Accounts Receivable Audit Program
12/31/2007
Procedure
1. Foot the file and agree to the G/L.
2. Check for duplicate invoice numbers in the
unpaid invoices and shipping files.
3. Age the unpaid invoices and identify any unpaid
invoices older than 45 days
.
4. Identify any customer balances that exceed the
credit limit or for which there is no credit limit.
5. Perform a sales cut-off test.
6. Determine the amount of any credit items in
the unpaid invoice file and consider the need to
re-classify those as liabilities.
7. Select a PPS sample of unpaid invoices. Use TM
of $500,000, expected misstatement of
$75,000. Assume you have set Audit risk at .
05, and assessed IR at 1.0 and CR at .5. (You
need to calculate RIA or sampling risk and show
these calculations in your w/ps.) Combine the
confirmation file with the sample file to
determine the results of the confirmation
process. Determine any misstatements and
project these as appropriate. Summarize any
concerns you have as a result of findings from
your sampling procedure (these can be included
in your overall memo)
8. a) Summarize the results of all of the above
procedures in a memo to file. Identify any
additional procedures that should be performed
as well as your overall conclusion regarding the
A/R balance.
b) Consideration of the Use of Analytical
Procedures to test A/R At the end of your
memo, briefly explain if it would, or would not,
be appropriate for an auditor to test NSGs A/R
balance using Analytical Procedures only.

Done By

W/P Ref

Describe how an auditor might use analytical

procedures in combination with their tests of
details (conducted above) to test the valuation
assertion for A/R. Reference the relevant
paragraph in AU-C 520 that permits this.

Step 7- Additional Calculations & Possible Explanations (attach this page to your
memo).
Complete the tables & questions below and include a copy in your audit file.
a) Initial Sample Size Calculated _______
Assume Expected Misstatement changes as follows, what is the impact on Sample
Size?
EE Changes From

EE Changes To

75,000
75,000
75,000

125,000
150,000
25,000

Sample Size Changes to

Explain why changes in expected misstatement caused the observed changes in

sample size.

b) Assume Allowable Risk of Incorrect Acceptance (TD Risk) changes as follows,

what is the impact on SS? Be sure to change expected misstatement back to
75,000.
TD Risk Changes from

TD Risk Changes to

10%
10%
10%

5%
1%
15%

Sample Size Changes to

Explain why changes in allowable risk of incorrect acceptance caused the observed
changes in sample size.

c) Assume Tolerable Misstatement changes as follows, what is the impact on SS?

Be sure to change TD risk back to 10%
TM Changes from
TM Changes to
Sample Size Changes to
500,000

250,000

500,000
500,000

100,000
750,000

Explain why changes in TM caused the observed changes in sample size.

A few tips on using ACL:

The first point is that ACL does not permit you to input commas as part of a
number. Students that miss this point could get frustrated.
Second, the case (part 7 additional exercises) asks you to perform multiple
calculations of sample size. If students input the four items used to determine
sample size and click OK, you will get your answer. However for the next
calculation, you will have to select Sampling, choose Sample Size from the
drop down menu, and input all four variables again. It is much more efficient if you
click on Calculate _i.e., not on OK_ to see the sample size. If you use this
approach, you only have to change the assumptions _i.e., variables_of interest and
click Calculate to obtain the updated sample size.