Reference no: EM133198202

1. Assume you are an auditor of XXX Corporation. XXX Corporation is not doing well, and management is under tremendous pressure to show a profit. You are concerned that XXX may be creating phony sales orders and shipping goods from its main manufacturing facilities to other XXX company warehouse locations and recording the shipments as sales revenue. 

Question:  Identify three audit steps you would take to ensure that these fraudulent transactions are not being recorded as sales.

2. ZZZ Company is a fast-growing highly profitable telecommunications company. The profit margin of ZZZ is 20 percent higher than its competitors, though the specific reason for the higher profitability is not known. Some are concerned that ZZZ may be capitalizing expense items to improve the bottom line. 

Question: 

A. Describe the guidelines for the capitalization of spending. 

B. Identify three substantive audit tests that would inform the auditor of inappropriate capitalization of expenses by a client.