ASSIGNMENT
MULTIPLE CHOICE QUESTIONS FROM CPA EXAMINATIONS
18-16 (OBJECTIVE 18-3) The following questions concern internal controls in the acquisition and payment cycle. Choose the best response.
a. An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to
(1) identify unusually large purchases that should be investigated further.
(2) verify that cash disbursements were for goods actually received.
(3) determine that purchases were properly recorded.
(4) test whether payments were for goods actually ordered.
b. Which of the following questions would be best to include in an internal control questionnaire concerning the completeness assertion for purchases?
(1) Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher?
(2) Are purchase requisitions prenumbered and independently matched with vendor invoices?
(3) Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions?
(4) Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?
c. Mailing disbursement checks and remittance advices should be controlled by the person who
(1) approves the vouchers for payment.
(2) matches the receiving reports, purchase orders, and vendors invoices.
(3) signs the checks last.
(4) maintains control over a mechanical check-signing machine.
18-17 (OBJECTIVES 18-6, 18-7) The following questions concern accumulating evidence in the acquisition and payment cycle. Choose the best response.
a. In auditing accounts payable, an auditor’s procedures most likely will focus primarily on management’s assertion of
(1) existence.
(2) realizable value.
(3) completeness.
(4) valuation and allocation.
b. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
(1) Examining unusual relationships between monthly accounts payable balances and recorded cash payments
(2) Reconciling vendors’ statements to the file of receiving reports to identify items received just prior to the balance sheet date
(3) Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period
(4) Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports
MULTIPLE CHOICE QUESTIONS FROM BECKER CPA EXAM REVIEW
18-18 (OBJECTIVES 18-3, 18-6, 18-7) The following questions concern internal controls and accumulating evidence in the acquisition and payment cycle. Choose the best answer.
a. While auditing a client’s purchase transactions, an auditor selects a sample of vouchers and then compares the dates on the vouchers to the dates on which the corresponding transactions were actually recorded in the client’s purchase journal. The audit procedure is most likely designed to test the
(1) occurrence assertion.
(2) completeness assertion.
(3) accuracy assertion.
(4) cutoff assertion.
b. In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?
(1) Completeness
(2) Occurrence
(3) Valuation and allocation
(4) Rights and obligations
c. Which of the following tests would an auditor be least likely to perform during an audit of accounts payable?
(1) Examine open vouchers, receiving reports, and vendor invoices shortly after the year end
(2) Trace a sample of vouchers to the purchase journal
(3) Send out accounts payable confirmations
(4) Select cash disbursements made shortly after year end and examine supporting documentation such as receiving reports and vendor invoices
DISCUSSION QUESTIONS AND PROBLEMS
18-19 (OBJECTIVE 18-3) Questions 1 through 9 are typically found in questionnaires used by auditors to obtain an understanding of internal control in the acquisition and payment cycle. In using the questionnaire for a client, a “yes” response to a question indicates a possible internal control, whereas a “no” indicates a potential deficiency.
1. Is the purchasing function performed by personnel who are independent of the receiving and shipping functions and the payables and disbursing functions?
2. Are all receiving reports prenumbered and the numerical sequence checked by a person independent of check preparation?
3. Are all vendors’ invoices routed directly to accounting from the mailroom?
4. Does the accounts payable clerk match the description and quantities of goods on the purchase order, receiving report, and vendor’s invoice?
5. Does a responsible employee review and approve the invoice account distribution before the transaction is entered in the computer?
6. Are all extensions, footings, discounts, and freight terms on vendors’ invoices checked for accuracy?
7. Are checks automatically posted in the cash disbursements journal as they are prepared?
8. Are all supporting documents properly cancelled at the time the checks are signed?
9. Is the custody of checks after signature and before mailing handled by an employee independent of all payable, disbursing, cash, and general ledger functions?
a. For each of the preceding questions, state the transaction-related audit objective(s) being fulfilled if the control is in effect.
b. For each internal control, list a test of control to test its effectiveness.
c. For each of the preceding questions, identify the nature of the potential financial misstatement(s) if the control is not in effect.
d. For each of the potential misstatements in part c., list a substantive audit procedure that can be used to determine whether a material misstatement exists.
18-20 (OBJECTIVE 18-3) The following audit procedures are included in the audit program for the audit of the financial statements of Golden State Overnight Express:
1. Select a sample of acquisitions from the acquisitions journal and perform the following:
a. Vouch the transaction to the voucher package that includes the matched receiving report, purchase order, and vendor invoice.
b. Verify that the purchase order was approved by an authorized purchasing agent.
c. Verify that the electronic initials of an accounts payable clerk are present in the file, indicating that the documents have been appropriately matched and that amounts on the vendor invoice were verified.
d. Recalculate the invoice amount and compare the dollar amounts per the invoice to the amount recorded in the acquisitions journal.
e. Examine whether the transaction was recorded to the correct vendor in the ac- counts payable master file.
f. Determine whether the transaction was recorded in the correct month, based on when the goods were received and the terms of the transaction.
g. Review the chart of accounts to determine if the transaction was charged to the appropriate general ledger account.
2. Discuss with the accounts payable personnel the nature of procedures they perform when matching acquisitions documentation and discuss the types of discrepancies they typically find and how those are resolved.
3. Scan the acquisitions journal for any unusual entries and investigate those noted.
4. Foot the acquisitions journal for two months of the year and determine that amounts were correctly recorded in the general ledger accounts.
5. Trace a sample of voucher packages to the acquisitions journal throughout the year to determine that the transaction is included in the acquisitions journal.
For each of the above procedures (consider 1.a. through 1.g. as separate procedures), perform the following:
a. Identify the type of audit evidence used for each procedure.
b. Identify the transaction-related audit objective(s) satisfied by each procedure.
c. Identify whether the procedure is a test of control or substantive test of transaction.
18-21 (OBJECTIVE 18-3) Donnen Designs, Inc., is a small manufacturer of women’s casual- wear jewelry, including bracelets, necklaces, earrings, and other moderately priced accessory items. Most of their products are made from silver, various low-cost stones, beads, and other decorative jewelry pieces. Donnen Designs is not involved in the manufacturing of high-end jewelry items such as those made of gold and semiprecious or precious stones.
Personnel responsible for purchasing raw material jewelry items for Donnen Designs would like to place orders directly with suppliers who offer their products for sale through websites. Most suppliers provide pictures of all jewelry components on their websites, along with pricing and other sales-term information. Customers who have valid business
Required
Required
In-class
Discussion
licenses are able to purchase the products at wholesale, rather than retail prices. Customers can place orders online and pay for those goods immediately by using a valid credit card.
Purchases made by credit card are shipped by the suppliers after the credit approval is received from the credit card agency, which usually occurs the same day. Customers can also place orders online with payment being made later by check. However, in that event, purchases are not shipped until the check is received and cashed by the supplier. Some of the suppliers allow a 30-day, full-payment refund policy, whereas other suppliers accept returns but only grant credit toward future purchases from that supplier.
a. Identify advantages for Donnen Designs if management allows purchasing personnel to order goods online through supplier websites.
b. Identify potential risks associated with Donnen Designs’ purchase of jewelry pieces through supplier websites.
c. Describe advantages of allowing purchasing agents to purchase products online using a Donnen Designs credit card.
d. Describe advantages of allowing purchasing agents to purchase products online with payment made only by check.
e. What internal controls can be implemented to ensure that
(1) purchasing agents do not use Donnen credit cards to purchase nonjewelry items for their own purposes, if Donnen allows purchasing agents to purchase jewelry using Donnen credit cards?
(2) purchasing agents do not order jewelry items from the suppliers and ship those items to addresses other than Donnen addresses?
(3) Donnen does not end up with unused credits with jewelry suppliers as a result of returning unacceptable jewelry items to suppliers that only grant credit toward future purchases?
18-22 (OBJECTIVES 18-3, 18-4) In testing cash disbursements for the Jay Klein Company, you obtained an understanding of internal control. The controls are reasonably good, and no unusual audit problems arose in previous years.
Although there are not many individuals in the accounting department, there is a reasonable separation of duties in the organization. There is a separate purchasing agent who is responsible for ordering goods and a separate receiving department that counts the goods when they are received and prepares receiving reports. There is a separation of duties between recording acquisitions and cash disbursements, and all information is recorded in the two journals independently. The controller reviews all supporting documents before signing the checks, and he immediately mails the checks to the vendors.
Check copies are used for subsequent recording.
All aspects of internal control seem satisfactory to you, and you perform minimum tests of 25 transactions as a means of assessing control risk. In your tests, you discover the following exceptions:
1. Three invoices were not initialed by the controller, but there were no dollar misstatements evident in the transactions.
2. One check amount in the cash disbursements journal was for $100 less than the amount stated on the vendor’s invoice.
3. One voided check was missing.
4. One invoice was paid twice. The second payment was supported by a duplicate copy of the invoice. Both copies of the invoice were approved for payment.
5. Two items in the acquisitions journal were misclassified.
6. Five receiving reports were recorded in the acquisitions journal at least two weeks later than their date on the receiving report.
7. Two receiving reports for vendors’ invoices were missing from the transaction packets. One vendor’s invoice had an extension error, and the invoice was initialed that the amount had been checked.
a. Identify whether each of 1 through 7 is a control test deviation, a monetary misstatement, or both.
b. For each exception, identify which transaction-related audit objective was not met.
c. What is the audit importance of each of these exceptions?
d. What follow-up procedures would you use to determine more about the nature of each exception?
e. How would each of these exceptions affect the rest of your audit? Be specific.
f. Identify internal controls that should have prevented each misstatement.
18-23 (OBJECTIVES 18-3, 18-6) The following misstatements are included in the accounting records of Westgate Manufacturing Company.
1. The accounts payable clerk intentionally excluded from the cash disbursements journal seven large checks written and mailed on December 26 to prevent cash in the bank from having a negative balance in the general ledger. They were recorded on January 2 of the subsequent year.
2. Acquisitions of raw materials are often not recorded until several weeks after the goods are received because receiving personnel fail to forward receiving reports to accounting. When pressure from a vendor’s credit department is put on Westgate’s accounting department, it searches for the receiving report, records the transactions in the acquisitions journal, and pays the bill.
3. Each month, a fraudulent receiving report is submitted to accounting by an employee in the receiving department. A few days later, he sends Westgate an invoice for the quantity of goods ordered from a small company he owns and operates in the evening. A check is prepared, and the amount is paid when the receiving report and the vendor’s invoice are matched by the accounts payable clerk.
4. Telephone expense (account 2112) was unintentionally charged to repairs and maintenance (account 2121).
5. The accounts payable clerk prepares a monthly check to Story Supply Company for the amount of an invoice owed and submits the unsigned check to the treasurer for payment along with related supporting documents that have already been approved.
When she receives the signed check from the treasurer, she records it as a debit to accounts payable and deposits the check in a personal bank account for a company named Story Company. A few days later, she records the invoice in the acquisitions journal again, resubmits the documents and a new check to the treasurer, and sends the check to the vendor after it has been signed.
6. The amount of a check in the cash disbursements journal is recorded as $6,412.87 which is the amount recorded in the acquisition journal. The actual invoice amount is $4,612.87.
a. For each misstatement, identify the transaction-related audit objective that was not met.
b. For each misstatement, state a control that should have prevented it from occurring on a continuing basis.
c. For each misstatement, state a substantive audit procedure that could uncover it.
18-24 (OBJECTIVES 18-5, 18-6, 18-7) The following auditing procedures were performed in the audit of accounts payable:
1. Obtain a list of accounts payable. Re-add and compare with the general ledger.
2. Trace from the general ledger trial balance and supporting documentation to deter-
mine whether accounts payable, related parties, and other related assets and liabilities
are properly included in the financial statements.
3. Calculate the ratio of purchases to accounts payable and compare to the same ratio from the prior year.
4. For liabilities that are payable in a foreign currency, determine the exchange rate and check calculations.
5. Discuss with the accounts payable supervisor whether any amounts included on the accounts payable list are due to related parties, debit balances, or notes payable.
6. Obtain vendors’ statements from the controller and reconcile them to the listing of accounts payable.
7. Obtain vendors’ statements directly from vendors and reconcile them to the listing of accounts payable.
Required
8. Examine supporting documents for cash disbursements several days before and after year end.
9. Examine the acquisitions and cash disbursements journals for the last few days of the current period and first few days of the succeeding period, looking for large or unusual transactions.
a. For each procedure, identify the type of audit evidence used.
b. For each procedure, identify which balance-related audit objective(s) was/were satisfied.
c. Evaluate the need to have certain objectives satisfied by more than one audit procedure.
18-25 (OBJECTIVES 18-3, 18-5, 18-6, 18-7) The following are various audit procedures performed in the audit of the acquisition and payment cycle and accounts payable:
1. Foot the acquisitions journal for the month of August and trace postings to general ledger and accounts payable master file.
2. Determine that the amount of purchases from major customers is properly disclosed in the financial statements.
3. Calculate the percentage change in expense accounts compared to the prior year for each division.
4. Vouch recorded purchases to vendor invoice and related receiving report.
5. Determine whether amounts due to related parties on the listing of accounts payable are reported separately in the financial statements.
6. Obtain vendors’ statements directly from vendors and reconcile them to the listing of accounts payable.
7. Examine supporting documents for cash disbursements after year end to determine whether they should be included in the year-end list of accounts payable.
8. For a sample of acquisitions, verify that the purchase order was properly approved.
9. For a sample of disbursements, verify that payment was authorized by the appropriate individual.
10. For a sample of acquisitions, agree quantities on vendor invoice with quantities on related receiving report and purchase order.
a. For each procedure, indicate whether it is a test of control, substantive test of transactions, substantive analytical procedure, or tests of details of balances.
b. For each test of control or substantive tests of transactions, identify the transaction- related audit objective(s) being met.
c. For each substantive analytical procedure or test of details of balances, identify the balance-related audit objective(s) being met.
18-26 (OBJECTIVES 18-3, 18-6) The Broughton Cap Company requires that prenumbered receiving reports be completed when purchased inventory items arrive in the receiving department. At the time of receipt, the receiving clerk writes the date of receipt on the receiving document. The last receipt in the fiscal year ended June 30, 2019, was recorded on receiving report 7280. The accounts payable department prepares prenumbered voucher packages as receiving reports are received from the receiving department. Entries in the acquisitions journal are prepared using information contained in the voucher package.
For late June 2019 and early July 2019, receipts of goods are included in voucher packages as follows:
Receiving Report No. Voucher No. Receiving Report No. Voucher No.
7276 2528 7280 2531
7277 2526 7281 2529
7278 2527 7282 2532
7279 2530 7283 2533
Required
Required
The June 2019 and July 2019 acquisitions journals included the following information:
Acquisitions Journal–June 2019
Day of Month Voucher No. Amount of Purchase
29 2526 $17,256.22
29 2527 $23,466.10
30 2528 $18,221.89
30 2529 $31,980.44
Acquisitions Journal–July 2019
Day of Month Voucher No. Amount of Purchase
1 2530 $15,001.99
1 2531 $24,888.33
2 2532 $11,933.74
2 2533 $26,459.19
a. Which voucher packages, if any, are recorded in the wrong accounting period?
Prepare an adjusting entry to correct the financial statements for the year ended June 30, 2019. Assume Broughton uses a perpetual inventory system and all purchases are inventory items.
b. Assume the receiving clerk accidentally wrote June 30 on receiving reports 7281 through 7283. Explain how that will affect the correctness of the financial statements.
How will you, as an auditor, discover that error?
c. Describe, in general terms, the audit procedures you would follow in making sure that cutoff for purchases is accurate at the balance sheet date.
d. Identify internal controls that will reduce the likelihood of cutoff misstatements related to purchases.
18-27 (OBJECTIVE 18-3) Even though Bergeron Wholesale Company is privately held, management has decided that it is worthwhile to have effective internal controls to the extent it is practical in a small company, as a way to reduce the likelihood of error and fraud. They have implemented the following system for acquisitions and payments.
Prenumbered purchase orders are approved by the vice president of finance for all purchases, including both tangible and service acquisitions. When goods are received, the goods are counted and a prenumbered receiving report is prepared with a copy sent to accounting.
The goods are stored in the warehouse under the control of the shipping manager. The receiving report is used to update the perpetual records, which include only quantities and are used to determine the need to reorder goods and for control over the physical quantities of inventory. When a vendor’s invoice is received, the chief accountant compares it to the purchase order and, for tangible goods, the receiving report, for both accuracy and appropriateness of the expenditure, and then staples the documents and initials each vendor’s invoice. She then records the transaction in the purchases journal and related records using small business ac- counting software. Password protection is used for all records to prevent unauthorized access.
The chief accountant prepares the checks and updates the cash disbursements journal using the same accounting software and submits the checks to Bergeron’s president for signature along with all supporting documentation. The president reviews and initials all support before signing checks and mails them to vendors on his way home from work. The controller receives the monthly bank statement directly from the bank and does a detailed reconciliation, including examining electronic copies of cancelled checks and supporting documentation for larger and unusual amounts. The controller also receives the monthly accounts payable listing from the chief accountant, compares the total to the general ledger, initials the listing, and files it. Once each quarter the inventory is counted and compared to the perpetual records, both as a check on record keeping and to determine whether there are inventory losses. Differences are listed, used for discussion with the controller and shipping manager, and filed.
Required
In-class
Discussion
a. List at least ten internal controls in the Bergeron acquisition and payment cycle. Be as specific as possible.
b. For each control, identify the transaction-related audit objective(s) to which the control relates.
c. For each control, list one test of control that is useful to test the effectiveness of the control. Be as specific as possible.
18-28 (OBJECTIVE 18-7) As part of the June 30, 2019, audit of accounts payable of Milner Products Company, the auditor sent 22 confirmations of accounts payable to vendors in the form of requests for statements. Four of the statements were not returned by the vendors, and five vendors reported balances different from the amounts recorded in Milner’s accounts pay-able master file. The auditor made duplicate copies of the five vendors’ statements to maintain control of the independent information and turned the originals over to the client’s accounts payable clerk to reconcile the differences. Two days later, the clerk returned the five statements to the auditor with the information on the audit schedule following part c.
a. Evaluate the acceptability of having the client perform the reconciliations, assuming that the auditor intends to perform adequate additional tests.
b. Describe the additional tests that should be performed for each of the five statements that included differences.
c. What audit procedures should be performed for the nonresponses to the confirmation requests?
Statement 1 Balance per vendor’s statement
Payment by Milner on June 30, 2019
Balance per master file
$ 7,618.01
(4,601.01)
$ 3,017.00
Statement 2 Balance per vendor’s statement
Credit memo issued by vendor on July 15, 2019
Balance per master file
$ 6,170.15
(1,360.15)
$ 4,810.00
Statement 3 Balance per vendor’s statement
Payment by Milner on July 3, 2019
Unlocated difference not followed up because of minor amount
Balance per master file
$ 7,319.21
(3,000.00)
615.06
$ 4,934.27
Statement 4 Balance per vendor’s statement
Balance per master file
Difference cannot be located because the vendor failed to provide details of its account balance
$ 26,251.80
(20,516.11)
$ 5,735.69
Statement 5 Balance per vendor’s statement
Invoices not received by Milner
Payment by Milner on June 15, 2019
$ 9,618.93
(2,733.18)
(2,500.00)
Balance per master file $ 4,385.75
18-29 (OBJECTIVE 18-3) You are part of the engagement team for the audit of Suzuki Manufacturing for the year ended December 31, 2019, and are responsible for auditing the acquisition cycle. Download the Excel file for the problem from the textbook website, which contains a worksheet with acquisition transactions for the year, and a second worksheet with the approved vendor list. Use Excel or audit software such as ACL or IDEA to perform the testing.
1. The company issues voucher numbers in sequential order. Use the transaction file to determine whether there are any gaps or duplicates in the voucher sequence.
2. All acquisitions are supported by receiving reports. Identity any gaps or duplicates in the sequence of receiving reports, and any acquisitions not supported by a receiving report.
3. Summarize acquisitions by customer number. The company is required to disclose all vendors who represent greater than 5 percent of acquisitions of the year. Identify the vendor number, name, and amount of purchases for any vendor that meets the disclosure criteria.
Required
Required
Data
Analytics
4. Verify that all acquisitions in the transaction file are from authorized vendors included in the vendor master file.
5. Identify vendors in the vendor file that are not included in the acquisition file. These vendors may be included in a sample of zero-balance confirmations at year end.
a. Indicate the audit objective(s) tested by each of the five audit procedures listed above.
b. Document any exceptions identified in your testing, including associated document numbers.
c. Assume your initial assessment of control risk was low for each of the seven transaction-related audit objectives. Based on the exceptions found, indicate which audit objective(s) should have an increase in control risk.
Required
CASE
18-30 (OBJECTIVES 18-2, 18-3, 18-4, 18-6) The following tests of controls and substantive tests of transactions audit procedures for acquisitions and cash disbursements are to be used in the audit of Ward Publishing Company. You concluded that internal control appears effective and a reduced assessed control risk is likely to be cost beneficial. Ward’s active involvement in the business, good separation of duties, and a competent controller and other employees are factors affecting your opinion.
Ward Publishing Company — Part I
(See p. 648 for Part II, and Case 19-28 on p. 673 for Part III)
Tests of Controls and Substantive Tests of Transactions Audit Procedures for Acquisitions and Cash Disbursements
1. Foot and cross-foot the acquisitions and cash disbursements journals for two months and trace totals to postings in the general ledger.
2. Scan the acquisitions and cash disbursements journals for all months and investigate any unusual entries.
3. Reconcile cash disbursements per books to cash disbursements per bank statement for one month.
4. Examine evidence that the bank reconciliation is prepared by the controller.
5. Inquire and observe whether the accounts payable master file balances are periodically reconciled to vendors’ statements by the controller.
6. Examine evidence that the numerical sequence of checks is accounted for by someone independent of the preparation function.
7. Inquire and observe that checks are mailed by D. Ward or someone under his supervision after he signs checks.
8. Examine initials indicating that the controller balances the accounts payable master file to the general ledger monthly.
9. Select a sample of entries in the cash disbursements journal, and
a. Obtain related cancelled checks and compare with entry for payee, date, and amount and examine signature endorsement.
b. Obtain vendors’ invoices, receiving reports, and purchase orders, and
(1) determine that supporting documents are attached to vendors’ invoices.
(2) determine that documents agree with the cash disbursements journal.
(3) compare vendors’ names, amounts, and dates with entries.
(4) determine whether a discount was taken when appropriate.
(5) examine vendors’ invoices for initials indicating an independent review of chart of account codings.
(6) examine reasonableness of cash disbursements and account codings.
(7) review invoices for approval of acquisitions by Ward.
(8) review purchase orders and/or purchase requisitions for proper approval.
(9) verify prices and recalculate footings and extensions on invoices.
(10) compare quantities and descriptions on purchase orders, receiving reports, and vendors’ invoices to the extent applicable.
(11) examine vendors’ invoices and receiving reports to determine that the check numbers are included and the documents are marked “paid” at the time of check signing.
c. Trace postings to the accounts payable master file for name, amount, and date.
10. Select a sample of receiving reports issued during the year and trace to vendors’ invoices and entries in the acquisitions journal.
a. Compare type of merchandise, name of vendor, date received, quantities, and amounts.
b. If the transaction is indicated in the acquisitions journal as paid, trace the check number to the entry in the cash disbursements journal. If unpaid, investigate reasons.
c. Trace transactions to accounts payable master file, comparing name, amount, and date.
Prepare all parts of a sampling data sheet (such as the one in Figure 15-2 on p. 505) through the planned sample size for the preceding audit program, assuming that a line item in the cash disbursements journal is used for the sampling unit. Use either non- statistical or attributes sampling. For all procedures for which the line item in the cash disbursements journal is not an appropriate sampling unit, assume that audit procedures were performed on a nonsampling basis. For all tests of controls, use a tolerable exception rate of 6 percent, and for all substantive tests of transactions, use a rate of 5 percent.
Use an ARO of 10 percent, which is considered medium. Plan for an estimated population exception rate of 1 percent for tests of controls and 0 percent for substantive tests of transactions.
Prepare the data sheet using the computer (instructor option — also applies to Part II).
Part II
Assume a sample size of 50 for all procedures, regardless of your answers in Part I. For other procedures, assume that an adequate sample size for the circumstance was selected. The only exceptions in your audit tests for all tests of controls and substantive tests of transactions audit procedures are as follows:
1. Procedure 2 —Two large transactions were identified as being unusual.
Investigation determined that they were authorized acquisitions of fixed assets.
They were both correctly recorded.
2. Procedure 9b(1) —A purchase order was not attached to a vendor’s invoice. The purchase order was found in a separate file and determined to be approved and appropriate. Another transaction included a purchase order, but it was not approved.
3. Procedure 9b(5)—Four vendors’ invoices were not initialed as being internally verified. Two actual account misclassifications existed. The controller explained that he often did not review codings because of the competence of the accounting clerk doing the coding and was surprised at the mistakes.
4. Procedure 9b(9) —One invoice was incorrectly extended by the vendor. As a result, Ward was overcharged by $300.
a. Complete the sampling data sheet from Part I using either nonstatistical or attributes sampling.
b. Explain the effect of the exceptions on tests of details of accounts payable. Which balance-related audit objectives are affected, and how do those objectives, in turn, affect the audit of accounts payable?
c. Given your tests of controls and substantive tests of transactions results, write an audit program for tests of details of balances for accounts payable. Assume the following:
(1) The client provided a list of accounts payable, prepared from the master file.
(2) Acceptable audit risk for accounts payable is high.
(3) Inherent risk for accounts payable is low.
(4) Substantive analytical procedure results were excellent.
