Norwood Office Supplies (NOS) Case
AC 432 – DeZoort
Fall 2004
This introductory document provides an overview of the NOS case, general instructions, an introduction to CAATs, and case (NOS) background. Assignments 1, 2, and 3 will be provided in separate documents.
PROJECT OVERVIEW AND INSTRUCTIONS
This project consists of three assignments. Assignment #1 asks you to access ACL, learn some basic ACL functions, and complete a basic assignment. Assignment #2 asks you to prepare and hand in an audit plan for the Norwood Office Supplies audit. This plan will include understanding the client and its industry, identifying key business and audit risks, developing audit objectives, and proposing audit procedures.
Assignment #3 asks you to complete audit procedures using ACL, document your findings, and describe their implications. The learning objectives for each assignment are detailed below.
Assignment #1 (completed individually) (20%)
Upon completing assignment #1 you should be able to:
• Gain access to ACL software
• Describe some basic functions and capabilities of the ACL software
• Perform some basic functions using the ACL software
Assignment #2 (completed as an audit team) (35%)
Upon completing assignment #2 you should be able to:
• Understand the client and its industry, including unique accounting and auditing issues within the industry
• Identify audit risks and business risks associated with an office supply company
• Describe audit objectives for each of the risks areas
• Design audit procedures that address each of the risks areas
• Identify additional professional services that can be performed to address operational and control deficiencies of an office supply company
Assignment #3 (completed as an audit team) (35%)
Upon completing assignment #3 you should be able to:
• Use the ACL software to conduct appropriate audit procedures
• Document, in a clear and concise manner, the results of audit tests
• Describe the implications of audit-test findings
Presentation (10%)
At the end of the project, your team should hand in a professional document that you would be comfortable delivering to a potential client. Specific deliverables are described on the next page.
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Audit Team Formation
Assignments 2 and 3 require you to work in audit teams of four. You are responsible for forming your own teams and coming to terms on how you will complete your work. However, you should divide the workload as evenly as possible.
Before starting work on the assignment, each team needs to provide me with a typed and signed contract that includes (at a minimum):
- acknowledgment and specification of responsibilities - agreement that all group members will participate equally in the completion of the project.
- the specific agreement the team has reached regarding penalties should any member shirk
(i.e., not participate as expected by the team). The entire team gets the same grade unless a serious, unresolvable problem is brought to my attention in a timely manner by the team.
- an agreement that no previous auditing or accounting projects, project notes, or other individuals will be used to complete the assignment.
This contract must be typed and signed by each team member.
Conflicts and Conflict Resolution
When problems arise with the project or group, they should be handled immediately . Serious problems should be brought to my attention as soon as they arise and not at the end of the project. When the assignment is complete, each member will prepare a peer review sheet (provided by me) to assess each individual’s performance. However, each team receives only one grade unless other arrangements are approved by me.
Signed Statement of Originality
After completing Assignment #3, each group should prepare a signed statement verifying that no previous auditing or accounting projects, notes, or other individuals were used in completing the project.
Self Evaluation
After completing Assignment #3, each group should prepare a thoughtful and honest self evaluation.
Each evaluation should consider what went well, what did not go well, and what skills were learned and used. This document should be typed and signed by each group member.
Deliverables
At the end of the project, your team should hand in a professional document that you would be comfortable delivering to a potential client. You can use your own judgment and preferences in this area, but please understand that substance and form count. At a minimum, the document should be bound and include:
1. Title Page
2. Table of Contents
3. Approved Contract
3. Signed Statement of Originality
4. Group Self-Evaluation
5. Body of Project (Assignments 1, 2, & 3, divided by assignment number)
6. References
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AN INTRODUCTION TO COMPUTER ASSISTED AUDIT TECHNIQUES (CAATs)
Objectives: After studying the introduction you should be able to:
1.
Identify the uses of CAATs
2.
Identify the market leading CAATs
The use of computer assisted auditing techniques (CAATs) has become common, and for some clients is absolutely essential. Audit clients of all sizes are increasingly processing transactions electronically.
Indeed, for certain clients, electronic data interchange (EDI), XML (and XBRL), and other forms of business-to-business electronic communication have made traditional paper-based audit trails disappear.
In such cases, the auditor may have to incorporate CAATs as a primary audit tool to examine the electronic audit trails and other data repositories. In other cases, the use of CAATs would greatly reduce the professional service hours required to complete the audit. Pragmatically, students who learn to use such tools before entering the auditing profession will have a distinct advantage in the marketplace. The overall objective of CAATs is to improve the efficiency and effectiveness of an audit. This case uses some basic functions of ACL software to illustrate how CAATs can be used. ACL is the market-leading software tool.
Auditing in an Electronic Environment
Auditing in an electronic environment will affect how an auditor will gain an understanding of the internal control environment and assess the related control risk. Control risk (see SAS 47) is the risk that the client’s system of internal control will fail to prevent or detect errors in the client’s accounting system.
For example, lack of segregation of duties and recent changes to the computer programs are but two indicators of higher risk of fraud, errors, and material misstatements. At the same time, inherent risk may exist regardless of the methods used to process accounting-related events. Characteristics of the client’s business determine inherent risk. For example, competition in the organization’s industry and pressure on management to achieve certain results can raise the possibility that there will be material misstatements, such as bogus revenues, regardless of the methods used to record accounting transactions. You will find only a few clues regarding risk assessment in the Norwood Office Supplies case study. An important objective of this case study is to help you understand how to develop audit objectives and audit procedures with only some consideration of the risks of material misstatements.
CAATs
Broadly defined, CAATs include the completion of audit tasks with the assistance of the computer.
CAATs allow the auditor to directly access a client’s computerized information. CAATs software packages allow auditors with little or no computer background to perform tasks that had been reserved for
IT auditors. The functions of CAATs software generally include:
• Footing of fields, such as amount due in an accounts receivable file
• Selecting samples and printing confirmations
• Scanning for unusual transactions, balances and other situations. Using powerful software permits the auditor to perform this and other tests on an entire population rather than on a sample.
• Performing analytical procedures such as aging of accounts receivable
• Sorting files to find, for example, duplicate invoices or checks
• Automatically preparing documentation of audit work
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Auditors use generalized audit software, such as the ACL software used in this project, to read and analyze machine-readable records. Auditor also use generalized audit software to detect exceptions in a file’s data. Exceptions may indicate the failure of a control. For example, an auditor may test a file of disbursements to determine whether all disbursements were allocated to appropriate cost centers. In this project, you will use ACL to perform tests on a client’s files to determine indirectly the extent that controls were operating during the year being audited.
In addition, auditors use generalized audit software to determine if the data in the files agree with the summarized data on the financial statements. For example, an auditor might summarize an accounts payable file to determine that the client’s reported accounts payable is reasonable. In this project, you will develop and perform tests on files to determine if the data in the files are accurate.
I encourage you to invest sufficient time completing these assignments to become comfortable with ACL.
The ACL software is the product of ACL Services Ltd., based in Vancouver, BC, Canada. This software is the market leader in technology tools for data inquiry, analysis, and reporting. As an auditor, you will need to be able to design the procedures suggested by these assignments and execute them with this software or a similar package (e.g., IDEA - a product developed by the Canadian Institute of Chartered
Accountants). The understanding and the skill that you develop here can be applied in future courses or in a variety of audit and other work situations.
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NOS CASE BACKGROUND
Norwood Office Supplies, Inc. (Norwood), located in Norwood, Massachusetts, sells office supplies to customers located in eastern Massachusetts, New Hampshire, and Rhode Island. Norwood uses a PCbased accounting package, such as Peachtree, for all its data processing needs. Norwood refers to this software package as PCAC. Your audit is for the year-end, December 31, 2003.
Norwood’s target market is divided into nine sales territories; sales are made through five sales representatives who are assigned to specific sales territories. Sales are made on account to established customers. Inventory, sales, accounts receivable, and related records are maintained on Norwood's computer facility located in the home office. Norwood's computer facility consists of a PC equipped with a Pentium III processor and a 40 GB hard drive. The PCAC software is used for all their accounting and record-keeping needs. Because the PCAC software was installed in November, 2003, much of the sales, receivable, and inventory historical data are still being developed.
Norwood has experienced many changes in the last year of operation. National-chain competitors have moved into their sales territory. For example, Staples, Office Max, and Office Depot have all opened retail outlets in Norwood. In addition, each of these companies, along with W. B. Mason, now offers wholesale sales and delivery. In addition, these chains are conducting sales over the Internet. Margins have become quite slim as the large chains are able to keep their prices and costs down by obtaining bulkrate reduced prices from their suppliers. Norwood has been able to survive because it has loyal customers and an experienced sales staff that has developed close relationships with Norwood customers.
SALES AND INVENTORY SYSTEMS
Sales Procedures
Norwood’s sales representatives visit customers in their assigned territories, record customer orders on a two-part sales order, give one copy to the customer and forward the other copy to the Norwood office.
The following are Norwood’s sales territories:
Territory Location
2
3
4
Central and Northern New Hampshire
Metro Boston – North
Metro Boston – South
8 City of Boston
9 City of Providence
The following are Norwood’s sales representatives, along with their assigned territories:
Representative Territory
Bob 3,6
Doug 4,5
Kay 8
Phil 1,2
Shannon 7,9
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At the Norwood office (see the flowchart in Figure 1), the data-entry clerk keys the sales orders into the computer. The next sales order number is taken from the Control File; customer data (including credit data) are taken from the Customer Master File, while inventory data (including available quantities) are taken from the Inventory Master File. After the clerk indicates final acceptance of the sales order input data, a sales order record is created on the Sales Order Master File. In addition, the Customer Master File is updated to indicate current orders and to allocate the inventory to be shipped by placing the quantity ordered in the “quantity allocated” field of the inventory record. The computer also prints a sales order that is sent to the warehouse. The Terms File and Control File provide data to be printed on the sales order.
Warehouse Procedures
In the warehouse, clerks pick goods from the bins using the sales order as a picking ticket. They complete a two-part shipping document, sending one copy with the goods to the customer and sending the other copy to the data entry clerk. Goods should not be shipped until a few days before the customer due date.
After a sales order has been initially input and the inventory allocated, within a few days the goods should be shipped and the shipment recorded.
Invoicing Procedures
Using the shipping document, the order-entry clerk keys in the shipment data. The computer processes the shipment data by first reducing the balance in the Inventory Master File and then recording an open invoice on the Accounts Receivable Master File. Next, the Customer Master File is updated to reflect the open receivable (i.e., the customer file contains the customer’s current accounts receivable balance). The computer then calculates the trade discounts as well as the sales tax to be assessed based on the state in which the customer is located. Payment terms are assigned to each sale based on the following schedule:
Term
NET 10 Days
NET 15 Days
NET 30 Days
2% 10/NET 30
Terms Code
3
4
5
6
Customer Credit Limit
$100
$100
$250
$500
5% 10/NET 30 7 $500
Finally, the Sales Order Master File is updated to reflect the shipment and a customer invoice is printed and mailed to the customer.
Inventory Management
Inventory items are assigned item numbers in the range 10000 - 60000. Items are assigned to five product groups as follows:
Product Description Product
Group
1
2
3
4
5
Paper, note pads, envelopes, typing ribbons
Pens, markers, rulers, erasers, chalk, inkpads, rubber stamps
Fasteners, paper clips, tape and dispensers, staplers, tacks
Computers and computer supplies
Wastebaskets, clocks, bulletin boards, adding machines, calculators, furniture
Inventory levels are maintained as follows. Replenishment stock is ordered from vendors when the onhand balance reaches or falls below the order point. When this occurs, the amount that is ordered is the order quantity. The goal is to have just enough stock on hand and/or on order to fill open orders and to satisfy expected demand for that item.
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Figure 1: Norwood Office Supplies, Inc. Systems Flowchart

Available Data Files
Customer Master File
Field Title
Customer Code
Customer Name
City State
Salesperson
Tax Rate
Credit Limit
Sales YTD
Current Orders
Current AR
Inventory Master File
Field Title
Field Description
Customer code
Customer name
City and state
Sales representative for this account
Tax rate (%)
Credit limit ($)
Year-to-date sales ($)
Current orders ($)
Current accounts receivable ($)
Field Description
Quantity_on_Hand Quantity on hand in warehouse
Quantity_on_Order Quantity on order from vendor
Allocated Quantity allocated to open sales orders
Date of last transaction Date_of_Last_Transaction
Accounts Receivable Master File
Field Title Field Description
Terms
PO_Number
Invoice Terms Code
Customer Purchase Order Number
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Sales Order Master File
Field Title Field Description
Customer Code Customer code for this sales order
Salesperson Salesperson for this sale
Sales Date
Taxable
Terms
Line
Sales order date
Y = Taxable, N = Not taxable
Sales order terms code
Detail line for sales order
Quantity Ordered
Unit Price
Due Date
Quantity Shipped
Assumptions
Quantity ordered
Line item unit price ($)
Line item due date
Quantity shipped
The following assumptions can be made about the Norwood audit: a. All standing data (i.e., customers, inventory, etc.) were loaded into the computer on November
30, 2003. No changes were made to the inventory or customer standing data after that date.
Norwood started using the PCAC system for the month of December. b. You have been provided transactions for the month of December, 2003. Assume that these are all the transactions for the year and that you are conducting an audit of the financial statements as of
December 31, 2003 (see Exhibits 1 and 2). For purposes of this assignment, you should be concerned with only the following five accounts on those statements:
• Accounts Receivable - Trade
• Merchandise Sales
• Accounts Payable - Sales Tax
• Inventory
• Cost of Goods Sold c. The account “Received/Not Vouchered” includes the merchandise receipts for which vendor invoices have not been received. Do not consider this account for this case study. In addition, the
AP - Sales Tax account represents the amount collected from customers that is payable to the jurisdiction for which the tax was collected. d. The actual shipping documents are not available in this case. However, you should assume that in all cases where a sales order indicates a shipment, a shipping notice exists. Also, assume that there is a sales order record indicating a shipment for every shipment that was actually made (i.e., the Sales Order Master File is valid, accurate, and complete).
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Account Description
------------------------
Revenue:
Merchandise Sales
Expenses:
Cost of Goods Sold
Exhibit 1
Norwood Office Supplies, Inc.
Income Statement Information – Gross Profit
For the year ended December 31, 2003
Month of December
5382.17
Amount %
--------- -------
100.0
3097.44 57.6
------- -------
2284.73 42.4
Year to Date
Amount %
--------- -------
5382.17 100.0
3097.44
-------
2284.73
57.6
------
42.4
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Exhibit 2
Norwood Office Supplies, Inc.
Balance Sheet
December 31, 2003
Assets:
Current Assets:
Cash in Bank
Petty Cash
Inventory
Accounts Receivable - Trade
Notes Receivable
Total Current Assets
Fixed Assets:
Equipment and Vehicles
Accumulated Depreciation
Office Furniture
Accumulated Depreciation
Total Fixed Assets
Other Assets:
Lease Deposit
TOTAL ASSETS
Liabilities:
Current Liabilities:
Accounts Payable – Trade
Customer Deposits
Accounts Payable – Payroll Tax
Received/Not Vouchered
Accounts Payable – Sales Tax
Total Current Liabilities
Long-Term Liabilities:
Notes Payable
Total Long-Term Liabilities
TOTAL LIABILITIES
Stockholders’ Equity:
Common Stock
($20 Par value. 100,000 shares authorized)
Paid-in Surplus
Retained Earnings
Earnings, year to date
Total Stockholders’ Equity
TOTAL LIABILITIES &
STOCKHOLDERS’ EQUITY
140457.30
297.00
17858.79
5584.07
5990.77
--------------
170187.93
--------------
39812.72
-10376.69
13734.29
-5197.00
-------------
37973.32
-------------
211388.79
===========
11383.94
300.96
1228.71
14753.72
201.90
-------------
27869.23
-------------
29725.59
-------------
29725.59
-------------
18000.00
43693.01
89816.23
-------------
57594.82
===========
2284.73
-------------
153793.97
-----------
211388.79
===========
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