Problem 10-16, page 331
The following are 11 audit procedures taken from an audit program:
1.
Add the supplier balances in the accounts payable master file, and compare the total with the general ledger.
2.
Examine vendors’ invoices to verify the ending balance in accounts payable.
3.
Compare the balance in employee benefits expense with previous years’. The comparison takes the increase in
the employee benefit rates into account.
4.
Discuss the duties of the cash disbursements bookkeeper with him or her, and observe whether he or she has
responsibility for handling cash or preparing the bank reconciliation.
5.
Confirm accounts payable balance directly with vendors.
6.
Use generalized audit software to run a gap test on the cheques issued during the year. (Print a list of cheque
numbers omitted from the normal cheque number sequencing.)
7.
Examine the treasurer’s initials on monthly bank reconciliations as an indication of whether they have been
reviewed.
8.
Examine vendors’ invoices and other documentation in support of recorded transactions in the acquisitions
journal.
9.
Multiply the commission rate by total sales, and compare the result with the commission expense.
10.
Examine vendors’ invoices and other supporting documents to determine whether large amounts in the
repairs and maintenance account should be capitalized.
11.
Examine the initials on vendors’ invoices that indicate internal verification of pricing, extending, and footing by
a clerk.
Required:
a.
Indicate whether each procedure is a test of controls, an analytical procedure, or a test of details of balances.
b.
Identify the type of evidence for each procedure.
Audit Strategy Solutions-1
Problem 10-16, Solution
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
a. Procedure
T of D of B
T of D of B
AP
Test of controls
T of D of B
T of D of B
Test of controls
Test of controls
AP
T of D of B
Test of controls
b. Type of Evidence
Recalculation and Reperformance
Inspection
Analytical procedures
Inquiry and observation
Confirmation
Reperformance
Inspection
Inspection
Analytical procedures
Inspection
Inspection
Audit Strategy Solutions-2
Problem 10-21, page 332
The following are audit procedures from different transaction cycles
1.
Use audit software to foot and cross-foot the cash disbursements journal, and trace the balance to the general
ledger.
2.
Select a sample of entries in the acquisitions journal, and trace each one to a related vendors’ invoice to
determine whether one exists.
3.
Examine documentation for acquisition transactions before and after the balance sheet date to determine
whether they are recorded in the proper period.
4.
Inquire of the credit manager whether each account receivable on the aged trial balance is collectible.
5.
Compute inventory turnover for each major product, and compare with that of previous years.
6.
Confirm with lenders a sample of notes payable balances, interest rates, and collateral.
7.
Use audit software to foot the accounts payable trial balance, and compare the balance with the general
ledger.
Required:
a.
For each audit procedure, identify the transaction cycle being audited.
b.
For each audit procedure , identify the type of evidence.
c.
For each audit procedure, identify whether it is a test of control or substantive test (indicating whether it is a
test of details of balances or an analytical procedure.)
d.
For each audit procedure, identify the related audit objective(s).
e.
Specifically assess the purpose of each audit procedure, as follows:
•
For tests of control, state the risk (potential error) that is being assessed.
•
For analytical procedures, state a possible result that you would expect.
•
For tests of detail, state the type of material error that you would be quantifying.
Audit Strategy Solutions-3
Problem 10-21, Solution
a.
b.
c.
d.
1. Acquisition and
Payment
2. Acquisition and
Payment
Recalculation
Substantive (test of detail)
Posting and summarization
Inspection
Test of control or
Substantive (detail)
Existence
3. Acquisition and
Payment
4. Sales and
Collection
5. Inventory and
Warehousing
Inspection
Substantive (detail)
Cutoff
Inquiry
Substantive (detail)
Valuation
Analytical
procedure
Substantive (AP)
Valuation
Confirmation
Substantive (detail)
Existence, Accuracy,
Presentation and disclosure
Recalculation
Substantive (detail)
6.
Capital
Acquisition and
Repayment
7. Acquisition and
Payment
Audit Strategy Solutions-4
e.
•
1. There could be a calculation error and some amounts might not be posted
to the general ledger, understating the accounts payable balance.
•
2. There could be unauthorized payments or duplicate payments, overstating
expenses and accounts payable.
•
3. Accounts payable could be recorded in the incorrect period, either over or
understating income or expenses.
•
4. Accounts receivable might not be collectible, overstating income and
understating the bad debt allowance.
•
5. Inventory might be obsolete and cannot be sold, overstating assets.
•
6. Incorrect notes payable information could be recorded in the accounts, or
there could be inaccurate or incomplete disclosure of notes payable
information in the financial statements and notes there to.
•
7. Same as 1.
Audit Strategy Solutions-5
Problem 12-21, page 406, Canadian 11th. Edition
The following internal controls for the acquisition and payment cycle were selected from a standard internal control
questionnaire:
1.
Vendors’ invoices are recalculated prior to payment.
2.
Approved price lists are used for acquisitions.
3.
Prenumbered receiving reports are prepared as support for purchases and are numerically accounted for.
4.
Dates on receiving reports are compared with vendors’ invoices before entry into the accounts payable
system.
5.
The accounts payable system is updated, balanced, and reconciled to the general ledger monthly.
6.
Account classifications are reviewed by someone other than the preparer.
7.
All cheques are signed by the owner or the manager.
8.
The cheque signer compares data on the supporting documents with the cheques.
9.
All supporting documents are cancelled after entry.
10.
After they are signed, cheques are mailed by the owner or manager, or a person under his or her supervision.
Required:
a.
For each control, state which transaction-related audit objective(s) is (are) applicable.
b.
For each control, write an audit procedure that could be used to test the control for effectiveness.
c.
For each control, identify a likely misstatement, assuming the control does not exist or is not functioning.
d.
For each likely misstatement, identify a substantive audit procedure to determine if the misstatement exists.
Audit Strategy Solutions-6
Problem 12-21, Solution
a. Objectives
1. Accuracy
b. Procedure
Examine vendors’ invoices for
indication of recalculation
c. Misstatement
An error in calculation of a
vendors’ invoices
d. Misstatement Procedure
Recalculation of the vendors’ invoices
2. Accuracy
Determine existence of approved
price lists for acquisitions
Unauthorized prices could be
paid for acquisitions
Obtain prices from purchasing
department and compare to vendors’
invoices
3. Occurrence
Completeness
Account for a numerical sequence
of receiving reports
Unrecorded acquisitions exist
Confirm accounts payable, especially
vendors with small or zero balances
4. Timing
Examine vendors’ invoices for
indication of comparison
Cutoff errors
Confirm accounts payable
5. Posting
Summarization
Examine indication of reconciliation Errors in subsidiary records or
of the subsidiary ledger and control control account
account
Foot subsidiary records and compare to
control account
6. Classification
Examine vendors’ invoices for
indication of internal verification
Account classification errors
Compare vendors’ invoices to
acquisitions journal for reasonableness of
account classification
7. Occurrence
Examine cancelled cheques for
signature
Invalid or unauthorized payment Examine supporting documents for
appropriateness of expenditures
8. Occurrence Accuracy Examine vendors’ invoices for
indication of comparison
Invalid or unauthorized payment Examine supporting documents for
accuracy and appropriateness of
expenditures
9. Occurrence
Examine supporting documents for
indication of cancellation
Duplicate payment for an
acquisition
10. Occurrence
Observe cheque mailing procedures Employee takes signed cheques
and inquire about normal procedures and changes payee name
Examine supporting documents for every
payment to selected vendors
Compare payee name on cancelled
cheque to supporting documents
Audit Strategy Solutions-7