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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,

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Presentation on theme: "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,"— Presentation transcript:

1 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

2 a. Procedureb. Type of Evidence 1.T of D of BRecalculation and Reperformance 2.T of D of BInspection 3.APAnalytical procedures 4.Test of controlsInquiry and observation 5.T of D of BConfirmation 6.T of D of BReperformance 7.Test of controlsInspection 8.Test of controlsInspection 9.APAnalytical procedures 10.T of D of BInspection 11.Test of controlsInspection Problem 10-16, Solution Audit Strategy Solutions-2

3 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

4 a.b.c.d. 1.Acquisition and Payment RecalculationSubstantive (test of detail)Posting and summarization 2.Acquisition and Payment InspectionTest of control or Substantive (detail) Existence 3.Acquisition and Payment InspectionSubstantive (detail)Cutoff 4.Sales and Collection InquirySubstantive (detail)Valuation 5.Inventory and Warehousing Analytical procedure Substantive (AP)Valuation 6.Capital Acquisition and Repayment ConfirmationSubstantive (detail)Existence, Accuracy, Presentation and disclosure 7.Acquisition and Payment RecalculationSubstantive (detail) Problem 10-21, Solution Audit Strategy Solutions-4

5 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. e. Audit Strategy Solutions-5

6 Problem 12-21, page 406, Canadian 11 th. 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

7 a. Objectivesb. Procedurec. Misstatementd. Misstatement Procedure 1. AccuracyExamine vendors’ invoices for indication of recalculation An error in calculation of a vendors’ invoices Recalculation of the vendors’ invoices 2. AccuracyDetermine 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 existConfirm accounts payable, especially vendors with small or zero balances 4. TimingExamine vendors’ invoices for indication of comparison Cutoff errorsConfirm accounts payable 5. Posting Summarization Examine indication of reconciliation of the subsidiary ledger and control account Errors in subsidiary records or control account Foot subsidiary records and compare to control account 6. ClassificationExamine vendors’ invoices for indication of internal verification Account classification errorsCompare vendors’ invoices to acquisitions journal for reasonableness of account classification 7. OccurrenceExamine cancelled cheques for signature Invalid or unauthorized paymentExamine supporting documents for appropriateness of expenditures 8. Occurrence AccuracyExamine vendors’ invoices for indication of comparison Invalid or unauthorized paymentExamine supporting documents for accuracy and appropriateness of expenditures 9. OccurrenceExamine supporting documents for indication of cancellation Duplicate payment for an acquisition Examine supporting documents for every payment to selected vendors 10. OccurrenceObserve cheque mailing procedures and inquire about normal procedures Employee takes signed cheques and changes payee name Compare payee name on cancelled cheque to supporting documents Problem 12-21, Solution Audit Strategy Solutions-7

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