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Problem 16-12, Page 529 Payments Cycle Solutions- 1 In testing the cutoff of accounts payable at the balance sheet date, explain why it is important that.

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Presentation on theme: "Problem 16-12, Page 529 Payments Cycle Solutions- 1 In testing the cutoff of accounts payable at the balance sheet date, explain why it is important that."— Presentation transcript:

1 Problem 16-12, Page 529 Payments Cycle Solutions- 1 In testing the cutoff of accounts payable at the balance sheet date, explain why it is important that the auditors coordinate their tests with the physical observation of inventory. What can the auditor do during the physical inventory to enhance the likelihood of an accurate cutoff?

2 Payments Cycle Solutions- 2 It is important that the cutoff of accounts payable be coordinated with that of the physical inventory to determine that they are established at the same point in time. If these cutoffs are not consistent, goods may be counted in the physical inventory for which no liability in accounts payable has been recorded, or vice versa. Such a situation would result in an understatement of accounts payable and cost of goods sold or an overstatement of these two accounts respectively. During the physical inventory, the auditor should gather cutoff information (e.g., the last several receiving reports, shipping documents, transfer documents) to assist in the determination that an accurate cutoff was established. Problem Solution

3 You are the staff auditor testing the combined purchase and cash disbursements journal for a small audit client. Internal control is regarded as reasonably effective, considering the number of personnel. The auditor in charge has decided that a sample of 80 items should be sufficient for this audit because of excellent controls and gives you the following instructions: 1.All transactions selected must exceed $ At least 50 of the transaction items must be for purchases of raw materials because these transactions are typically material. 3.It is not acceptable to include the same vendor in the sample more than once. 4.All vendors’ invoices that cannot be located must be replaced with new sample items. 5.Both cheques and supporting documents are to be examined for the same transactions. 6.The sample must be random, after modifications for instructions 1 through 5. REQUIRED: a.Evaluate each of these instructions for testing acquisition and cash disbursement transactions. b.Explain the difficulties of applying each of these instructions to attributes sampling. Problem 18-20, Page 634, Canadian 11 th. Edition Payments Cycle Solutions- 3

4 Instructiona. Evaluationb. Application Difficulties 1.If the vast majority of transactions exceed this amount, the limit is appropriate. Otherwise, a sample of smaller amounts should also be included. For attributes sampling, the sample must be randomly selected from the total population. This limitation would prevent the use of attributes sampling or at least force the auditor to generalize only to those transactions exceeding $100 rather than to the overall system. 2.If raw materials is the most significant account included in the accounts tested, this stratification of the judgmental sample is appropriate. To utilize such a stratification, the population would have to be split into raw materials and others, and the sample size computed and results evaluated for each population separately. 3.Such elimination of vendors from repeat selections fulfills no purpose in the test and eliminates the possibility of selecting more sample items from vendors with whom the client does considerable business. The sample would not be random and the auditor could not statistically generalize to the population. 4.When invoices are not located they should not simply be replaced. The fact that they were not located shall be taken into account in the evaluation of the results of the test and determination made as to the need for expansion of the sample. The evaluation of results makes little sense if transactions with missing documents are omitted from the sample. 5.This is an appropriate way to perform the test as long as the sample size utilized is sufficient to cover all tests performed. There would be no difficulty in application. 6.No sample which meets the above requirements can be random. The random selection of this sample will not provide results which may be evaluated statistically. See response 3 above. Payments Cycle Solutions- 4


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