ACC 521 Lecture Notes - Lecture 11: Accounts Receivable, Perpetual Inventory, Electrical Engineering

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4 Oct 2014

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The accounts payable audit procedures should be directed toward searching for proper inclusion of all accounts payable and ascertaining that recorded amounts are reasonably stated because the primary audit purpose is to reveal any possible material understatements. The principal objectives of the accounts payable examination are. To determine adequacy of internal control for processing and payment of invoices. To prove that amounts shown on the balance sheet are in agreement with supporting accounting records. To determine that liabilities existing at the balance sheet date have been recorded. Clark and kent are not required to use accounts payable confirmation procedures. For accounts payable the auditor can examine external evidence such as supplier invoices and supplier statements which substantiate the accounts payable balance. Although not required, the accounts payable confirmation is often used. The company is in a tight cash position and bill-paying is slow.

Related Questions

The following tests of controls and substantive tests oftransactions audit procedures for
acquisitions and cash disbursements are to be used in the audit ofWard Publishing Company. You
concluded that internal control appears effective and a reducedassessed control risk is likely to be cost
beneficial. Wardâs active involvement in the business, goodseparation of duties, and competent
controller and other employees are factors affecting youropinion.

PART I:

Tests f Controls and Substantive Tests of Transactions AuditProcedures for Acquisitions and
Cash Disbursements
1. Foot and cross-foot the acquisitions and cash disbursementsjournals for 2 months and trace
totals to postings in the general ledger.
2. Scan the acquisitions and cash disbursements journals for allmonths and investigate any unusual
entries.
3. Reconcile cash disbursements per books to cash disbursements perbank statement for 1 moth.
4. Examine evidence that the bank reconciliation is prepared by thecontroller.
5. Inquire and observe whether the accounts payable master filebalances are periodically
reconciled to vendorâs statements by the controller.
6. Examine the log book s evidence that the numerical sequence ofchecks is accounted for by
someone independent of the preparation function.
7. Inquire and observe that checks are mailed by D. Ward or someoneunder his supervision after
he signs checks.
8. Examine initials indicating that the controller balances theaccounts payable master file to the
general ledger monthly.
9. Select a sample of entries in the cash disbursements journaland
a. Obtain related cancelled checks and compare with entry forpayee, date, and amount and
examine signature endorsement.
b. Obtain vendorsâ invoices, receiving reports, and purchaseorders, and
1. Determine that supporting documents are attached to vendorsâinvoices.
2. Determine that documents agree with the cash disbursementsjournal.
3. Compare vendorsâ names, amounts, and dates with entries.
4. Determine whether a discount was taken when appropriate.
5. Examine vendorsâ invoices for initials indicating an independentreview of chart of
account coding.
6. Examine reasonableness of cash disbursements and accountcodlings.
7. Review invoices for approval of acquisition by Ward.
8. Review purchase orders and /or purchase requisitions for properapproval.
9. Verify prices and recalculate footings and extensions oninvoices.
10. Compare quantities and descriptions on purchase orders,receiving reports, and vendorsâ
invoices to the extent applicable.
11. Examine vendorsâ invoices and receiving reports to determinethat the check numbers
are included and the documents are marked âpaidâ at the time ofcheck signing.
c. Trace posting to the accounts payable master file for name,amount, and date. 10. Select a sample of receiving reports issuedduring the year and trace to vendorsâ invoice 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 aspaid, trace the check number to
the entry in the cash disbursements journal. If unpaid, investigatereasons.
c. Trace transactions to accounts payable master file, comparingname, amount, and date.
Required: Prepare all parts of a sampling datasheet through the planned sample size for the preceding
audit program, assuming that a line item in the cash disbursementjournal is used for the sampling unit.
Use either nonstatistical or attributes sampling. For allprocedures for which the line item in the cash
disbursements journal is not an appropriate sampling unit, assumethat audit procedures were
performed on a nonsampling basis. For all tests of controls, use atolerable exception rate of 5%, and for
all substantive tests of transactions, use a rate of 6%. Use anARACR of 10%, which is considered
medium. Plan for an estimated population exception rate of 1% fortests of controls and 0% for
substantive tests of transactions.
Prepare the data sheet using the computer (also applies to PartII)

	Planned Audit
Description of Attributes	EPER	TER	ARO (10%)	Initial sample size

rubysnail529

Management assertions for the financial statements referenced inPCAOB Auditing Standards are:

Existence, occurrence

Completeness

Rights, obligations

Valuation, allocation

Presentation and disclosure

The purpose of tests of controls is to permit the auditor toassess whether properly designed controls operate effectivelyenough to prevent or detect material misstatements that would makethese managements assertions wrong.

Required:

For each of the following audit procedures identify whether theprocedure is:

(a) directed at a control or at an amount ordisclosure, or both, and

(b) what assertion (or assertions) is (are)targeted.

Accounts, Classes of Transactions	Audit Procedure	Directed at:	Assertion:
All	Inquire who controls passwords for IT access.
Sales, Receivables, Inventory	Examine document packages for items that have been shipped forinclusion of a customer order, credit approval, and shippingdocument. Make sure the documents are properly matched andcomplete, with all required signatures and trace amounts to thesales journal, accounts receivable subsidiary ledger, and inventoryfiles.
Payroll	For the Hourly Payroll Expense account, multiply the averagenumber of workers times the average number of hours worked per yeartimes the average hourly rate. Compare to the total posted annualamount.
Cash	Inspect the client-prepared bank reconciliation for each monthof the year, recalculate the amounts, examine the supporting bankstatements, and trace the cash amount to the general ledger.
Fixed assets	Obtain a list of fixed assets and physically look at theassets.
Long-term debt	Read the contract related to each of the companyâs long-termborrowings and agree the terms of the contracts to the financialstatements notes.
Cash, Long-term debt	For each item of long-term debt that existed both at thebeginning and end of the year, inspect the debt contracts and thecompanyâs analysis of the discounted debt amount and its analysisof violation of debt covenants and look for whether the detailsagree. Recalculate the amounts, and examine recorded entries andbank statements for cash disbursements for debt repayments. Usingthat information, determine whether the company has been inviolation of any debt covenants during the year.
Prepaid rent	Using the beginning financial statement amount, cash receiptsand cash disbursements evidence, and the lease agreement, calculateyear-end prepaid rent and agree that amount to what is shown in thegeneral ledger.
Inventory	At the end of the last day in the fiscal year, go to theclientâs shipping area and record the last shipment; trace theshipment into the clientâs

ochrellama864

Management assertions for the financial statements referenced inPCAOB Auditing Standards are:

Existence, occurrence

Completeness

Rights, obligations

Valuation, allocation

Presentation and disclosure

Required:

For each of the following audit procedures identify whether theprocedure is:

(a) directed at a control or at an amount ordisclosure, or both, and

(b) what assertion (or assertions) is (are)targeted.

Accounts, Classes of Transactions	Audit Procedure	Directed at:	Assertion:
All	Inquire who controls passwords for IT access.
Sales, Receivables, Inventory	Examine document packages for items that have been shipped forinclusion of a customer order, credit approval, and shippingdocument. Make sure the documents are properly matched andcomplete, with all required signatures and trace amounts to thesales journal, accounts receivable subsidiary ledger, and inventoryfiles.
Payroll	For the Hourly Payroll Expense account, multiply the averagenumber of workers times the average number of hours worked per yeartimes the average hourly rate. Compare to the total posted annualamount.
Cash	Inspect the client-prepared bank reconciliation for each monthof the year, recalculate the amounts, examine the supporting bankstatements, and trace the cash amount to the general ledger.
Fixed assets	Obtain a list of fixed assets and physically look at theassets.
Long-term debt	Read the contract related to each of the companyâs long-termborrowings and agree the terms of the contracts to the financialstatements notes.
Cash, Long-term debt	For each item of long-term debt that existed both at thebeginning and end of the year, inspect the debt contracts and thecompanyâs analysis of the discounted debt amount and its analysisof violation of debt covenants and look for whether the detailsagree. Recalculate the amounts, and examine recorded entries andbank statements for cash disbursements for debt repayments. Usingthat information, determine whether the company has been inviolation of any debt covenants during the year.
Prepaid rent	Using the beginning financial statement amount, cash receiptsand cash disbursements evidence, and the lease agreement, calculateyear-end prepaid rent and agree that amount to what is shown in thegeneral ledger.
Inventory	At the end of the last day in the fiscal year, go to theclientâs shipping area and record the last shipment; trace theshipment into the clientâs records.

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ACC 521 Lecture Notes - Lecture 11: Accounts Receivable, Perpetual Inventory, Electrical Engineering

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