ACC 521 Lecture Notes - Lecture 8: Internal Control, Bes, Enquire

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4 Oct 2014

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Ep9-5 tests of control procedure and audit programs. Test of control procedure: select a sample of recorded sales invoices from the sales journal. Note the date, number, amount and customer name. 2 in the accounts receivable department chronological (date) file and read (vouch) the customer order to see if credit was approved according to company policy. Test of control procedure: select a sample of recorded sales invoices from the sales journal (same sample as in a). Note the date, number, physical quantity and customer name. Find the copy 3 in the billing department file for the recording date. Compare (vouch) the quantities noted in copy 3. Find the bill of lading in the shipping department numerical file. Compare (vouch) the quantity shipped, date and customer name. Test of control procedure: select a sample of recorded sales invoices from the sales journal. (same sample as in a and b). Note the date, invoice number, amount and customer name.

Related Questions

Q11. In performing a test of controls, the auditors vouch asample of entries in the purchases journal to the supportingdocuments. Which assertion would this test of controls most likelytest?

A. Completeness

B. Existence

C. Valuation

D. Rights

A. Determination of quantities of goods received

B. Detection of damaged or defective merchandise

C. Preparation of a shipping document

D. Transmittal of goods received to the storeâs department

Q8. Which of the following should be included as a part ofinventory costs of a manufacturing company?

A. Factory Overhead only

B. Direct Labor and Raw Materials

C. Direct Labor, Raw Materials and Factory Overhead

D. None of the Above

Q9. When a primary risk related to an audit is possibleoverstated inventory, the assertion most directly related is:

A. Existence

B. Completeness

C. Clarity

D. Presentation

Q10. When confirming accounts payable, the approach is mostlikely to be one of:

A. Selecting the accounts with the largest balances at year-end,plus a sample of other accounts

B. Selecting the accounts of companies with whom the client haspreviously done the most business, plus a sample of otheraccounts.

C. Selecting a random sample of accounts payable at year-end

D. Confirming all accounts

Q1. Reconciliation of the bank account should not be performedby a person who also processes cash disbursements.

A. True B. False

Q2. Which of the following controls would most likely reduce therisk of diversion of customer payments by a clientâs employees?

A. Pre-numbered checks

B. A bank lockbox

C. Monthly bank reconciliations

D. Daily deposit of cash receipts

Q3. The best way to verify the amounts of dividend revenuereceived during the year is:

A. Re-computation of dividend revenue

B. Examination of cash disbursementrecords

C. Verification by reference to dividend record books

D. Confirmation with dividend-paying companies

Q4. To determine that all sales have been recorded, the auditorswould select a sample of transactions from the:

A. Shipping Department Files C. Receiving Department Files

B. Accounts Receivable Ledger D. Sales Journal

Q5. Which of the following is most likely to be an example offraudulent financial reporting related to sales?

A. Inaccurate billing due to a lack of internalcontrols

B. Recording sales when the customer is very likely to returnthe goods

C. Misbilling a client due to a data input error

D. Cashier error when recording a cash sale

Q6. Which of the following is NOT among the criteria thatordinarily exist for revenue to be recognized?

A. Persuasive evidence of an arrangementexists

B. Collectability is reasonably assured

C. The sellerâs price to the buyer is fixed or determinable

D. Delivery is scheduled to occur at some point in thefuture

Q7. The receiving department is least likely to be responsiblefor the:

A. Determination of quantities of goods received

B. Detection of damaged or defective merchandise

C. Preparation of a shipping document

D. Transmittal of goods received to the storeâs department

amaranthserval39

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

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1. The production manager, Nick Wang, is responsible for initiating orders for inventory. The system sends Nick an email alerting him of the stock falling below 65% of the previous month's usage. He then generates a pre-numbered purchase order (PO). He can also adjust the quantities on the purchase order when he anticipates increases or decreases in sales. The purchase order is then sent to the purchase clerk Ray Kim via email.

2. For inventory orders, Ray normally sends the purchase orders directly to their approved suppliers. The suppliers will then send Ray a confirmation of items and quantities and an estimated date for the parts to be delivered. When the confirmation is received, Ray will log on his computer, finds the relevant PO initiated by Nick and select the supplier's name on the PO and then click on the box "sent to suppliers".

3. If a PO cannot be filled by any of the approved suppliers, Ray may look for a new supplier. When he obtains a quote from a new supplier, he passes the quote and the new supplier's information to his manager, Barry Sadler for approval. Once approved, Barry will add the new supplier into the approved supplier list.

4. Jasmine Lee Ltd requires their suppliers to attach a Delivery Note (DN) with inventory they ordered. DN should have a reference to the relevant PO number and shows the quantities and items being delivered. When a delivery arrives at the warehouse, the warehouse assistant Gordon Scully will reject the delivery if there is no PO on it or the PO number is invalid. Gordon reconciles the DN to the relevant PO on the computer to match items and quantities. Once it is confirmed, Gordon initials and dates one copy of the DN and then passes it to Gary Chen the warehouse manager.

5. When Gary receives the DN, he logs on to a computer and updates the PO to be "received" and the computer is requested to print a pre-numbered Goods Receiving Report (GRR). The computer retrieves a list of the items ordered from Purchase Order Master file and supplier details in the Supplier Master file to check for accuracy and then prints the GRR. Gary then counts the actual items against the GRR. Once all items are counted and checked, Gary updates the inventory record to reflect the actual items and quantities that have been received. When updating inventory, the computer asks for the relevant PO, if the computer accepts the PO number, it automatically displays the ordered items and quantities and ask Gary to confirm. After Gary updates inventory, the system will generate a journal (Note: the journal posted by the system is to Dr Raw materials inventory; Cr Creditor.). Gary then writes the journal number on the GRR and signs it. The signed GRR together with a copy of DN are left in a tray on the desk of Ray.

6. If discrepancies are found between the DN and the results from the actual counting, a copy of the GRR and DN will be passed to Ray to contact the suppliers. Inventory will not be updated until the discrepancies are sort out.

7. Ray receives all supplier invoices. Suppliers include the relevant PO number on their invoices. On receipt of an invoice, Ray agrees the details on supplier's invoice against the relevant PO. If they agree, he sequentially numbers the invoice based on its due date to ensure that it will be paid within discount period. If there are no discrepancies, he prepares a payment requisition for the invoiced amount and forwards the payment requisition, with the invoice attached, to Barry Sadler for authorisation.

8. Barry signs the payment requisitions to confirm authorisation and forwards the documentation to the banking clerk, Toni Burton who keys the payments into the payment journal (the journal posted by the system is Dr Creditor; Cr Bank). The system generates a journal number which Toni writes on the payment requisition to make sure the account payable balance is updated. Toni files the payment requisitions with the supporting documents.

9. Toni then loads the payments on the online banking facility with reference to the payment requisition number. Barry must approve and release the payments. The banking system automatically sends electronic transfer records to Barry who subsequently forwards them to Ray. Ray checks it against supplier invoices and then sends a remittance advice to individual suppliers.

Required:

a) Identity SIX control strengths of the purchases and payments system.

b) For each control strength, explain what the purpose of the control (i.e what does the control prevent or detect).

You may use the following format to present your answer.

Internal control strengths

Identify a control strength (a)

The purpose of the control (b)

c) Identity FIVE control weaknesses of the purchases and payments system.

d) For each control weakness, explain its potential consequence/implication and provide a suggestion for improvement.

You may use the following format to present your answer.

Internal control weaknesses

Identify a control weakness (c)

Consequence/Implication and suggestion for improvement (d)

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ACC 521 Lecture Notes - Lecture 8: Internal Control, Bes, Enquire

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