18-32 (Objectives 18-2, 18-3, 18-4, 18-6)
18-32 (Objectives 18-2, 18-3, 18-4, 18-6) The following tests of controls The following tests of controls andand substantive
substantive
tests of transactions audit procedures for acquisitions and cash disbursements tests of transactions audit procedures for acquisitions and cash disbursements are to be
are to be
used in the audit of Ward Publishing Company. You concluded that internal used in the audit of Ward Publishing Company. You concluded that internal control
control
appears eective and a reduced assessed control risk is likely to be appears eective and a reduced assessed control risk is likely to be costcost benecial. Ward!s
benecial. Ward!s
active involvement in the business" good separation of
active involvement in the business" good separation of duties" and a competentduties" and a competent controller
controller
and other employees are factors aecting your
and other employees are factors aecting your opinion.opinion.
Ward Publishing Company # Part $
Ward Publishing Company # Part $
%&ee page '() for Part $$" and Case *+,)- on pages '/'' for Part $$$0
%&ee page '() for Part $$" and Case *+,)- on pages '/'' for Part $$$0
T
Tests of Contrests of Controls and &ubsols and &ubstantive Ttantive Tests of Tests of Transactions 1udransactions 1udit Proceit Proceduresdures
for 1cquisitions and
for 1cquisitions and Cash 2isbursementsCash 2isbursements
*. 3oot and cross,foot the acquisitions and cash disbursements 4ournals for ) *. 3oot and cross,foot the acquisitions and cash disbursements 4ournals for ) months
months
and trace totals to postings in the
and trace totals to postings in the general ledgergeneral ledger..
). &can the acquisitions and cash disbursements 4ournals for
). &can the acquisitions and cash disbursements 4ournals for all months andall months and investigate
investigate
any unusual entries. any unusual entries.
(. 5econcile cash disbursements per books to cash disbursements per bank (. 5econcile cash disbursements per books to cash disbursements per bank statement
statement for * month. for * month.
6. 78amine evidence
6. 78amine evidence that the bank that the bank reconciliation is prepared by the reconciliation is prepared by the controllercontroller.. . $nquire and observe whether the accounts payable m
. $nquire and observe whether the accounts payable master le balances areaster le balances are peri odically reconciled
peri odically reconciled to vendors! statements by the to vendors! statements by the controllercontroller..
'. 78amine the log book as evidence that the numerical sequence of checks is '. 78amine the log book as evidence that the numerical sequence of checks is accounted
accounted
for by someone independent of the preparation function. for by someone independent of the preparation function. 9. $nquire and observe that checks are mailed by
9. $nquire and observe that checks are mailed by 2. War2. Ward or someone under hid or someone under hiss supervision after he signs checks.
supervision after he signs checks. -. 78amine initials indicating that the
-. 78amine initials indicating that the controller balances the accounts payablecontroller balances the accounts payable master
master le to the
le to the general ledger general ledger monthlymonthly.. +. &elect a sample of
+. &elect a sample of entries in the cash disbursements 4ournal" andentries in the cash disbursements 4ournal" and a. obtain related cancelled checks and comp
a. obtain related cancelled checks and compare with entry for payee" date" andare with entry for payee" date" and amount and e8amine signature endorsement.
amount and e8amine signature endorsement. b. obtain vendors! invoices" receiving
b. obtain vendors! invoices" receiving reports" and purchase orders" andreports" and purchase orders" and %*0 determine that supporting documents are attached to vendors! invoices. %*0 determine that supporting documents are attached to vendors! invoices. %)0 determine that documents agree with the cash disbursements 4ournal. %)0 determine that documents agree with the cash disbursements 4ournal. %(0 compare vendors! names" amounts" and dates with entries.
%(0 compare vendors! names" amounts" and dates with entries. %60 determine whether a discount was taken when appropriate. %60 determine whether a discount was taken when appropriate. %0 e8amine vendors! invoices for initials indicating an
%0 e8amine vendors! invoices for initials indicating an independent review of independent review of chart of account codings.
chart of account codings.
%'0 e8amine reasonableness of cash disbursements and account codings. %'0 e8amine reasonableness of cash disbursements and account codings. %90 review invoices for
%-0 review purchase orders and:or purchase requisitions for proper approval. %+0 verify prices and recalculate footings and e8tensions on invoices.
%*;0 compare quantities and descriptions on purchase orders" receiving reports" and vendors! invoices to the e8tent applicable.
%**0 e8amine vendors! invoices and receiving reports to determine that the check
numbers are included and the documents are marked <paid= at the time of check signing.
c. Trace postings to the accounts payable master le for name" amount" and date.
*;. &elect a sample of receiving reports issued during the year and trace to vendors!
invoice and entries in the acquisitions 4ournal.
a. Compare type of merchandise" name of vendor" date received" quantities" and amounts.
b. $f the transaction is indicated in the acquisitions 4ournal as paid" trace the check
number to the entry in the cash disbursements 4ournal. $f unpaid" investigate reasons.
c. Trace transactions to accounts payable master le" comparing name" amount" and date.
Prepare all parts of a sampling data sheet %such as the one in 3igure *,) on page 6+;0 through
the planned sample si>e for the preceding audit program" assuming that a line item in the
cash disbursements 4ournal is used for the sampling unit. ?se either nonstatistical or
attributes sampling. 3or all procedures for which the line item in the cash disbursements
4ournal is not an appropriate sampling unit" assume that audit procedures were performed
on a nonsampling basis. 3or all tests of controls" use a tolerable e8ception rate of @" and
for all substantive tests of transactions" use a rate of '@. ?se an 151C5 of *;@" which is
considered medium. Plan for an estimated population e8ception rate of *@ for tests of con trols and ;@ for substantive tests of transactions.
Prepare the data sheet using the computer %instructor option#also applies to Part $$0.
Part $$
1ssume a sample si>e of ; for all procedures" regardless of your answers in Part $. 3or
other procedures" assume that an adequate sample si>e for the circumstance was selected.
The only e8ceptions in your audit tests for all tests of controls and substantive tests of
*. Procedure )#Two large transactions were identied as being unusual. $nvestigation
determined that they were authori>ed acquisitions of 8ed assets. They were both
correctly recorded.
). Procedure +b%*0#1 purchase order was not attached to a vendor!s invoice. The pur chase order was found in a separate le and determined to be approved
and appropriate.
(. Procedure +b%0#&i8 vendors! invoices were not initialed as being internally veried. Three actual misclassications e8isted. The controller e8plained that he often did not review codings because of the competence of the accounting clerk doing the coding and was surprised at the mistakes.
a. Complete the sampling data sheet from Part $ using either nonstatistical or attributes
sampling.
b. 78plain the eect of the e8ceptions on tests of details of accounts payable. Which
balance,related audit ob4ectives are aected" and how do those ob4ectives" in turn"
aect the audit of accounts payableB
c. iven your tests of controls and substantive tests of transactions results" write an audit
program for tests of details of balances for accounts payable. 1ssumeA
%*0 The client provided a list of accounts payable" prepared from the master le. %)0 1cceptable audit risk for accounts payable is high.
%(0 $nherent risk for accounts payable is low. %60 1nalytical procedure results were e8cellent.
Ward Publishing Company # Part $$$ %&ee Case *-,() for Parts $ and $$0
19-28 (Objectives 19-1, 19-2, 19-5) 78amine the tests of controls and substantive tests of
transactions results" including the sampling application in Case *-,() %pp. '(;/ '()0" for
Ward Publishing Company. 1ssume that you have already reached several conclusions.
*. Your tests of details of balances for accounts payable are completed" and you found
no e8ceptions.
). 1cceptable audit risk for property" plant" and equipment and all e8penses is high.
(. $nherent risk for property" plant" and equipment is high because in the current year" the
client has acquired a material amount of new and used printing equipment and has
returnedD
an allowance was received on others. $nherent risk for e8pense accounts is low. 6. Eew computer equipment and some printing equipment are being leased. The client
has never leased equipment before.
. 1nalytical procedures for property" plant" and equipment are inconclusive because of
the large increases in acquisition and disposal activity.
'. 1nalytical procedures show that repairs" maintenance" and small tools e8penses have
increased materially" both in absolute terms and as a percentage of sales. Two other
e8penses have also materially increased" and one has materially decreased. 9. $n e8amining the sample for tests of controls and substantive tests of transactions"
you observe that no sample items included any property" plant" and equipment or
lease transactions.
a. 78plain the relationship between the tests of controls and substantive tests of trans actions results in Case *-,() and the audit of property" plant" and
equipment and leases.
b. Fow will the tests of controls and substantive tests of transactions results and your
conclusions %* through 90 aect your planned tests of details for property" plant" and
equipment and leasesB &tate your conclusions for each balance,related audit ob4ective.
2o not write an audit program.
c. 78plain the relationship between the tests of controls and substantive tests of trans actions results in Case *-,() and the audit of e8penses.
d. Fow will the tests of controls and substantive tests of transactions results and your
conclusions %* through 90 aect your planned tests of details of balances for e8pensesB
2o not write an audit program.
1nswerA
G Case / Ward Publishing Company *-,()
Part $
Computer &olution. Computer prepared data sheets using 78cel are contained on the Companion Web site %3ilename P*-().8ls0. 1pplication of audit sampling is
not appropriate for Procedures *,- due to the nature of the procedures. $n this case" audit sampling is also not appropriate for
*-,() , Part $ %continued0 Procedure *; because the sampling unit is a line item in the cash disbursements 4ournal. The sampling data sheet that follows
represents an attributes sampling approach. The only dierences between this approach and a nonstatistical sampling approach are the estimate of 151C5 and the determination of sample si>es. &ee the footnotes to the sampling data sheet for further e8planations. 1 sampling data sheet using attributes sampling followsA
27&C5$PT$HE H3 1TT5$I?T7 PJ1EE72 1?2$T 7P75 T75 151C5K $E$T$1J &1LPJ7 &$M7KK +.a. 7ntry in C2 4ournal agrees
with details on cancelled check.
;@ '@ *;@
(-+.b.%*0 1ll supporting documents attached to vendor!s invoice.
*@ @ *;@ 99
+.b.%)0 2ocuments agree with disbursements.
;@ '@ *;@
(-+.b.%(0 7ntry in C2 4ournal agrees with details on vendorNs invoice.
;@ '@ *;@
(-+.b.%60 2iscount was taken as appropriate.
;@ '@ *;@
(-+.b.%0 OendorNs invoice initialed. *@ @ *;@ 99 +.b.%'0 1ccount coding reasonable. ;@ '@ *;@ (-+.b.%90 Purchases approved by
Ward. *@ @ *;@ 99
+.b.%-0 P.H. or P.5. properly
approved. *@ @ *;@ 99
+.b.%+0 Prices" footings and e8tensions are correct.
;@ '@ *;@
(-+.b.%*;0 2etails on supporting documents agree.
;@ '@ *;@
(-+.b.%**0 2ocuments properly
completed and cancelled upon payment.
*@ @ *;@ 99
K 3or a nonstatistical sampling data sheet" 151C5 columns should indicate <medium= for all attributes.
KK 3or a nonstatistical sampling data sheet" students! determination of sample si>e will vary. While no one answer
Part $$
a. 1ttributes sampling approachA The results portion of the sampling data sheet are as followsA
1TT5$I?T7 &1LPJ7 7QC7PT$HE
EH. &$M7 7QC7PT$HE& 51T7 C?75
+.a. ; ; ; 6.'@ +.b. %*0 ; *K )@ 9.'@ %)0 ; ; ; 6.'@ %(0 ; ; ; 6.'@ %60 ; ; ; 6.'@ %0 ; 'K *)@ over *9.-@ %'0 ; (KK '@ *).+@ %90 ; ; ; 6.'@ %-0 ; ; ; 6.'@ %+0 ; ; ; 6.'@ %*;0 ; ; ; 6.'@ %**0 ; ; ; 6.'@ K Control deviations K K Lonetary misstatements
Eonstatistical approachA Iecause C?75 under nonstatistical
sampling is estimated using auditor 4udgment" students! answers to
this question will vary. They will most likely be similar to the C?75s
calculated using attributes sampling. Iecause the &75 is >ero for
attributes +.a." +.b.%)0,%60" and +.b.%90,%**0" it is unlikely that
students will estimate C?75 greater than the T75 of @ %tests of
controls0 or '@ %substantive tests of transactions0. 3or attribute +.b.
%0 students should conclude that the results are not acceptable
because the &75 of *)@ clearly e8ceeds the T75 of @. 3or attribute
+.b.%'0" even though the &75 equals the T75 of '@" the results are
not acceptable because sampling error must be considered in
determining C?75. 3or attribute +.b.%*0" students! estimates of C?75
will be more variable since the &75 is only )@. &ome students will
nd the results acceptable" and some will not" depending on their
estimates of sampling error.
b. 78ception * is not an e8ception" and has no eect on tests of details of accounts payable. 78ception ) is a control deviation. 7ven though it is not a monetary misstatement" controls require the presence of all supporting documents before a purchase and the related disbursement are
processed. $f an invalid purchase is recorded" the liability and the related debited account may be overstated. $f an invalid disbursement is recorded" accounts payable may be inappropriately reduced.
Thus" misstatements in the occurrence of those transactions could actually result in both overstatements and understatements of accounts payable. Tests for occurrence include tracing items on the accounts payable listing
to supporting documents and conrmation of accounts payable and reconciliation to vendorNs statements. 78ception ( is a control deviation where one,half of those items also contain monetary misstatements.
Lisclassication is a serious misstatement. Fowever" it relates to the de bit entry" not the credit to accounts payable. Tests supporting charges to
assets and e8pense accounts will need to be increased" but tests of accounts payable will probably not be aected.
c. Hn the following page is an audit program for accounts payable. The balance,related audit ob4ectives tested by each procedure are indicated. Iecause the appropriate audit risk for accounts payable is high and
inherent risk is low" and because analytical review procedures were e8cellent" detailed tests should be held to a minimum. The e8ception to this is for procedure (D this has not been reduced because of the e8ception in procedure +.b.%*0 I1J1EC7,57J1T72 1?2$T HIR7CT$O7& 2 et ai l t i e ,i n 7 8i s t en c e C om pl et en e s s 1 c c ur a c y C l a s s i c at i on C ut of
*. Hbtain list of accounts payable. 3oot the list and
agree to general ledger. Q
). Trace all items on the list over S*;";;; to
vendorNs invoice and supporting documents. Q Q
(. Hbtain vendorNs statements for ); vendors
with greatest volume of purchases" plus *; others"
by conrmation. 5econcile statements Q Q Q Q
to accounts payable list.
6. 78amine all subsequent period disbursements and payments in process of amounts over S";;;
to determine if they were recorded in Q Q
the proper period.
. 5eview the list of accounts payable for proper
classication of accounts due to related parties" Q debit balances" or items with unusual terms.
EoteA 5ights and 5eali>able value are not applicable to accounts payable. Eo audit work was
