Tests of Controls and Substantive Tests of Transactions for Apollo Shoes - Essay Example

Audit Program Design Part II Introduction A business can also be viewed as a collection of different systems that operate in a cohesive manner in order to get some results. The purpose of every business is usually to benefit a certain group of customers by providing them products or services that meet their specific needs. But the systems in every business also need to be audited in terms of their suitability and credibility. Before a business can be audited, it is wise to construct an audit design that will aid in the process of audit and not only look at the existing flow of transactions and their recording and reporting on financial statements and other records, but also recommend improvements and needed changes that will serve in terms of clarity, veracity and meet the laws and principles of the land. In this assignment we are going to design tests of controls, substantive tests of transactions, and analytical procedures for the acquisition and payment of the business called Apollo Shoes. The Acquisitions and Payments Process at Apollo Shoes It Is evident that we can only design an audit procedure or process around the existing flow of transactions and their processes at Apollo Shoes. Only in the case of massive fraud or circumstances warranting a detailed investigation would the complete revamping of existing procedures be understandable. According to the present Accounting and Control Procedure Manual as indicated in the Case Study details, all cash disbursements /payments are made by check, signed by the Treasurer, including those for petty cash transactions. Checks are always made out to a defined payee, never to cash. Blank checks remain in the custody of the Accounts Payable Department and the treasurer is not allowed to sign blank checks. Additionally, we see that checks are recorded in the cash disbursements journal using the date of the check, and in the general journal using the month of the check as a factor for recording these entries. Internal Control Procedures While it appears from the case study material especially the accounting and control procedure manual that some degree of internal control has been maintained over cash disbursements/ payments process, there are a few comments to be made. One factor is the separation of ownership and control. Since the treasurer himself signs most of the checks, he can very well make them out to a fictitious vendor and then pocket the money himself after opening up an account in that name. The case of Comptronix as reported in Chapter 19 of the text indicates that collusion between unscrupulous individuals even in top management is not unheard of (Arens et al., 2006). Enron is another case in point. Secondly, the recording of transactions as per date made out on the check leaves some room for error and can result in reconciliation difficulties with the bank statement, as this is a common practice with nearly every business. It is better if a simple chronological order is followed date-wise in recording every transaction of whatever nature so that there is no ambiguity on this account. Concerning the purchase of fixed assets, the approval for the same is usually made in advance by top management. This ensures that they have approved the purchase. Budgetary allocation of funds is also evident, and all excesses of 10% or above to be signed off by the Treasurer. Payments once again are to be made by check. The automatic treatment of fixed assets of value of $5,000 and above as capital expenditure is questionable, and should be looked at on a case to case basis. Assessing Risk Factors Connected with the Acquisitions and Payment Process The risk factor involved due to concentration of the signing of all checks by the Treasurer has been indicated above. It is better that a combination of two signatures be required on every disbursed check. One can be the Head of Department or VP of the section of the business to which the check pertains, and the other would be the Treasurer. The Treasurer and CEO or CFO can be the signatories to all blank or loose checks to be made out, so that at least two persons know of these transactions at a minimum at all times. Or the other signatory can very well be the VP or Department Head of the section of the business to which the check pertains. A proper and detailed record should also be maintained by the Accounts Payable Department for these checks, including purpose of issue and amount and party eventually issued to. Numbering of such checks and date-wise recording and verification at the end of every month should also be done, with the CFO, CEO and Internal Auditor involved in the process. It is best if blank or loose checks are never used at all for the business, as it gives rise to possibilities of fraud and misappropriation. Regarding the purchase or acquisition of fixed assets, care should be taken to label and record all fixed assets with an identifiable number or code while auditing for their completeness and accuracy. Possibilities of under and over invoicing should be looked into. In this case study material, it has been pointed out by the internee Bradley Crumpler that there were quite a number of calculation errors in regard to invoicing and materials/ purchase requisitions, so these should also be looked into. It is also clear that the Reserve for Inventory Obsolescence has been grossly overstated and the Inventory Manager had been making shipments out of old stocks of shoes after recording these as obsolete (Louwers & Reynolds, 2007, p 85). This is really a case of fraud that should be looked into. Designing Tests of Control and Substantive Test of Transactions for Acquisitions It is suggested that a proper procedure be outlined for materials and asset purchases, with material requisitions, purchase invoices, ordering and receiving reports being properly recorded and accounted for. The pricing details, quantity and quality of goods ordered and details of refunds and returns and the reason for the same should also be audited. Cases of under and over invoicing and excessive returns, refunds and pricing errors should also be pointed out and the authorizers at both ends questioned. Designing Tests of Control and Substantive Test of Transactions for Cash Disbursements It is suggested that all cash disbursements be chronologically recorded and all payments be made by check. As far as possible the use of loose and blank checks should be avoided. Payments made to various parties should be checked against their monthly account/vendor statement details. Dual signing be made a necessity. Conclusion In this way it is recommended that a proper audit control procedure over acquisitions and disbursements can and should be maintained. References Arens, A. Elder, R. & Beasley, M. (2006). Auditing and Assurance Services, An Integrative Approach, 11th ed. Pearson Education. Louwers, T. & Reynolds, J. (2007). Apollo Shoes Inc.: A Case to Accompany Auditing and Assurance Services. McGraw Hill/ Irwin. Read More