3 simple auditing questions - Assignment Example

INSTRUCTIONAL S IDENTIFICATION OF AUDIT TESTS FOR THE EXPENDITURE CYCLE (ACQUISITIONS AND CASH DISBURSEMENTS The Winery at Chateau Americana INSTRUCTIONAL OBJECTIVESRecognize common business documents used with purchases and cash disbursementsRecognize common control activities used to process purchases and cash disbursementsIdentify control activities that reduce the likelihood of material misstatementsLink control activities to management assertionsDesign tests of controls for control activities related to purchases and cash disbursementsDesign substantive tests of transactions to detect material misstatements for non-payroll accounts in the expenditure cycleDesign analytical tests to detect potential material misstatements for non-payroll accounts in the expenditure cycleDesign substantive tests of balances to detect material misstatements for accounts payableLink tests of controls, substantive tests of transactions, analytical tests, and substantive tests of balances to management assertions related to purchases, cash payments, and accounts payableIdentify significant deficiencies and material weaknesses for non-payroll expenditure cycle accounts to discuss with management and the audit committeeKEY FACTSThe audit manager, Mikel Frucella, reviewed CA’s control environment, risk assessment policies, and monitoring system and assessed them as strong.

The audit staff, Julia Granger, reviewed CAs policies and procedures related to purchases and cash disbursements and prepared the flowcharts on audit schedules E-110, E111,and E-112.Processes not documented in the flowcharts are as follows: Purchase returns and allowances are recorded in the purchases journal,Purchase discounts are recorded in the cash disbursements journal,Other expenditure cycle adjustments are recorded in the general journal and require preparation of a prenumbered adjustment memo.

Documents and records used to record purchase transactions include a purchase requisition, purchase order, receiving report, vendor invoice, standardized chart of accounts, purchases journal, vendor ledgers file, and general ledger.Documents and records used with respect to cash disbursement transactions include a voucher cover, signed check, bank statement, standardized chart of accounts, cash disbursements journal, vendor ledgers file, and general ledger. Receiving reports are only generated for production and PP&E purchases.

Purchase orders are not generated for recurring services, such as utilities.SUGGESTED SOLUTION Complete steps 5 through 8 in the Expenditure Cycle Planning Audit Program (audit schedule E-100) and document your work on audit schedules E-100, E-120, E-121, E-130, E-140, E-141, E-150, E-151, E-160, E-161, E-170, and E-171. Julia Granger has already completed steps 1 through 4 and has documented the results of her work on audit schedules E-100, E-110, E-111, and E-112. Assume that the client performs the control activities identified in the flowcharts.

A solution to the assignment is provided using schedules similar to the schedules provided to students on the pages that follow. Again, due to the subjective nature of some of the judgments alternative solutions could be considered equally acceptable. Note that the solution lists potential audit tests that could be performed. It is very unlikely that an auditor would decide to perform all these audit tests. Additionally, the solution does not indicate whether the audit test should be performed on the entire population or a sample of the population.

The Winery at Chateau AmericanaReference:E-100Expenditure Cycle Planning Audit ProgramPrepared by:JG (initial)Date: (date)11/12/XXFor the Year Ended: December 31, 20XXReviewed by:Audit ProceduresInitialDateA/S Ref.1. Obtain and study a copy of the clients policies and procedures manuals related to purchases and cash disbursements.JG11/12/XXN/A2. Discuss with and observe client personnel performing control activities related to purchases and cash disbursements.JG11/12/XXN/A3. Perform a document walk-through of the clients polices and procedures related to purchases and cash disbursements.

JG11/12/XXN/A4. Obtain or prepare a flowchart for purchases and cash disbursements showing control activities, document flows, and records.JG11/12/XXE-110E-111E-1125. Use the control activities matrix to list client control activities that reduce the likelihood of material misstatements for management assertions related to purchases and cash disbursements.(initial)(date)E-120E-1216. Based on the previous audit procedures, list potential internal control deficiencies on the internal control deficiencies schedule.(initial)(date)E-1307.

Use the planning audit test matrices to list potential tests of controls related to purchases and cash disbursements.(initial)(date)E-140E-1418. Use the planning audit test matrices to identify potentiala. Substantive tests of transactions, (initial)(date)E-150E-151b. Analytical tests, and(initial)(date)E-160E-161c. Tests of balances related to non-payroll expenditure cycle accounts.(initial)(date)E-170E-171The Winery at Chateau AmericanaReference:E-120Expenditure Cycle – Purchases Control Activities Prepared by:(initial)MatrixDate:(date)For the Year Ended December 31, 20XXReviewed by:Control ActivitiesExistenceRights and ObligationsValuationPresentationand DisclosureCompleteness1) Purchasing supervisor reviews and signs all purchase orders.XX2) Receiving department counts and inspects production and PP&E items and compares to purchase order.XXX3) Receiving department prepares a prenumbered receiving report for production and PP&E purchases.X4) Vendor invoices are recomputed and matched to receiving report and purchase order.XX5) Vendor invoices for non-production and non-PP&E items are routed to department purchasing item for acceptance and approval.XX6) Purchases journal, vendor ledgers, inventory file, and G/L are automatically updated when vendor invoice is input by accounting.X7) Accounting supervisor reviews purchases journal for proper account classification of purchases.

XXXIdentify the management assertion(s) each control activity affects with an "X."The Winery at Chateau AmericanaReference:E-121Expenditure Cycle – Cash Disbursements Control Prepared by:(initial)Activities MatrixDate:(date)For the Year Ended December 31, 20XXReviewed by:Control ActivitiesExistenceRights and ObligationsValuationPresentationand DisclosureCompleteness1) Cash disbursements journal, vendor ledgers, and G/L are automatically updated when accounting prints checks.X2) Accounting supervisor reviews voucher packages for reasonableness and proper account classification and initials voucher cover.XXXX3) CFO reviews voucher packages for reasonableness, signs checks, and stamps documents included in voucher package “Paid.”XXX5) Cash checking account is reconciled monthly by the executive secretary and reviewed by CEO.XXX6) all income and related collections from the investments and other income generating activities are properly recorded.X7) the market and or other values of the investments is stated fairly X8) The market value of all the investments is stated fairly and the losses are properly recognized as well as recorded.X9) Transfers are appropriately authorized and the financial statements presentation including the disclosure of all investments conforms to the generally accepted accounting principles that are consistently applied.X10) the custodian is holding securities as is identified in the confirmation.

XIdentify the management assertion(s) each control activity affects with an "X."The Winery at Chateau AmericanaReference:E-130Expenditure Cycle – Internal Control DeficienciesPrepared by:(initial)Date:(date)For the Year Ended December 31, 20XXReviewed by:Internal Control DeficienciesClient Personnel Discussed WithSDMW1) there is no completion of a monthly bank reconciliation by the clients personnel who are both independent of handling and recording of the cash receipts and the cash disbursementsYesNo2) the client does not have substantive tests of transactions for cash receipts and cash disbursements.YesNo3) the client does not have structures of receiving and reviewing reportYes yes The client does not have extensive tests of the entitys bank reconciliationsNo yesClient has no structure for accounts reconciliation and segregation of dutiesYes noClient has complex accounting system (Louwers et al, 2007)yesnoClient does not have clear structures for assertions for investments occurrence, authorization, completeness, accuracy, and classificationLegend:SD – Significant Deficiency (Yes or No)MW – Material Weakness (Yes or No)The Winery at Chateau AmericanaReference:E-140Expenditure Cycle - Tests of Controls Planning MatrixPrepared by:(initial)Date:(date)For the Year Ended December 31, 20XXReviewed by:PurchasesCash DisbursementsAccounts PayableTests of ControlsExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessTC1) Inquire and observe the purchasing WWWsupervisor reviewing and signing purchase orders.TC2) Examine purchase orders for supervisorMMMsignature.TC3) Review purchase orders to ensure purchasesMMMare consistent with company policy.TC4) Inquire and observe the receiving WWWWWdepartment inspecting and comparing productionand PP&E items to purchase order.TC5) Review receiving reports and compare to MMMMMpurchase orders.TC6) Inquire and observe the use of prenumberedWWreceiving reports.TC7) Examine prenumbered receiving reports.WWTC8) Inquire and observe the recomputation and WWWWcomparison of vendor invoices to purchase ordersand receiving reports.TC9) Inspect documentation or approval supportingWWWWvendor invoices.TC10) Recompute vendor invoices and compare to MMMMpurchase orders and receiving reports.TC11) Inquire concerning the automatic updating ofWWpurchases journal, vendor ledgers, inventory file, and G/L.TC12) Trace vendor invoices to recording in MMpurchases journal, vendor ledgers, inventory file,and G/L.

Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion.The Winery at Chateau AmericanaReference:E-141Expenditure Cycle - Tests of Controls Planning MatrixPrepared by:(initial)Date:(date)For the Year Ended December 31, 20XXReviewed by:PurchasesCash DisbursementsAccounts PayableTests of ControlsExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessTC13) Inquire and observe the accounting Wsupervisor reviewing the purchases journal for proper account classification.TC14) Review purchases journal for proper Mclassification of purchases.TC15) Inquire concerning the automatic updating ofWWWWcash disbursement journal, vendor ledgers, inventory file, and G/L.TC16) Trace checks to recording in cashMMMMdisbursement journal, vendor ledgers, inventoryfile, and G/L.TC17) Inquire and observe the accounting WWWWsupervisor reviewing voucher packages and initialing voucher cover.TC18) Inspect voucher package for accountingWWWWsupervisor initial.TC19) Inspect voucher package documentationMMMMfor reasonableness and being stamped “Paid.”TC20) Inquire and observe the CFO reviewing WWWWvoucher packages and signing checks.TC21) Examine CFO signature on cancelled checks.MMMMTC22)Inquire and observe the preparation of theWWWWWWmonthly bank reconciliations.TC23) Inspect the monthly bank reconciliations.

MMMMMMTC24) Reperform the monthly bank reconciliations.MMMMMMIndicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion.The Winery at Chateau AmericanaReference:E-150Expenditure Cycle - Substantive Tests of Transactions Prepared by:(initial)Planning MatrixDate:(date)For the Year Ended December 31, 20XXReviewed by:PurchasesCash DisbursementsAccounts PayableSubstantive Tests of TransactionsExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessTT1) Vouch purchases recorded in the MMMMMM purchases journal to supporting documents.TT2) Trace receiving reports to vendor invoices MMMMMMand recording in the purchases journal.TT3) Recompute vendor invoice amounts by MMMMreference to purchase order and receiving report.TT4) Foot the purchases journal and agree to MMposting in G/L and vendor ledgers files.TT5) Vouch purchase returns and allowancesMMMMMrecorded in the purchases journal to supportingdocuments.TT6) Vouch cash disbursements recorded in theMMMMMMcash disbursements journal to supportingdocuments.TT7) Trace checks to voucher package and MMMMMMrecording in cash disbursements journal.TT8) Foot the cash disbursements journal and MMagree to posting in G/L and vendor ledgers files. TT9) Recompute purchase discounts recorded inMMpurchases journal by reference to vendor invoice.

Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion.The Winery at Chateau AmericanaReference:E-160Expenditure Cycle – Analytical Tests Planning MatrixPrepared by:(initial)Date:(date)For the Year Ended December 31, 20XXReviewed by:PurchasesCash DisbursementsAccounts PayableAnalytical TestsExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessAT1) Scan the year-end vendor ledgers for MMMMMMMMMlarge, unusual, related party or debit balances and perform follow-up procedures for each one identified.AT2) Scan the purchases journal for large, unusual, MMMMMMMor related party transactions and perform follow-upprocedures for each one identified.AT3) Scan the cash disbursement journal for large, MMMunusual, or related party transactions and perform follow-up procedures for each one identified.AT4) Scan the numerical sequence of checks in the MMcash disbursement journal and perform follow-up procedures for missing numbers.AT5) Scan the general journal for large, unusual, MMMMMMMor related party expenditure cycle transactions andperform follow-up procedures for each one identified.AT6) Compare current year expense account WWWWWWWWWWWWWbalances to prior year balances on an absolute and percent of sales basis and perform follow-up procedures for unexpected relationships.AT7) Compare current year inventory turnover toWWWWWWWWWWWWWprior year turnover and perform follow-up procedures for unexpected relationships.AT8) Compare current year accounts payable WWWWWWWWWWWWWturnover to prior year turnover and perform follow-up procedures for unexpected relationships.

Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion.The Winery at Chateau AmericanaReference:E-170Expenditure Cycle - Tests of Balances Planning MatrixPrepared by:(initial)Date:(date)For the Year Ended December 31, 20XXReviewed by:PurchasesCash DisbursementsAccounts PayableTests of BalancesExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessTB1) Obtain the last five receiving reports WMWMissued before year-end and determine if they were properly included in the purchases journal and year-end vendor ledgers.TB2) Obtain the first five receiving reports issuedMWMWafter year-end and determine if they were properlyexcluded from the purchases journal and year-endvendor ledgers.TB3) Obtain the last five checks issued before year-WMMWend and determine if the related payables were properly excluded from the year-end vendorledgers.TB4) Obtain the first five checks issued after year-MWWMend and determine if the related payables were properly included in the year-end vendor ledgers.TB5) Examine documents supporting purchaseWMWreturns and allowances recorded just after year-end to ensure proper accounting.TB6) Examine documents supporting purchaseWWMreturns and allowances recorded just before year-end to ensure proper accounting.TB7) Confirm accounts payable balances on the SWWWWSSWWyear-end vendor ledgers with the vendor.TB8) Select a sample of checks issued after year-MMMMMMMend.

Examine the related voucher package and determine if the related payables were properlyincluded or excluded from the year-end vendorledgers.Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion.The Winery at Chateau AmericanaReference:E-171Expenditure Cycle – Tests of Balances Planning MatrixPrepared by:(initial)Date:(date)For the Year Ended December 31, 20XXReviewed by:PurchasesCash DisbursementsAccounts PayableTests of BalancesExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessExistenceRights/ObligationsValuationPresentation/DisclosureCompletenessTB9) Foot the printout of the year-end accounts MMMpayable vendor ledgers and agree the footedbalance to the general ledger.TB10) Review board of directors’ meeting minutesMfor indication of related party payables.TB11) Inquire of management concerning relatedWparty and noncurrent payables.

Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion.Flow chart documentationThe flow chart refers to the whole process for the expenditure cycle –purchase at the winery at chateau, Americana. The company purchases material from the vendors, the purchased material are inspected and counted and the prices compared to the purchase orders and a pre-numbered receiving report is prepared. / After that the receiving report and the purchase order are issued.

On the accounting side, the accountants receive the invoices from the vendors for the items purchased. All the materials that are not accounted for in terms of receiving report are transferred to the appropriate department for acknowledgment for the receipt. The vendors document are marched with the appropriate accounted document to allow for documentation in the purchase journal, vendor ledger, general ledger and the inventory files. The files are reviewed by the supervisor. All the reports such as the purchase order, receiving report and vendor invoices are documented by the supervisor.

References Louwers et al, (2007). Auditing and Assurance Services, (2nd ). McGraw-Hill/Irwin: The McGraw-Hill Companies, Inc.