Chapter 18, Problem 19DQP

a.

To determine

The transaction – related audit objective(s) being fulfilled if the control is in effect.

Explanation of Solution

Do personnel who are independent of the receiving and shipping functions and the payables and distributing functions perform the purchasing function:

The transaction-related objective here is ‘occurrence’.

Are all receiving reports pre-numbered and the numerical sequence checked by a person independent of check preparations:

The transaction-related objective here is ‘completeness’.

Are all vendors’ invoices routed directly to accounting from the mailroom?:

The transaction-related objective here is ‘timing and completeness’.

Does the accounts payable clerk match the description and quantities of goods on the purchase order, receiving report, and vendor’s invoice:

The transaction-related objective here is ‘classification’.

Does a responsible employee review and approve the invoice account distribution before the transaction is entered in the computer:

The transaction-related objective here is ‘classifications’.

Are all extensions, footings, discounts, and freight terms on vendors’ invoices checked for accuracy:

The transaction-related objective here is ‘accuracy’.

Are checks automatically posted in the cash disbursement journal as they are prepared?:

The transaction-related objective here is ‘timing and completeness’.

Are all supporting documents properly cancelled at the time the checks are signed?:

The transaction-related objective here is ‘occurrence’.

Is the custody of checks after signature and before mailing handled by an employee independent of all payable, disbursing, cash, and general ledger functions?:

The transaction-related objective here is ‘occurrence’.

b.

To determine

List the test of controls to test its effectiveness.

Explanation of Solution

Do personnel who are independent of the receiving and shipping functions and the payables and distributing functions perform the purchasing function:

The test of control in this is ‘observe and inquire about personnel performing purchasing, shipping, payables, and disbursing functions.

Are all receiving reports pre-numbered and the numerical sequence checked by a person independent of check preparations:

The test of control in this is ‘account for numerical sequence of receiving reports and determine that all were recorded’.

Are all vendors’ invoices routed directly to accounting from the mailroom?:

The test of control in this is ‘observe and enquire about the procedure performed by mail clerk. Compare date mail is received to date accounting received invoices’.

Does the accounts payable clerk match the description and quantities of goods on the purchase order, receiving report, and vendor’s invoice:

The test of control in this is ‘examine indication of approval’.

Does a responsible employee review and approve the invoice account distribution before the transaction is entered in the computer:

The test of control in this is ‘examine indication of approval’.

Are all extensions, footings, discounts, and freight terms on vendors’ invoices checked for accuracy:

The test of control in this is ‘examine cancelled invoices for indication of checking for clerical accuracy’.

Are checks automatically posted in the cash disbursement journal as they are prepared?:

The test of control in this is ‘Observe whether the system automatically post checks when they are prepared’.

Are all supporting documents properly cancelled at the time the checks are signed?:

The test of control in this is ‘Examine invoices for which checks have been disbursed to determine that they have been cancelled’.

Is the custody of checks after signature and before mailing handled by an employee independent of all payable, disbursing, cash, and general ledger functions?:

The test of control in this is ‘observe and inquire about the handling of checks from the time they are mailed to suppliers’.

c.

To determine

Potential financial misstatement if the control is not in effect.

Explanation of Solution

Do personnel who are independent of the receiving and shipping functions and the payables and distributing functions perform the purchasing function:

The potential misstatement here is ‘receiving reports are misplaced and acquisitions not recorded’.

Are all receiving reports pre-numbered and the numerical sequence checked by a person independent of check preparations:

The potential misstatement here is ‘receiving reports are misplaced and acquisitions not recorded’.

Are all vendors’ invoices routed directly to accounting from the mailroom?:

The potential misstatement here is ‘late recording or non-recoding of liabilities to suppliers’.

Does the accounts payable clerk match the description and quantities of goods on the purchase order, receiving report, and vendor’s invoice:

The potential misstatement here is ‘acquisitions are recorded in the wrong account’.

Does a responsible employee review and approve the invoice account distribution before the transaction is entered in the computer:

The potential misstatement here is ‘Acquisitions are recorded in wrong account’.

Are all extensions, footings, discounts, and freight terms on vendors’ invoices checked for accuracy:

The potential misstatement in this is ‘Acquisitions from vendor are recorded at improper amounts’.

Are checks automatically posted in the cash disbursement journal as they are prepared?:

The potential misstatement here is ‘checks are disbursed and not recorded or they are recorded in the wrong time period’.

Are all supporting documents properly cancelled at the time the checks are signed?:

The potential misstatement here is ‘invoices are recorded and paid more than once’.

Is the custody of checks after signature and before mailing handled by an employee independent of all payable, disbursing, cash, and general ledger functions?:

The potential misstatement here is ‘checks are disbursed and no merchandise is received. Checks are received by someone other than the supplier for whom they are intended’.

d.

To determine

Substantive audit procedure, for each misstatement, that can be used to determine whether a material misstatement exists.

Explanation of Solution

Do personnel who are independent of the receiving and shipping functions and the payables and distributing functions perform the purchasing function:

The substantive audit procedure that can be used here is ‘vendor statement reconciliation’ and ‘review of physical inventory shortages’.

Are all receiving reports pre-numbered and the numerical sequence checked by a person independent of check preparations:

The substantive audit procedure that can be used here is ‘vendor statement reconciliation’.

Are all vendors’ invoices routed directly to accounting from the mailroom?:

The substantive audit procedure that can be used here is ‘vendor statement reconciliation’ and ‘search for un recorded liabilities’.

Does the accounts payable clerk match the description and quantities of goods on the purchase order, receiving report, and vendor’s invoice:

The substantive audit procedure that can be used here is ‘examine supportive invoice for reasonableness of accounting distribution’.

Does a responsible employee review and approve the invoice account distribution before the transaction is entered in the computer:

The substantive audit procedure that can be used here is ‘examine supportive invoice for reasonableness of accounting distribution’.

Are all extensions, footings, discounts, and freight terms on vendors’ invoices checked for accuracy:

The substantive audit procedure that can be used here is ‘text extensions, footings, discounts, and freight terms on vendor’s invoices’.

Are checks automatically posted in the cash disbursement journal as they are prepared?:

The substantive audit procedure that can be used here is ‘examine checks clearing the banks prior to year-end to determine that they were recorded in the cash disbursement journal prior to year-end’.

Are all supporting documents properly cancelled at the time the checks are signed?:

The substantive audit procedure that can be used here is ‘examine vendor statements, noting any unrecorded payment appearing on the statement’.

Is the custody of checks after signature and before mailing handled by an employee independent of all payable, disbursing, cash, and general ledger functions?:

The substantive audit procedure that can be used here is ‘trace checks to supporting  invoice and determine reasonableness of expenditure. Reconcile vendor’s statements’.