3 simple auditing questions

INSTRUCTIONAL S IDENTIFICATION OF AUDIT TESTS FOR THE EXPENDITURE CYCLE (ACQUISITIONS AND CASH DISBURSEMENTS The Winery at Chateau Americana INSTRUCTIONAL OBJECTIVES
Recognize common business documents used with purchases and cash disbursements
Recognize common control activities used to process purchases and cash disbursements
Identify control activities that reduce the likelihood of material misstatements
Link control activities to management assertions
Design tests of controls for control activities related to purchases and cash disbursements
Design substantive tests of transactions to detect material misstatements for non-payroll accounts in the expenditure cycle
Design analytical tests to detect potential material misstatements for non-payroll accounts in the expenditure cycle
Design substantive tests of balances to detect material misstatements for accounts payable
Link tests of controls, substantive tests of transactions, analytical tests, and substantive tests of balances to management assertions related to purchases, cash payments, and accounts payable
Identify significant deficiencies and material weaknesses for non-payroll expenditure cycle accounts to discuss with management and the audit committee
KEY FACTS
The 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 Americana
Reference:
E-100
Expenditure Cycle Planning Audit Program
Prepared by:
JG (initial)
Date: (date)
11/12/XX
For the Year Ended: December 31, 20XX
Reviewed by:
Audit Procedures
Initial
Date
A/S Ref.
1. Obtain and study a copy of the clients policies and procedures manuals related to purchases and cash disbursements.
JG
11/12/XX
N/A
2. Discuss with and observe client personnel performing control activities related to purchases and cash disbursements.
JG
11/12/XX
N/A
3. Perform a document walk-through of the clients polices and procedures related to purchases and cash disbursements.
JG
11/12/XX
N/A
4. Obtain or prepare a flowchart for purchases and cash disbursements showing control activities, document flows, and records.
JG
11/12/XX
E-110
E-111
E-112
5. 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-120
E-121
6. Based on the previous audit procedures, list potential internal control deficiencies on the internal control deficiencies schedule.
(initial)
(date)
E-130
7. Use the planning audit test matrices to list potential tests of controls related to purchases and cash disbursements.
(initial)
(date)
E-140
E-141
8. Use the planning audit test matrices to identify potential
a. Substantive tests of transactions,
(initial)
(date)
E-150
E-151
b. Analytical tests, and
(initial)
(date)
E-160
E-161
c. Tests of balances related to non-payroll expenditure cycle accounts.
(initial)
(date)
E-170
E-171
The Winery at Chateau Americana
Reference:
E-120
Expenditure Cycle – Purchases Control Activities
Prepared by:
(initial)
Matrix
Date:
(date)
For the Year Ended December 31, 20XX
Reviewed by:
Control Activities
Existence
Rights and Obligations
Valuation
Presentation
and Disclosure
Completeness
1)Purchasing supervisor reviews and signs all purchase orders.
X
X
2)Receiving department counts and inspects production and PP&E items and compares to purchase order.
X
X
X
3) Receiving department prepares a prenumbered receiving report for production and PP&E purchases.
X
4)Vendor invoices are recomputed and matched to receiving report and purchase order.
X
X
5)Vendor invoices for non-production and non-PP&E items are routed to department purchasing item for acceptance and approval.
X
X
6)Purchases journal, vendor ledgers, inventory file, and G/L are automatically updated when vendor invoice is input by accounting.
X
7)Accounting supervisor reviews purchases journal for proper account classification of purchases.
X
X
X
Identify the management assertion(s) each control activity affects with an ” X.”
The Winery at Chateau Americana
Reference:
E-121
Expenditure Cycle – Cash Disbursements Control
Prepared by:
(initial)
Activities Matrix
Date:
(date)
For the Year Ended December 31, 20XX
Reviewed by:
Control Activities
Existence
Rights and Obligations
Valuation
Presentation
and Disclosure
Completeness
1)Cash disbursements journal, vendor ledgers, and G/L are automatically updated when accounting prints checks.
X
2)Accounting supervisor reviews voucher packages for reasonableness and proper account classification and initials voucher cover.
X
X
X
X
3)CFO reviews voucher packages for reasonableness, signs checks, and stamps documents included in voucher package “ Paid.”
X
X
X
5)Cash checking account is reconciled monthly by the executive secretary and reviewed by CEO.
X
X
X
6) all income and related collections from the investments and other income generating activities are properly recorded.
X
7) the market and or other values of the investments is stated fairly
X
8) The market value of all the investments is stated fairly and the losses are properly recognized as well as recorded.
X
9) 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.
X
10) the custodian is holding securities as is identified in the confirmation.
X
Identify the management assertion(s) each control activity affects with an ” X.”
The Winery at Chateau Americana
Reference:
E-130
Expenditure Cycle – Internal Control Deficiencies
Prepared by:
(initial)
Date:
(date)
For the Year Ended December 31, 20XX
Reviewed by:
Internal Control Deficiencies
Client Personnel Discussed With
SD
MW
1)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 disbursements
Yes
No
2) the client does not have substantive tests of transactions for cash receipts and cash disbursements
.
Yes
No
3) the client does not have structures of receiving and reviewing report
Yes
yes
The client does not have extensive tests of the entitys bank reconciliations
No
yes
Client has no structure for accounts reconciliation and segregation of duties
Yes
no
Client has complex accounting system (Louwers et al, 2007)
yes
no
Client does not have clear structures for assertions for investments occurrence, authorization, completeness, accuracy, and classification
Legend:
SD–Significant Deficiency (Yes or No)
MW–Material Weakness (Yes or No)
The Winery at Chateau Americana
Reference:
E-140
Expenditure Cycle – Tests of Controls Planning Matrix
Prepared by:
(initial)
Date:
(date)
For the Year Ended December 31, 20XX
Reviewed by:
Purchases
Cash Disbursements
Accounts Payable
Tests of Controls
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
TC1)Inquire and observe the purchasing
W
W
W
supervisor reviewing and signing purchase
orders.
TC2)Examine purchase orders for supervisor
M
M
M
signature.
TC3)Review purchase orders to ensure purchases
M
M
M
are consistent with company policy.
TC4)Inquire and observe the receiving
W
W
W
W
W
department inspecting and comparing production
and PP&E items to purchase order.
TC5)Review receiving reports and compare to
M
M
M
M
M
purchase orders.
TC6)Inquire and observe the use of prenumbered
W
W
receiving reports.
TC7)Examine prenumbered receiving reports.
W
W
TC8)Inquire and observe the recomputation and
W
W
W
W
comparison of vendor invoices to purchase orders
and receiving reports.
TC9) Inspect documentation or approval supporting
W
W
W
W
vendor invoices.
TC10)Recompute vendor invoices and compare to
M
M
M
M
purchase orders and receiving reports.
TC11)Inquire concerning the automatic updating of
W
W
purchases journal, vendor ledgers, inventory file,
and G/L.
TC12)Trace vendor invoices to recording in
M
M
purchases 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 Americana
Reference:
E-141
Expenditure Cycle – Tests of Controls Planning Matrix
Prepared by:
(initial)
Date:
(date)
For the Year Ended December 31, 20XX
Reviewed by:
Purchases
Cash Disbursements
Accounts Payable
Tests of Controls
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
TC13)Inquire and observe the accounting
W
supervisor reviewing the purchases journal for
proper account classification.
TC14)Review purchases journal for proper
M
classification of purchases.
TC15)Inquire concerning the automatic updating of
W
W
W
W
cash disbursement journal, vendor ledgers,
inventory file, and G/L.
TC16)Trace checks to recording in cash
M
M
M
M
disbursement journal, vendor ledgers, inventory
file, and G/L.
TC17)Inquire and observe the accounting
W
W
W
W
supervisor reviewing voucher packages and
initialing voucher cover.
TC18)Inspect voucher package for accounting
W
W
W
W
supervisor initial.
TC19)Inspect voucher package documentation
M
M
M
M
for reasonableness and being stamped “ Paid.”
TC20)Inquire and observe the CFO reviewing
W
W
W
W
voucher packages and signing checks.
TC21)Examine CFO signature on cancelled checks.
M
M
M
M
TC22)Inquire and observe the preparation of the
W
W
W
W
W
W
monthly bank reconciliations.
TC23)Inspect the monthly bank reconciliations.
M
M
M
M
M
M
TC24)Reperform the monthly bank reconciliations.
M
M
M
M
M
M
Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion.
The Winery at Chateau Americana
Reference:
E-150
Expenditure Cycle – Substantive Tests of Transactions
Prepared by:
(initial)
Planning Matrix
Date:
(date)
For the Year Ended December 31, 20XX
Reviewed by:
Purchases
Cash Disbursements
Accounts Payable
Substantive Tests of Transactions
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
TT1) Vouch purchases recorded in the
M
M
M
M
M
M
purchases journal to supporting documents.
TT2) Trace receiving reports to vendor invoices
M
M
M
M
M
M
and recording in the purchases journal.
TT3) Recompute vendor invoice amounts by
M
M
M
M
reference to purchase order and receiving report.
TT4) Foot the purchases journal and agree to
M
M
posting in G/L and vendor ledgers files.
TT5) Vouch purchase returns and allowances
M
M
M
M
M
recorded in the purchases journal to supporting
documents.
TT6) Vouch cash disbursements recorded in the
M
M
M
M
M
M
cash disbursements journal to supporting
documents.
TT7) Trace checks to voucher package and
M
M
M
M
M
M
recording in cash disbursements journal.
TT8) Foot the cash disbursements journal and
M
M
agree to posting in G/L and vendor ledgers files.
TT9) Recompute purchase discounts recorded in
M
M
purchases 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 Americana
Reference:
E-160
Expenditure Cycle – Analytical Tests Planning Matrix
Prepared by:
(initial)
Date:
(date)
For the Year Ended December 31, 20XX
Reviewed by:
Purchases
Cash Disbursements
Accounts Payable
Analytical Tests
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
AT1) Scan the year-end vendor ledgers for
M
M
M
M
M
M
M
M
M
large, unusual, related party or debit
balances and perform follow-up procedures
for each one identified.
AT2) Scan the purchases journal for large, unusual,
M
M
M
M
M
M
M
or related party transactions and perform follow-up
procedures for each one identified.
AT3) Scan the cash disbursement journal for large,
M
M
M
unusual, or related party transactions and perform
follow-up procedures for each one identified.
AT4) Scan the numerical sequence of checks in the
M
M
cash disbursement journal and perform follow-up
procedures for missing numbers.
AT5) Scan the general journal for large, unusual,
M
M
M
M
M
M
M
or related party expenditure cycle transactions and
perform follow-up procedures for each one
identified.
AT6) Compare current year expense account
W
W
W
W
W
W
W
W
W
W
W
W
W
balances 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 to
W
W
W
W
W
W
W
W
W
W
W
W
W
prior year turnover and perform follow-up
procedures for unexpected relationships.
AT8) Compare current year accounts payable
W
W
W
W
W
W
W
W
W
W
W
W
W
turnover 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 Americana
Reference:
E-170
Expenditure Cycle – Tests of Balances Planning Matrix
Prepared by:
(initial)
Date:
(date)
For the Year Ended December 31, 20XX
Reviewed by:
Purchases
Cash Disbursements
Accounts Payable
Tests of Balances
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
TB1) Obtain the last five receiving reports
W
M
W
M
issued 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 issued
M
W
M
W
after year-end and determine if they were properly
excluded from the purchases journal and year-end
vendor ledgers.
TB3) Obtain the last five checks issued before year-
W
M
M
W
end and determine if the related payables were
properly excluded from the year-end vendor
ledgers.
TB4) Obtain the first five checks issued after year-
M
W
W
M
end and determine if the related payables were
properly included in the year-end vendor ledgers.
TB5) Examine documents supporting purchase
W
M
W
returns and allowances recorded just after year-
end to ensure proper accounting.
TB6) Examine documents supporting purchase
W
W
M
returns and allowances recorded just before year-
end to ensure proper accounting.
TB7) Confirm accounts payable balances on the
S
W
W
W
W
S
S
W
W
year-end vendor ledgers with the vendor.
TB8) Select a sample of checks issued after year-
M
M
M
M
M
M
M
end. Examine the related voucher package and
determine if the related payables were properly
included or excluded from the year-end vendor
ledgers.
Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion.
The Winery at Chateau Americana
Reference:
E-171
Expenditure Cycle – Tests of Balances Planning Matrix
Prepared by:
(initial)
Date:
(date)
For the Year Ended December 31, 20XX
Reviewed by:
Purchases
Cash Disbursements
Accounts Payable
Tests of Balances
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
Existence
Rights/Obligations
Valuation
Presentation/Disclosure
Completeness
TB9) Foot the printout of the year-end accounts
M
M
M
payable vendor ledgers and agree the footed
balance to the general ledger.
TB10) Review board of directors’ meeting minutes
M
for indication of related party payables.
TB11) Inquire of management concerning related
W
party and noncurrent payables.
Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion.
Flow chart documentation
The 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.