Essentials of Auditing and Assurance Services Chapter 12
Parts 1 and 2 of this case study dealt with obtaining an understanding of internal control and assessing control risk for transactions affecting accounts payable of Pinnacle Manufacturing. In Part 3 we design analytical procedures and design and perform tests of details of balances for accounts payable
Assume that your understanding of internal controls over acquisitions and cash disbursements and the related tests of controls and substantive tests of transactions support an assessment of a low control risk. Also assume that analytical procedures support the overall reasonableness of the balance. Accounts payable at December 31, 2002 are included in Figure 12-8 page 366
List those relationships, ratios, and trends that you believe will provide useful information about the overall reasonableness of accounts payable
Prepare an audit program in a design format for tests of details of balances for accounts payable. Before preparing the audit program you should review the Hillsburg Hardware Company design format audit program in Table 12-4 page 357 and performance format audit program in Table 12-5 page 358. You should prepare a matrix similar to the one in Figure 22-7 on page 356 for accounts payable. Assume that acceptable audit risk was assessed as high. Use your judgement to assess inherent risk for each objective. Assume that assessed control risk is low for all transaction related audit objectives and analytical procedures are relevant. The design format audit program should include audit procedures and sample sizes for procedures that involve sampling. Use your judgement and the evidence planning worksheet in determining sample sizes
Prepare an audit program for accounts payable in a performance format using the audit procedures and sample sizes from part b
Assume for requirement b that
1-Assessed control risk had been high rather than low for each transaction related audit objective
2-Inherent risk was high for each balance related audit objective
3-Analytical procedures indicated a high potential for misstatement
What would the effect have been on the audit procedures and sample sizes for part b?
Confirmation requests were sent to the 20 vendors listed in Figure 12-9. 14 confirmation responses were returned indicating no difference between the vendor’s and the company’s records. Figure 12-10 pages 368-369 presents the 6 replies that indicate a difference between the vendor’s balance and the company’s records. The auditor’s follow up findings are indicated on each reply. Prepare an audit schedule similar to the one illustrated in Figure 12-11 on page 370 to determine the misstatements if any for each difference. The exception for Fiberchem is analyzed as an illustration. Assume that Pinnacle Manufacturing took a complete physical inventory at December 31, 2002 and the auditor concluded that recorded inventory reflects all inventory on hand at the balance sheet date. Include the 14 balances confirmed without exception as one amount on the schedule and total the schedule columns
Estimate the total misstatement in accounts payable based on the sample misstatements you identified in requirement e. What is your conclusion about the fairness of the recorded balance in accounts payable for Pinnacle Manufacturing and your assessment of control risk as low for all transaction related audit objectives?