How much evidence is needed to be persuasive? Each of the following scenarios describes the auditor's findings of internal control.

Required

For each situation, indicate whether additional evidence in the form of direct tests of account balances is required, and if so, the type and amount of testing that should be performed. Identify the accounts affected.

1. The automated purchasing system for inventory items for direct delivery into production contains appropriate approvals, is accompanied by a long-term contract, and any shortages of delivery automatically generate exception reports that are sent to management.

2. Each department is limited to $500 per item limit on all purchases other than those that go through regular purchase agents. The auditor took a sample of 30 purchases and found that (a) all were approved by the department and (b) all were under $500. Most of the items were for subscriptions, travel, or miscellaneous expense.

3. The client performs regular cycle counts of perpetual inventory. No major discrepancies have been noted in the last year. The counts are made by inventory specialists, not by internal auditors.

4. Access to adding vendors is working properly.

5. The auditor finds that the same person is in charge of ordering products, reconciling receipt of merchandise with the purchase order and vendor invoice, and then forwarding the approved material to the treasurer for payment.

6. The auditor finds that both the purchasing controls and the shipping controls involving inventory are working properly.

7. The auditor's test of internal controls finds weaknesses in the control environment in the following ways:

a. Management's compensation is dependent on increased stock valuations.

b. Management shows little care for basic internal controls.

c. Management has committed to increased sales and profits for this year.

d. The audit committee meets four times a year, but the agenda is primarily set by management.

8. In addition, the company's inventory level has risen faster than sales; gross margin has increased over last year.