Your firm has been engaged to examine the financial statements of Brown Appliances, Inc. for the year ended December 31. The company manufactures major appliances sold to the general public through dealers and distributors.

You are to audit the trade accounts payable of a division of Brown Appliances, Inc. The trade accounts payable of this division aggregates \(\$ 2.5\) million which is 60 percent of total accounts payable. Accounts payable total 40 percent of total liabilities and 30 percent of total liabilities and stockholders' equity. Net income for the year is \(\$ 3\) million.

Excerpts from the internal control memorandum follow:

"Invoices from suppliers are received in the purchasing department, where they are matched with receiving reports and checked to the applicable purchase order for quantities and pricing. Invoices and receiving reports are then forwarded to the accounting department for clerical checking and final approval for payment.

"On the payment date, (the seventh working day of the month) invoices with attached receiving reports are separated into two groups: one group of invoices with receiving reports dated in the prior month, the other group with receiving reports dated in the current month. The check register is then prepared, with each group having a separate total and check number sequence. The accounts payable for monthly financial statement purposes is the total of the check register for invoices with receiving reports dated in the prior month. A voucher register is not maintained.

"The purchasing department holds unmatched receiving reports and unmatched invoices

"Cutoff procedures as established by the company appear adequate; however, the company makes it a practice not to record inventory in transit.

"Vendors' statements received by the company are forwarded to a clerk in the accounting department. The clerk does not check all charges appearing on the vendors' statements, but does reconcile all old outstanding charges appearing thereon."

An accounts payable listing has been prepared by the company for the auditors. As explained above, this listing was prepared from the check register of December charges paid in January, and shows vendor, check number, invoice date, date paid, and amount. A quick review of the listing reveals the following:

1. January-dated invoices amounting to \(\$ 200,000\) appear on the listing payable to Talley and Park Advertising Agency, for advertising to appear in Better Homes and Gardens magazine in February and March. This was included in the year-end accounts payable listing at the request of the vice-president of advertising because he said he wanted to more closely match advertising department budgeted expense with actual expenditures for the year. The distribution was made to advertising expense.

2. Amounts appear on the listing as payments for payrolls, payroll taxes, other taxes, and profit sharing plans.

3. No amounts appear on the listing for legal or accounting services.

Required:

Discuss the problems and procedures involved in auditing this company's accounts payable. Specifically discuss

(a) the auditing procedures you would use in your examination and

(b) the adjustments you would recommend to be made to the accounts payable listing.