10-43 (Objective 10-5) In Parts I and II of this case, you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing. Your team has been assigned the responsibility of auditing the acquisition and payment cycle and one related balance sheet account, accounts payable. The general approach to be taken will be to reduce assessed control risk to a low level, if possible, for the two main types of transactions affecting accounts payable: acquisitions and cash disbursements. The following are furnished as background information:

• A summary of key information from the audit of the acquisition and payment cycle and accounts payable in the prior year, which was extracted from the previous audit firms audit files (Figure 10-12)
• A flowchart description of the accounting system and internal controls for the acquisition and payment cycle (Figure 10-13, p. 334)the flowchart shows that although each of the companys three divisions has its own receiving department, the purchasing and accounts payable functions are centralizedThe purpose of Part III is to obtain an understanding of internal control and assess control risk for Pinnacle Manufacturings acquisition and cash disbursement transactions.

  Required

  • a. Familiarize yourself with the internal control system for acquisitions and cash disbursements by studying the information in Figure 10-12 andFigure 10-13.
  • b. Prepare a control risk matrix for acquisitions and a separate one for cash disbursements using Figure 10-5 on page 309 as a guide. A formatted control risk matrix is provided on the textbook Web site. The objectives should be specific transaction-related audit objectives for acquisitions for the first matrix and cash disbursements for the second matrix. 332333See pages 608612 in Chapter 18 for transaction-related audit objectives for acquisitions and cash disbursements. In doing Part III, the following steps are recommended:
    • (1) Controls
      • a. Identify key controls for acquisitions and for cash disbursements. After you decide on the key controls, include each control in one of the two matrices.
      • b. Include a C in the matrix in each column for the objective(s) to which each control applies. Several of the controls should satisfy multiple objectives.
    • (2) Deficiencies
      • a. Identify key deficiencies for acquisitions and for cash disbursements. After you decide on the deficiencies, include each significant deficiency or material weakness in the bottom portion of one of the two matrices.
      • b. Include a D in the matrix in each column for the objective(s) to which each significant deficiency or material weakness applies.
      • (3) Assess control risk as high, medium, or low for each objective using your best judgment. Do this for both the acquisitions and cash disbursements matrices.