1. 13-285 8Because of the small size of the company and the limited number of accounting personnel, Dry Goods Wholesale Company Ltd. initially records all acquisitions of goods and services at the time that cash disbursements are made. At the end of each quarter when financial statements for internal purposes are prepared, accounts payable are recorded by adjusting journal entries. The entries are reversed at the beginning of the subsequent period. Except for the lack of a purchasing system, the controls over acquisitions are excellent for a small company. (There are adequate prenumbered documents for all receipt of goods, proper approvals, and adequate internal verification wherever possible.)

Before the auditor arrives for the year-end audit, the bookkeeper prepares adjusting entries to record the accounts payable as of the balance sheet date. The aged trial balance is listed as of the year-end, and a manual schedule is prepared adding the amounts that were entered in the following month. Thus, the accounts payable balance equals the aged trial balance plus the following month's journal entry for invoices received after the year-end. All vendors' invoices supporting the journal entry are retained in a separate file for the auditor's use.

In the current year, the accounts payable balance has increased dramatically because of a severe cash shortage. (The cash shortage apparently arose from expansion of inventory and facilities rather than lack of sales.) Many accounts have remained unpaid for several months, and the client is getting pressure from several vendors to pay the bills. Since the company had a relatively profitable year, management is anxious to complete the audit as early as possible so that the audited statements can be used to obtain a larger bank loan.

Required

a) Explain how the lack of a complete aged accounts payable trial balance will affect the auditor's tests of controls for acquisitions and cash disbursements.

b) What should the auditor use as a sampling unit in performing tests of acquisitions?

c) Assume that no misstatements are discovered in the auditor's tests of controls for acquisitions and cash disbursements. How will that assumption affect the verification of accounts payable?

d) Discuss the reasonableness of the client's request for an early completion of the audit and the implications of the request from the auditor's point of view.

e) List the audit procedures that should be performed in the year-end audit of accounts payable to meet the cutoff objective.

f) State your opinion as to whether it is possible to conduct an adequate audit in these circumstances.