8.43

Accounts Payable Confirmations. Partners Clark and Kent, both CPAs, are preparing their audit plan for the audit of accounts payable on Marlboro Corporation's annual audit. Saturday afternoon they reviewed the thick file of last year's documentation and they both remembered too well the six days they spent last year on accounts payable.

Last year, Clark had suggested that they mail confirmations to 100 of Marlboro's suppliers. The company regularly purchases from about 1,000 suppliers and these account payable balances fluctuate widely, depending on the volume of purchase and the terms Marlboro's purchasing agent is able to negotiate. Clark's sample of 100 was designed to include accounts with large balances. In fact, the 100 accounts confirmed last year covered 80 percent of the total dollars in accounts payable. Both Clark and Kent had spent many hours tracking down minor differences reported in confirmation responses. Nonresponding accounts were investigated by comparing Marlboro's balance with monthly statements received from suppliers.

Required:

Identify the accounts payable audit objectives that auditors must consider in determining the audit procedures to be performed.

Identify situations when auditors should use accounts payable confirmations and discuss whether they are required to use them.

Discuss why the use of large dollar balances as the basis for selecting accounts payable for confirmation is not the most effective approach and indicate a more effective sample selection procedure that could be followed when choosing accounts payable for confirmation.

LO 8-4

8.44 Search for Unrecorded Liabilities. C. Marsh, CPA, is the independent auditor for Compufast Corporation (Compufast), which sells personal computers, peripheral equipment (printers, data storage), and a wide variety of programs for business and games. From experience on Compufast's previous audits, Marsh knew that the company's accountants were very much concerned with timely recording of revenues and receivables and somewhat less concerned with keeping up-to-date records of accounts payable and other liabilities. Marsh knew that the control environment was strong in the asset area and weak in the liability area. Required: List substantive procedures that Marsh and the audit staff can perform to obtain reasonable assurance that Compufast's unrecorded liabilities are discovered and adjusted in the financial statements currently under audit.

LO 8-7

8.45 Page 349 Fictitious Vendors, Theft, and Embezzlement. The following cases are designed like the ones in the chapter. Your assignment is to write the audit approach portion of the cases organized around these sections: Objective. Express the objective in terms of the facts supposedly asserted in financial records, accounts, and statements. Control. Write a brief explanation of desirable controls, missing controls, and especially the kinds of deviations that could arise from the situation described in the case. Tests of controls. Write some procedures for getting evidence about existing controls, especially procedures that could discover deviations from controls. If there are no controls to test, then there are no procedures to perform; go to the next section. A procedure should instruct someone about the source(s) of evidence to tap and the work to do. Audit of balance. Write some procedures for getting evidence about the existence, completeness, valuation or allocation, or rights and obligations assertions identified in your objective section. Discovery summary. Write a short statement about the discovery you expect to accomplish with your procedures. Purchasing Stars Bailey Books Inc. is a retail distributor of upscale books, periodicals, and magazines. Bailey has 431 retail stores throughout the southeastern states. Three full-time purchasing agents work at corporate headquarters. They are responsible for purchasing all inventory at the best prices available from wholesale suppliers. They can purchase with or without obtaining competitive bids. The three purchasing agents are R. McGuire in charge of purchasing books, M. Garza in charge of purchasing magazines and periodicals, and L. Collins (manager of purchasing) in charge of ordering miscellaneous items such as paper products and store supplies. One of the purchasing agents is suspected of taking kickbacks from vendors. In return, Bailey is thought to be paying inflated prices, which first are recorded in inventory and then in cost of goods sold and other expense accounts as the assets are sold or used. The duties of Collins, the manager in charge, do not include audit or inspection of the performance of the other two purchasing agents. No one audits or reviews Collins's performance. The purchasing system is computerized and detail records are retained. An extract from these records is in Exhibit 8.45.1. EXHIBIT 8.45.1 This kickback scheme has been going on for two or three years. Bailey Books could have overpaid by several hundred thousand dollars. Please cite all work using apa and use pcaob