Assignment #1 from Valley Publishing Company audit case, A control matrix for the acquisition and disbursement cycle. This should list the controls and weaknesses for the cycle keyed off the the applicable transaction objective.

ASSIGNMENT 1 RISK ASSESSMENT, PRELIMINARY ANALYTICAL PROCEDURES, AND INTERNAL CONTROL EVALUATION Assume that you are a senior accountant on the staff of Baynes & Grey. You are preparing to perform a financial statement audit of a daily newspaper, the end results of which will be your firm's opinion on the statements. An audit requires finding, gathering, and evaluating evidence using a disciplined approach. Throughout the case, suggestions are given that rep- resent an organized and systematic approach to performing the audit. One of the long-term benefits in performing this audit case will be the habit of using a systematic process. Fol- lowing each suggested procedure in an orderly fashion will significantly reduce the number of processing errors you make. On the other hand, trying to shortcut or omit processes may result in a sloppy and/or error-filled case Before proceeding, be sure to read the introduction to become familiar with the location of the information needed to perform the audit. Refer back to the Introduction frequently. Of course, missing from the audit case as a source of information are the actual client officers and employees. Your professor may assume that role at his/her discretion. Starting the Audit The CPA firm of Baynes & Grey has been reappointed as auditors of the Valley Publishing Company (VPC) for the year ended December 31, 20x2. VPC publishes the Apple Valley Times, a daily newspaper located in Center City, Illinois. The Times is published six days per week, Sunday through Friday. You have been given the assignment of auditing the financial statements of VPC for the year 20x2. This is the first time that you have been assigned to this client. Depending on how the assignment is organized by your professor, you will either perform all of the audit work yourself or you will participate on a team with other students. Preliminary Arrangements Barney Baynes is the partner in charge of this audit. He has made preliminary arrangements with the client and has obtained a signed engagement letter dated December 14, 20x2, for the 20x2 audit. You may assume that he has discussed the engagement with you and that you have reviewed prior year financial statements and correspondence files. You have also been introduced to client personnel. See the Organization Chart in the Permanent File. At the time of these introductions, you made arrangements to observe the newsprint inventory on December 31. You also arranged to have certain workpapers prepared for your use by Betty Henry, Accountant and Office Manager (included on the Armond Dalton Resources web- site at www.armonddaltonresources.com). You updated the narrative portion of the Permanent File describing procedures for purchasing and cash disbursements and revenues and cash receipts. 1-2 SECTION 1: Assignment 1 On December 31, 20x2, you observed the physical inventory of newsprint. Your sched ule, evidencing this work, has been filed by you among the 20x2 workpaper materials as workpaper C-2. You will be required to perform additional work on this workpaper in the assignments dealing with newsprint inventory. At the same time, you sent requests to the banks for confirmations of bank balances and cutoff bank statements or electronic access. The bank sent cutoff statements You returned to the offices of the client on Tuesday, January 6, 20x3. With the assistance of Henry, you prepared and mailed correspondence dealing with a variety of matters, such as requests to customers for confirmation of accounts receivable balances, at- torney's letters, loans outstanding, etc. At that time, you counted the petty cash fund at the request of the board of directors. The count is recorded on workpaper A-7. Since January 6, you have been busy working on other clients. Meanwhile, Henry has completed the recording of 20x2 transactions and the normal client adjusting entries. She has also completed the various workpapers previously requested by you, including a trial balance by entry into computer files. Closing entries will not be recorded until you have completed your audit. It is now Monday, January 12, 20x3, and you have returned to the office of VPC ready to complete the audit, which will require approximately 15 working days. You have received, in the office of Baynes & Grey, replies to the confirmations mailed out on January 6. You have brought with you: The Permanent File, Prior year workpapers (20x1), and Audit programs, confirmations, and various workpapers prepared in paper format. Henry gives you a flash drive with the workpapers you requested in a folder labeled Workpapers. The original vouchers and some other records are in a folder labeled Records. For your convenience, calendars for December 20x2 and January 20x3 are as follows: December 20x2 January 20x3 S M T w T F S S M T W T F S 1 2 3 4 5 6 1 2 3 7 8 9 10 11 12 13 4 5 7 8 10 14 15 16 17 18 19 20 11 12 13 14 15 16 17 21 22 23 24 25 26 27 18 19 20 21 22 23 24 28 29 30 31 25 26 27 28 29 30 31 6 SECTION 1: Assignment 1 1-3 Required of Student 1. Background Information In order to gain an understanding about the VPC and the nature of its business: Read and study carefully the information in the Permanent File covering his- tory and background: organization; chart of accounts; minutes of directors' and stockholders' meetings and procedures and flowcharts dealing with purchasing, cash disbursements, revenues, and cash receipts. Review the audit program, and Review the 20xl workpapers 2. Note the interrelationships in the 20x I workpapers, first, between the financial state- ments and trial balance, and second, between the trial balance and the detailed work- paper schedules. Note also the system of cross-referencing, providing for cross-refer- encing of amounts between summary workpapers and detailed schedules. For instance, an account on the Trial Balance may readily be traced to a supporting work paper to determine its detailed composition and the auditing procedures applied. This system of cross-referencing should be carefully followed, assignment by assignment, as you pro- ceed with the current year audit. Related Parties - For disclosure and other audit consideration, related parties have been identified as members of the board of directors and/or entities they represent. Risk Assessment - Assume that you have performed an appropriate risk assessment of misstatements occurring due to fraud or error, including a "brainstorming session with the engagement team." No significant findings came to your attention. Trial Balance The Trial Balance is used to support the financial statements and control the audit work. The financial statement amounts come directly from the Per Financial Statement col- umn in the Trial Balance. Adjusting and reclassification entries entered into the trial balance convert general ledger amounts to final financial statement amounts. After the audit, adjusting entries are posted to the client's general ledger. The Trial Balance is in the computer folder Workpapers. The Trial Balance is divided into four pages, referred to as TB-1 through TB-4 in the 20x2 workpapers. The account titles and the balances at December 31, 20x2, have been inserted by Betty Henry. The 20x1 amounts have been entered by Henry from the 20xl adjusted general ledger. As a guide to an appropriate and consistent solution, additional account titles that you may need have been inserted on the 20x2 trial balance (TB). To assure that the 20x2 amounts came from the client's records, they should be traced to/from the general ledger. Because the general ledger has not been furnished with the problem, you may assume that you have performed this procedure and have found no exceptions. Although a general ledger has not been included, excerpts and analyses will be furnished to you when appropriate, 1 - 4 SECTION 1: Assignment 1 3. 4. Required Documentation: Foot the Trial Balance and review for possible errors. Trace the amounts in the "Per Audit, 12/31/x1" column to corresponding amounts on the trial balance for the previous year (Per Audit for 20x1). Assume that you have traced and agreed the "per book" amounts to the general ledger, but document this procedure. Preliminary Analytical Procedures Analytical procedures are required to plan the audit, gain an understanding of the busi- ness, and make preliminary risk assessments. This includes comparing current year (20x2) book balances with the prior year (20x1) audit amounts and examining unusu- al relationships between account balances based on your expectations. A template has been prepared (from the trial balance) for use in documenting the preliminary analytical review. The template, indexed as "PAR," is included in the Workpapers folder. When performing these procedures, consider the information you gained from your review of the Permanent File, especially information contained in the board of directors' minutes. Required Documentation: Document obvious or possible explanations for large or unusual variances occurring in 20x2 and how these will be dealt with during the audit. For example: if an account appears to have an unusually large increase, a possible expla- nation may be a transaction approved by the board of directors. This may be dealt with by stating that the account will be analyzed in detail as part of the audit. Throughout the audit, you will be following up on these items. Summarize significant findings from the preliminary analytical review in a memo. Complete the Preliminary Analytical Review Procedures section of the audit program: initial and date the steps as completed. Internal Control Assignments The following assignments relate to gaining an understanding of the internal control and the preliminary assessment of control risk. Review the Internal Control section of the audit program. Initial and date the steps as completed. Required (And Optional) Documentation: a. From the information you have gained in your study of the items in Requirement 1 above, prepare a memo evaluating the Control Environment for VPC. b. Optional per instructor: The description of revenues and cash receipts and related flowcharts has been updated for the current year. Certain symbols on the flow- charts have been blanked and letters inserted. Based upon a study of the descrip- tions and flowcharts, indicate what each of the letters represents. c. Optional per instructor: Because one has not previously been prepared, prepare a flowchart for purchasing and cash disbursements. d. Based upon his prior experience with VPC and his current understanding of the internal control, Barney Baynes believes that it will again be cost effective to set control risk at less than the maximum for purchases and cash disbursements. As in prior years, control risk for all other accounting cycles will be set at the max- imum. Prepare a matrix to evaluate internal controls for acquisitions and cash disbursements, Match a listing of controls and weaknesses to each transaction objective for acquisition and disbursement cycle along with your risk level as- sessment and recommended level of testing. SECTION 1: Assignment 1 1-5 Internal Control and Other Suggestions for Improvement: In Assignment 11. you will be required to make a list of suggestions for improvement. Start a list at the beginning of the audit so that you will be prepared to meet the require- ment in Assignment 11 at the end of the audit. In listing your comments, you should use the following format: A description of the comment, along with its significance; i.e., control deficiency, significant deficiency, material weakness, or efficiency matter. The reason why you have listed this comment; i.e.. what are the potential negative effects to the company of this weakness or inefficient procedure. Your suggestion on how to correct the weakness or deficiency . Deliverable to Your Instructor The deliverables for Assignment 1 are: Completed audit programs for the Preliminary Analytical Review Procedures and Internal Control PAR - A copy of the trial balance with notations regarding your analytical review procedures. A brief overall analytical review memo highlighting major findings. A memo summarizing the control environment (with a conclusion). A controls matrix for the acquisition and disbursement cycle. This should list the controls and weaknesses for the cycle keyed off to the applicable transaction objective. A list of the missing items in the flowcharts (optional per instructor). A flowchart for purchasing and cash disbursements (optional per instructor). A cover sheet for the assignment with your name(s). 1-6 SECTION 1: Assignment 1 ASSIGNMENT 1 RISK ASSESSMENT, PRELIMINARY ANALYTICAL PROCEDURES, AND INTERNAL CONTROL EVALUATION Assume that you are a senior accountant on the staff of Baynes & Grey. You are preparing to perform a financial statement audit of a daily newspaper, the end results of which will be your firm's opinion on the statements. An audit requires finding, gathering, and evaluating evidence using a disciplined approach. Throughout the case, suggestions are given that rep- resent an organized and systematic approach to performing the audit. One of the long-term benefits in performing this audit case will be the habit of using a systematic process. Fol- lowing each suggested procedure in an orderly fashion will significantly reduce the number of processing errors you make. On the other hand, trying to shortcut or omit processes may result in a sloppy and/or error-filled case Before proceeding, be sure to read the introduction to become familiar with the location of the information needed to perform the audit. Refer back to the Introduction frequently. Of course, missing from the audit case as a source of information are the actual client officers and employees. Your professor may assume that role at his/her discretion. Starting the Audit The CPA firm of Baynes & Grey has been reappointed as auditors of the Valley Publishing Company (VPC) for the year ended December 31, 20x2. VPC publishes the Apple Valley Times, a daily newspaper located in Center City, Illinois. The Times is published six days per week, Sunday through Friday. You have been given the assignment of auditing the financial statements of VPC for the year 20x2. This is the first time that you have been assigned to this client. Depending on how the assignment is organized by your professor, you will either perform all of the audit work yourself or you will participate on a team with other students. Preliminary Arrangements Barney Baynes is the partner in charge of this audit. He has made preliminary arrangements with the client and has obtained a signed engagement letter dated December 14, 20x2, for the 20x2 audit. You may assume that he has discussed the engagement with you and that you have reviewed prior year financial statements and correspondence files. You have also been introduced to client personnel. See the Organization Chart in the Permanent File. At the time of these introductions, you made arrangements to observe the newsprint inventory on December 31. You also arranged to have certain workpapers prepared for your use by Betty Henry, Accountant and Office Manager (included on the Armond Dalton Resources web- site at www.armonddaltonresources.com). You updated the narrative portion of the Permanent File describing procedures for purchasing and cash disbursements and revenues and cash receipts. 1-2 SECTION 1: Assignment 1 On December 31, 20x2, you observed the physical inventory of newsprint. Your sched ule, evidencing this work, has been filed by you among the 20x2 workpaper materials as workpaper C-2. You will be required to perform additional work on this workpaper in the assignments dealing with newsprint inventory. At the same time, you sent requests to the banks for confirmations of bank balances and cutoff bank statements or electronic access. The bank sent cutoff statements You returned to the offices of the client on Tuesday, January 6, 20x3. With the assistance of Henry, you prepared and mailed correspondence dealing with a variety of matters, such as requests to customers for confirmation of accounts receivable balances, at- torney's letters, loans outstanding, etc. At that time, you counted the petty cash fund at the request of the board of directors. The count is recorded on workpaper A-7. Since January 6, you have been busy working on other clients. Meanwhile, Henry has completed the recording of 20x2 transactions and the normal client adjusting entries. She has also completed the various workpapers previously requested by you, including a trial balance by entry into computer files. Closing entries will not be recorded until you have completed your audit. It is now Monday, January 12, 20x3, and you have returned to the office of VPC ready to complete the audit, which will require approximately 15 working days. You have received, in the office of Baynes & Grey, replies to the confirmations mailed out on January 6. You have brought with you: The Permanent File, Prior year workpapers (20x1), and Audit programs, confirmations, and various workpapers prepared in paper format. Henry gives you a flash drive with the workpapers you requested in a folder labeled Workpapers. The original vouchers and some other records are in a folder labeled Records. For your convenience, calendars for December 20x2 and January 20x3 are as follows: December 20x2 January 20x3 S M T w T F S S M T W T F S 1 2 3 4 5 6 1 2 3 7 8 9 10 11 12 13 4 5 7 8 10 14 15 16 17 18 19 20 11 12 13 14 15 16 17 21 22 23 24 25 26 27 18 19 20 21 22 23 24 28 29 30 31 25 26 27 28 29 30 31 6 SECTION 1: Assignment 1 1-3 Required of Student 1. Background Information In order to gain an understanding about the VPC and the nature of its business: Read and study carefully the information in the Permanent File covering his- tory and background: organization; chart of accounts; minutes of directors' and stockholders' meetings and procedures and flowcharts dealing with purchasing, cash disbursements, revenues, and cash receipts. Review the audit program, and Review the 20xl workpapers 2. Note the interrelationships in the 20x I workpapers, first, between the financial state- ments and trial balance, and second, between the trial balance and the detailed work- paper schedules. Note also the system of cross-referencing, providing for cross-refer- encing of amounts between summary workpapers and detailed schedules. For instance, an account on the Trial Balance may readily be traced to a supporting work paper to determine its detailed composition and the auditing procedures applied. This system of cross-referencing should be carefully followed, assignment by assignment, as you pro- ceed with the current year audit. Related Parties - For disclosure and other audit consideration, related parties have been identified as members of the board of directors and/or entities they represent. Risk Assessment - Assume that you have performed an appropriate risk assessment of misstatements occurring due to fraud or error, including a "brainstorming session with the engagement team." No significant findings came to your attention. Trial Balance The Trial Balance is used to support the financial statements and control the audit work. The financial statement amounts come directly from the Per Financial Statement col- umn in the Trial Balance. Adjusting and reclassification entries entered into the trial balance convert general ledger amounts to final financial statement amounts. After the audit, adjusting entries are posted to the client's general ledger. The Trial Balance is in the computer folder Workpapers. The Trial Balance is divided into four pages, referred to as TB-1 through TB-4 in the 20x2 workpapers. The account titles and the balances at December 31, 20x2, have been inserted by Betty Henry. The 20x1 amounts have been entered by Henry from the 20xl adjusted general ledger. As a guide to an appropriate and consistent solution, additional account titles that you may need have been inserted on the 20x2 trial balance (TB). To assure that the 20x2 amounts came from the client's records, they should be traced to/from the general ledger. Because the general ledger has not been furnished with the problem, you may assume that you have performed this procedure and have found no exceptions. Although a general ledger has not been included, excerpts and analyses will be furnished to you when appropriate, 1 - 4 SECTION 1: Assignment 1 3. 4. Required Documentation: Foot the Trial Balance and review for possible errors. Trace the amounts in the "Per Audit, 12/31/x1" column to corresponding amounts on the trial balance for the previous year (Per Audit for 20x1). Assume that you have traced and agreed the "per book" amounts to the general ledger, but document this procedure. Preliminary Analytical Procedures Analytical procedures are required to plan the audit, gain an understanding of the busi- ness, and make preliminary risk assessments. This includes comparing current year (20x2) book balances with the prior year (20x1) audit amounts and examining unusu- al relationships between account balances based on your expectations. A template has been prepared (from the trial balance) for use in documenting the preliminary analytical review. The template, indexed as "PAR," is included in the Workpapers folder. When performing these procedures, consider the information you gained from your review of the Permanent File, especially information contained in the board of directors' minutes. Required Documentation: Document obvious or possible explanations for large or unusual variances occurring in 20x2 and how these will be dealt with during the audit. For example: if an account appears to have an unusually large increase, a possible expla- nation may be a transaction approved by the board of directors. This may be dealt with by stating that the account will be analyzed in detail as part of the audit. Throughout the audit, you will be following up on these items. Summarize significant findings from the preliminary analytical review in a memo. Complete the Preliminary Analytical Review Procedures section of the audit program: initial and date the steps as completed. Internal Control Assignments The following assignments relate to gaining an understanding of the internal control and the preliminary assessment of control risk. Review the Internal Control section of the audit program. Initial and date the steps as completed. Required (And Optional) Documentation: a. From the information you have gained in your study of the items in Requirement 1 above, prepare a memo evaluating the Control Environment for VPC. b. Optional per instructor: The description of revenues and cash receipts and related flowcharts has been updated for the current year. Certain symbols on the flow- charts have been blanked and letters inserted. Based upon a study of the descrip- tions and flowcharts, indicate what each of the letters represents. c. Optional per instructor: Because one has not previously been prepared, prepare a flowchart for purchasing and cash disbursements. d. Based upon his prior experience with VPC and his current understanding of the internal control, Barney Baynes believes that it will again be cost effective to set control risk at less than the maximum for purchases and cash disbursements. As in prior years, control risk for all other accounting cycles will be set at the max- imum. Prepare a matrix to evaluate internal controls for acquisitions and cash disbursements, Match a listing of controls and weaknesses to each transaction objective for acquisition and disbursement cycle along with your risk level as- sessment and recommended level of testing. SECTION 1: Assignment 1 1-5 Internal Control and Other Suggestions for Improvement: In Assignment 11. you will be required to make a list of suggestions for improvement. Start a list at the beginning of the audit so that you will be prepared to meet the require- ment in Assignment 11 at the end of the audit. In listing your comments, you should use the following format: A description of the comment, along with its significance; i.e., control deficiency, significant deficiency, material weakness, or efficiency matter. The reason why you have listed this comment; i.e.. what are the potential negative effects to the company of this weakness or inefficient procedure. Your suggestion on how to correct the weakness or deficiency . Deliverable to Your Instructor The deliverables for Assignment 1 are: Completed audit programs for the Preliminary Analytical Review Procedures and Internal Control PAR - A copy of the trial balance with notations regarding your analytical review procedures. A brief overall analytical review memo highlighting major findings. A memo summarizing the control environment (with a conclusion). A controls matrix for the acquisition and disbursement cycle. This should list the controls and weaknesses for the cycle keyed off to the applicable transaction objective. A list of the missing items in the flowcharts (optional per instructor). A flowchart for purchasing and cash disbursements (optional per instructor). A cover sheet for the assignment with your name(s). 1-6 SECTION 1: Assignment 1