audit accounting

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Worthington Department Stores Auditing standards require the auditor to obtain sufficient appropriate audit evidence (AS 1105.04: Audit Evidence). The audit firm of Hepple & Ramsey was investigated for the audit of Worthington. Worthington is a large discount catalog department store chain. The company recently expanded from 6 to 43 stores by borrowing from several large financial institutions and from a public offering of common stock. A recent investigation has disclosed that Worthington materially overstated net income. This was accomplished by understating accounts payable and recording fictitious supplier credits that further reduced accounts payable. An SEC investigation was critical of the evidence gathered by Worthington's audit firm, Hepple & Ramsey, in testing accounts payable and the supplier credits. The following is a description of some of the fictitious supplier credits and unrecorded amounts in accounts payable, as well as the audit procedures a. Manning Advertising Credits-Worthington had arrangements with some vendors to share the cost of advertising the vendor's product. The arrangements were usually agreed to in advance by the vend evidence of the placing of the ad. Worthington created a 114 page list of approximately 1,100 vendors, supporting advertising credits of $300,000. Worthington's auditors selected a sample of 4 of the 1,100 items for direct confirmation. One item was confirmed by telephone, one traced to cash receipts, one to a vendor credit memo for part of the amount and cash receipts for the rest, and one to a vendor credit memo. Two of the amounts confirmed differed from the amount on the list, but the auditors did not seek an explanation for the differences because the amounts were not material. or and supported by The rest of the credits were tested by selecting 20 items (one or two from each page of the list). Twelve of the items were supported by examining the ads placed, and eight were supported by Worthington debit memos charging the vendors for the promotional allowances. e. Cut-OffHepple & Ramsey also performed a purchases cutoff test by vouching accounts payable invoices received for nine weeks after year-end. The purpose of this test was to identify invoices received after year-end that should have been recorded in accounts payable. Thirty percent of the sample ($160,000) was found to relate to the prior year, indicating a potential unrecorded liability of approximately $500,000. The audit firm and Worthington eventually agreed on an adjustment to increase accounts payable by $260,000. Required For each of the five instances above, identify deficiencies in the sufficiency and appropriateness of the evidence gathered in the audit of accounts payable of Worthington Stores