Chapter 13: Overall Audit Strategy and Audit Program

The following are two situations, all involving non-public companies, in which the auditor is required to develop an audit strategy:

1. The client has inventory at approximately 50 locations in a three state region. This inventory is difficult to count and can be observed only by traveling by car. The internal controls over acquisitions, cash disbursements, and perpetual records are considered effective. This is the fifth year that you have done the audit, and audit results in the past have always been excellent.

2. This is the first year of an audit of a medium sized company that is considering selling its business because of severe under financing. A review of the acquisition and payment cycle indicates that controls over cash disbursements are excellent but controls over acquisitions cannot be considered effective. The client lacks receiving reports and a policy as to the proper timing to record acquisitions. When you review the general ledger, you observe that there are many large adjusting entries to correct accounts payable.

a. For Audit #1, recommend an evidence mix for the five types of tests for the audit of inventory and cost of goods sold. Justify your answer. Include in your recommendations both tests of controls and substantive tests.

b. For Audit #2, recommend an evidence mix for the audit of the acquisition and payment cycle, including accounts payable. Justify your answer.