Question
Creative Company Ltd. Is small size company with limited number of accounting personnel. The company initially records all acquisition of goods and services at the
Creative Company Ltd. Is small size company with limited number of accounting personnel. The company initially records all acquisition 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 approval, 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 months journal entry for invoices received after the year-end. All vendors invoices supporting the journal entry are retained in a separate file for the auditors use. In the current year, the accounts payable balance has increased dramatically because of a severe cash shortage. The cash shortage apparently arose from the 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. Because 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 large bank loan. Required: Explain how the lack of a complete aged accounts payable trial balance will affect the auditors tests of controls for acquisitions and disbursements. (1 Mark) What should the auditor use as a sampling unit I performing tests of acquisitions? (1 Mark) Assume that no misstatements are discovered in the tests of controls for acquisitions and cash disbursements. How will this assumption affect the verification of accounts payable? (1 Mark) Discuss the reasonableness of the clients request for early completion of the audit and the implication of the request from the auditors point of view. State your opinion as to whether it is possible to conduct an adequate audit in these circumstances. (2 Mark)
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