DIRECTIONAL TESTING AND DUAL-PURPOSE TESTS During a discussion, one auditor noted that her approach to testing sales transactions was to select a random sample of recorded sales and trace back through the system to supporting documents, noting that all items billed were shipped and were invoiced at correct prices. She stated that she then had good confidence about the correctness of the sales account and, thus, having performed a dual-purpose test, the remaining work on sales (assuming the procedures also evidenced the working of control procedures) could be limited. A second auditor disagreed. Her approach was to select evidence of shipments, such as prenumbered shipping documents, and then trace forward through the system to the actual invoice processing. If no exceptions were noted, however, she agreed with the first auditor that the remaining audit work on the sales account could be limited. REQUIRED: a- Which auditor is right? Explain b- What assertion is tested by the second auditor? c- What is a dual purpose test? Explain why the tests performed by both of the auditors would or would not be considered dual purpose tests. ORGANIZATION OF ACQUISITION FUNCTION The organization of a manufacturing firm includes the following departments: purchasing, receiving, inspecting, warehousing, and controllership. An auditor is assigned to audit the receiving department. The preliminary survey reveals the following information: 1- A copy of each purchase order is routinely sent to the receiving department by the purchasing department. Intracompany email is used for the notification followed by the physical copy via regular intracompany mail. Each purchase order is filed by purchase order number. In response to a job enrichment program, everyone in the receiving department is authorized to file the purchase orders. Whoever happens to be available when the company mail is received is expected to file any purchase orders it contains. 2- When a shipment of goods is delivered to the receiving docks, the shippers invoice is signed and is forwarded to the controllers office, the vendors packing slip is filed in receiving by vendor name, and the goods are stored in the warehouse by receiving personnel. In response to a job enrichment program, all persons in the receiving department have been trained to perform all three activities independently. Whoever happens to be available when a shipment arrives is expected to perform all three of the activities associated with that shipment. REQUIRED: a- What are the major deficiencies and the inefficiencies in the process as described? b- How could the process be improved? First, consider the need for strategic production and suppliers. Second, consider how greater computerization could improve the process. c- Why is it important to have segregation between the purchasing, receiving, and payment functions? How is that segregation maintained when all three functions are automated? d- Assume the purchasing and receiving functions operate as described. What would your assessment be of control risk? What are the implications for substantive testing of the related account balances? Describe the substantive procedures the auditor should consider the inventory, expenses, payables, and other related accounts. BANK CONFIRMATIONS The AICPA has developed a standard bank confirmation form to assure consistent communication with the banking community. REQUIRED: a- Is the auditor required to send a bank confirmation to banks from which the client receives a bank cutoff statement shortly after year end? Explain. b- What additional information is gathered through a bank confirmation? Explain how the other information gathered is used on the audit. c- For each scenario in the following list, recommend an audit procedure or additional audit ork that should be performed. 1- The client has one major bank account located in a distant city, and the auditor is not familiar with the bank. The auditor has assessed control risk as high on this engagement. The mailing address of the bank is simply a post office box number, but such a number is not considered unusual. 2- The client has three accounts with its major bank. For two of the three accounts, the confirmation returned by the bank shows different balances from what the client shows. The balance per the client for one of the accounts is the same as the bank shows in the cutoff statement received from the bank shortly after year end. The auditor did not request a cutoff statement on the other account for which the confirmation differs. 3- The returned confirmation shows a loan that the client does not list as a libility