Essentials of Auditing and Assurance Services Chapter 12 Case #12-31 Parts 1 and 2 of this case study dealt with obtaining an understanding of internal control and assessing control risk for transactions affecting accounts payable of Pinnacle Manufacturing. In Part 3 we design analytical procedures and design and perform tests of details of balances for accounts payable Assume that your understanding of internal controls over acquisitions and cash disbursements and the related tests of controls and substantive tests of transactions support an assessment of a low control risk. Also assume that analytical procedures support the overall reasonableness of the balance. Accounts payable at December 31, 2002 are included in Figure 12-8 page 366

1- Prepare an audit program for accounts payable in a performance format using the audit procedures and sample sizes from part b

2- Assume for requirement b that 1-Assessed control risk had been high rather than low for each transaction related audit objective 2-Inherent risk was high for each balance related audit objective 3-Analytical procedures indicated a high potential for misstatement What would the effect have been on the audit procedures and sample sizes for part b?

3.Confirmation requests were sent to the 20 vendors listed in Figure 12-9. 14 confirmation responses were returned indicating no difference between the vendor's and the company's records. Figure 12-10 pages 368-369 presents the 6 replies that indicate a difference between the vendor's balance and the company's records. The auditor's follow up findings are indicated on each reply. Prepare an audit schedule similar to the one illustrated in Figure 12-11 on page 370 to determine the misstatements if any for each difference. The exception for Fiberchem is analyzed as an illustration. Assume that Pinnacle Manufacturing took a complete physical inventory at December 31, 2002 and the auditor concluded that recorded inventory reflects all inventory on hand at the balance sheet date. Include the 14 balances confirmed without exception as one amount on the schedule and total the schedule columns

4.Estimate the total misstatement in accounts payable based on the sample misstatements you identified in requirement e. What is your conclusion about the fairness of the recorded balance in accounts payable for Pinnacle Manufacturing and your assessment of control risk as low for all transaction related audit objectives?

Accounts ng Trial Balance of Trade mber 31, 2002 FIGURE 12-8 payo 660.00 Midwest Electric Utility 1,21100 Midwest Gas Co. 2,500.00 M&A Milling 86.00 Mobil Oil Co. 1.500.00 Monsanto Chemical 8,753.00 Nielsen Enterprises 1,800.00 Norris Industries 3,250.00 Pacific Title Co. Advent Sign ig Co der Insutance Co Bauer and Adamson Bieyl & Son Central Steel Inc Chesea Development Co. 980.00 Permaloy Manufacturing Polein Drill and Bit 750.00 675.00Propec Inc. 6,425.00 Rayno Sales and Service Diamond Janitorial Service Dictaphone Corp Douglas Equipment Ellison, Robt & Assoc FMC Corp Fiberchem Inc. Fuller Travel GAFCO Glade Specialties Granger Supply Co 917 80 346.10 Reames Construction 5,819.00Remington Supply Co 6,315.80 Ritter Engineering Corp 1200.00 943.00 Roberts Bros. Service 5,750.00 1,000.00 Sanders, Geo. A. &Co 4,250.00 Semco, Inc. 89.7 819.00 346.00 5020 S & S Truck Painting 719.62 Standard Oil Co ,500.00 Stationery Supply 1,412.00 Thermal Tape Co 2,500.00 Todd Machinery, Inc. ,627.30Valco Sales 12,816.27 Innes, Brush & Co. CPAs J & L Plastics Corp. 619.12 6,888.12 1,429.00 284.00 126.33 2,369.62 1,915.00 3,250.00 Kazco. Mfg. Co Koch Plumbing Contractors Kohler Products Lakeshore Inc 19.27 Vermax Corp. 2,750.00 Waco Electronics, Inc. 10,483.23 Western Telephone Co. 1850.00 Williams Controls, Inc. 20.00 Xerox Corp 2,733.10 Yates Supply Co. Lundberg Coatings, Inc. 919.70 Other related information: $192,085.53 The vendors with the greatest volume of transactions during the year are as foll Central Steel Inc Commercial Supply FMC Corp. Fiberchem Inc GAFCO Mobil Oil Co. ows Monsanto Chemical Norris Industries Remington Supply Co. Standard Oil Co. Tolerable misstatement for accounts payable is $7,500.00. Accounts ng Trial Balance of Trade mber 31, 2002 FIGURE 12-8 payo 660.00 Midwest Electric Utility 1,21100 Midwest Gas Co. 2,500.00 M&A Milling 86.00 Mobil Oil Co. 1.500.00 Monsanto Chemical 8,753.00 Nielsen Enterprises 1,800.00 Norris Industries 3,250.00 Pacific Title Co. Advent Sign ig Co der Insutance Co Bauer and Adamson Bieyl & Son Central Steel Inc Chesea Development Co. 980.00 Permaloy Manufacturing Polein Drill and Bit 750.00 675.00Propec Inc. 6,425.00 Rayno Sales and Service Diamond Janitorial Service Dictaphone Corp Douglas Equipment Ellison, Robt & Assoc FMC Corp Fiberchem Inc. Fuller Travel GAFCO Glade Specialties Granger Supply Co 917 80 346.10 Reames Construction 5,819.00Remington Supply Co 6,315.80 Ritter Engineering Corp 1200.00 943.00 Roberts Bros. Service 5,750.00 1,000.00 Sanders, Geo. A. &Co 4,250.00 Semco, Inc. 89.7 819.00 346.00 5020 S & S Truck Painting 719.62 Standard Oil Co ,500.00 Stationery Supply 1,412.00 Thermal Tape Co 2,500.00 Todd Machinery, Inc. ,627.30Valco Sales 12,816.27 Innes, Brush & Co. CPAs J & L Plastics Corp. 619.12 6,888.12 1,429.00 284.00 126.33 2,369.62 1,915.00 3,250.00 Kazco. Mfg. Co Koch Plumbing Contractors Kohler Products Lakeshore Inc 19.27 Vermax Corp. 2,750.00 Waco Electronics, Inc. 10,483.23 Western Telephone Co. 1850.00 Williams Controls, Inc. 20.00 Xerox Corp 2,733.10 Yates Supply Co. Lundberg Coatings, Inc. 919.70 Other related information: $192,085.53 The vendors with the greatest volume of transactions during the year are as foll Central Steel Inc Commercial Supply FMC Corp. Fiberchem Inc GAFCO Mobil Oil Co. ows Monsanto Chemical Norris Industries Remington Supply Co. Standard Oil Co. Tolerable misstatement for accounts payable is $7,500.00