INTEGRATED CASE APPLICATION PINNACLE MANUFACTURING PART VI 16 35 ( Objectives 16 2 , 16 3 , 16 4 ) Parts III, IV, and V 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 VI, you will 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 The listing of the 519 accounts making up the accounts payable balance of $11,277,989 at December 31, 2009 is included under the Pinnacle link on the textbook Web site Required a List those relationships, ratios, and trends that you believe will provide useful information about the overall reasonableness of accounts payable You should consider income statement accounts that affect accounts payable in selecting the analytical procedures b Study Table 19 5 (p 647) containing balance related audit objectives and tests of details of balances for accounts payable to be sure you understand each procedure and its purpose Prepare an audit program for accounts payable in a performance format, using the audit procedures in Table 19 5 The format of the audit program should be similar to Table 16 5 (p 541) Be sure to include a sample size for each procedure c 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, and (3) analytical procedures indicated a high potential for misstatement What would the effect have been on the audit procedures and sample sizes for requirement b d Confirmation requests were sent to a stratified sample of 51 vendors listed in Figure 16 8 (p 552) Confirmation responses from 45 vendors were returned indicating no difference between the vendors and the companys records Figure 16 9 (pp 554555) presents the six replies that indicate a difference between the vendors balance and the companys records The auditors follow up findings are indicated on each reply Prepare an audit schedule similar to the one illustrated in Figure 16 10 (p 556) to determine the misstatements, if any, for each difference The audit schedule format shown in Figure 16 10 can be downloaded using the Pinnacle link on the textbook Web site The exception for Fiberchem is analyzed as an illustration Assume that Pinnacle Manufacturing took a complete physical inventory at December 31, 2009, and the auditor concluded that recorded inventory reflects all inventory on hand at the balance sheet date Include the balances confirmed without exception as one amount on the schedule for each stratum, and total the schedule columns e Estimate the total misstatement in the income statement, not just the misstatements in the sample, based on the income statement misstatements you identified in requirement d The total misstatement should include a projected misstatement and an estimate for sampling error Hint See pages 257258 for guidance on calculating the point estimate Note that the misstatements should be projected separately for each stratum You will need to determine the size of each stratum using the accounts payable listing Use your judgment to estimate sampling error, considering the size of the population and the amounts tested f Estimate the total misstatement in accounts payable in the same way you did for the income statement in requirement e Hint A misstatement caused by the failure to record an FOB origin purchase is an understatement of accounts payable and inventory and has no effect on income g What is your conclusion about the fairness of the recorded balance in accounts payable for Pinnacle Manufacturing as it affects the income statement and balance sheet How does this affect your assessment of control risk as being low for all transaction related audit objectives Assume you decided that tolerable misstatement for accounts payable as it affects the income statement is $230,000 Im working on part F needing help Im not even sure how to get started Figure 16 8 Pinnacle Manufacturing Sample of Accounts Payable Selected for Confirmation December 31, 2011 High Volume Items ( $250,000) 1 AMERICAN PRESS 2 CLEAN O RAMA, CO 3 FIBERCHEM 4 RUFUS AUSTIN ANTIQUES 5 TODD MACHINERY 6 WELBURN MANUFACTURING Large Balance Items ($50,001 $250,000) 1 A M SANDLER INC 2 AMERICAN BABY USTC 3 BEACH HOOVER REFINING 4 BEARING DRIVES CO 5 BURTON MARTIN 6 CABLE SYS IND TRAF CONS 7 EDDIE VENTURA, INC 8 FIBEROPTICS 9 FINISH METALS INC 10 FREEMAN FURNITURE ATTN A P 11 G P CHAMBERS CO 12 GODWIN DRUG COMPANY 13 HOLY FAMILY HOSPITAL 14 LAS FLORES DESIGNS INC 15 LEAN CORP 16 MACDONALD SVC CORPORATION 17 MCCOYS INC 18 METADYNE CORP 19 MICRON POWER SYSTEMS 20 MOBIL OIL 21 NATIONAL ELEVATOR MACH CO 22 NORRIS INDUSTRIES 23 R B PRODUCTS 24 REMINGTON SUPPLY 25 SAFETY ENVELOPE CO 26 SCANDEC USA INC 27 THE DUTTON COMPANY 28 THE HABERDASHERY CO 29 UNIVERSITY OF CALIFORNIA 30 ZZZZ BANK ADJUSTMENTS Items $50,000 and less 1 ADVENT SIGN MFG CO 2 B K MFG CO INC 3 BELLCO 4 BOSTON SHOECASE CO 5 DYNAMIC METAL PRODUCTS 6 EVERHART CO 7 FULLER TRAVEL 8 GOOD HOUSE HOME VIDEO INC 9 HARRAH'S METALS, INC 10 J C LICHT CO GLENDALE HTS 11 LIBERTY LIGHTING 12 LONG BEACH LAWN SERVICE 13 PREMIER WHIRLPOOL BATH 14 QUAKER TRANSANALYSIS 15 TOWER INTERNATIONAL TOTAL TESTED $340,767 94 317,668 63 793,049 89 400,046 08 531,073 93 388,836 07 $2,771,442 54 $81,348 54 75,432 73 76,408 79 73,017 24 78,682 54 71,288 95 60,255 55 60,102 78 60,769 71 130,493 51 64,125 44 84,331 05 117,916 83 88,644 92 67,985 23 147,943 95 67,936 32 85,432 51 136,071 37 93,210 48 76,921 40 88,314 64 80,092 46 123,411 24 223,950 34 65,942 94 63,882 02 71,869 16 80,624 95 64,471 21 $2,660,878 80 $51,750 00 42,668 50 42,710 74 52,174 50 36,546 05 47,519 14 32,470 11 46,472 67 51,279 85 53,228 47 46,802 78 48,488 96 6,550 33 50,363 69 37,299 57 $646,325 34 $6,078,646 68 FIGURE 16 9 Replies to Requests for Information STATEMENT FROM FIBERCHEM Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 Invoice No 8312 8469 8819 9002 Date 11 22 2011 12 02 2011 12 18 2011 12 30 2011 Amount $300,000 00 $178,000 00 $315,049 89 $32,500 00 (2) Balance Due $300,000 00 $478,000 00 $793,049 89 $825,549 89 (1) Auditor's notes (1) Agrees with accounts payable listing (2) Goods shipped FOB Fiberchem's plant on December 31, 2011, arrived at Pinnacle Manufacturing on January 4, 2012 STATEMENT FROM MOBIL OIL Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 Invoice No DX14777 DX16908 Date 12 23 2011 12 29 2011 Amount $93,210 48 $37,812 00 (2) Balance Due $93,210 48 $131,022 48 (1) Auditor's notes (1) Agrees with accounts payable listing (2) Goods shipped FOB Pinnacle Manufacturing December 29, 2011 arrived at Pinnacle Manufacturing on January 3, 2012 STATEMENT FROM NORRIS INDUSTRIES Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 Invoice No 14896 15111 Date 12 27 2011 12 28 2011 Amount $88,314 64 $117,296 00 (2) Balance Due $88,314 64 $205,610 64 (1) Auditor's notes (1) Agrees with accounts payable listing (2) Goods received December 30, 2011, recorded on January 2, 2012 STATEMENT FROM REMINGTON SUPPLY Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 Invoice No 141702 142619 142811 143600 144927 Date 11 11 2011 11 19 2011 12 04 2011 12 21 2011 12 29 2011 (2) Amount $23,067 00 $12,000 00 $7,100 00 $27,715 24 $53,529 00 Balance Due $23,067 00 $35,067 00 $42,167 00 $69,882 24 $123,411 24 (1) Auditor's notes (1) Agrees with accounts payable listing (2) Goods shipped FOB Pinnacle Manufacturing on December 29, 2011, arrived at Pinnacle Manufacturing on January 4, 2012 STATEMENT FROM ADVENT SIGN MFG CO Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 First progress billing per contract Second progress billing per contract Total due $51,750 00 $7,500 00 $59,250 00 (1) (2) Auditor's notes (1) Agrees with accounts payable listing (2) Progress payment due as of December 31, 2011, per contract for construction of new custom electric sign Sign installation completed on January 15, 2012 STATEMENT FROM FULLER TRAVEL Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 Invoice No 84360110 84360181 84360222 84360291 Date 12 04 2011 12 12 2011 12 21 2011 12 26 2011 Amount $9,411 63 $9,411 63 $7,100 00 $13,646 85 (2) (2) (1) (2) Balance Due $9,411 63 $18,823 26 $25,923 26 $39,570 11 Auditor's notes (1) Paid by Pinnacle Manufacturing on December 28, 2011 Payment in transit at year end (2) The total of these items of $32,470 11 agrees with accounts payable listing

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INTEGRATED CASE APPLICATION PINNACLE MANUFACTURING: PART VI 16-35 ( Objectives 16-2 , 16-3 , 16-4 ) Parts III, IV, and V of this case study

INTEGRATED CASE APPLICATION PINNACLE MANUFACTURING: PART VI 16-35 ( Objectives 16-2 , 16-3 , 16-4 ) Parts III, IV, and V 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 VI, you will 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. The listing of the 519 accounts making up the accounts payable balance of $11,277,989 at December 31, 2009 is included under the Pinnacle link on the textbook Web site. Required a. List those relationships, ratios, and trends that you believe will provide useful information about the overall reasonableness of accounts payable. You should consider income statement accounts that affect accounts payable in selecting the analytical procedures. b. Study Table 19-5 (p. 647) containing balance-related audit objectives and tests of details of balances for accounts payable to be sure you understand each procedure and its purpose. Prepare an audit program for accounts payable in a performance format, using the audit procedures in Table 19-5. The format of the audit program should be similar to Table 16-5 (p. 541). Be sure to include a sample size for each procedure. c. 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, and (3) analytical procedures indicated a high potential for misstatement. What would the effect have been on the audit procedures and sample sizes for requirement b? d. Confirmation requests were sent to a stratified sample of 51 vendors listed in Figure 16-8 (p. 552). Confirmation responses from 45 vendors were returned indicating no difference between the vendors and the companys records. Figure 16-9 (pp. 554555) presents the six replies that indicate a difference between the vendors balance and the companys records. The auditors follow-up findings are indicated on each reply. Prepare an audit schedule similar to the one illustrated in Figure 16-10 (p. 556) to determine the misstatements, if any, for each difference. The audit schedule format shown in Figure 16-10 can be downloaded using the Pinnacle link on the textbook Web site. The exception for Fiberchem is analyzed as an illustration. Assume that Pinnacle Manufacturing took a complete physical inventory at December 31, 2009, and the auditor concluded that recorded inventory reflects all inventory on hand at the balance sheet date. Include the balances confirmed without exception as one amount on the schedule for each stratum, and total the schedule columns. e. Estimate the total misstatement in the income statement, not just the misstatements in the sample, based on the income statement misstatements you identified in requirement d. The total misstatement should include a projected misstatement and an estimate for sampling error. Hint: See pages 257258 for guidance on calculating the point estimate. Note that the misstatements should be projected separately for each stratum. You will need to determine the size of each stratum using the accounts payable listing. Use your judgment to estimate sampling error, considering the size of the population and the amounts tested. f. Estimate the total misstatement in accounts payable in the same way you did for the income statement in requirement e. Hint: A misstatement caused by the failure to record an FOB origin purchase is an understatement of accounts payable and inventory and has no effect on income. g. What is your conclusion about the fairness of the recorded balance in accounts payable for Pinnacle Manufacturing as it affects the income statement and balance sheet? How does this affect your assessment of control risk as being low for all transaction-related audit objectives? Assume you decided that tolerable misstatement for accounts payable as it affects the income statement is $230,000. Im working on part F needing help. Im not even sure how to get started. image text in transcribed

Figure 16-8 Pinnacle Manufacturing Sample of Accounts Payable Selected for Confirmation--December 31, 2011 High-Volume Items (>$250,000) 1. AMERICAN PRESS 2. CLEAN-O-RAMA, CO. 3. FIBERCHEM 4. RUFUS AUSTIN ANTIQUES 5. TODD-MACHINERY 6. WELBURN MANUFACTURING Large Balance Items ($50,001 - $250,000) 1. A & M SANDLER INC 2. AMERICAN BABY % USTC 3. BEACH & HOOVER REFINING 4. BEARING DRIVES CO 5. BURTON MARTIN 6. CABLE SYS % IND TRAF CONS 7. EDDIE VENTURA, INC. 8. FIBEROPTICS 9. FINISH METALS INC 10. FREEMAN FURNITURE - ATTN A/P 11. G P CHAMBERS CO 12. GODWIN DRUG COMPANY 13. HOLY FAMILY HOSPITAL 14. LAS FLORES DESIGNS INC 15. LEAN CORP 16. MACDONALD SVC CORPORATION 17. MCCOYS INC 18. METADYNE CORP 19. MICRON POWER SYSTEMS 20. MOBIL OIL 21. NATIONAL ELEVATOR & MACH CO 22. NORRIS INDUSTRIES 23. R & B PRODUCTS 24. REMINGTON SUPPLY 25. SAFETY ENVELOPE CO 26. SCANDEC USA INC 27. THE DUTTON COMPANY 28. THE HABERDASHERY CO 29. UNIVERSITY OF CALIFORNIA 30. ZZZZ BANK ADJUSTMENTS Items $50,000 and less 1. ADVENT SIGN MFG. CO. 2. B&K MFG CO INC 3. BELLCO 4. BOSTON SHOECASE CO 5. DYNAMIC METAL PRODUCTS 6. EVERHART CO 7. FULLER TRAVEL 8. GOOD HOUSE HOME VIDEO INC 9. HARRAH'S METALS, INC. 10. J C LICHT CO-GLENDALE HTS 11. LIBERTY LIGHTING 12. LONG BEACH LAWN SERVICE 13. PREMIER WHIRLPOOL BATH 14. QUAKER TRANSANALYSIS 15. TOWER INTERNATIONAL TOTAL TESTED $340,767.94 317,668.63 793,049.89 400,046.08 531,073.93 388,836.07 $2,771,442.54 $81,348.54 75,432.73 76,408.79 73,017.24 78,682.54 71,288.95 60,255.55 60,102.78 60,769.71 130,493.51 64,125.44 84,331.05 117,916.83 88,644.92 67,985.23 147,943.95 67,936.32 85,432.51 136,071.37 93,210.48 76,921.40 88,314.64 80,092.46 123,411.24 223,950.34 65,942.94 63,882.02 71,869.16 80,624.95 64,471.21 $2,660,878.80 $51,750.00 42,668.50 42,710.74 52,174.50 36,546.05 47,519.14 32,470.11 46,472.67 51,279.85 53,228.47 46,802.78 48,488.96 6,550.33 50,363.69 37,299.57 $646,325.34 $6,078,646.68 FIGURE 16-9 Replies to Requests for Information STATEMENT FROM FIBERCHEM Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 Invoice No. 8312 8469 8819 9002 Date 11/22/2011 12/02/2011 12/18/2011 12/30/2011 Amount $300,000.00 $178,000.00 $315,049.89 $32,500.00 (2) Balance Due $300,000.00 $478,000.00 $793,049.89 $825,549.89 (1) Auditor's notes: (1) Agrees with accounts payable listing. (2) Goods shipped FOB Fiberchem's plant on December 31, 2011, arrived at Pinnacle Manufacturing on January 4, 2012. STATEMENT FROM MOBIL OIL Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 Invoice No. DX14777 DX16908 Date 12/23/2011 12/29/2011 Amount $93,210.48 $37,812.00 (2) Balance Due $93,210.48 $131,022.48 (1) Auditor's notes: (1) Agrees with accounts payable listing. (2) Goods shipped FOB Pinnacle Manufacturing December 29, 2011; arrived at Pinnacle Manufacturing on January 3, 2012 STATEMENT FROM NORRIS INDUSTRIES Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 Invoice No. 14896 15111 Date 12/27/2011 12/28/2011 Amount $88,314.64 $117,296.00 (2) Balance Due $88,314.64 $205,610.64 (1) Auditor's notes: (1) Agrees with accounts payable listing. (2) Goods received December 30, 2011, recorded on January 2, 2012. STATEMENT FROM REMINGTON SUPPLY Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 Invoice No. 141702 142619 142811 143600 144927 Date 11/11/2011 11/19/2011 12/04/2011 12/21/2011 12/29/2011 (2) Amount $23,067.00 $12,000.00 $7,100.00 $27,715.24 $53,529.00 Balance Due $23,067.00 $35,067.00 $42,167.00 $69,882.24 $123,411.24 (1) Auditor's notes: (1) Agrees with accounts payable listing. (2) Goods shipped FOB Pinnacle Manufacturing on December 29, 2011, arrived at Pinnacle Manufacturing on January 4, 2012. STATEMENT FROM ADVENT SIGN MFG. CO. Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 First progress billing per contract Second progress billing per contract Total due $51,750.00 $7,500.00 $59,250.00 (1) (2) Auditor's notes: (1) Agrees with accounts payable listing. (2) Progress payment due as of December 31, 2011, per contract for construction of new custom electric sign. Sign installation completed on January 15, 2012. STATEMENT FROM FULLER TRAVEL Pinnacle Manufacturing Detroit, MI Amounts due as of December 31, 2011 Invoice No. 84360110 84360181 84360222 84360291 Date 12/04/2011 12/12/2011 12/21/2011 12/26/2011 Amount $9,411.63 $9,411.63 $7,100.00 $13,646.85 (2) (2) (1) (2) Balance Due $9,411.63 $18,823.26 $25,923.26 $39,570.11 Auditor's notes: (1) Paid by Pinnacle Manufacturing on December 28, 2011. Payment in transit at year-end. (2) The total of these items of $32,470.11 agrees with accounts payable listing