Integrated Case ApplicationPinnacle Manufacturing: Part IV

1. 12-37 (Objectives 12-1, 12-2) In Parts I and II of this case, you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing. In Part III, you considered fraud risks. Your team has been assigned the responsibility of auditing the acquisition and payment cycle and one related balance sheet account, accounts payable. The general approach to be taken will be to reduce assessed control risk to a low level, if possible, for the two main types of transactions affecting accounts payable: acquisitions and cash disbursements. The following are furnished as background information:

   • A summary of key information from the audit of the acquisition and payment cycle and accounts payable in the prior year, which was extracted from the previous audit firms audit files (Figure 12-12)

     Figure 12-12

     Information for Audit of Accounts PayablePrevious Year

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   • A flowchart description of the accounting system and internal controls for the acquisition and payment cycle (Figure 12-13)the flowchart shows that although each of the companys three divisions has its own receiving department, the purchasing and accounts payable functions are centralized

     Figure 12-13

     Pinnacle ManufacturingAcquisition and Payment Cycle

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   The purpose of Part IV is to obtain an understanding of internal control and assess control risk for Pinnacle Manufacturings acquisition and cash disbursement transactions.

   1. Familiarize yourself with the internal control system for acquisitions and cash disbursements by studying the information in Figure 12-12 and Figure 12-13.

   2. Prepare a control risk matrix for acquisitions and a separate one for cash disbursements using Figure 12-3 on page 381 as a guide. A formatted control risk matrix is available online. The objectives should be specific transaction-related audit objectives for acquisitions for the first matrix and cash disbursements for the second matrix. See pages 623627 in Chapter 18 for transaction-related audit objectives for acquisitions and cash disbursements. In doing Part IV, the following steps are recommended:

   1. Controls

      1. Identify key controls for acquisitions and for cash disbursements. After you decide on the key controls, include each control in one of the two matrices.

      2. Include a C in the matrix in each column for the objective(s) to which each control applies. Several of the controls should satisfy multiple objectives.

   2. Deficiencies

      1. Identify control deficiencies for acquisitions and for cash disbursements. After you decide on the deficiencies, include each deficiency in the bottom portion of one of the two matrices.

      2. Include a D in the matrix in each column for the objective(s) to which each control deficiency applies.

   3. Assess control risk as high, medium, or low for each objective using your best judgment. Do this for both the acquisitions and cash disbursements matrices

Accounts payable, 12-31-18 Number of accounts Total accounts payable Range of individual balances Performance materiality for accounts payable 452 $9,460,776 $33.27$677,632.97 $230,000 Transactions, 2018 Acquisitions: Number of acquisitions Total acquisitions 16,243 $92,883,712 Cash disbursements: Number of disbursements Total cash disbursements 23,661 $87,280,031 Results of audit procedurestests of controls and substantive tests of transactions for acquisitions (sample size of 100): Purchase order not approved Purchase quantities, prices, and/or extensions not correct Transactions charged to wrong general ledger account Transactions recorded in wrong period No other exceptions NN - - Results of audit procedures-cash disbursements (sample size of 100): Cash disbursement recorded in wrong period No other exceptions Results of audit proceduresaccounts payable: (50% of vendors' balances were verified; combined net understatement amounts were projected to the population as follows): Three cutoff misstatements One difference in amounts due to disputes and discounts No adjustment was necessary because the total projected misstatement was not material. $52,349 $9,552 CENTRALIZED PURCHASING DEPARTMENT RECEIVING DEPARTMENTS ACCOUNTS PAYABLE CLERK CASH DISBURSEMENTS CLERK Prepare purchase order from approved requisition; P.O. approved by supervisor Receive and check goods Receive vendor's invoice Verifies accuracy and completeness of documents package, dates and approves. Receiving report Purchase order INV Key enter and process cash disbursement transaction data, reconciles to control total R.R P.O. REQ R.R. .. REQ Cash disbursement transaction Voucher document package TO file Print reports Cash disbursements journal Check vendor Match documents Prepare voucher Notes on controls Purchases can only be made from vendors included in pre-approved vendor file. Key enter and process Chart of accountsthe company uses purchase transaction an adequate detailed chart of accounts. data, reconciles Prenumbered documentsall documents to control total shown are prenumbered. They are accounted for by a function other than the preparer. Clerk follows up weekly on computer / Purchase Voucher generated report of unmatched receiving report. transaction document Bank reconciliation-done monthly by file package independent person. Procedures are applied daily. Accounts payable master file total is reconciled to the general ledger total Print monthly reports Treasurer reviews vendor activity for major vendors and commitments requiring disclosure. Acquisitions File description journal I. Chronological 2. Numerical *Includes voucher, vendor's invoice, receiving report, purchase order, and purchase requisition. Update accounts payable master file To vendor; signed by treasurer (reviews support) Accounts payable master file Accounts payable, 12-31-18 Number of accounts Total accounts payable Range of individual balances Performance materiality for accounts payable 452 $9,460,776 $33.27$677,632.97 $230,000 Transactions, 2018 Acquisitions: Number of acquisitions Total acquisitions 16,243 $92,883,712 Cash disbursements: Number of disbursements Total cash disbursements 23,661 $87,280,031 Results of audit procedurestests of controls and substantive tests of transactions for acquisitions (sample size of 100): Purchase order not approved Purchase quantities, prices, and/or extensions not correct Transactions charged to wrong general ledger account Transactions recorded in wrong period No other exceptions NN - - Results of audit procedures-cash disbursements (sample size of 100): Cash disbursement recorded in wrong period No other exceptions Results of audit proceduresaccounts payable: (50% of vendors' balances were verified; combined net understatement amounts were projected to the population as follows): Three cutoff misstatements One difference in amounts due to disputes and discounts No adjustment was necessary because the total projected misstatement was not material. $52,349 $9,552 CENTRALIZED PURCHASING DEPARTMENT RECEIVING DEPARTMENTS ACCOUNTS PAYABLE CLERK CASH DISBURSEMENTS CLERK Prepare purchase order from approved requisition; P.O. approved by supervisor Receive and check goods Receive vendor's invoice Verifies accuracy and completeness of documents package, dates and approves. Receiving report Purchase order INV Key enter and process cash disbursement transaction data, reconciles to control total R.R P.O. REQ R.R. .. REQ Cash disbursement transaction Voucher document package TO file Print reports Cash disbursements journal Check vendor Match documents Prepare voucher Notes on controls Purchases can only be made from vendors included in pre-approved vendor file. Key enter and process Chart of accountsthe company uses purchase transaction an adequate detailed chart of accounts. data, reconciles Prenumbered documentsall documents to control total shown are prenumbered. They are accounted for by a function other than the preparer. Clerk follows up weekly on computer / Purchase Voucher generated report of unmatched receiving report. transaction document Bank reconciliation-done monthly by file package independent person. Procedures are applied daily. Accounts payable master file total is reconciled to the general ledger total Print monthly reports Treasurer reviews vendor activity for major vendors and commitments requiring disclosure. Acquisitions File description journal I. Chronological 2. Numerical *Includes voucher, vendor's invoice, receiving report, purchase order, and purchase requisition. Update accounts payable master file To vendor; signed by treasurer (reviews support) Accounts payable master file