Integrated Case ApplicationPinnacle Manufacturing: Part IV
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 firm's audit files (Figure 12-12)
Figure 12-12
Accounts payable, l2-3 I- IS Number of accounts 452 Total accounts payable $9,460,776 Range of individual balances $33.27$677,632.97 Performance materiality for accounts payable $230,000 Transactions, 20 IB Acquisitions: Number of acquisitions |6.243 Total acquisitions $92,883.70 Cash disbursements: Number of disbursements 23,66I Total cash disbursements $87,280.03l Results of audit procedurestests of controls and substantive tests of transactions for acquisitions (sample size of |00): Purchase order not approved 2 Purchase quantities, prices, andl'or extensions not correct 2 Transactions charged to wrong general ledger account | Transactions recorded in wrong period I No other exceptions Results of audit procedurescash disbursements (sample size of l00): Cash disbursement recorded in wrong period I No other exceptions Results of audit proceduresaccounts payable: (50% of vendors' balances were veried; combined net understatement amounts were projected to the population as follows): Three cutoff misstatements $52,349 One difference in amounts due to disputes and discounts $9552 No adjustment was necessary because the total projected misstatement was not material. CENTRALIZED ACCOUNTS CASH PURCHASING RECEIVING PAYABLE DISBURSEMENTS DEPARTMENT DEPARTMENTS CLERK CLERK Prepare purchase order from approved Verifies accuracy and completeness of documents package. dates and approves. Receive vendor's invoice Receive and check requisition; goods P.O. approved by supervisor Key enter and process cash disbursement transaction data, reconciles to control total Receiving report order '1 To d ven 0" Match documents Purchase Cash disbursement transaction file Voucher document package Prepare voucher Notes on controls Print reports . 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 Cash - Prenumbered documentsall documents to control total disbursements shown are prenumbered. They are . journal 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 reconciliationdone monthly by file package* U pdate independent person. accounts To vendor; - Procedures are applied daily. signed by . A . payable ccounts payable master le total IS m t r f" treasurer reconciled to the general ledger total Print as e e (reviews support) monthly. reports - Treasurer reviews vendor activity for major vendors . . . . Accounts and commitments requnrmg disclosure. payable master file Acquisitions Flle description journal |. Chronological 2. Numerical *lncludes voucher, vendor's invoice. receiving report, purchase order. and purchase requisition
