INTRODUCTION

Town and Country Hard are (T&CH) is a closely owned business founded six years ago by Caleb

and Jasmine Wright. T&CH has retail hard"' are stores located at three lake communities along the Virginia

and North Carolina border. T&CH sells products for home improvement and recreational fishing that include

building materials, plumbing supplies, electrical supplies, cleaning products, paint products, lawn and garden

products, house, wares, tools, and hunting and fishing supplies.

BACKGROUND

T&CH is required to have an audit of its annual financial statements to fulfill requirements of loan

agreements with financial institutions.This audit is to be completed in accordance with the AICPA professional

standards for the audit of nonpublic companies. Your audit firm is in the process of completing the audit for

the Fiscal 2018 financial statements in accordance with these professional standards. Saura Gupta, audit senior,

reviewed T&CH policies and procedures related to purchases and prepared the enclosed flowcharts (referenced

in the top right hand corner as E 10-1 and E 10-2).The general ledger accounts related to purchasing activities

at TCH include the following:

Cash Administrative Expenses

Inventory Purchases Selling Expenses

Purchase Discounts Prepaid Expenses

Purchase Returns and Allowances Accounts Payable

Freigh In Accrued Liabilities

The two staff auditors assigned to this engagement are Tyrone Henderson and you. Tyrone has already

performed walkthrough procedure to test the design of controls related to purchasing activities. Based on the

walkthrough procedures already completed, Saura decided to test the clients control activities associated ,with the receiving report exception report. The receiving report exception report indicates the numerical sequence of receiving reports used in that given, week and it documents any unused receiving report numbers. Tyrone Henderson has already selected and requested e exception reports from the client. Tyrone has also reviewed the exception reports previously reviewed by client personnel and documented his " work on audit schedule E I I

Saura has asked you to review the, work completed by Tyrone and to complete the procedures noted below.

1. COSO's Internal Control -- Integrated Frame, work discusses technology general controls and application

controls. what are technology general controls and application controls? How do technology general

controls differ from application controls?

2.The audit schedule E 11 indicates that the clients internal control related to purchase transactions includes

both manual and automated components (see control type section) . Describe the difference between

manual and automated controls. Review the flowcharts on audit schedules E 10-1 and E 10-2, what are the

manual controls and autoomated controls in T&CHs Purchase Ordering and Receiving?

3. Review the control description section on audit schedule E 11, what aspects of the client's review control

(review of Receiving Report Exception Report) are manual and how might that be dependent on automated

components?

4. When a client internal control is manual, with an automated component, what is the auditor's responsibility

related to the automated component of a manual controls ?What should the auditor do to meet his or her

responsibility when testing manual controls that have an automated component? Describe how Tyrones

testing of the manual aspects of the Receiving Report Exception Report review control might need to

differ from his testing of the automated component of the control.

5. Review the flowcharts on audit schedules E 10-1 and E 10-2 and become familiar with the accounting

documents and records used with purchase activities at T&CH. Also review audit schedule E 11 and client

Receiving Report Exception Reports to understand the work performed by Tyrone Henderson related

to testing the Receiving Report Exception Report review control. Evaluate the adequacy of Tyrones

documentation of the work performed and identify any suggestions for him to consider.

6. Based on your review of the work completed by Tyrone Henderson, document your evaluation of the test of

controls related to the Receiving Report Exception Report review control in the "Evaluation" section of audit

schedule E 11 . Based on your evaluation, document your conclusion about the operating effectiveness of

that control in the "Conclusion" section and then document , whether the final risk of material misstatement

for accounts payable and cost of goods sold are "low" medium" or "!ugh" for the relevant assertion(s) on

audit schedule E 11 . If you conclude that the client internall control is not effective, what additional work

would you need to perform to conclude the control is effective?