m ilion go smoothly C121 LO 1, 3, 4, 6, 7) Challenging Understanding internal control, fraud risk assessment and substantive tests 2. Analysis and evaluation Evaluate the effectiveness of the CIRI' control environment. You may evaluate each individual component of the control environment but the develop an overa conclusion regarding the control environment and linen cament and its influence on other aspects of internal b. L. Analysis and Using the belowaluate the factors cated with the risk of fraud and the effectiveness of control activities with respect to the occurrence on for pur chases and payables associated with the EDI purchasing system Fraud Risk Factors Attitude and Opportunity Rationalization Incentives Pressures Control Activities Possible Misstateme Assertion purchases and payables 2. An Identity internal control deficiencies that you find in the purchasing system c. Evaluation Prepare a ter with the most important internal control recommendati recommendations that you have for management. Each spese recommendation should describe the current wystem. explain the risk involved, and make specific recommendations for improvement. Focus on issues raised by the new system and not on issues that have been raised in prior audits Phasell: Substantive Testing obtaining an understanding of the accounting system, you looked at the file containing the excep- flon reports reviewed by Dennis Bewer ( for items billed but not received). While these reports are printed daily, the only three or for reports would be present for a given week. Dennis said that he really pays attention to the reports primarily on Wednesday and Thursday and that the often does not keep the reports from earlier in the week. Subsequently you pulled a sample of transactions from the EDT wystem to perform substantive Dests of transactions and test the accuracy of recorded transactions that are processed through the system STV of Popn. Sample Transactions TV of Sample Dropshipments Shipped to stores Purchases through the system $ 16,371,095 You noted the following issues among the 30 transactions find one that whipped directly to the stores with an invoice total of .75, for which the cice on the invoice per the purchase order was $67 per but was billed at 5 unit any purchased 100 units of the SKU number on that invoice and paid the invoice in t h e The company was closed from Thursday, June 30, 2002, through Monday, July ten on Thursday, June During the meno count, a track came in with a shem from CW The walue of the invoice was 9.875. The un olce 9575. The units were s eated from the rest of the in word net counted. At the end of the inventory, the shipment was added to the overall the inventory. During the closing of the books after July 4, the pable in the amount of 9 5 with a dale of June 30, 2022 in dropshipants has been a problem in pa t , CIR has tot always had o ne des del contractional Flowever your firm has been with ents had been biled to customers and subsequently cash was received asciated with the liveries. In the current year, not only did you verify that the item was supported by electronic reports, but you also followed up to find that they were billed to customers who paid for the goods 11 of the clectronie imioso cws for dropshipments included in the sample were supported by electronic recching reports and they were paid in the correct amounts and on time. However, Dennis could not show where one traction with an invoice amount of 54,323 had been billeds, and had been paid by customers. Heute w pobties. Fint he l d that some customers t paid for the shipments Second he complained that the one had to follow up with the wors ning receiving reports because somece at the stone level biled to be a shipping report. However, ingen and ensuring pray responsibility was only for the purchasing tem, not the con wat vendors were paid on time. He could not verify what caused the problems with this e the follow-up failed to identify the underlying sales voice for th 0 1,,4,6, Challenging Understanding internal control fraud risk and substantive tests AnhandationWhat h ers and ot fan arenaised by the endence dabe ing that representative of problems in the population determine fine suming that the st a te C12.1 (LO 1, 3, 4, 6, 7) Challenging Understanding internal control, fraud risk assessment, and substantive tests a. Analysis and evaluation: Evaluate the effectiveness of the CIRI's control environment. You may evaluate each individual component of the control environment but then develop an overall conclusion regarding the control environment and its influence on other aspects of internal control b. 1. Analysis and evaluation: Using the table below, evaluate the factors associated with the risk of fraud and the effectiveness of control activities with respect to the occurrence assertion for pur- chases and payables associated with the EDI purchasing system. Incentives/ Pressures Fraud Risk Factors Attitude and Opportunity Rationalization Control Activities Possible Misstatements Assertion Occurrence purchases and payables 2. Analysis: Identify internal control deficiencies that you find in the EDI purchasing system. c. Evaluation: Prepare a letter with the two most important internal control recommendations that you have for management. Each specific recommendation should describe the current system, explain the risk involved, and make specific recommendations for improvement. Focus on issues raised by the new system and not on issues that have been raised in prior audits. Phase II: Substantive Testing When obtaining an understanding of the accounting system, you looked at the file containing the excep- tion reports reviewed by Dennis Brewer (e.g., for items billed but not received). While these reports are printed daily, often only three or four reports would be present for a given week. Dennis said that he really pays attention to the reports primarily on Wednesday and Thursday and that he often does not keep the reports from earlier in the week. Subsequently, you pulled a sample of 30 transactions from the EDI system to perform substantive tests of transactions and test the accuracy of recorded transactions that are processed through the system. of the 30 transactions selected at random, 19 represented transactions shipped directly to stores, and 11 represented drop shipments. The following table summarizes the nature of this sample of 30. # of Transactions 1,391 Sample Size $ BV of Popn. $ 5,756,077 10,615,018 $ 16,371,095 Drop shipments Shipped to stores Purchases through the EDI system $ BV of Sample $ 80,530 188,455 $ 268,985 1,737 3,128 You noted the following issues among the 30 transactions. You find one item that shipped directly to the stores with an invoice total of $9,775, for which the price on the invoice per the purchase order was $67 per unit but was billed at $76 per unit. The com- pany purchased 100 units of the SKU number on that invoice and paid the invoice in full as billed. The company was closed from Thursday, June 30, 2022, through Monday, July 4, 2022. Inventory was taken on Thursday, June 30, 2022. During the inventory count, a truck came in with a shipment from CWS. The value of the invoice was $9,875. The units were segregated from the rest of the in- ventory and not counted. At the end of the inventory, the shipment was added to the overall value of the inventory. During the closing of the books after July 4, the purchase was recorded as an account payable in the amount of $9,875 with a date of June 30, 2022. Auditing drop shipments has been a problem in past audits, as CIRI has not always had receiving documents to support deliveries to construction sites. However, your firm has been able to verify that shipments had been billed to customers and subsequently cash was received associated with these de liveries. In the current year, not only did you verify that the item was supported by electronic receiving reports, but you also followed up to find that they were billed to customers who paid for the goods. All 11 of the electronic invoices from CWS for drop shipments included in the sample were supported by electronic receiving reports and they were paid in the correct amounts and on time. However, Dennis could not show where one transaction with an invoice amount of $4,323 had been billed to, and had been paid by, customers. He suggested two possibilities. First, he suggested that some customers had prepaid for the shipments. Second, he complained that he often had to follow up with the stores about filing receiving reports because someone at the store level failed to file a shipping report. However, his primary responsibility was only for the purchasing system, not the billing system and ensuring that vendors were paid on time. He could not verify what caused the problem with this transaction. Further follow-up failed to identify the underlying sales invoice for this transaction. m ilion go smoothly C121 LO 1, 3, 4, 6, 7) Challenging Understanding internal control, fraud risk assessment and substantive tests 2. Analysis and evaluation Evaluate the effectiveness of the CIRI' control environment. You may evaluate each individual component of the control environment but the develop an overa conclusion regarding the control environment and linen cament and its influence on other aspects of internal b. L. Analysis and Using the belowaluate the factors cated with the risk of fraud and the effectiveness of control activities with respect to the occurrence on for pur chases and payables associated with the EDI purchasing system Fraud Risk Factors Attitude and Opportunity Rationalization Incentives Pressures Control Activities Possible Misstateme Assertion purchases and payables 2. An Identity internal control deficiencies that you find in the purchasing system c. Evaluation Prepare a ter with the most important internal control recommendati recommendations that you have for management. Each spese recommendation should describe the current wystem. explain the risk involved, and make specific recommendations for improvement. Focus on issues raised by the new system and not on issues that have been raised in prior audits Phasell: Substantive Testing obtaining an understanding of the accounting system, you looked at the file containing the excep- flon reports reviewed by Dennis Bewer ( for items billed but not received). While these reports are printed daily, the only three or for reports would be present for a given week. Dennis said that he really pays attention to the reports primarily on Wednesday and Thursday and that the often does not keep the reports from earlier in the week. Subsequently you pulled a sample of transactions from the EDT wystem to perform substantive Dests of transactions and test the accuracy of recorded transactions that are processed through the system STV of Popn. Sample Transactions TV of Sample Dropshipments Shipped to stores Purchases through the system $ 16,371,095 You noted the following issues among the 30 transactions find one that whipped directly to the stores with an invoice total of .75, for which the cice on the invoice per the purchase order was $67 per but was billed at 5 unit any purchased 100 units of the SKU number on that invoice and paid the invoice in t h e The company was closed from Thursday, June 30, 2002, through Monday, July ten on Thursday, June During the meno count, a track came in with a shem from CW The walue of the invoice was 9.875. The un olce 9575. The units were s eated from the rest of the in word net counted. At the end of the inventory, the shipment was added to the overall the inventory. During the closing of the books after July 4, the pable in the amount of 9 5 with a dale of June 30, 2022 in dropshipants has been a problem in pa t , CIR has tot always had o ne des del contractional Flowever your firm has been with ents had been biled to customers and subsequently cash was received asciated with the liveries. In the current year, not only did you verify that the item was supported by electronic reports, but you also followed up to find that they were billed to customers who paid for the goods 11 of the clectronie imioso cws for dropshipments included in the sample were supported by electronic recching reports and they were paid in the correct amounts and on time. However, Dennis could not show where one traction with an invoice amount of 54,323 had been billeds, and had been paid by customers. Heute w pobties. Fint he l d that some customers t paid for the shipments Second he complained that the one had to follow up with the wors ning receiving reports because somece at the stone level biled to be a shipping report. However, ingen and ensuring pray responsibility was only for the purchasing tem, not the con wat vendors were paid on time. He could not verify what caused the problems with this e the follow-up failed to identify the underlying sales voice for th 0 1,,4,6, Challenging Understanding internal control fraud risk and substantive tests AnhandationWhat h ers and ot fan arenaised by the endence dabe ing that representative of problems in the population determine fine suming that the st a te C12.1 (LO 1, 3, 4, 6, 7) Challenging Understanding internal control, fraud risk assessment, and substantive tests a. Analysis and evaluation: Evaluate the effectiveness of the CIRI's control environment. You may evaluate each individual component of the control environment but then develop an overall conclusion regarding the control environment and its influence on other aspects of internal control b. 1. Analysis and evaluation: Using the table below, evaluate the factors associated with the risk of fraud and the effectiveness of control activities with respect to the occurrence assertion for pur- chases and payables associated with the EDI purchasing system. Incentives/ Pressures Fraud Risk Factors Attitude and Opportunity Rationalization Control Activities Possible Misstatements Assertion Occurrence purchases and payables 2. Analysis: Identify internal control deficiencies that you find in the EDI purchasing system. c. Evaluation: Prepare a letter with the two most important internal control recommendations that you have for management. Each specific recommendation should describe the current system, explain the risk involved, and make specific recommendations for improvement. Focus on issues raised by the new system and not on issues that have been raised in prior audits. Phase II: Substantive Testing When obtaining an understanding of the accounting system, you looked at the file containing the excep- tion reports reviewed by Dennis Brewer (e.g., for items billed but not received). While these reports are printed daily, often only three or four reports would be present for a given week. Dennis said that he really pays attention to the reports primarily on Wednesday and Thursday and that he often does not keep the reports from earlier in the week. Subsequently, you pulled a sample of 30 transactions from the EDI system to perform substantive tests of transactions and test the accuracy of recorded transactions that are processed through the system. of the 30 transactions selected at random, 19 represented transactions shipped directly to stores, and 11 represented drop shipments. The following table summarizes the nature of this sample of 30. # of Transactions 1,391 Sample Size $ BV of Popn. $ 5,756,077 10,615,018 $ 16,371,095 Drop shipments Shipped to stores Purchases through the EDI system $ BV of Sample $ 80,530 188,455 $ 268,985 1,737 3,128 You noted the following issues among the 30 transactions. You find one item that shipped directly to the stores with an invoice total of $9,775, for which the price on the invoice per the purchase order was $67 per unit but was billed at $76 per unit. The com- pany purchased 100 units of the SKU number on that invoice and paid the invoice in full as billed. The company was closed from Thursday, June 30, 2022, through Monday, July 4, 2022. Inventory was taken on Thursday, June 30, 2022. During the inventory count, a truck came in with a shipment from CWS. The value of the invoice was $9,875. The units were segregated from the rest of the in- ventory and not counted. At the end of the inventory, the shipment was added to the overall value of the inventory. During the closing of the books after July 4, the purchase was recorded as an account payable in the amount of $9,875 with a date of June 30, 2022. Auditing drop shipments has been a problem in past audits, as CIRI has not always had receiving documents to support deliveries to construction sites. However, your firm has been able to verify that shipments had been billed to customers and subsequently cash was received associated with these de liveries. In the current year, not only did you verify that the item was supported by electronic receiving reports, but you also followed up to find that they were billed to customers who paid for the goods. All 11 of the electronic invoices from CWS for drop shipments included in the sample were supported by electronic receiving reports and they were paid in the correct amounts and on time. However, Dennis could not show where one transaction with an invoice amount of $4,323 had been billed to, and had been paid by, customers. He suggested two possibilities. First, he suggested that some customers had prepaid for the shipments. Second, he complained that he often had to follow up with the stores about filing receiving reports because someone at the store level failed to file a shipping report. However, his primary responsibility was only for the purchasing system, not the billing system and ensuring that vendors were paid on time. He could not verify what caused the problem with this transaction. Further follow-up failed to identify the underlying sales invoice for this transaction