Nancy Sharp, CPA, is the auditor of the Raleigh Corporation. She has just completed the audit work on the accounts payable balance for the current year engagement. She used judgemental non-statistical sampling. (Assume this is an acceptable technique for the Raleigh engagement.)
Nancy’s working papers show that confirmation requests were mailed to 100 of Raleigh’s vendors. The selected vendors were all the accounts with large dollar balances.
Since she found no material errors in these individual payable balances, she considered her work in accounts payable to be complete. She was confident that accounts payable on Raleigh Corporation’s books actually existed and were properly valued.
REQUIRED:
1. Nancy has tested two objectives (existence and valuation) very thoroughly; however, she has failed to test for the objective of completeness. This perhaps is the most important objective to be met in the area of Accounts Payable. What is the purpose of testing for completeness in Accounts Payable?
2. What effect do incomplete accounts payable have on the Balance Sheet? What effect do incomplete accounts payable have on the Income Statement? 3. Nancy only confirmed vendors with large reported balances. Are there other vendor accounts she should have included in the confirmation test? Why?
4. List three (3) substantive tests (other than confirmations) Nancy should have performed either at year end or subsequent to the balance sheet date in order to help meet the completeness objective. (i.e., tests that search for unrecorded liabilities)
5. Give a specific example of an internal control Raleigh should be using to ensure completeness of its purchases and payable transactions.