Pinnacle Manufacturing: Part V 50 marks Part III of the Pinnacle case study (see Chapter 8) covered the internal control structure and an initial assessment of control risk over purchase and cash payment transactions. Part V develops tests of controls and related substantive tests of transactions for the acquisition and payment cycle. Assume that the key internal controls in the acquisition and payment cycle are the following: (i) Segregation of the purchasing, receiving and cash payment functions. (ii) Independent reconciliation of the monthly bank statements. (iii) Use of pre-numbered document packages (containing purchase order, receiving report and supplier invoice), properly accounted for. (iv) Use of pre-numbered cheques, properly accounted for. (v) Use of pre-numbered receiving reports, properly accounted for. (vi) Internal verification of document package before cheque preparation. (vii) Review of supporting documents and signing of cheques by an independent, authorised person. (viii) Cancellation of documents prior to signing of the cheque. (ix) Monthly reconciliation of the accounts payable master file with the general ledger. Required: 1. Prepare a table showing, for each of the internal controls listed above, the following: a. the transaction-related audit objective(s) that it partially or fully satisfies. Express the audit objective in statement form; - e.g., Occurrence - recorded purchases are for goods and services actually received. (9 marks) b. one procedure to test the control. Use the most relcom iable test of control evidence you can think of. Write the audit procedure in good form. (9 marks) c. one substantive test of transactions audit procedure to test whether the control failed to be effective. Use the most reliable substantive test of transactions evidence you can think of. Write the audit procedure in good form. (9 marks) 2. Prepare a substantive audit programme for acquisitions and cash payments transactions. (23 marks) Note: Use Figure 12.6 (page 407) as an example of the format of a transactions audit programme. Where possible, follow the approach shown in procedure 13(a) to 13(e) in Figure 12.6, applying several tests to the same ?starting point? procedure. Pinnacle Manufacturing: Part VI 50 marks Part VI of the Pinnacle Manufacturing case covers analytical procedures and tests of details of balances for accounts payable. Assume that the understanding of internal controls over acquisitions and cash payments, and the related tests of controls and substantive tests of transactions support an assessment of a low control risk. The accounts payable listing at year-end shows 519 accounts, making up the accounts payable balance of $11,277,989 at 31 December 20X2. Accounts payable balances between $50,001 and $200,000 total $4,075,355 and balances less than $50,000 are $4,792,683. Required: 1. List the relationships, ratios and trends that will provide useful information about the overall reasonableness of accounts payable. Consider income statement accounts that affect accounts payable in selecting the analytical procedures. (6 marks) 2. Prepare a substantive audit programme for accounts payable in a performance format. Group the procedures under the headings General, Ending Balances, Cut off and Disclosure & Classification. (10 marks) Note: Use Figure 12.14 (page 427) as an example of the format of a balances audit programme. 3. Assume that a) assessed control risk had been high rather than low for each transaction-related audit objective; b) inherent risk was high for each balance-related audit objective; and c) analytical procedures indicated a high potential for misstatement. What would be the effect on the audit procedures and sample sizes in the audit programme in 2? (5 marks) 4. Confirmation requests were sent to a stratified sample of 51 vendors listed in Figure 14.10 (page 530). Confirmation responses from 45 suppliers were returned, indicating no difference between the supplier?s and Pinnacle?s records. Figure 14.11 (pages 531-532) presents the six replies that indicate a difference between the supplier?s balance and the company?s record. The auditor?s follow-up findings are indicated for each reply. Prepare an Analysis of Accounts Payable Confirmation Exceptions as shown in Figure 14.12* (page 533) to determine the misstatements, if any, for each difference. Include the balances confirmed without exception as one amount on the schedule for each stratum, and total the schedule columns. Brief explanations should show accounts to be debited and credited where appropriate. (13 marks) Note: Assume that Pinnacle Manufacturing took a complete physical inventory as at 31 December 20X2 and the auditor concluded that recorded inventory reflects all inventory on hand at the balance sheet date. * Figure 14.12 shows the $27,500 difference in Fiberchem as a Timing difference (no misstatement) in accounts payable; this is incorrect. It is an understatement in accounts payable. 5. Estimate the total misstatement in the income statement, based on the income statement misstatement identified in 4 above. The misstatement should be calculated separately for each stratum of accounts payable. The total misstatement should include the projected misstatement and an estimate for sampling error; consider the size of the population and the amounts tested and use professional judgement to estimate the sampling error. (5 marks) 6. Estimate the total misstatement in accounts payable using the same methodology as in 5 above. Note that a misstatement caused by the failure to record an FOB origin purchase is an understatement of accounts payable and inventory and has no effect on income. (6 marks) 7. What is your conclusion about the fairness of the recorded balance in accounts payable for Pinnacle Manufacturing as it affects the income statement and balance sheet, and your assessment of control risk as low for all transaction-related audit objectives? Assume that tolerable error for accounts payable as it affects the income statement is $230,000. (5 marks) Pinnacle Manufacturing: Part V 50 marks Part III of the Pinnacle case study (see Chapter 8) covered the internal control structure and an initial assessment of control risk over purchase and cash payment transactions. Part V develops tests of controls and related substantive tests of transactions for the acquisition and payment cycle. Assume that the key internal controls in the acquisition and payment cycle are the following: (i) Segregation of the purchasing, receiving and cash payment functions. (ii) Independent reconciliation of the monthly bank statements. (iii) Use of pre-numbered document packages (containing purchase order, receiving report and supplier invoice), properly accounted for. (iv) Use of pre-numbered cheques, properly accounted for. (v) Use of pre-numbered receiving reports, properly accounted for. (vi) Internal verification of document package before cheque preparation. (vii) Review of supporting documents and signing of cheques by an independent, authorised person. (viii) Cancellation of documents prior to signing of the cheque. (ix) Monthly reconciliation of the accounts payable master file with the general ledger. Required: 1. Prepare a table showing, for each of the internal controls listed above, the following: a. the transaction-related audit objective(s) that it partially or fully satisfies. Express the audit objective in statement form; - e.g., Occurrence - recorded purchases are for goods and services actually received. (9 marks) b. one procedure to test the control. Use the most relcom iable test of control evidence you can think of. Write the audit procedure in good form. (9 marks) c. one substantive test of transactions audit procedure to test whether the control failed to be effective. Use the most reliable substantive test of transactions evidence you can think of. Write the audit procedure in good form. (9 marks) 2. Prepare a substantive audit programme for acquisitions and cash payments transactions. (23 marks) Note: Use Figure 12.6 (page 407) as an example of the format of a transactions audit programme. Where possible, follow the approach shown in procedure 13(a) to 13(e) in Figure 12.6, applying several tests to the same 'starting point' procedure. Error! No text of specified style in document. Error! No text of specified style in document. Pinnacle Manufacturing: Part VI 50 marks Part VI of the Pinnacle Manufacturing case covers analytical procedures and tests of details of balances for accounts payable. Assume that the understanding of internal controls over acquisitions and cash payments, and the related tests of controls and substantive tests of transactions support an assessment of a low control risk. The accounts payable listing at year-end shows 519 accounts, making up the accounts payable balance of $11,277,989 at 31 December 20X2. Accounts payable balances between $50,001 and $200,000 total $4,075,355 and balances less than $50,000 are $4,792,683. Required: 1. List the relationships, ratios and trends that will provide useful information about the overall reasonableness of accounts payable. Consider income statement accounts that affect accounts payable in selecting the analytical procedures. (6 marks) 2. Prepare a substantive audit programme for accounts payable in a performance format. Group the procedures under the headings General, Ending Balances, Cut off and Disclosure & Classification. (10 marks) Note: Use Figure 12.14 (page 427) as an example of the format of a balances audit programme. 3. Assume that a) assessed control risk had been high rather than low for each transaction-related audit objective; b) inherent risk was high for each balance-related audit objective; and c) analytical procedures indicated a high potential for misstatement. What would be the effect on the audit procedures and sample sizes in the audit programme in 2? (5 marks) 4. Confirmation requests were sent to a stratified sample of 51 vendors listed in Figure 14.10 (page 530). Confirmation responses from 45 suppliers were returned, indicating no difference between the supplier's and Pinnacle's records. Figure 14.11 (pages 531-532) presents the six replies that indicate a difference between the supplier's balance and the company's record. The auditor's follow-up findings are indicated for each reply. Prepare an Analysis of Accounts Payable Confirmation Exceptions as shown in Figure 14.12* (page 533) to determine the misstatements, if any, for each difference. Include the balances confirmed without exception as one amount on the schedule for each stratum, and total the schedule columns. Brief explanations should show accounts to be debited and credited where appropriate. (13 marks) Note: Assume that Pinnacle Manufacturing took a complete physical inventory as at 31 December 20X2 and the auditor concluded that recorded inventory reflects all inventory on hand at the balance sheet date. * Figure 14.12 shows the $27,500 difference in Fiberchem as a Timing difference (no misstatement) in accounts payable; this is incorrect. It is an understatement in accounts payable. 5. Estimate the total misstatement in the income statement, based on the income statement misstatement identified in 4 above. The misstatement should be calculated separately for each stratum of accounts payable. The total misstatement should include the projected misstatement and an estimate for sampling error; consider the size of the population and the amounts tested and use professional judgement to estimate the sampling error. (5 marks) Page 2 Error! No text of specified style in document. Error! No text of specified style in document. 6. Estimate the total misstatement in accounts payable using the same methodology as in 5 above. Note that a misstatement caused by the failure to record an FOB origin purchase is an understatement of accounts payable and inventory and has no effect on income. (6 marks) 7. What is your conclusion about the fairness of the recorded balance in accounts payable for Pinnacle Manufacturing as it affects the income statement and balance sheet, and your assessment of control risk as low for all transaction-related audit objectives? Assume that tolerable error for accounts payable as it affects the income statement is $230,000. (5 marks) Page 3