Pinnacle Manufacturing: Part V In Part IV of this case study, you obtained an understanding of internal control and made an initial assessment of control risk for each transaction-related audit objective for acquisition and cash disbursement transactions. The purpose of Part V is to continue the assessment of control risk by determining the appropriate tests of controls and substantive tests of transactions. In order to do this, you must complete the steps needed to prepare an audit program for tests of controls and substantive tests of transactions for acquisitions and cash disbursements Required a) Reference the audit file on the following page listing 9 controls. Assume that you previously (in Part IV) identified these as key controls you want to rely on Identify the transaction-related audit objective(s) that it partially or fully satisfies Use the list (A-J) on page 4. Note that objectives may be used more than once List one audit procedure to test the control. Use the list (I-IX) on page 4 List one audit procedure to test whether the control failed to be effective (a substantive test of transactions). Use the list (1-8) on page 4. Reference the audit file "Acquisitions - Substantive Tests of Transactions." Decide which transaction-related audit objective for acquisitions is appropriate for the giver substantive test of transactions audit procedure(s) b) c) d) e) f) Reference the audit file "Cash Disbursements Substantive Tests of Transactions." Decide which transaction-related audit objective for cash disbursements is appropriate for the given substantive test of transactions audit procedure(s) Transaction Related Audit Objectives Test of Control Substantive Test of Transaction Key Internal Control 1. Segregation of the purchasing, receiving, and cash disbursements functions 2. Use of prenumbered voucher packages, properly accounted for. 3. Use of prenumbered checks, properly accounted for. 4. Use of prenumbered receiving reports, properly accounted for 5.Internal verification of document package before check preparation 6. Review of supporting documents and signing of checks by an independent, authorized person 7. Cancellation of documents prior to signing of the check. 8. Monthly reconciliation of the accounts payable master file with the general ledger. 9. Independent reconciliation of the monthly bank statements. Requirement (b) Transaction Related Audit Objectives (# times used) A. Recorded acquisitions are stated at the correct amounts (accuracy). (1) B. Recorded cash disbursement transactions are stated at the correct amounts (accuracy) (1) C. Acquisitions are properly classified (classification). (1) D. Existing acquisition transactions are recorded (completeness). (2) E. Existing cash disbursement transactions are recorded (completeness). (2) F. Recorded acquisitions are for goods and services actually received (occurrence). (3) G. Recorded cash disbursements are for goods and services actually received (occurrence). (2) H. Acquisition transactions are properly included in the master files, and are properly summarized (posting and summarization). (2,) I. Cash disbursement transactions are properly included in the master file, and are properly summarized (posting and summarization). (1) Acquisitions are recorded on the correct dates (timing). (1) Requirement (c) Tests of Controls (each procedure used once) I. Account for a sequence of checks. II. Account for a sequence of receiving reports. II. Account for a sequence of voucher packages. IV. Discuss segregation of duties with personnel and observe activities. V. Examine checks for signature VI. Examine document package for indication of internal verification VIl. Examine file of completed bank reconciliations. VIII. Examine indication of cancellation IX. Inquire of client about monthly reconciliation procedures. Requirement (d) Substantive Test of Transactions (only procedure #4 is used twice) 1. Examine the acquisitions journal for duplicate entries to a vendor 2. Examine supporting documents for propriety and recompute information on the supporting documents. 3. Foot acquisitions and cash disbursements journals and trace postings to the general ledger and accounts payable and inventory master 4. 5. 6. 7. 8. files. Reconcile recorded cash disbursements with the cash disbursements on the bank statement (proof of cash disbursements). (2) Trace entries in the acquisitions journal to related vendors' invoices, receiving reports, and purchase orders Trace from a file of receiving reports to the acquisitions journal Trace from a file of vendors' invoices to the acquisitions journal Trace the cancelled check to the related acquisitions journal entry and examine for payee name and amount. TRANSACTION-RELATED AUDIT OBJECTIVES SUBSTANTIVE AUDIT PROCEDURES Examine underlying documents for propriety. Review the acquisitions journal, general ledger, and accounts payable master file for large or unusual amounts. Trace a sample of receiving reports to the acquisitions journal. Trace from a file of vendors' invoices to the acquisitions journal. Trace from additions in perpetual inventory records to recorded acquisitions. * Compare amounts for entries in acquisitions journal to related vendors' invoices, purchase orders and receiving reports. Recompute information on vendor invoices. Compare prices on vendor invoices with approved price limits established by management. Trace individual entries in accounts payable master file to acquisitions journal . Examine vendors' invoices for proper classification. Compare classification with chart of accounts by reference to vendors' invoices. Compare dates of receiving reports and vendors' invoices with dates in the acquisitions journal TRANSACTION-RELATED AUDT OBJECTIVES: Accuracy, Classification, Completeness, Occurrence, posting and Summarization, and Timing. TRANSACTION-RELATED AUDIT OBJECTIVES SUBSTANTIVE AUDIT PROCEDURES Trace cancelled check numbers in the cash disbursements journal to related cancelled checks and examine for payee, name, and amount. Examine cancelled check for authorized signature, proper endorsement, and cancellation by the bank. * Review the cash disbursements journal, general ledger, and accounts payable master file for large or unusual amounts. Trace cancelled check to the related acquisitions journal entry and examine for payee name and amount Trace entries in acquisitions journal to subsequent payment in cash disbursements journal Compare cancelled checks with the related acquisitions journal and cash disbursements journal entries Recompute cash discounts. Trace individual entries in accounts payable master file to cash disbursements journal. Compare classification with chart of accounts by reference to vendors' invoices and acquisitions journal .Compare dates on cancelled checks with cash disbursements journal. .Compare dates on cancelled checks with the bank cancellation date TRANSACTION-RELATED AUDIT OBJECTIVES: Accuracy, Classification, Completeness, Occurrence, Posting and Summarization, and Timing. Pinnacle Manufacturing: Part V In Part IV of this case study, you obtained an understanding of internal control and made an initial assessment of control risk for each transaction-related audit objective for acquisition and cash disbursement transactions. The purpose of Part V is to continue the assessment of control risk by determining the appropriate tests of controls and substantive tests of transactions. In order to do this, you must complete the steps needed to prepare an audit program for tests of controls and substantive tests of transactions for acquisitions and cash disbursements Required a) Reference the audit file on the following page listing 9 controls. Assume that you previously (in Part IV) identified these as key controls you want to rely on Identify the transaction-related audit objective(s) that it partially or fully satisfies Use the list (A-J) on page 4. Note that objectives may be used more than once List one audit procedure to test the control. Use the list (I-IX) on page 4 List one audit procedure to test whether the control failed to be effective (a substantive test of transactions). Use the list (1-8) on page 4. Reference the audit file "Acquisitions - Substantive Tests of Transactions." Decide which transaction-related audit objective for acquisitions is appropriate for the giver substantive test of transactions audit procedure(s) b) c) d) e) f) Reference the audit file "Cash Disbursements Substantive Tests of Transactions." Decide which transaction-related audit objective for cash disbursements is appropriate for the given substantive test of transactions audit procedure(s) Transaction Related Audit Objectives Test of Control Substantive Test of Transaction Key Internal Control 1. Segregation of the purchasing, receiving, and cash disbursements functions 2. Use of prenumbered voucher packages, properly accounted for. 3. Use of prenumbered checks, properly accounted for. 4. Use of prenumbered receiving reports, properly accounted for 5.Internal verification of document package before check preparation 6. Review of supporting documents and signing of checks by an independent, authorized person 7. Cancellation of documents prior to signing of the check. 8. Monthly reconciliation of the accounts payable master file with the general ledger. 9. Independent reconciliation of the monthly bank statements. Requirement (b) Transaction Related Audit Objectives (# times used) A. Recorded acquisitions are stated at the correct amounts (accuracy). (1) B. Recorded cash disbursement transactions are stated at the correct amounts (accuracy) (1) C. Acquisitions are properly classified (classification). (1) D. Existing acquisition transactions are recorded (completeness). (2) E. Existing cash disbursement transactions are recorded (completeness). (2) F. Recorded acquisitions are for goods and services actually received (occurrence). (3) G. Recorded cash disbursements are for goods and services actually received (occurrence). (2) H. Acquisition transactions are properly included in the master files, and are properly summarized (posting and summarization). (2,) I. Cash disbursement transactions are properly included in the master file, and are properly summarized (posting and summarization). (1) Acquisitions are recorded on the correct dates (timing). (1) Requirement (c) Tests of Controls (each procedure used once) I. Account for a sequence of checks. II. Account for a sequence of receiving reports. II. Account for a sequence of voucher packages. IV. Discuss segregation of duties with personnel and observe activities. V. Examine checks for signature VI. Examine document package for indication of internal verification VIl. Examine file of completed bank reconciliations. VIII. Examine indication of cancellation IX. Inquire of client about monthly reconciliation procedures. Requirement (d) Substantive Test of Transactions (only procedure #4 is used twice) 1. Examine the acquisitions journal for duplicate entries to a vendor 2. Examine supporting documents for propriety and recompute information on the supporting documents. 3. Foot acquisitions and cash disbursements journals and trace postings to the general ledger and accounts payable and inventory master 4. 5. 6. 7. 8. files. Reconcile recorded cash disbursements with the cash disbursements on the bank statement (proof of cash disbursements). (2) Trace entries in the acquisitions journal to related vendors' invoices, receiving reports, and purchase orders Trace from a file of receiving reports to the acquisitions journal Trace from a file of vendors' invoices to the acquisitions journal Trace the cancelled check to the related acquisitions journal entry and examine for payee name and amount. TRANSACTION-RELATED AUDIT OBJECTIVES SUBSTANTIVE AUDIT PROCEDURES Examine underlying documents for propriety. Review the acquisitions journal, general ledger, and accounts payable master file for large or unusual amounts. Trace a sample of receiving reports to the acquisitions journal. Trace from a file of vendors' invoices to the acquisitions journal. Trace from additions in perpetual inventory records to recorded acquisitions. * Compare amounts for entries in acquisitions journal to related vendors' invoices, purchase orders and receiving reports. Recompute information on vendor invoices. Compare prices on vendor invoices with approved price limits established by management. Trace individual entries in accounts payable master file to acquisitions journal . Examine vendors' invoices for proper classification. Compare classification with chart of accounts by reference to vendors' invoices. Compare dates of receiving reports and vendors' invoices with dates in the acquisitions journal TRANSACTION-RELATED AUDT OBJECTIVES: Accuracy, Classification, Completeness, Occurrence, posting and Summarization, and Timing. TRANSACTION-RELATED AUDIT OBJECTIVES SUBSTANTIVE AUDIT PROCEDURES Trace cancelled check numbers in the cash disbursements journal to related cancelled checks and examine for payee, name, and amount. Examine cancelled check for authorized signature, proper endorsement, and cancellation by the bank. * Review the cash disbursements journal, general ledger, and accounts payable master file for large or unusual amounts. Trace cancelled check to the related acquisitions journal entry and examine for payee name and amount Trace entries in acquisitions journal to subsequent payment in cash disbursements journal Compare cancelled checks with the related acquisitions journal and cash disbursements journal entries Recompute cash discounts. Trace individual entries in accounts payable master file to cash disbursements journal. Compare classification with chart of accounts by reference to vendors' invoices and acquisitions journal .Compare dates on cancelled checks with cash disbursements journal. .Compare dates on cancelled checks with the bank cancellation date TRANSACTION-RELATED AUDIT OBJECTIVES: Accuracy, Classification, Completeness, Occurrence, Posting and Summarization, and Timing