You are a staff auditor performing financial statement audit work. In preparation for the annual financial statement audit by your accounting firm. I Love Auditing LLP, you've been asked by the manager of the engagement to perform controls testing over the accounts payable function for the company's largest subsidiary. This company 1s still doing things very manually, which 1s frustrating as your other clients have a lot more automation in place. Worse yet, you have to travel to the location which is a 90 minute drive each way for the next 2 weeks. The manager uses the firm's audit software to auto-generate a random sample of 45 invoices paid from the current year for you to test. You email the list of invoices to test to the accounts payable supervisor to provide you read only access to the ERP system so you look at the invoices, purchase orders agreed to with suppliers, and receiving reports. The supervisor emails back and says she has no idea how to give you gystem access and tells you that you are free to ask her staff if you can pull the mvoices from the file cabinet yourself, as they have pressing quarter end work to do. After you arrive, you spend the next 2 hours pulling the invoices, receiving reports, and purchase orders from the dusty filing cabinets. You feel a bit down as vou annoved as you had a hard time locating a bunch of documents. After you believe you have all 45 copies of the invoices, recerving reports, and purchase orders, you head to the empty conference room and drop into your seat tired from exercise. You start your computer and access the firm's audit software. Your audit team has identified 5 areas/objectives that need to have controls identified and attributes defined to be tested as follows: 1) Whether differences exist between the data on the purchase order, receiving report, and invoice, and if so, whether the accounts payable clerks have done any follow-up on why they differ. Potential Controls: #1) Manually, the revenue assurance team will perform a three way match of the customer Purchase Order, recerving report, and Invoice #2 The AP clerk does appropriate follow-up on non-matched items to resolve and enter them into the AP system timely 2) Invoices are paid at the correct amounts Potential controls: the AP clerk recalculates the mathematical accuracy of all invoices before payment. Issues are identified and resolved timely. 3) Whether the payment was processed in time for the company to take advantage of available purchase discounts, and the payment reflected the discount taken Potential Controls: Discounts are recalculated and appropriately applied to payments. The amount paid and the discount amount are properly recorded. 4) Whether payment of the invoice was formally authorized by appropriate personnel, are stamped as paid and with the date of payment. (Seriously need to get modermzed here!) Potential Controls: AP Manager approves all payments after review of supporting details. 5) Whether the payment was recorded in the appropriate account in the proper period. Potential Controls: Invoices reviewed and approved by the AP manager validate that payment was made and recorded in the correct period based on the payment date and the correct general ledger accounts. You check the 5 controls for each invoice, finding 11 total exceptions (mstances without evidence that a control worked) out of the total of 225 different instances of controls applications for the mvoices (45 invoices X 5 controls per mvoice). This doesn't seem bad; 1t's an error rate of 4.9%. You formally document your findings, re-file the paperwork, and go back home for the day. You meet over Microsoft Teams with the audit manager as she 1s traveling to another location for the the limit that would lead the audit manager to conclude that controls functioned effectively. In previous audits, she tells you, the subsidiary's accounts payable controls tests always produced fewer exceptions than the limit and no additional control tests or substantive procedures were needed. Having taken auditing class, you know what controls failing potentially means for the required substantive testing for accounts payable (1t's gomg to go up). The manager looks agitated and stressed out as she starts to review the audit schedule for the rest of the fall The manager thinks for a minute looking agitated and then re-opens her controls testing guidance. She decides, mnstead of making a final judgment on controls risk. to expand the controls testing sample. She computes a new sample size: the smallest number of mvoices for which 11 exceptions would result in a finding that controls function effectively. The expanded sample size 13 75. She then randomly selects 30 additional invoices (75-45) for you to test back at the subsidiary headquarters. As she emails you the list of additional invoices, she advises you \"not to be as strict about control exceptions as you were with the first 45 invoices. You scratch your head as you know from audit class that vour professor really cares about due professional care, competency, professional skepticism, and having a business analyst mindset. You shrug it off and think your manager needs some audit refresh training. The next day you get dressed up agam and go back to the subsidiary, pull the documents, conduct the controls tests, and find no further exceptions. You then report this to the audit manager, who 1s not as upset and agitated as she was before. She reviews your workpapers quickly and discusses the next set of tests you will do 1 another business process area. (1) Using a control matrix, explain for each control why these testing attributes are effective for determining 1f the controls in place are effective. Be spectfic for each attribute. 1-2 sentences per attribute 1s sufficient. (2) Note that the manager sampled from the population of paid invoices only, mstead of all mvoices. a. What are the advantages and disadvantages of this approach to controls testing? b. Are any financial statement assertions better tested using the population of all imnvoices as opposed to paid invoices? If so, which ones and why? If not, why not? (3) Note that the manager used a pooled approach to testing the controls: instead of testing each control separately and finding its exception rate as a percentage of the 45 invoices, he had you test all 5 controls together and find the exception rate as a percentage of 225 samples. a. What are the advantages and disadvantages of this approach to controls testing? b. Why do audit firms now generally avoid a pooling approach methodology for financial statement audits? . Do you think the conclusion about the controls exception rate 15 as valid as 1f you had performed separate tests of each control? Why or why not? (4) Now consider the manapger's strategy to expand the control sample. a. Do you believe that expanding the controls testing sample 1s justified. in general? If so, why? If not, why not? b. What do you think of the manager's approach to expanding the sample to 75 paid invoices? What are the strengths and weaknesses of taking such an approach? Type of Financial Statement Assertions Control Objective Transaction Risk Control Activities Tests to perform Number Process Control Objective AMPD P&D R&O Class Auth Fraud V & M Cutoff 1a Accounts No differences exist between the Differences between the PO, RR, and |Manually, the AP clerk will perform a 1) The 3 documents actually match X X X X X X Payable data on the purchase order, invoice are not identified and managed three way match of the Purchase Order, 2) Validate that the AP clerk signed off on the 3-way match. receiving report, and invoice, correctly Receiving report, and Invoice 3) Purchase order was approved by the appropriate level of management. 1b Accounts No differences exist between the Differences between the PO, RR, and The AP clerk does appropriate follow-up 1) Identify transactions that required follow-up X X X X X X Payable data on the purchase order, invoice are not identified and managed on non-matched items to resolve and 2) AP clerk documented a proper resolution of the mis- receiving report, and invoice, correctly enter them in to the AP system timely. matched items 3) Apporiate approval was obtained based on authorization matrix 2 Accounts Invoices paid are mathematically Invoice paid are paid for incorrect the AP clerk recalculates the 1) Validate that the AP clerk recalculated the amounts X X X X X Payable accurate amounts mathematical accuracy of all invoices 2) Identify transactions that did not "add up" properly and before payment. Issues are identified appropriate resolution was made. and resolved timely. 3) 3) Apporiate approval was obtained based on auditorization matrix. 4 Accounts Discounts are approrpiately Discounts are not taken or are not taken The AP clerk calculates and enters the 1) Validate that the AP Clerk calculated a discount and X X X X X X Payable calculated and recorded to the full amount available discount amount into the AP system entered it into the A System based on agreed upon contract/invoice 2) Recalculate the discount for mathematical accuracy terms 3) Validate the terms of the discount to the contract/invoice 3 Accounts Payment of the invoice was Payments are not authorized for AP Manager approves all payments 1) Validate AP manager reviewed and signed off on each X X X X X X X Payable formally authorized by appropriate payment before the final is processed after review of supporting details. nvoice for payment personnel. and paid 2) Validate the Payment date matches the payment date in the system. 5 Accounts The payment was recorded in the |Payments are not recorded to the Invoices reviewed and approved by the 1) Validate that the AP manager reviewed and approced X X X X X Payable appropriate account in the proper correct GL acccount or not reorded in AP manager validate that payment was the GL account for posting period. the right period made and recorded in the correct period 2) Validate that the payment was posted in the correct based on the payment date into the right | period. general ledger accounts.Item # |P Code | Control Ref Process Area Issue Potential errorfrisk Recommendation Mgmt's Remediation Plan Owner Targeted Targeted [ ) ) Completion Date | Status | Testing Date | Conclusion 1|High 20a,9a 9h, |Close the books Reconciliations that are performed and reviewed by |Journal entries may be created [Approval of entries should be done by 9c, 9n, 9p, Or, the same individual: by individuals who also an appropriate level of management 9k, 10, 10c, - Sales and Use Tax perform the reconciliations that [te ensure that enfries are accurate 9m, 9g, 9b - Quarterly AP Accrual memo may be in eror or represent |and valid. The approval should be - Benefit Accruals fraudulent activity. appropriately evidence. See additional - Accounts Payable information regarding journal entries - Legal Expense Delow #5. - Vacation Accrual - BTl Accrual - Redispatch Expense and Revenue - Solomon/Cost repository reconciliation - Wiscellaneous Current and Accrued Liabilities _Short Term Incentive -Pronerty Tax Accrual 2|Medium of Close the books The accrued payroll calculation is not reviewed for Accrued payroll may not be The accrued payroll calculation mathematical accuracy or reasonableness. stated fairly on the financial should be reviewed by the Manager of statements Accounting to ensure that the appropriate amounts were accrued for based on the number of days to pay atthe end of the period. The review should be aporopriatel 3|Medium 9g Close the books The short-term incentive accrual and LT incentive is |Accrued incentives amounts |This ST incentive accrual calculation calculated by HR and is not reviewed in detail. Onlya |may not be stated fairly on the [should be reviewed by the Manager of high lavel review is performed by Accounting financial stataments accounting to ensure amounts accrued for are accurate. The review should be appropriately evidenced. 4|Medium 95 Close the books Benefits reclassified from labor accounts to FERC | Accrued benefits amounts may [This benefits accrual calculation benefit accounts (NOE 095) are not reviewed after the |not be stated fairly on the should be reviewed by the Manager of entry is posted financial statements. accounting to ensure amounts accrued for are accurate. The review should be appropriately evidenced 5|High 7e,10d,8b, |Close the books There is a lack of review and formal approval of all Journal entries may be ATC should investigate system 9i, 10e, 91, 8a, journal entries entered during the clasing and inaccurate, incomplete or controls requiring approval of journal 101, 5a, 71, 6a financial reporting processes specifically as follows: |invalid resulting infinancial |entries by a team member other than - Adjusting entries, as a result of performing account |statement misstatements the journal entry initiator. If system reconciliations, are not reviewed changes are not praclical, a process - Recurring entries created and posted by Linda Kind should be developed to review a are not reviewed complete listing of journal entries at - Wonthly journal entry binder in total is not reviewed the end of the closing process prior to - Topside adjusting entries during the financial the issuance of final financial reporting process are not reviewed statements to ensure that all entries are appropriate and can be traced hack tn sunnafting documentation G|High 7a Close the books The Soloman system does not prevent back dating of | Journal entries may be back |The Solemon system should allow for journal entries. When the books are closed in the dated either in error or to a'hard close of passed periods to current month, the default seftings are changed. correct period errors resulting |ensure that entries are not back-dated in a lack of appropriate review. |and are appropriate reviewed in the current period. If this system is not available, a review of journals entries as noted in #5 above should encompass a report to identify entries by date to correct back-dated entries. 7|High 14e Close the books There is no review of Jill's Alliant billing for accuracy or|Billings andfor journal entries [Billings should be reviewed before completeness. may be inaccurate, incomplete or invalid resulting in financial statement misstatements. issuance to Alliant. Related journal entries should be reviewed and aboroved imelv as noted in #5 above Item # Priority Code Control Ref Process Area Issue Potential error/risk Recommendation Memt's Remediation Plan Owner Targeted Targeted Completion Date Status Testing Date Conclusion 8 High 14d Plant Accounting There is a retirement backlog that could impact The current backlog may |ATC should work to reduce the depreciation expense. represent a material amount amount of unretired assets in the that should be written off Power Plant system so that against the fixed asset etirements occur within a reasonable balance. amount of time after the asset is actually retired (such as 1-2 months after retirement). Furthermore, ATC should consider documenting why the company believes this impact is 9 High 21a Financial Reporting Deferred tax entries require greater version control to Journal entries may be A more thorough process needs to be better track changes and adjustments, as multiple calculated incorrectly or mplemented to ensure proper versions are causing changes to occur to entries. booked to incorrect accounts. version control of spreadsheets and These entries need to be reviewed and formally review of amounts prior to approved by appropriate level of management. submission for entry. 10 High 24d Financial Reporting There is no evidence of review for the disclosure lead | Erroneous and unapproved These schedules should be schedules prior to being provided to Jill Katers used information may be used in the reviewed, agreed to system reports or in the financial reporting process. accumulation of the financial balances (if applicable), and signed statements. prior to submission to Financial 11 High 24b Financial Reporting There is no formal Disclosure Committee. Disclosures may not be We recommend that the Company complete or valid. establish a formal Disclosure Committee with a charter, formal meeting minutes, and approvals. 12 High N/A Close the books Information for the Executive Compensation, Deferred | Accrued amounts may not be These entries should be reviewed Compensation, Pension Guaranty, and stated fairly on the financial and approved by either the CFO or the Postretirement Health accruals is accumulated by statements Disclosure Committee, as needed. Mike Hofbauer and adjusting entries are proposed based on this information. There is no formal review of these adjusting entries 13 Low 10f Close the books The interest on generator interconnects calculation is Amounts may not be stated The calculation and related journal not reviewed for completeness/accuracy. fairly on the financial entries should be reviewed to ensure statements that the appropriate and complete amounts were recorded. The review should be appropriately evidenced. 14 Medium 10g Close the books Supervisory and A&G Overhead: Application of Amounts may not be stated The calculation and related journal overhead to invoices is not reviewed. In addition, fairly on the financial entries should be reviewed to ensure Supervisory and A&G overhead loaders are based on |statements that the appropriate and complete 2001 studies. amounts were recorded. The review should be appropriately evidenced. Furthermore, the Company should consider implementation of a control to ensure loaders are updated on a timely basis. 15 High 18b, 2d, 22a, Financial Reporting A reporting checklist is recommended to evidence the Critical steps within the detailed financial reporting checklist 2c, 21a, 18e review of the following in the financial reporting inancial reporting process should be maintained that would process: may be omitted or not properly highlight reviews of key financial and Monthly reporting package approved. disclosure information. Roll forward/Review of deferred tax balances Top-side entries Cash Flow statement Earnings variance analysis FERC disclosures and Financial Statements 16 High 11a, 11b, 11c, Close the books There are no formal documentation regarding reviews Error reports may not serve as |Formal documentation should be 11d and resolution related to the following error reports: an effective control, if errors are maintained for around how the errors Bi-Weekly Payroll not appropriately investigated are identified, investigated and Credit Card Imports and resolved. resolved including any journal entries Payroll Import from Power Plant that result from error resolution. 0&M and TSA invoices