You have been assigned to perform the audit procedures related to the accounts payable balance for the audit of the 2016 financial statements.After reviewing and testing internal controls for accounts payable, you determine that the control risk is fairly low.Below is the information that you have requested andreceivedfrom the company.
Assessment 6 Integrated Audit Part A: Findings and Recommendations for Management What recommendations do you have for management, based on the audit information for B, P, & J Truck Repair Service? Recommendations should include: Purchases and accounts payable: Explain the results of the analytic procedures related to the accounts payable audit and what those results indicate. Internal control: Identify management's assertions regarding the internal controls and the effectiveness of each internal control within human resources. Production control: Identify the control objectives. Test the control activities (or procedures) of the parts inventory reporting system and explain the strengths and weaknesses. Scenario B, P, & J Truck Repair Service is a heavy-duty truck maintenance shop that performs various services for its customers. The company has two categories of purchases, stock purchases for ordinary maintenance and special purchases for major repairs. Stock purchases include shop supplies (shop towels, cleaning products, et cetera), general parts (oil, brake fluid, coolant, et cetera), and high-demand specialty parts (truck parts that are common to many vehicles). Specialty purchases include low-demand specialty parts (truck parts that are specific to a vehicle) and equipment (tools, truck lift, air compressors, et cetera). Stock purchases are estimated and made in advance of demand. Specialty purchases are only ordered on an \"as needed\" basis for specific parts or equipment. Accounts Payable Audit You have been assigned to perform the audit procedures related to the accounts payable balance for the audit of the 2016 financial statements. After reviewing and testing internal controls for accounts payable, you determine that the control risk is fairly low. Below is the information that you have requested and received from the company. Table 1: ACCOUNTS PAYABLE LEDGER BALANCES AS OF DECEMBER 31, 2016 Accounts Bass Truck Parts Inland Wholesale Hunter Tire Air Brake Specialty Trucker's Haven BKS Fleet Supply Made in USA Parts and Accessories 2014 $32,000 10,400 11,200 40,000 19,200 38,400 0 2015 $35,000 10,900 12,000 42,410 17,600 53,400 4,400 2016 $32,800 0 6,200 57,600 8,000 92,000 0 Table 2: PURCHASES SUBSIDIARY LEDGER AS OF DECEMBER 31, 2016 Purchases Stock Purchases 2014 $840,000 2015 $849,000 2016 $744,000 1 Purchases Special Purchases 2014 1,570,000 2015 1,690,000 2016 1,177,000 Table 3: COST OF GOODS SOLD LEDGER BALANCE AS OF DECEMBER 31, 2016 Goods Cost of Goods Sold 2014 $1,864,000 2015 $2,105,000 2016 $1,752,000 Additional Information: All purchases are made on credit. The 2014 beginning balance for accounts payable was $159,000. Instructions for Accounts Payable Audit Perform analytical procedures for accounts payable of B, P, & J Truck Repair Service in the following manner: (a) Calculate and list all necessary figures and comparisons to analyze accounts payable. (b) Explain what the result of each may indicate for the balance in accounts payable. (c) Using the information for B, P, & J provided above and the results of analytical procedures performed, explain the substantive audit procedures, audit evidence, and related management assertions that you would need for the test of details of the accounts payable balance. Internal Control Audit For each of the following items relating to an audit of B, P, & J Truck Repair Service, identify what establishes appropriate control, the problem or control that might arise if the control is missing, and a test that can be performed to verify that the control is operating effectively. 1. What is the proper segregation of duties between the supervisor, human resources, and payroll processing department for authorization to input changes to pay rates and payroll deductions? 2. What is the proper segregation of duties for authorization to hire and fire employees? 3. What approvals are required on time worked by employees before payroll is processed? 4. What happens when an employee's bank information for EFT is improper and the transfer is not completed? 5. For hourly workers, what is required to verify check-in and check-out at the beginning and end of shifts? 6. How is the payroll checking account funded and reconciled? Set up your answer in a table such as the one below. Appropriate Control Potential Problem or Misstatement Test of Control 1. 2. 3. 4. 5. 6. 2 Production Control Audit Each of the following audit procedures is being used in the audit of B, P, & J Truck Repair Service to test the production control activities. 1. Select a sample of the documents prepared when parts are released from inventory. Examine and tie the job number to the cost accounting records. 2. Select a sample of the parts release documents in the production department file. Examine the documents for the supervisor's signature or initials. 3. Select a sample of the parts release documents in the production department file. Examine for issue date and parts usage report date. 4. Select a sample of the parts release documents in the production department file. Examine for the name and item number of the part. 5. Select a sample of the parts release documents in the production department file. Examine for the parts department employee's signature or initials indicating who issued the parts. 6. Select a sample of the parts release documents in the production department file. Examine for a matching parts requisition in the inventory file, noting the date of requisition. For each of these procedures identify the strength of the internal control procedure being tested and the internal accounting objectives being addressed. Format your answer in tabular form. Audit Procedure Strength Objective Part B: Audit Objective of Management Financial Statement Assertions Related to Investments Management at B, P, & J Truck Repair Service has made the following assertions relating to company investments. You have assessed the control risk for the company at the maximum for all financial statement assertions relating to investments. Consequently, the internal control over financial reporting audit report will indicate material weaknesses; rather than relying on ICFR during the financial statement audit, all audit evidence will come from substantive procedures. You have determined that B, P, & J is unable to exercise significant influence over any investee and there are no related parties. You have received an investment analysis from B, P, & J's management revealing the following: There is a notation indicating that all securities either are in the treasurer's safe or held by an independent bank custodian. Investments are classied as current or noncurrent. The beginning and ending balances are shown at cost and market. Unamortized premiums or discounts are associated with bonds. The face amount of bonds or number of shares of stock are given for the beginning and ending of the year. Accrued investment income for each investment at the beginning and ending of the year is presented. Investment income earned and collected is presented. Valuation allowances at the beginning and ending of the year are shown. 3 Any sales or additions to portfolios for the year include date, number of shares, face amount of bonds, proceeds, cost, and realized gain/loss. Based on the information above, identify explain the audit objective for each of the listed management nancial statement assertions relative to investments. Assertion Audit Objective Existence Completeness Valuation/Allocation Presentation and Disclosure Part C: Tests and Procedures for Long-Term Liabilities In your continuing effort to perform a financial audit for B, P, & J Truck Repair Service for the year ended December 31, 2016, you discover that the company obtained a long-term loan from a local bank. The nance terms are as follows: 1. The loan is secured by inventory and accounts receivable of the company. 2. The company's debt-to-equity ratio should not exceed 2:1. 3. Monthly installment payments began July 1, 2016. 4. The company must get permission from the bank before paying dividends. In addition to this loan, you learn that the company borrowed short-term funds from the company president. The loan is material and the transaction occurred just prior to year end. (a) What procedures (other than internal control tests) should you use when auditing the described loans? (b) What issues do you believe should be addressed by the nancial statement disclosures with respect to the president's loan? 4
