You have just been assigned to the audit of a new manufacturing client, Carroll Manufacturing Inc. (CMI) and the in-charge accountant on the engagement. CMI manufactures automobile engines which are sold to several automotive companies. CMI purchases rawsteel and cast iron. CMI does its own tool and die work, but it still purchases a number of parts related to carburetion and ignition systems.

RATIO

UNAUDITEDRATIO

AUDITOR'SEXPECTATIONRANGE

Accounts Payable Turn Days

27 days

32 days - 38 days

Inventory Turn Days

55 days

58 days - 64 days

Gross Margin

48%

42% - 46%

Sales and Accounts Payable

Sales Growth: 7%

Sales Growth: 6% - 9%

Growth Rates

Accounts Payable Growth: 4%

Accounts Payable Growth: 6%-9%

The table above provides some preliminary information obtained during audit planning for CMI. Compose memo to the audit file explaining the planning implications associated with the audit findings above. Identify assertions that are likely to be overstated or understated.

• To:Audit File
• Re:Analytical procedures
• From:CPA Candidate

Assertion

• A.Existence and Occurrence
• B.Completeness
• C.Rights and Obligations
• D.Valuation or Allocation
• E.Presentation and Disclosure

Identify the appropriate assertion for each of the following internal controls. Check all that apply.

Internal Control

(A)

(B)

(C)

(D)

(E)

1.

The computer matches the customer number on the voucher with the customer number on the master customer file.

2.

Only the controller and the assistant controller have the authority to add a new vendor to the vendor master file.

3.

The computer checks batch totals and run-to-run totals to ensure that all transactions are processed.

4.

The manager of engine production reviews all purchases charged to his responsibility center on a weekly basis, reviewing vendors, amounts, and accounts charged.

5.

The computer matches the date on the receiving report with the accounting period when the voucher is recorded.

6.

The computer prints a report of all purchase orders that have not been received and receivings that have not resulted in the recording of a voucher.

Audit procedure

• A.Vouch accounts payable credits to supporting vouchers, vendor invoices, receiving reports, and purchase orders and other supporting information.
• B.Obtain an understanding of the business and industry and determine the significance of purchases and accounts payable to the entity.
• C.Inquire of management about existence of undisclosed commitments or contingent liabilities.
• D.Trace a sample of cash receipts transactions from cash receipts journal to the general ledger.
• E.Vouch debit memos to underlying shipping reports and vendor's authorizations.
• F.Obtain listing of accounts payable at balance sheet date and determine that it accurately represents the underlying accounting records by footing the listing and determining agreement with (1) the total of the unpaid voucher file, subsidiary ledger, or accounts payable master file, and (2) the general ledger control account balance.
• G.Observe the number of the last receiving report issued on the last business day of the audit period and trace sample of lower and higher numbered receiving reports to related purchase documents and determine that transactions were recorded in the proper period.
• H.Trace dates of "paid" checks returned with year-end cut-off bank statements to dates recorded.
• I.Determine that payables are properly identified and classified as to type and expected period of payment.
• J.Examine subsequent payments between balance sheet date and end of field work, and when related documentation indicates payment was for obligation in existence at balance sheet date, trace to accounts payable listing.

Determine the audit procedure that best addresses the following risks.

Risk

(A)

(B)

(C)

(D)

(E)

(F)

(G)

(H)

(I)

(J)

1.

Recorded purchases may not represent goods received during the year.

2.

Cash disbursements may not be recorded in the proper time period.

3.

All purchases (and payables) during the period may not be recorded.

4.

Accounts payable might be understated due to the recording of invalid purchase returns.

5.

The auditor may not have complete information about individual accounts payable that make up the general ledger balance.