Problem 10-16, page 331

1. Problem 10-16, page 331 The following are 11 audit procedures taken from an audit program: • Add the supplier balances in the accounts payable master file, and compare the total with the general ledger. • Examine vendors’ invoices to verify the ending balance in accounts payable. • Compare the balance in employee benefits expense with previous years’. The comparison takes the increase in the employee benefit rates into account. • Discuss the duties of the cash disbursements bookkeeper with him or her, and observe whether he or she has responsibility for handling cash or preparing the bank reconciliation. • Confirm accounts payable balance directly with vendors. • Use generalized audit software to run a gap test on the cheques issued during the year. (Print a list of cheque numbers omitted from the normal cheque number sequencing.) • Examine the treasurer’s initials on monthly bank reconciliations as an indication of whether they have been reviewed. • Examine vendors’ invoices and other documentation in support of recorded transactions in the acquisitions journal. • Multiply the commission rate by total sales, and compare the result with the commission expense. • Examine vendors’ invoices and other supporting documents to determine whether large amounts in the repairs and maintenance account should be capitalized. • Examine the initials on vendors’ invoices that indicate internal verification of pricing, extending, and footing by a clerk. Required: • Indicate whether each procedure is a test of controls, an analytical procedure, or a test of details of balances. • Identify the type of evidence for each procedure.

2. Problem 10-16, Solution

3. Problem 10-21, page 332 The following are audit procedures from different transaction cycles • Use audit software to foot and cross-foot the cash disbursements journal, and trace the balance to the general ledger. • Select a sample of entries in the acquisitions journal, and trace each one to a related vendors’ invoice to determine whether one exists. • Examine documentation for acquisition transactions before and after the balance sheet date to determine whether they are recorded in the proper period. • Inquire of the credit manager whether each account receivable on the aged trial balance is collectible. • Compute inventory turnover for each major product, and compare with that of previous years. • Confirm with lenders a sample of notes payable balances, interest rates, and collateral. • Use audit software to foot the accounts payable trial balance, and compare the balance with the general ledger. Required: • For each audit procedure, identify the transaction cycle being audited. • For each audit procedure , identify the type of evidence. • For each audit procedure, identify whether it is a test of control or substantive test (indicating whether it is a test of details of balances or an analytical procedure.) • For each audit procedure, identify the related audit objective(s). • Specifically assess the purpose of each audit procedure, as follows: • For tests of control, state the risk (potential error) that is being assessed. • For analytical procedures, state a possible result that you would expect. • For tests of detail, state the type of material error that you would be quantifying.

4. Problem 10-21, Solution

5. e. • 1. There could be a calculation error and some amounts might not be posted to the general ledger, understating the accounts payable balance. • 2. There could be unauthorized payments or duplicate payments, overstating expenses and accounts payable. • 3. Accounts payable could be recorded in the incorrect period, either over or understating income or expenses. • 4. Accounts receivable might not be collectible, overstating income and understating the bad debt allowance. • 5. Inventory might be obsolete and cannot be sold, overstating assets. • 6. Incorrect notes payable information could be recorded in the accounts, or there could be inaccurate or incomplete disclosure of notes payable information in the financial statements and notes there to. • 7. Same as 1.

6. Problem 12-21, page 406, Canadian 11th. Edition The following internal controls for the acquisition and payment cycle were selected from a standard internal control questionnaire: • Vendors’ invoices are recalculated prior to payment. • Approved price lists are used for acquisitions. • Prenumbered receiving reports are prepared as support for purchases and are numerically accounted for. • Dates on receiving reports are compared with vendors’ invoices before entry into the accounts payable system. • The accounts payable system is updated, balanced, and reconciled to the general ledger monthly. • Account classifications are reviewed by someone other than the preparer. • All cheques are signed by the owner or the manager. • The cheque signer compares data on the supporting documents with the cheques. • All supporting documents are cancelled after entry. • After they are signed, cheques are mailed by the owner or manager, or a person under his or her supervision. Required: • For each control, state which transaction-related audit objective(s) is (are) applicable. • For each control, write an audit procedure that could be used to test the control for effectiveness. • For each control, identify a likely misstatement, assuming the control does not exist or is not functioning. • For each likely misstatement, identify a substantive audit procedure to determine if the misstatement exists.

7. Problem 12-21, Solution