Problem 16-12, Page 529

1. Problem 16-12, Page 529 • In testing the cutoff of accounts payable at the balance sheet date, explain why it is important that the auditors coordinate their tests with the physical observation of inventory. What can the auditor do during the physical inventory to enhance the likelihood of an accurate cutoff?

2. Problem 16-12 Solution It is important that the cutoff of accounts payable be coordinated with that of the physical inventory to determine that they are established at the same point in time. If these cutoffs are not consistent, goods may be counted in the physical inventory for which no liability in accounts payable has been recorded, or vice versa. Such a situation would result in an understatement of accounts payable and cost of goods sold or an overstatement of these two accounts respectively. During the physical inventory, the auditor should gather cutoff information (e.g., the last several receiving reports, shipping documents, transfer documents) to assist in the determination that an accurate cutoff was established.

3. Problem 18-20, Page 634, Canadian 11th. Edition You are the staff auditor testing the combined purchase and cash disbursements journal for a small audit client. Internal control is regarded as reasonably effective, considering the number of personnel. The auditor in charge has decided that a sample of 80 items should be sufficient for this audit because of excellent controls and gives you the following instructions: All transactions selected must exceed $100. At least 50 of the transaction items must be for purchases of raw materials because these transactions are typically material. It is not acceptable to include the same vendor in the sample more than once. All vendors’ invoices that cannot be located must be replaced with new sample items. Both cheques and supporting documents are to be examined for the same transactions. The sample must be random, after modifications for instructions 1 through 5. REQUIRED: Evaluate each of these instructions for testing acquisition and cash disbursement transactions. Explain the difficulties of applying each of these instructions to attributes sampling.