Assignment
I. The following are typical questions that might appear on an internal control questionnaire for accounts payable.
1. Are monthly statements from vendors reconciled with the accounts payable listing?
2. Are vendors' invoices matched with receiving reports before they are approved for payment?
Required:
1. Describe the purpose of each of the above internal control activities.
2. Describe the manner in which each of the above procedures might be tested.
Assuming that the operating effectiveness of each of the above procedures is found to be inadequate, describe how the auditors might alter their substantive procedures to compensate for the increased level of the risk of material misstatement.
II. As part of your first audit of the financial statements of Marina del Rey, Inc., you have decided to confirm some of the accounts payable. You are now in the process of selecting the individual companies to whom you will send accounts payable confirmation requests. Among the accounts payable you are considering are the following:
|
Company
|
Amount payable at year-end
|
Total Purchases from Vendor during year
|
|
Dayco, Inc.
|
$ --
|
$1,980,000
|
|
Gearbox, Inc.
|
22,650
|
46,100
|
|
Landon Co.
|
65,000
|
75,000
|
|
Western Supply
|
190,000
|
2,123,000
|
Required:
1. Which two of the above four accounts payable would you select as the most important to confirm? Explain your choice in terms of the audit objectives in sending accounts payable confirmation requests.
2. Assume that you are selecting accounts receivable to be confirmed. Assume also that the four companies listed above are customers of your client rather than suppliers and that the dollar amounts are accounts receivable balances and total sales for the year. Which two companies would you select as the most important to confirm? Explain your choice.