Write the audit approach portion.
Objective. Express the objective in terms of the facts supposedly asserted in financial records, accounts, and statements.
Control. Write a brief explanation of desirable controls, missing controls, and especially the kinds of “deviations” that could arise from the situation described in the case.
Tests of controls. Write some procedures for getting evidence about existing controls, especially procedures that could discover deviations from controls. If there are no controls to test, then there are no procedures to perform; go to the next section. A “procedure” should instruct someone about the source(s) of evidence to tap and the work to do.
Audit of balance. Write some procedures for getting evidence about the existence, completeness, valuation or allocation, or rights and obligations assertions identified in your objective section.
Discovery summary. Write a short statement about the discovery you expect to accomplish with your procedures.
Purchasing Stars
Bailey Books Inc. is a retail distributor of upscale books, periodicals, and magazines. Bailey has 431 retail stores throughout the southeastern states. Three full-time purchasing agents work at corporate headquarters. They are responsible for purchasing all inventory at the best prices available from wholesale suppliers. They can purchase with or without obtaining competitive bids. The three purchasing agents are R. McGuire in charge of purchasing books, M. Garza in charge of purchasing magazines and periodicals, and L. Collins (manager of purchasing) in charge of ordering miscellaneous items such as paper products and store supplies.
One of the purchasing agents is suspected of taking kickbacks from vendors. In return, Bailey is thought to be paying inflated prices, which first are recorded in inventory and then in cost of goods sold and other expense accounts as the assets are sold or used.
The duties of Collins, the manager in charge, do not include audit or inspection of the performance of the other two purchasing agents. No one audits or reviews Collins's performance. The purchasing system is computerized and detail records are retained. An extract from these records is below.
This kickback scheme has been going on for two or three years. Bailey Books could have overpaid by several hundred thousand dollars.