18–20
AUDIT
PROCEDURE
a.
TYPE OF
EVIDENCE
b.
TRANSACTION AUDIT
OBJECTIVE
c.
TEST OF
CONTROL OR
SUBSTANTIVE
TEST OF
TRANSACTION
1.a.
Inspection
Recorded acquisitions and
payments are for goods
and services received,
consistent with the best
interests of the client
(occurrence).
Test of control
1.b.
Inspection
Recorded acquisitions and
payments are for goods
and services received,
consistent with the best
interests of the client
(occurrence).
Test of control
1.c.
Inspection
Recorded acquisitions and
payments are for goods
and services received,
consistent with the best
interests of the client
(occurrence).
Acquisitions are recorded
at the proper amounts
(accuracy).
Test of control
1.d.
Recalculation
Acquisitions are recorded
at the proper amounts
(accuracy).
Substantive test of
transaction
1.e.
Reperformance
Acquisition transactions are
correctly included in the
accounts payable master
file and are correctly
summarized (posting and
summarization).
Substantive test of
transaction
1.f.
Inspection
Acquisitions are recorded
on the correct dates
(timing).
Substantive test of
transaction
1.g.
Inspection
Acquisition transactions are
properly classified
(classification).
Substantive test of
transaction
18–20 (continued)
AUDIT
PROCEDURE
a.
TYPE OF
EVIDENCE
b.
TRANSACTION AUDIT
OBJECTIVE
c.
TEST OF
CONTROL OR
SUBSTANTIVE
TEST OF
TRANSACTION
2.
Inquiry
Recorded acquisitions and
payments are for goods
and services received,
consistent with the best
interests of the client
(occurrence).
Acquisitions are recorded at
the proper amounts
(accuracy).
Acquisitions are recorded
on the correct dates
(timing).
Test of control
3.
Analytical
procedure
Recorded acquisitions and
payments are for goods
and services received,
consistent with the best
interests of the client
(occurrence).
Acquisitions are recorded at
the proper amounts
(accuracy).
Substantive test of
transaction
4.
Recalculation
Acquisition transactions are
correctly included in the
accounts payable master
file and are correctly
summarized (posting and
summarization).
Substantive test of
transaction
5.
Inspection
Existing acquisitions are
recorded (completeness).
Substantive test of
transaction
18–21 a. Here are advantages for purchasing raw material jewelry items
online through supplier Web sites:
18-13
18–21 (continued)
Faster Delivery of Purchases. Because Donnen Designs
purchasing agents may be able to purchase raw material
More Product Information. Most jewelry suppliers post
pictures of the products for sale on the Internet. Thus, Donnen
b. Here are potential risks associated with online purchases of raw
material jewelry items:
Unauthorized Purchases Using Donnen Credit Cards. Given
that all online sales must be made using a company credit
cards but shipped to purchasing agent addresses.
Privacy Protection for Donnen Credit Cards. Because the
Inconsistent Product Quality. Because Donnen purchasing
agents will be buying products from a wide variety of new
Reliability of Supplier. Because Donnen purchasing agents
will be buying products from a wide variety of new vendors,
c. The primary advantage of allowing Donnen Designs purchasing
agents to acquire products using company credit cards is that the
d. The primary advantages of restricting purchases to only those
that can be paid by company check are that it (1) decreases the
18-14
18–21 (continued)
e. Suggested internal controls:
(1) To prevent purchasing agents from making unauthorized
purchases of non–jewelry items using Donnen credit cards,
the company could:
Request through the credit card agency that only
selected types of products are authorized for purchase
(2) To prevent purchasing agents from ordering jewelry items for
shipment to an agent’s home address, the company could:
Send all credit card billing statements directly to
accounting for reconciliation to receiving reports.
(3) To prevent a buildup of unused credits with online vendors
for returned goods, the company could:
Only allow purchases from selected online vendors
whose policies indicate that products may be returned
for credit to the credit card account.
18–22 a. The employees in this large government agency were purchasing
expensive items such as appliances, electronics, and even
vehicles, for themselves using agency funds. The fraud was
18-15
18–22 (continued)
An understaffed internal audit function
The agency had a reactive approach to fraud detection and
prevention rather than a proactive approach
The incentives of the agency employees to commit fraud included
the following:
The agency would lose any budget money that was not spent
by the end of the year, so this provided an incentive for
b. Data analytics can be used to detect fraud by enabling the auditor
to analyze large datasets more easily and to drill down into the
data. The auditor can easily disaggregate purchases by month, by
c. A fraud examiner could perform the following comparisons in order
to detect fraud related to a particular vendor:
Calculate year–to–year percentage changes in total purchases
from each vendor.
If there are multiple employees making purchases, calculate the
percentage of purchases made by each employee to each
If there is a spending limit, or a limit on the purchases that can
be made without a purchase order or supervisor approval,
18–23
EXCEPTION
a.
TYPE OF
EXCEPTION
d.
FOLLOW–UP
e.
EFFECT
ON AUDIT
f.
PREVENTIVE
CONTROLS
1
Monetary
misstatement
Recorded cash
disbursement
transactions are
correctly stated
(accuracy).
Results in $100
liability, which
may or may not
be recorded on
the books.
Investigate the
exception rate
to determine the
possible effect
of unrecorded
financial
statements.
Probably none,
since
occurrence rate
is low. If amount
is significant,
of reconciliation
of vendor
statements may
be appropriate.
An independent
person should
compare checks
to invoice
amount prior to
2
Control
deviation
Existing cash
disbursement
transactions are
recorded
(completeness).
The check may not
actually have
been voided. It
could represent
the disbursement
of cash if a check
was prepared.
Determine
company policy
for voided
checks and
evaluate the
potential for
unrecorded
checks.
Auditor should
examine the
bank cutoff
statement for
the possibility
that the voided
check and other
checks may
have been
issued and
cashed but not
recorded.
Require that all
voided checks
be properly
voided and
saved.
18–16
Copyright © 2017 Pearson Education, Inc.
18–23 (continued)
EXCEPTION
a.
TYPE OF
EXCEPTION
d.
FOLLOW–UP
e.
EFFECT
ON AUDIT
f.
PREVENTIVE
CONTROLS
3
Monetary
misstatement
Recorded cash
disbursements
are for goods and
services actually
received
It could be a
fraudulent
payment or it could
result in an over–
statement of
records. If the
payment is
fraudulent, there
are serious audit
ramifications. If it
is unintentional,
the situation is
wasteful of
company assets
and must be
brought to the
client’s attention.
First determine
whether it is
fraudulent. If
not, investigate
the frequency of
duplicate
payments to
determine their
significance.
The duplicate
payments result
in recording of
nonexistent
inventory. If the
performs an
interim physical
inventory, the
auditor could
experience a
problem relying
on the system of
internal control
between the
physical
inventory date
and year–end.
Invoices must be
matched with
an original
receiving report
and purchase
approval for
payment.
All duplicate
invoices are
marked
“duplicate” upon
receipt.
4
Monetary
misstatement
Acquisition
transactions are
properly classified
(classification).
Indicates that no
one is effectively
reviewing the
accounting
distribution.
Auditor must
consider the effect
Determine the
significance of the
misclassifications
and plan any
required
additional steps
that are deemed
If considered
significant, the
exceptions could
prevent reliance
on the system of
internal controls
and require the
Have someone
review the
account
distribution of
invoices that
enter the
system.
18–17
Copyright © 2017 Pearson Education, Inc.
18–23 (continued)
EXCEPTION
a.
TYPE OF
EXCEPTION
b.
TRANSACTION–
RELATED AUDIT
OBJECTIVE
NOT MET
c.
AUDIT
IMPORTANCE
d.
FOLLOW–UP
e.
EFFECT
ON AUDIT
f.
PREVENTIVE
CONTROLS
5
Control
deviation
Recorded
acquisitions and
related cash
disbursements
are for goods
received,
consistent with
the best interests
of the client
(occurrence).
Indicates that the
controller is not
following the
procedure of
initialing
may indicate that
he or she is not
effectively
reviewing
invoices and
other supporting
documents prior
to payment.
Determine whether
or not the
controller is
effectively
reviewing
other supporting
documents.
If determination is
made that
controller does
not review
supporting
audit tests
should be
increased to
determine the
significance of
the deficiency.
A competent
independent
person should
review
supporting
approval of
controller and
test items to
determine
effectiveness of
controller’s
review.
6
Monetary
misstatement
Acquisition
transactions are
recorded on the
correct dates
(timing).
At the date of
the physical
inventory, this
situation will be
critical in that
any items
counted in
physical
inventory and not
recorded in the
acquisitions
journal will cause
an understated
Determine whether
or not this
situation persists
throughout the
year and whether
it is rectified at
physical
inventory date
and year–end.
Require expansion
of purchase
cutoff work
at physical
inventory date
and year–end.
Require that
copies of all
receiving reports
be routed directly
to accounting
and that
accounting
account for
numerical
sequence of
receiving reports
on a regular
basis.
18–18
Copyright © 2017 Pearson Education, Inc.
18–23 (continued)
EXCEPTION
a.
TYPE OF
EXCEPTION
b.
TRANSACTION–
RELATED AUDIT
OBJECTIVE
NOT MET
c.
AUDIT
IMPORTANCE
d.
FOLLOW–UP
e.
EFFECT
ON AUDIT
f.
PREVENTIVE
CONTROLS
7
Control
deviation and
Monetary
Recorded
acquisitions are
for goods and
services
received,
consistent with
the best interests
of the client
(occurrence).
Recorded
acquisition
transactions are
correctly stated
(accuracy).
Absence of
receiving reports
prevents the
auditor from
determining
whether or not
the goods were
received and
processed on a
timely basis. The
extension error
indicates that the
clerical accuracy
of invoice tests
are ineffective.
Obtain bill of
lading copy from
vendor to
determine
whether or not
the merchandise
was received.
Determine if the
absence of
receiver indicates
that they are not
compared to the
invoice.
Determine the
exception rate by
expanding the
tests if the
misstatement
noted is
considered
significant.
If either of the
problems is
considered
significant to the
auditor, he or she
should expand
the scope of his
or her tests of
controls or
substantive tests
of transactions to
determine the
effect on the
financial
statements.
Require that
copies of
receiving reports
must be present
before invoices
are approved for
payment. Have
an independent
person test
extensions to
determine that
the clerical tests
are effective.
18–19
Copyright © 2017 Pearson Education, Inc.
18–24
MISSTATEMENT
a.
TRANSACTION–
RELATED AUDIT
OBJECTIVE NOT MET
b.
PREVENTIVE
CONTROL
c.
SUBSTANTIVE
PROCEDURE
1
Cash disbursement
transactions are
recorded on the
correct dates
(timing).
Transactions are
recorded
automatically using
a computer process
with the same
information as the
check preparation.
Trace last checks
written to cash
disbursements
journal.
Examine date checks
cancelled at bank to
determine if checks
were held by the
client.
2
Acquisition
transactions are
recorded on the
correct dates
(timing).
Receiving reports to
be delivered to
accounting at the
end of the day on
which the raw
materials are
received.
Accounting
department
accounts for
numerical sequence
of receiving reports
after obtaining the
last number used
from receiving
personnel.
At the date on which
the cutoff test is to
be performed, the
auditor obtains the
number of the last
receiving report(s)
that should have
been recorded and
accounts for the
numerical sequence
of all previous
receiving report(s)
that should have
been recorded.
3
Recorded acquisitions
are for goods and
services received,
consistent with the
best interests of the
client (occurrence).
Require that an
authorized purchase
order and/or
approval of each
invoice by the
ordering department
head be required
before payments
are made for goods
received.
Examine underlying
documents for
reasonableness and
authenticity.