CASE 6
SUGGESTED ANSWERS TO DISCUSSSION QUESTIONS
(1)
In the brief description presented of Lakeside’s inventory procurement system,
several specific control activities can be seen:
* The company maintains a perpetual inventory which provides significantly
greater control than does a periodic system;
* The case implies that the company uses preprinted forms so that adequate
information is captured whenever a document is prepared;
(2)
Canceled checks are the last document in this system, while receiving reports
are one of the first. Whenever auditors select a final document such as a
canceled check and search for its documentation, they are seeking to
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(3)
How might Lakeside pay for goods that were received? The company could, as
an example, receive an invoice and not properly match it with the corresponding
receiving report. The receiving report might state that 10 items were actually
acquired while the invoice was for 20 or 100. The individual doing the review
may not notice the discrepancy and erroneously approve the invoice. As another
possibility, this individual might authorize an incorrect invoice in order to receive
a kickback from the vendor.
How might Lakeside fail to pay for goods that were not received? If either the
(4)
Audit documentation, also called a working paper, is designed to demonstrate
that the auditor has obtained sufficient, competent evidence on which to base an
(5)
A CPA firm must establish policies and procedures for the supervision of work at
all organizational levels to provide reasonable assurance that the examination
conforms to generally accepted auditing standards. Procedures for supervision
are necessary to ensure that appropriate judgments and conclusions have been
drawn from the work performed. Not every member of an audit team will have
the expertise necessary to evaluate the handling of each accounting and auditing
problem that arises. Furthermore, some of the audit staff may lack an in-depth
knowledge of the client or the client’s industry, thus increasing the possibility of
incorrect judgments. Supervision by auditors having the necessary experience
and expertise provides reasonable assurance that sufficient evidence and proper
conclusions were obtained.
Auditing literature places emphasis on the existence of appropriate supervisory
(6)
Because of the great volume of audit documentation accumulated during an
engagement, most firms use an indexing system to organize all materials.
(7)
One of the purposes of audit documentation is to serve as an historical record of
all audit testing performed by the CPA firm. This documentation provides a
(8)
Audit procedures are the steps that are required to test a particular control,
transaction, or account. Some firms write procedures specifically designed for a
designed to meet the particular circumstances of each client.
SUGGESTED ANSWERS TO EXERCISES
(1)
Exhibit 6-1 may well be a student’s first view of audit documentation. Therefore,
Case 6 – Exercise 1
The Lakeside Company
Inventory Purchases and Cash Disbursements Transactions –
In-charge Review Comments
December 31, 2006
Prepared by:
Date:
Item on Working Paper Problem
The fifth procedure states that the
auditor “examined canceled checks for
Obviously, the auditor is not just
physically examining this information
The fifth procedure No indication is given as to the purpose
of verifying the account code.
Exception (A) Poorly written. The staff auditor does
current list price.
Exception (A) The e
xplanation for the discrepancies
represents monthly purchases from
about the reason for the change. The
explanation (and the actual testing
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Item on Working Paper Problem
for the discrepancy. The auditor
provides no information that any further
testing has been carried out to verify
these amounts. The assumption h
as
Exception (B) Also vague and poorly written. Once
again, Thomas’ explanation is
Exception (C) Seems relatively clear. An auditor
would prefer to see this policy in an
Note: On the whole, other than comments A and B, this working paper appears
(2)
Attached is one example of an audit document that could be produced by
carrying out the prescribed auditing procedures. A great amount of variety exists
in format, and students ought to be evaluated on the clarity and understandability
of their approach rather than on the development of a particular structure.
apparently been made through the
comment “Pass Further Work” that the
differences are immaterial and, thus,
all of the supervisors have added their
initials, concurrence appears to exist
udents may want
examination and, if so, what testing
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In reviewing this audit document with students, the instructor should be aware
that this question was developed with several educational objectives in mind:
* To introduce students to the types of testing procedures performed by
auditors in verifying the operating efficiency of a company’s control policies
(3)
If Art Heyman found inconsistencies in this part of the audit his primary
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Case 6 – Exercise 2
Lakeside Company
Inventory Purchases and Cash Disbursements Transactions
December 31, 2012
Audit Doc. No.
Prepared by: AH 12/2/12
Reviewed by:
Reviewed by:
Date
Vendor
Purchase
Requisition
Number
Receiving Report
Number
Invoice
Number
Check
Number
Check
Amount
Audit
Procedures
8/20/09 Cypress 6702 3918 711 3091 $2,413.95
1, 2, 3, 4, 5, 6
Audit Objective: To verify that items received were properly ordered, received, and paid.
Scope:
Population: All receiving reports prepared during the period under audit.
Sample: Judgmentally selected 12 receiving reports from inventory department file. Pulled reports sequentially, randomly starting with #3918.
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2. Compared receiving report with purchase invoice for quantity and description. All agreed except B.
4. Invoices reviewed for compliance to see if they were checked, extended, and footed by Lakeside employees. All were except D.
6. Inspected canceled checks and compared them to invoice amounts, recomputing 3% discount. All agreed except E.
Comments:
A Receiving report not in file. Client should be asked to find it or provide a reason for its absence.
Unless it is accounted for, the scope of testing may need to be expanded. AH
B On two invoices Cypress billed Lakeside for items different from those received. In both cases the bill
C Some receiving reports indicate receiving a different amount of goods than ordered. Requisitions indicate that goods have been backordered in both cases.
Lakeside, however, paid only for goods received. System is functioning properly. AH
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