Madison Perry, CPA, is conducting an audit of Parker Inc. In so doing, Perry is performing a study of Parker’s internal control and has identified a number of important controls related to purchases on which to rely. These controls are as follows:
1. There is segregation of duties between the individual authorizing the purchase, the individual preparing the purchase order, and the individual receiving goods and services being purchased.
2. Verification of approval of purchases is evidenced by having the individuals performing the verification place their initials on the purchase order.
3. On receipt of goods or services, invoices from vendors should be matched to purchase orders. This matching is evidenced by a handwritten notation of the purchase order number on each invoice.
4. Mathematical verification of vendor invoices should be evidenced by having the individuals performing the verification place their initials on the invoice itself.
5. Payments should be made only for vendor invoices that have been matched to purchase orders and mathematically verified.

a. For each of the five controls, describe one test of control that Perry could perform to verify the operating effectiveness of the control.
b. For each of the five controls, provide an example of a deviation that Perry might identify.
c. Assume that Perry encountered the following situation(s) during the tests of controls. Discuss whether you believe these situations represent deviations from the controls. 1. For a sample purchase, Perry could readily determine that different individuals authorized the purchase and prepared the purchase order. However, because receiving per-sonnel were on vacation, the individual authorizing the purchase initially received the goods and services being purchased. This is a one- time occurrence and happened only on the day when all receiving personnel were on vacation or otherwise absent from work.
2. For one purchase, the individual did not initial the purchase order to evidence verification but signed it at the bottom.
3. One vendor invoice did not have handwritten notation of the purchase order number; however, the notation “OK, approved” was written.
4. For one purchase, a vendor invoice could not be located. As a result, a substitute invoice was identified and this invoice was properly verified by Parker’s personnel.
5. Perry identified a single cash disbursement to a vendor that was related to five separate invoices; all five invoices were properly approved for payment. Parker commonly combines several invoices into a single check to save costs.
d. Once identified by Perry, how do deviations affect the conclusion made with respect to the operating effectiveness of Parker’s internal control?

  • CreatedOctober 27, 2014
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