The following tests of controls and substantive tests of transactions audit procedures for acquisitions and cash disbursements are to be used in the audit of Ward Publishing Company. You concluded that internal control appears effective and a reduced assessed control risk is likely to be cost beneficial. Ward’s active involvement in the business, good separation of duties, and a competent controller and other employees are factors affecting your opinion.

1. Foot and cross-foot the acquisitions and cash disbursements journals for 2 months and trace totals to postings in the general ledger.

2. Scan the acquisitions and cash disbursements journals for all months and investigate any unusual entries.

3. Reconcile cash disbursements per books to cash disbursements per bank statement for 1 month.

4. Examine evidence that the bank reconciliation is prepared by the controller.

5. Inquire and observe whether the accounts payable master file balances are periodically reconciled to vendors’ statements by the controller.

6. Examine the log book as evidence that the numerical sequence of checks is accounted for by someone independent of the preparation function.

7. Inquire and observe that checks are mailed by D. Ward or someone under his supervision after he signs checks.

8. Examine initials indicating that the controller balances the accounts payable master file to the general ledger monthly.

9. Select a sample of entries in the cash disbursements journal, and

a. Obtain related cancelled checks and compare with entry for payee, date, and amount and examine signature endorsement.

b. Obtain vendors’ invoices, receiving reports, and purchase orders, and

(1) Determine that supporting documents are attached to vendors’ invoices.

(2) Determine that documents agree with the cash disbursements journal.

(3) Compare vendors’ names, amounts, and dates with entries.

(4) Determine whether a discount was taken when appropriate.

(5) Examine vendors’ invoices for initials indicating an independent review of chart of account codings.

(6) Examine reasonableness of cash disbursements and account codings.

(7) Review invoices for approval of acquisitions by Ward.

(8) Review purchase orders and/or purchase requisitions for proper approval.

(9) Verify prices and recalculate footings and extensions on invoices.

(10) Compare quantities and descriptions on purchase orders, receiving reports, and vendors’ invoices to the extent applicable.

(11) Examine vendors’ invoices and receiving reports to determine that the check-numbers are included and the documents are marked “paid” at the time of check signing.

c. Trace postings to the accounts payable master file for name, amount, and date.

10. Select a sample of receiving reports issued during the year and trace to vendors’ invoice and entries in the acquisitions journal.

a. Compare type of merchandise, name of vendor, date received, quantities, and amounts.

b. If the transaction is indicated in the acquisitions journal as paid, trace the check number to the entry in the cash disbursements journal. If unpaid, investigate reasons.

c. Trace transactions to accounts payable master file, comparing name, amount, and date.

Required

Prepare all parts of a sampling data sheet (such as the one in Figure) through the planned sample size for the preceding audit program, assuming that a line item in the cash disbursements journal is used for the sampling unit. Use either nonstatistical or attributes sampling. For all procedures for which the line item in the cash disbursements journal is not an appropriate sampling unit, assume that audit procedures were performed on a nonsampling basis. For all tests of controls, use a tolerable exception rate of 5%, and for all substantive tests of transactions, use a rate of 6%. Use an ARACR of 10%, which is considered medium. Plan for an estimated population exception rate of 1% for tests of controls and 0% for substantive tests of transactions.

Prepare the data sheet using the computer (instructor option—also applies to Part II).

Assume a sample size of 50 for all procedures, regardless of your answers in Part I. For other procedures, assume that an adequate sample size for the circumstance was selected.

The only exceptions in your audit tests for all tests of controls and substantive tests of transactions audit procedures are as follows:

1. Procedure 2—Two large transactions were identified as being unusual. Investigation determined that they were authorized acquisitions of fixed assets. They were both correctly recorded.

2. Procedure 9b(1)—A purchase order was not attached to a vendor’s invoice. The purchase order was found in a separate file and determined to be approved and appropriate.

3. Procedure 9b(5)—Six vendors’ invoices were not initialed as being internally verified. Three actual misclassifications existed. The controller explained that he often did not review codings because of the competence of the accounting clerk doing the coding and was surprised at the mistakes.

Required

a. Complete the sampling data sheet from Part I using either nonstatistical or attributes sampling.

b. Explain the effect of the exceptions on tests of details of accounts payable. Which balance-related audit objectives are affected, and how do those objectives, in turn, affect the audit of accounts payable?

c. Given your tests of controls and substantive tests of transactions results, write an audit program for tests of details of balances for accounts payable. Assume:

(1) The client provided a list of accounts payable, prepared from the master file.

(2) Acceptable audit risk for accounts payable is high.

(3) Inherent risk for accounts payable is low.

(4) Analytical procedure results were excellent.