In Parts I and II of this case, you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing. Your team has been assigned the responsibility of auditing the acquisition and payment cycle and one related balance sheet account, accounts payable. The general approach to be taken will be to reduce assessed control risk to a low level, if possible, for the two main types of transactions affecting accounts payable: acquisitions and cash disbursements. The following are furnished as background information:
€¢ A summary of key information from the audit of the acquisition and payment cycle and accounts payable in the prior year, which was extracted from the previous audit firm's audit files (Figure)

€¢ A flowchart description of the accounting system and internal controls for the acquisition and payment cycle (Figure)-the flowchart shows that although each of the company's three divisions has its own receiving department, the purchasing and accounts payable functions are centralized The purpose of Part III is to obtain an understanding of internal control and assess control risk for Pinnacle Manufacturing's acquisition and cash disbursement transactions.

Required
a. Familiarize yourself with the internal control system for acquisitions and cash disbursements by studying the information in Figure and Figure.

b. Prepare a control risk matrix for acquisitions and a separate one for cash disbursements using figure. A formatted control risk matrix is provided on the textbook Web site. The objectives should be specific transaction-related audit objectives for acquisitions for the first matrix and cash disbursements for the second matrix.

See pages 608-612 in Chapter 18 for transaction-related audit objectives for acquisitions and cash disbursements. In doing Part III, the following steps are recommended:
(1) Controls
a. Identify key controls for acquisitions and for cash disbursements. After you decide on the key controls, include each control in one of the two matrices.
b. Include a "C" in the matrix in each column for the objective(s) to which each control applies. Several of the controls should satisfy multiple objectives.
(2) Deficiencies
a. Identify key deficiencies for acquisitions and for cash disbursements. After you decide on the deficiencies, include each significant deficiency or material weakness in the bottom portion of one of the two matrices.
b. Include a "D" in the matrix in each column for the objective(s) to which each significant deficiency or material weakness applies.
(3) Assess control risk as high, medium, or low for each objective using your best judgment. Do this for both the acquisitions and cash disbursementsmatrices.

Transcribed Image Text:

FIGURE Information for Audit of Accounts Payable-Previous Year Accounts payable, 12-31-10 Number of accounts Total accounts payable Range of individual balances Tolerable misstatement for accounts payable 452 $9,460,776 $33.27-$677,632.97 $230,000 Transactions, 2010 Acquisitions: Number of acquisitions Total acquisitions 16,243 92,883,712 Cash disbursements: Number of disbursements Total cash disbursements 23,661 $87,280,031 Results of audit procedures-tests of controls and substantive tests of transactions for ac quisitions (sample size of 100) Purchase order not approved Purchase quantities, prices, and/or extensions not corredt Transactions charged to wrong general ledger account Transactions recorded in wrong period No other exceptions Results of audit procedures-cash disbursements (sample size of 100): Cash disbursement recorded in wrong period No other exceptions 2 Results of audit pro (50% of vendors' balances were verified; combined net understatement amoun payable: ts were projected to the population as follows): Three cutoff misstatements One difference in amounts due to $52,349 $9,552 disputes and discounts No adjustment was necessary because the total projected misstatement was not material. FIGURE Pinnacle Manufacturing- Acquisition and Payment Cycle CENTRALIZED PURCHASING DEPARTMENT RECEIVING DEPARTMENTS PAYABLE CLERK CASH DISBURSEMENTS CLERK Prepare purchase order fronm Review document package for Receive and check Receive vendor's invoice requisition; PO. approved by supervisor nitial, and write date on invoice Purchase order Receiving INV and proc cess cash R.R. R.R transaction data REQ Р.О disbursement transaction Voucher document package Match documents Check prices Check extensions Compute discounts Prepare voucher To Print reports enter and process Notes on controls .Chart of accounts-the company uses an Cash disbursements journal transaction data adequate detailed chart of accounts. Prenumbered documents-all documents shown are prenumbered. They are accounted for by a function other than the preparer .Bank reconciliation-done monthly by the 8 document package transaction treasurer. Procedures are applied daily. Backlogs are resolved promptly by authorizing overtime. To vendor accounts . Accounts payable master file total is reconciled to the genrl ledger total master fi (reviews support) Accounts File description master file Acguisitions 1. Chronological 2. Numerical FIGURE Control Risk Matrix for Hillsburg Hardware Co. Sales SALES TRANSACTION-RELATED AUDIT OBJECTIVES INTERNAL CONTROL Credit is approved automatically by computer by comparison to authorized credit limits (CI). Recorded sales are supported by authorized shipping documents and approved customer orders (C2). Separation of duties exists a sales, and handling of cash receipts (C3). mong billing, recording of Shipping documents are forwarded to billing daily and are billed the subsequent day (C4). Shipping documents are prenumbered and accounted for weekly (C5). Z Batch totals of quantities shipped are compared 8 with quantities billed (C6). Unit selling prices are obtained from the price list master file of approved prices (C7). Sales transactions are internally verified (C8). Statements are mailed to customers each month (C9) Computer automatically posts transactions to the accounts receivable subsidiary records and to the general ledger (C10). Accounts receivable master file is reconciled to the general ledger on a monthly basis (C11) There is a lack of internal verification for the possibility of salesi voices being recorded more than once (D1) There is a lack of control to test for timely recording (D2) Assessed control risk Med. Low Low LowMed.