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 8-12 ).

• A flowchart description of the accounting system and internal controls for the acquisition and payment cycle ( Figure 8-13 ). 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 8-12 and Figure 8-13 .

b. Prepare a control risk matrix for acquisitions and a separate one for cash disbursements. A formatted control risk matrix is provided on the textbook website. The objectives should be specific transaction-related audit objectives for acquisitions for the first matrix and cash disbursements for the second matrix. See Chapter 13 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 deficiency 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 control deficiency applies. Assess control risk as high, medium, or low for each objective using your best judgment. Do this for both the acquisitions and cash disbursements matrices.

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Figure 8-12 Information for Audit of Accounts Payable-Previous Year Accounts payable, 12-31-14 Number of accounts Total accounts payable Range of individual balances Performance materiality for accounts payable 452 $9 460 776 $33.27-$677 632.97 $230 000 Transactions, 2014 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 acquisitions (sample size of 100): Purchase order not approved Purchase quantities, prices, and/or extensions not correct 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 Results of audit procedures-accounts payable: (50% of vendors' balances were verified; combined net understatement amounts were projected to the population as follows): Three cutoff misstatements One difference in amounts due to disputes and discounts No adjustment was necessary because the total projected misstatement was not material. $52 349 $9 552