Question 2(9 marks)

Paul Ma is responsible for the acquisition and payment cycle of Raleigh Corporation. Inherent risk for accounts payable is high due to the following risk factors: client's bank covenants are tied to the current ratio and management receives bonuses based upon net income. Controls tend to be strong; however, due to some errors in the past, control risk has been set at moderate.

Accounts Payable Substantive Tests

Ma selected the 100 largest supplier balances from the total of 1000 suppliers recorded in the accounts payable subledger and sent out confirmations.

Cash Disbursement Control Tests

In testing cash disbursements for Raleigh, Ma performed minimum 25 transactions to determine if the control risk assessment was appropriate. He found the following exception:

Five receiving reports were recorded in the acquisitions journal at least two weeks later than their date on the receiving report.

Required:

(a)Based upon the risk factors discussed above (bank covenants and management bonuses) what is the relevant assertion at risk of misstatement for accounts payable? Explain why. (2 marks)

(b)Explain what is wrong with the design of Ma's substantive test for accounts payable (2 marks).

(c)Provide three substantive audit procedure that would be more effective than selecting and confirming large supplier balances for the audit of accounts payable. (3 marks)

(d)For the exception for the cash disbursement testing, identify which assertion(s) was not met.(1 mark)

(e)Explain the impact (what could go wrong) for the exception (internal control weakness) for Raleigh. (1 mark )