Question

18-26 (Objectives 18-3, 18-4) In testing cash disbursements for the Jay Klein Company, you obtained an understanding of internal control. The controls are reasonably good, and no unusual audit problems arose in previous years.

Although there are not many individuals in the accounting department, there is a reasonable separation of duties in the organization. There is a separate purchasing agent who is responsible for ordering goods and a separate receiving department that counts the goods when they are received and prepares receiving reports. There is a separation of duties between recording acquisitions and cash disbursements, and all information is recorded in the two journals independently. The controller reviews all supporting documents before signing the checks, and he immediately mails the checks to the vendors. Check copies are used for subsequent recording.

All aspects of internal control seem satisfactory to you, and you perform minimum tests of 25 transactions as a means of assessing control risk. In your tests, you discover the following exceptions:

• 1. One invoice was paid twice. The second payment was supported by a duplicate copy of the invoice. Both copies of the invoice were marked “paid.”
• 2. Two items in the acquisitions journal were misclassified.
• 3. Three invoices were not initialed by the controller, but there were no dollar misstatements evident in the transactions.
• 4. Five receiving reports were recorded in the acquisitions journal at least 2 weeks later than their date on the receiving report.
• 5. Two receiving reports for vendors’ invoices were missing from the transaction packets. One vendor’s invoice had an extension error, and the invoice was initialed that the amount had been checked.
• 6. One check amount in the cash disbursements journal was for $100 less than the amount stated on the vendor’s invoice.
• 7. One voided check was missing.

Required

a.

Identify whether each of 1 through 7 is a control test deviation, a monetary misstatement, or both.

b.

For each exception, identify which transaction-related audit objective was not met.

c.

What is the audit importance of each of these exceptions?

d.

What follow-up procedures would you use to determine more about the nature of each exception?

e.

How would each of these exceptions affect rest of the your audit? Be specific.

f.

Identify internal controls that should have prevented each misstatement.

Answer 1

Answers:

Required	a. Identify whether each of 1 through 7 is a control test deviation, a monetary misstatement, or both.	b. For each exception, identify which transaction-related audit objective was not met.	c. What is the audit importance of each of these exceptions?	d. What follow-up procedures would you use to determine more about the nature of each exception?	e. How would each of these exceptions affect rest of the your audit? Be specific.	f. Identify internal controls that should have prevented each misstatement.
1	Both	Accuracy	The invoice being recorded more than once, that is duplicte entries which does not provide authentic information.	Verify payments of accounts department whether documents accepted for payment were duplicate or original	Duplicate and more than one cash disbursements	Defacing document procedure as soon as the payment is made.
2	Control Deviation	Accuracy - Posting and Summarizatiion	The purpose auditing would not be able to be achieved	I would check the entries in the acquisitions journal and subsidiary books and ledgers	Check material amounts in the acquisitions journal	Make sure all acquisitions are listed appropriately
3	Control Deviation	Authority	Transactions are made by the proper authority and they are correct.	I would check test documents and trace acknowledgement by proper authority.	Dummy transactions will be entered in accounting system.	Confirm that a clearly defined and understood procedure for authorization is established.
4	Control Deviation	Timing/Cutoff	Whether the occurance of transaction and the consequence is correct.	Check the date of invoice and supporting documents with the date and details of recording entries in books.	Unrecorded transactions may remain untraced	Make a control to unsure that the gap between occurance and date of posting is within an appropriate time.
5	Both	Completeness and Accuracy	This may affect solvency and profitability.	Sequence of the receiving report numbers should be checked and signature on invoices need to be checked by the proper authority.	Unaccounted transactions may get recorded	More strong control procedure set up for checks.
6	Monetary Misstatement	Accuracy	Incorrect amounts entered in specific accounts	Trace vouchers and confirm with amounts posted in system.	May result in commission errors.	Internal checks and proper follow up could be set.
7	Control Deviation	Existence and custody of important documents	Dummy payment might happen	Trace the sequence of check number.	Dummy payments may be entered by employee	Control to check the sequence of check numbers.