Question

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 the rest of your audit? Be specific.

f. Identify internal controls that should have prevented each misstatement.

18-24 (ObjeCtives 18-3, 18-6) The following misstatements are included in the accounting

records of Westgate Manufacturing Company.

1. The accounts payable clerk intentionally excluded from the cash disbursements

journal seven large checks written and mailed on December 26 to prevent cash in the

bank from having a negative balance on the general ledger. They were recorded on

January 2 of the subsequent year.

2. Acquisitions of raw materials are often not recorded until several weeks after the

goods are received because receiving personnel fail to forward receiving reports to

accounting. When pressure from a vendor’s credit department is put on Westgate’s

accounting department, it searches for the receiving report, records the transactions

in the acquisitions journal, and pays the bill.

3. Each month, a fraudulent receiving report is submitted to accounting by an employee

in the receiving department. A few days later, he sends Westgate an invoice for the

quantity of goods ordered from a small company he owns and operates in the evening.

A check is prepared, and the amount is paid when the receiving report and the

vendor’s invoice are matched by the accounts payable clerk.

4. Telephone expense (account 2112) was unintentionally charged to repairs and maintenance

(account 2121).

5. The accounts payable clerk prepares a monthly check to Story Supply Company for

the amount of an invoice owed and submits the unsigned check to the treasurer for

payment along with related supporting documents that have already been approved.

When she receives the signed check from the treasurer, she records it as a debit to

accounts payable and deposits the check in a personal bank account for a company

named Story Company. A few days later, she records the invoice in the acquisitions

journal again, resubmits the documents and a new check to the treasurer, and sends

the check to the vendor after it has been signed.

6. The amount of a check in the cash disbursements journal is recorded as $4,612.87

instead of $6,412.87.

a. For each misstatement, identify the transaction-related audit objective that was not met.

b. For each misstatement, state control that should have prevented it from occurring

on a continuing basis.

c. For each misstatement, state a substantive audit procedure that could uncover it.

Answer 1

	Activity	Unmet transaction-related audit objective	Prevention	audit procedure
1	The accounts payable clerk intentionally excluded from the cash disbursements journal seven large checks written and mailed on December 26 to prevent cash in the bank from having a negative balance on the general ledger. They were recorded on January 2 of the subsequent year.	Timing	It could have been prevented by changing software systems to have that checks prepared	Re-review the check and confirm the date of clearance in the bank.
2	Acquisitions of raw materials are often not recorded until several weeks after the goods are received because receiving personnel fail to forward receiving reports to accounting. When pressure from a vendor’s credit department is put on Westgate’s accounting department, it searches for the receiving report, records the transactions in the acquisitions journal, and pays the bill.	Timing	First version of report should be sent instantly via mail of software system. Another report can be sent when it is prepared.	Receipt date vs transaction date should be compared and verified.
3	Each month, a fraudulent receiving report is submitted to accounting by an employee in the receiving department. A few days later, he sends Westgate an invoice for the quantity of goods ordered from a small company he owns and operates in the evening. A check is prepared, and the amount is paid when the receiving report and the vendor’s invoice are matched by the accounts payable clerk.	Occurrence	Segregation of responsibility and proper authorization mechanism. AP clerk will not work on payment Treasury person will work on payment	A complete check for journal entries and cash flows.
4	Telephone expense (account 2112) was unintentionally charged to repairs and maintenance (account 2121).	Classification	Additional review of account distribution	Additional verification of entries for account
5	The accounts payable clerk prepares a monthly check to Story Supply Company for the amount of an invoice owed and submits the unsigned check to the treasurer for payment along with related supporting documents that have already been approved. When she receives the signed check from the treasurer, she records it as a debit to accounts payable and deposits the check in a personal bank account for a company named Story Company. A few days later, she records the invoice in the acquisitions journal again, resubmits the documents and a new check to the treasurer, and sends the check to the vendor after it has been signed.	Occurrence	Proper flow of checks After signature of treasurer, checks should directly go to vendor. Second cash payment can be stopped by destroying supporting documents	Check all the cash payments and verify the names of check with vendor name of invoices
6	The amount of a check in the cash disbursements journal is recorded as $4,612.87 instead of $6,412.87	Valuation/Accuracy	Computer systems can be deployed for the preparation of checks and recording transactions	Compare amounts of checks with the amounts recorded in cash disbursement journal.