Problem

In Parts I and II of this case, you performed preliminary analytical procedures and assess...

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 1)
• A flowchart description of the accounting system and internal controls for the acquisition and payment cycle (Figure 10-13, p. 334)—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

Required

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.

a. Familiarize yourself with the internal control system for acquisitions and cash disbursements by studying the information in Figure 1 and Figure 3.
b. Prepare a control risk matrix for acquisitions and a separate one for cash disbursements using Figure 2 on page 309 as a guide. 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.

FIGURE 1 Information for Audit of Accounts Payable – Previous Year