Rachelle Thea D.

Cuenca
BSA3

PRELIMS CASE ANALYSIS ANSWERS

1. Objective. Express the objective in terms of the facts supposedly asserted in financial
records accounts, and statements.
In this case, the objective that should be asserted in financial record accounts, and
statements would be the following: a) completeness- to know if all existing purchase transactions
are recorded, b) valuation and allocation – accounts payable are included in the financial
statements at appropriate amounts, c) existence and occurrence- recorded purchases are for the
goods received or provided, d) accuracy-purchases are correctly recorded for the goods received
and e) classification- purchases transactions are classified properly.

2. Control. Write a brief explanation of desirable controls, missing controls and especially
the kinds of “deviations” that could arise from the situation described in the case.

Bailey Books Inc. has 431 retail stores and there are only three agents who perform the
task of purchasing the inventories which is not appropriate because when match with how many
retail stores the company operates, the task is very huge for only three purchasing agents. One
desirable control for this is there should be at least one purchasing agent per region or state.
Furthermore, the agents purchase books, magazines, and periodicals without competitive
bidding which is not also adequate and appropriate since they personally choose where to buy
the inventory. A desirable control that must be performed and implemented is obtaining bids
from other suppliers and the best supplier who sells at the least price of goods will be selected.
Apart from that, Collins, being in charge, of purchasing should conform to a procedure
to check if the procedures and processes in purchasing books are being followed by the other two
agents. The two agents must first ask approval for the selection of suppliers. A higher rank
manager may also be necessary to check the performance of all the three agents and
authorization or approval of incoming purchase transactions. Monthly reports must be prepared
by the agents and must be submitted to the higher rank manager. The inventory, cost of goods
sold, and expenses account needs to be selected on a sample basis and properly vouched for the
reliability of the transactions.
Another missing control is the segregation of duties for the approval of the purchase
order of the purchasing agents and receiving of the goods ordered. It must be ensured that the
receiving personnel will count and check the goods received with supporting documents that will
be forwarded to both purchasing department and accounting department. It is also required that
the purchasing department should have a list of authorized suppliers that auditor would check
and conform if the company have existing liabilities towards those suppliers. This will aid the
tracing of liabilities that never existed at all.

3. Tests of controls. Write some procedures for getting evidence about existing controls, especially
procedures that could discover deviations from controls.
 Bailey has 431 retail stores all over the southeastern states and three full-time purchasing
agents work at corporate headquarters. They are responsible for purchasing all inventory at the
best prices available from wholesale suppliers and they can purchase with or without obtaining
competitive bids. The duties of Collins, the manager in charge, do not include audit or inspection
of the performance of the other two purchasing agents. Since no one audits or reviews Collins's
performance, an inspection would be done in a surprise basis. Inspection of the process and the
purchasing records is a test of control that may be typically conducted for a sample of documents
related to transactions that occurred throughout the year. By doing this, it will provide evidence
if the system of controls has operated in a reliable manner throughout the reporting period.
However, if the auditor encounters any error, they will expand the sample size and conduct
further testing.
Another procedure is to examine if the purchase requisitions, P.Os, and goods received
notes are approved at the appropriate level. This should be verified if the purchase transactions
are approved. Hence, list of authorized suppliers must be obtained so that it would be verified if
the cash payments transactions are received by valid and legit suppliers only.

3. Audit of balance. Write some procedures for getting evidence about the existence, completeness,
valuation, or allocation, or rights and obligations assertions identified in your objective section.

In order to get evidence about existence and completeness, the auditor may proceed to
obtain a balance confirmation from the Company’s suppliers on a monthly basis for instance.
This is to know if the financial statements or the records of the company reconcile or match with
that of the supplier. If they do not match, the auditor will have to make the company prepare a
reconciliation regarding this matter. This procedure must be followed by the company to
maintain consistency with the balances of both parties. Authorized personnel such as a manager
must be appointed to verify or confirm whether the company has proceeded with the balance
confirmations from the suppliers and reconciliation necessary before paying the suppliers.
Moreover, to obtain evidence for the assertion of rights and obligations, all recorded
accounts payable should be supported by supplier’s invoices and goods received notes to know if
they are real suppliers and the inventory are really received before making cash payments while
for a valuation and allocation, policies and procedures that are appropriate in ensuring the
accounts payable are recorded at fair value and the inventories in accordance with GAAP.

4. Discovery summary. Write a short statement about the discovery you expect to accomplish with your
procedures.
If the above procedure is followed, there is a probability that the agents will not be able to
receive the excess payments since there would be both monthly balance confirmation and
reconciliation statements. Thus, payments would be made correctly only to existing suppliers
and would be made only if the amounts in the confirmation matches with the balance in the
account records of the Bailey Book Inc.