Problem 10-16, page 331

The following are 11 audit procedures taken from an audit program:

1. Add the supplier balances in the accounts payable master file, and compare the total with the general ledger.
2. Examine vendors’ invoices to verify the ending balance in accounts payable.
3. Compare the balance in employee benefits expense with previous years’. The comparison takes the increase in
the employee benefit rates into account.
4. Discuss the duties of the cash disbursements bookkeeper with him or her, and observe whether he or she
has responsibility for handling cash or preparing the bank reconciliation.
5. Confirm accounts payable balance directly with vendors.
6. Use generalized audit software to run a gap test on the cheques issued during the year. (Print a list of
cheque numbers omitted from the normal cheque number sequencing.)
7. Examine the treasurer’s initials on monthly bank reconciliations as an indication of whether they have been
reviewed.
8. Examine vendors’ invoices and other documentation in support of recorded transactions in the acquisitions
journal.
9. Multiply the commission rate by total sales, and compare the result with the commission expense.
10. Examine vendors’ invoices and other supporting documents to determine whether large amounts in
the repairs and maintenance account should be capitalized.
11. Examine the initials on vendors’ invoices that indicate internal verification of pricing, extending, and footing by
a clerk.
Required:
a. Indicate whether each procedure is a test of controls, an analytical procedure, or a test of details of balances.
b. Identify the type of evidence for each procedure.
Audit Strategy Solutions-1
Problem 10-16, Solution

a. Procedure b. Type of Evidence

1. T of D of B Recalculation and Reperformance
2. T of D of B Inspection
3. AP Analytical procedures
4. Test of controls Inquiry and observation
5. T of D of B Confirmation
6. T of D of B Reperformance
7. Test of controls Inspection
8. Test of controls Inspection
9. AP Analytical procedures
10. T of D of B Inspection
11. Test of controls Inspection

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Problem 10-21, page 332
The following are audit procedures from different transaction cycles
1. Use audit software to foot and cross-foot the cash disbursements journal, and trace the balance to the
general ledger.
2. Select a sample of entries in the acquisitions journal, and trace each one to a related vendors’ invoice to
determine whether one exists.
3. Examine documentation for acquisition transactions before and after the balance sheet date to
determine whether they are recorded in the proper period.
4. Inquire of the credit manager whether each account receivable on the aged trial balance is collectible.
5. Compute inventory turnover for each major product, and compare with that of previous years.
6. Confirm with lenders a sample of notes payable balances, interest rates, and collateral.
7. Use audit software to foot the accounts payable trial balance, and compare the balance with the
general ledger.
Required:
a. For each audit procedure, identify the transaction cycle being audited.
b. For each audit procedure , identify the type of evidence.
c. For each audit procedure, identify whether it is a test of control or substantive test (indicating whether it is
a test of details of balances or an analytical procedure.)
d. For each audit procedure, identify the related audit objective(s).
e. Specifically assess the purpose of each audit procedure, as follows:
• For tests of control, state the risk (potential error) that is being assessed.
• For analytical procedures, state a possible result that you would expect.
• For tests of detail, state the type of material error that you would be quantifying.
Audit Strategy Solutions-3
Problem 10-21, Solution

a. b. c. d.
1. Acquisition and Recalculation Substantive (test of detail) Posting and summarization
Payment
2. Acquisition and Inspection Test of control or Existence
Payment Substantive (detail)

3. Acquisition and Inspection Substantive (detail) Cutoff

Payment
4. Sales and Inquiry Substantive (detail) Valuation
Collection
5. Inventory Analytical Substantive (AP) Valuation
and procedure
Warehousing
Confirmation Substantive (detail) Existence, Accuracy,
6. Capital Presentation and disclosure
Acquisition and
Repayment
7. Acquisition and Recalculation Substantive (detail)
Payment

Audit Strategy Solutions-4

e. • 1. There could be a calculation error and some amounts might not be posted
to the general ledger, understating the accounts payable balance.

• 2. There could be unauthorized payments or duplicate payments,

overstating expenses and accounts payable.

• 3. Accounts payable could be recorded in the incorrect period, either over or

understating income or expenses.

• 4. Accounts receivable might not be collectible, overstating income and

understating the bad debt allowance.

• 5. Inventory might be obsolete and cannot be sold, overstating assets.

• 6. Incorrect notes payable information could be recorded in the accounts,

or there could be inaccurate or incomplete disclosure of notes payable
information in the financial statements and notes there to.

• 7. Same as 1.
Audit Strategy Solutions-5
Problem 12-21, page 406, Canadian 11th. Edition
The following internal controls for the acquisition and payment cycle were selected from a standard internal control
questionnaire:
1. Vendors’ invoices are recalculated prior to payment.
2. Approved price lists are used for acquisitions.
3. Prenumbered receiving reports are prepared as support for purchases and are numerically accounted for.
4. Dates on receiving reports are compared with vendors’ invoices before entry into the accounts
payable system.
5. The accounts payable system is updated, balanced, and reconciled to the general ledger monthly.
6. Account classifications are reviewed by someone other than the preparer.
7. All cheques are signed by the owner or the manager.
8. The cheque signer compares data on the supporting documents with the cheques.
9. All supporting documents are cancelled after entry.
10. After they are signed, cheques are mailed by the owner or manager, or a person under his or her supervision.
Required:
a. For each control, state which transaction-related audit objective(s) is (are) applicable.
b. For each control, write an audit procedure that could be used to test the control for effectiveness.
c. For each control, identify a likely misstatement, assuming the control does not exist or is not functioning.
d. For each likely misstatement, identify a substantive audit procedure to determine if the misstatement exists.

Audit Strategy Solutions-6

Problem 12-21, Solution
a. Objectives b. Procedure c. Misstatement d. Misstatement Procedure
1. Accuracy Examine vendors’ invoices for An error in calculation of a Recalculation of the vendors’ invoices
indication of recalculation vendors’ invoices
2. Accuracy Determine existence of approved Unauthorized prices could be Obtain prices from purchasing
price lists for acquisitions paid for acquisitions department and compare to vendors’
invoices
3. Occurrence Account for a numerical sequence Unrecorded acquisitions exist Confirm accounts payable, especially
Completeness of receiving reports vendors with small or zero balances
4. Timing Examine vendors’ invoices for Cutoff errors Confirm accounts payable
indication of comparison
5. Posting Examine indication of reconciliation Errors in subsidiary records or Foot subsidiary records and compare to
Summarization of the subsidiary ledger and control control account control account
account
6. Classification Examine vendors’ invoices for Account classification errors Compare vendors’ invoices to
indication of internal verification acquisitions journal for reasonableness of
account classification
7. Occurrence Examine cancelled cheques for Invalid or unauthorized payment Examine supporting documents for
signature appropriateness of expenditures

8. Occurrence Accuracy Examine vendors’ invoices for Invalid or unauthorized payment Examine supporting documents for
indication of comparison accuracy and appropriateness of
expenditures
9. Occurrence Examine supporting documents for Duplicate payment for an Examine supporting documents for every
indication of cancellation acquisition payment to selected vendors
10. Occurrence Observe cheque mailing procedures Employee takes signed cheques Compare payee name on cancelled
and inquire about normal procedures and changes payee name cheque to supporting documents

Audit Strategy Solutions-7