Problem 10-16, page 331 The following are 11 audit procedures taken from an audit program: Add the supplier balances in the accounts payable master file, and compare the total with the general ledger. Examine vendors’ invoices to verify the ending balance in accounts payable. Compare the balance in employee benefits expense with previous years’. The comparison takes the increase in the employee benefit rates into account. 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. Confirm accounts payable balance directly with vendors. 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.) Examine the treasurer’s initials on monthly bank reconciliations as an indication of whether they have been reviewed. Examine vendors’ invoices and other documentation in support of recorded transactions in the acquisitions journal. Multiply the commission rate by total sales, and compare the result with the commission expense. Examine vendors’ invoices and other supporting documents to determine whether large amounts in the repairs and maintenance account should be capitalized. Examine the initials on vendors’ invoices that indicate internal verification of pricing, extending, and footing by a clerk. Required: Indicate whether each procedure is a test of controls, an analytical procedure, or a test of details of balances. Identify the type of evidence for each procedure.

Problem 10-16, Solution a. Procedure b. Type of Evidence 1. T of D of B Recalculation and Reperformance 2. Inspection 3. AP Analytical procedures 4. Test of controls Inquiry and observation 5. Confirmation 6. Reperformance 7. 8. 9. 10. 11.

Problem 10-21, page 332 The following are audit procedures from different transaction cycles Use audit software to foot and cross-foot the cash disbursements journal, and trace the balance to the general ledger. Select a sample of entries in the acquisitions journal, and trace each one to a related vendors’ invoice to determine whether one exists. Examine documentation for acquisition transactions before and after the balance sheet date to determine whether they are recorded in the proper period. Inquire of the credit manager whether each account receivable on the aged trial balance is collectible. Compute inventory turnover for each major product, and compare with that of previous years. Confirm with lenders a sample of notes payable balances, interest rates, and collateral. Use audit software to foot the accounts payable trial balance, and compare the balance with the general ledger. Required: For each audit procedure, identify the transaction cycle being audited. For each audit procedure , identify the type of evidence. 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.) For each audit procedure, identify the related audit objective(s). 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.

Problem 10-21, Solution a. b. c. d. 1. Acquisition and Payment Recalculation Substantive (test of detail) Posting and summarization 2. Acquisition and Payment Inspection Test of control or Substantive (detail) Existence 3. Acquisition and Payment Substantive (detail) Cutoff 4. Sales and Collection Inquiry Valuation 5. Inventory and Warehousing Analytical procedure Substantive (AP) 6. Capital Acquisition and Repayment Confirmation Existence, Accuracy, Presentation and disclosure 7. Acquisition and Payment

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.

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: Vendors’ invoices are recalculated prior to payment. Approved price lists are used for acquisitions. Prenumbered receiving reports are prepared as support for purchases and are numerically accounted for. Dates on receiving reports are compared with vendors’ invoices before entry into the accounts payable system. The accounts payable system is updated, balanced, and reconciled to the general ledger monthly. Account classifications are reviewed by someone other than the preparer. All cheques are signed by the owner or the manager. The cheque signer compares data on the supporting documents with the cheques. All supporting documents are cancelled after entry. After they are signed, cheques are mailed by the owner or manager, or a person under his or her supervision. Required: For each control, state which transaction-related audit objective(s) is (are) applicable. For each control, write an audit procedure that could be used to test the control for effectiveness. For each control, identify a likely misstatement, assuming the control does not exist or is not functioning. For each likely misstatement, identify a substantive audit procedure to determine if the misstatement exists.

Problem 12-21, Solution a. Objectives b. Procedure c. Misstatement d. Misstatement Procedure 1. Accuracy Examine vendors’ invoices for indication of recalculation An error in calculation of a vendors’ invoices Recalculation of the vendors’ invoices 2. Accuracy Determine existence of approved price lists for acquisitions Unauthorized prices could be paid for acquisitions Obtain prices from purchasing department and compare to vendors’ invoices 3. Occurrence Completeness Account for a numerical sequence of receiving reports Unrecorded acquisitions exist Confirm accounts payable, especially vendors with small or zero balances 4. Timing Examine vendors’ invoices for indication of comparison Cutoff errors Confirm accounts payable 5. Posting Summarization Examine indication of reconciliation of the subsidiary ledger and control account Errors in subsidiary records or control account Foot subsidiary records and compare to control account 6. Classification Examine vendors’ invoices for indication of internal verification Account classification errors Compare vendors’ invoices to acquisitions journal for reasonableness of account classification 7. Occurrence Examine cancelled cheques for signature Invalid or unauthorized payment Examine supporting documents for appropriateness of expenditures 8. Occurrence Accuracy Examine supporting documents for accuracy and appropriateness of expenditures 9. Occurrence Examine supporting documents for indication of cancellation Duplicate payment for an acquisition Examine supporting documents for every payment to selected vendors 10. Occurrence Observe cheque mailing procedures and inquire about normal procedures Employee takes signed cheques and changes payee name Compare payee name on cancelled cheque to supporting documents