14-37 (OBJECTIVES 14-3, 14-5) In Part IV of this case study, you obtained an understanding of internal control and made an initial assessment of control risk for each transaction-related audit objective for acquisition and cash disbursement transactions. The purpose of Part V is to continue the assessment of control risk by determining the appropriate tests of controls and substantive tests of transactions.

QUESTION

14-37 (OBJECTIVES 14-3, 14-5) In Part IV of this case study, you obtained an understanding of

internal control and made an initial assessment of control risk for each transaction-related

audit objective for acquisition and cash disbursement transactions. The purpose of Part V

is to continue the assessment of control risk by determining the appropriate tests of controls

and substantive tests of transactions. In order to do this, you must complete the steps

needed to prepare a high-quality performance format audit program for tests of controls

and substantive tests of transactions for acquisitions and cash disbursements.

Assume in Part IV that you identified the following as the key controls you want to

rely on (even though your answers were likely different from these):

1. Segregation of the purchasing, receiving, and cash disbursements functions
2. Purchasing can only make acquisitions from a preapproved vendor list
3. Use of prenumbered voucher packages, properly accounted for
4. Use of prenumbered checks, properly accounted for
5. Use of prenumbered receiving reports, properly accounted for
6. Internal verification of document package, including comparison to preapproved

vendor list, before check preparation

7. Review of supporting documents and signing of checks by an independent, authorized

person

8. Cancellation of documents prior to signing of the check
9. Monthly reconciliation of the accounts payable master file with the general ledger
10. Independent reconciliation of the monthly bank statements
11. Independent review of financial statement disclosures related to acquisitions and

cash disbursements

1. Access the file listing the 11 controls online at www.pearsonhighered.com/arens.

The file, Case 14-37 Key Controls List, is included with the Pinnacle files.

1. For each control, identify the transaction-related audit objective(s) that it partially or

fully satisfies.

1. For each control, list one audit procedure to test the control. Use the most reliable test

of control evidence that you can think of. Write the audit procedure in good form.

1. For each test of control identified in c., list one substantive test of transactions audit

procedure to test whether the control is operating effectively. Use the most reliable

substantive tests of transactions evidence that you can think of.

1. In the same file, below the list of key controls, locate the table titled “Substantive Tests

of Transactions by Audit Objective.” Decide and write one substantive test of transactions

audit procedure for each transaction-related audit objective for acquisitions and

one substantive test of transactions for each transaction-related audit objective for

cash disbursements. At least one of the audit procedures must be different from the

ones in requirement d. Prepare a performance audit program for acquisitions and cash

disbursements using all audit procedures in requirements c. and d. See Figure 14-6

(p. 477) for a format. To the extent possible, follow the approach in procedure 13 a.

through e. in Figure 14-6 of having “one starting point” procedure followed by other

related procedures. The audit program should include procedures for both acquisitions

and cash disbursements. Be sure to eliminate any duplicate audit procedures.

ANSWER