Question 16-11, page 529

1
Question 16-11, page 529

• Explain why it is common for auditors to send
  confirmation requests to vendors with zero
  balances on the clients accounts payable
  listing but uncommon to follow the same approach
  in verifying accounts receivable.

2
Solution, Question 16-11

• Auditors traditionally follow a conservative
  approach in selecting vendors for accounts
  payable confirmations and customers for accounts
  receivable confirmations.
• The auditor assumes that the client is more
  likely to understate accounts payable
• and therefore concentrates on the vendors with
  whom the client deals actively, especially if
  that vendors balance appears to be lower than
  normal on the clients accounts payable listing
  at the confirmation date.
• In verifying accounts receivable
• the auditor assumes that the client is more
  likely to overstate account balances
• and for that reason he concentrates more on the
  higher balances and is not particularly concerned
  with zero balances.

3
Problem 16-21, Page 530

• Because of the small size of the company and the
  limited number of accounting personnel, Dry Goods
  Wholesale Company Ltd. initially records all
  acquisitions of goods and services at the time
  that cash disbursements are made. At the end of
  each quarter when financial statements for
  internal purposes are prepared, accounts payable
  are recorded by adjusting journal entries. The
  entries are reversed at the beginning of the
  subsequent period. Except for the lack of a
  purchasing system, the controls over acquisitions
  are excellent for a small company. (There are
  adequate prenumbered documents for all receipt of
  goods, proper approvals, and adequate internal
  verification wherever possible.)
• Before the auditor arrives for the year-end
  audit, the bookkeeper prepares adjusting entries
  to record the accounts payable as of the balance
  sheet date. The aged trial balance is listed as
  of the year end, and a manual schedule is
  prepared adding amounts that were entered in the
  following month. Thus, the accounts payable
  balance equals the aged trial balance plus the
  following month's journal entry for invoices
  received after year end. All vendors invoices
  supporting the journal entry are retained in a
  separate file for the auditors use.
• In the current year, the accounts payable balance
  has increased dramatically because of a severe
  cash shortage. (The cash shortage apparently
  arose from expansion of inventory and facilities
  rather than a lack of sales.) Many accounts have
  remain unpaid for several months, and the client
  is getting pressure from several vendors to pay
  the bills. Since the company had a relatively
  profitable year, management is anxious to
  complete the audit as early as possible so that
  the audited statements can be used to obtain a
  larger bank. loan.
• REQUIRED
• Explain how the lack of a complete aged accounts
  payable trial balance will affect the auditors
  tests of controls for acquisitions and cash
  disbursements.
• What should the auditor use as a sampling unit in
  performing tests of acquisitions?
• Assume that no misstatements are discovered in
  the auditors tests of controls for acquisitions
  and disbursements. How will that assumption
  affect the verification of accounts payable?
• Discuss the reasonableness of the clients
  request for an early completion of the audit and
  the implications of the request from the
  auditors point of view.
• List the audit procedures that should be
  performed in the year-end audit of accounts
  payable to meet the cutoff objective.
• State your opinion as to whether it is possible
  to conduct an adequate audit in these
  circumstances.

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Problem 16-21 , Solution

• An aged accounts payable trial balance
• represents a good source of information on
  transactions.
• Select items from this trial balance for testing.
• Also review documents for potential cut-off
  errors.
•  
• Sampling unit
• use prenumbered receiving documents as the
  sampling unit for tests of missing documents
• cash disbursement entries for other tests (e.g.,
  existence and classification).
•  
• No misstatements discovered in the auditors
  tests of controls
• the auditor may be able to reduce the scope of
  his or her tests for existence, accuracy, and
  classification of accounts payable.
•  
• The clients request for early completion of the
  audit
• This will present a problem for the auditor to
  evaluate the propriety of the purchase cutoff.
  not enough time.
• Since no acquisitions journal exists, this means
  there could be an important weakness in internal
  controls for the recording of accounts payable.
• To compensate, perform an extensive search for
  unrecorded liabilities at the end of the year.
• Audit procedures to satisfy cutoff objective
• Reconciliation of vendors statements as of the
  year-end date.
• Examination of invoices that are paid subsequent
  to year end to determine whether or not they
  should have been included in accounts payable at
  year end. If these invoices indicate that the
  purchases were received prior to year-end, the
  auditor should search the accounts payable
  listing for these items. If they do not appear on
  the accounts payable listing, they represent
  unrecorded liabilities and should be recorded by
  the client at year-end.

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Problem 16-22, p. 531

• You were in the final stages of your examination
  of the financial statements of Ozine corporation
  for the year ended December 31, 2011, when the
  corporations president came to talk to you. He
  believed that there was no point to your
  examining the 2012 acquisitions data files and
  testing data in support of 2012 entries. He
  stated that (1) bills pertaining to 2011 that
  were received too late to be included in the
  December acquisitions data files were recorded by
  the corporation as of the year end by journal
  entry, (2) the internal auditor made tests after
  the year end, and (3) he would furnish you with a
  letter confirming that here were no unrecorded
  liabilities.
• REQUIRED
• Should a public accountants test for unrecorded
  liabilities be affected by the fact that the
  client made a journal entry to record 2011 bills
  that were received late? Explain.
• Should a public accountants test for unrecorded
  liabilities be affected by the fact that a letter
  is obtained in which a responsible management
  official confirms that, to the best of his or her
  knowledge, all liabilities have been recorded?
  Explain.
• Should a public accountants test for unrecorded
  liabilities be eliminated or reduced because of
  the internal audit tests? Explain.
• Assume that the corporation, which handled some
  government contracts, had no internal auditor but
  that the Auditor Generals office spent three
  weeks auditing the records and was just
  completing her work at this time. How would the
  public accountants unrecorded liability test be
  affected by the work of the auditor from the
  Auditor General's office?
• What sources in addition to the 2011 acquisitions
  data files should the public accountant consider
  to locate possible unrecorded liabilities?

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Solution, Problem 16-22

• The fact that the client made a journal entry to
  record vendors invoices that were received late
  should simplify the public accountants test for
  unrecorded liabilities and reduce the possibility
  of a need for a further adjustment
• But the public accountants test is nevertheless
  required.
• Clients normally are expected to make necessary
  adjustments to their books so that the public
  accountant may examine statements that the client
  believes are complete and correct.
• If the client has not journalized late invoices,
  the public accountant is compelled in his or her
  testing to substantiate what will ultimately be
  recorded as an adjusting entry.
• In this examination, the public accountant should
  test entries in the 2012 data files to be sure
  that all items which according to dates of
  receiving reports or vendors invoices were
  applicable to 2011 have been included in the
  journal entry recorded by the client. 
• No. The public accountant should obtain a letter
  in which responsible executives of the clients
  organization represent that to the best of their
  knowledge all liabilities have been recognized.
• However, this is done as a normal audit procedure
  to remind the client of his responsibilities and
  the statements that have been made.
• It does not relieve the public accountant of the
  responsibility for making his or her own tests.
• Whenever a public accountant is justified in
  relying on work done by an internal auditor the
  public accountant can curtail (but not eliminate)
  his or her own audit work.
• In this case, the public accountant should have
  ascertained early in his or her examination that
  Ozines internal auditor is qualified by being
  both technically competent and reasonably
  independent.
• Once satisfied as to these points, the public
  accountant should discuss the nature and scope of
  the internal audit program with the internal
  auditor and review his or her working papers in
  order that the public accountant may properly
  coordinate his or her own program with that of
  the internal auditor.
• If the Ozine internal auditor is qualified and
  has made tests for unrecorded liabilities, the
  public accountant may limit his or her work to a
  less extensive test in this audit area.
• Should also consider the level of internal
  independence of the internal auditor. (i.e. best
  to report to the audit committee.)

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Solution, Problem 16-22

• Work done by an auditor for the Auditor Generals
  office will normally have no effect on the scope
  of the public accountants audit
• The concern of government auditors is usually
  limited to matters that are likely to be
  unrelated to the financial statements.
• Nevertheless, the public accountant should
  discuss the government auditors work program
  with him/her, as there are isolated situations
  where specific procedures followed to a
  satisfactory conclusion by an auditor from the
  Auditor Generals office will furnish the public
  accountant with added assurance and therefore
  permit him/her to curtail certain work in a
  particular area.
• Another reason for discussing the Auditor
  Generals offices auditors results with him or
  her is that his or her findings may affect the
  financial statements in other ways.
•  
• e. In addition to the 2011 acquisitions data, the
  public accountant should consider the following
  sources for possible unrecorded liabilities
• vendors invoices that have not been entered in
  the purchases journal.
• status of tax returns for prior years still open.
• discussions with employees.
• representations from management.
• comparison of account balances with preceding
  year.
• examination of individual accounts during the
  audit.
• existing contracts and agreements.
• minutes of meetings.
• lawyers bills and letters of representation.
• status of renegotiable business.
• correspondence with principal suppliers.
• audit testing of cutoff date for reciprocal
  accounts, e.g., inventory and capital assets.