Question

In testing cash disbursements for the Jay Klein Company, you obtained an understanding of internal control. The controls are reasonably good, and no unusual audit problems arose in previous years. Although there are not many individuals in the accounting department, there is a reasonable separation of duties in the organization. There is a separate purchasing agent who is responsible for ordering goods and a separate receiving department that counts the goods when they are received and prepares receiving reports. There is a separation of duties between recording acquisitions and cash disbursements, and all information is recorded in the two journals independently. The controller reviews all supporting documents before signing the checks, and he immediately mails the checks to the vendors. Check copies are used for subsequent recording. All aspects of internal control seem satisfactory to you, and you perform minimum tests of 25 transactions as a means of assessing control risk. In your tests, you discover the following exceptions:

1. One invoice was paid twice. The second payment was supported by a duplicate copy of the invoice. Both copies of the invoice were marked “paid.”

2. Two items in the acquisitions journal were misclassified.

3. Three invoices were not initialed by the controller, but there were no dollar misstatements evident in the transactions.

4. Five receiving reports were recorded in the acquisitions journal at least 2 weeks later than their date on the receiving report.

5. Two receiving reports for vendors’ invoices were missing from the transaction packets. One vendor’s invoice had an extension error, and the invoice was initialed that the amount had been checked.

6. One check amount in the cash disbursements journal was for $100 less than the amount stated on the vendor’s invoice.

7. One voided check was missing.

a. Identify whether each of 1 through 7 is a control test deviation, a monetary misstatement, or both.

b. For each exception, identify which transaction-related audit objective was not met.

c. What is the audit importance of each of these exceptions?

d. What follow-up procedures would you use to determine more about the nature of each exception?

e. How would each of these exceptions affect rest of the your audit? Be specific. f. Identify internal controls that should have prevented each misstatement.

Answer 1

		Control test deviation/ Monetary misstatement/Both	Audit objective not met	Audit importance	Follow-up procedures	Affect the rest and Internal controls
1	Double payment of invoices	Control test deviation	Accuracy	Important to ensure that the payments are not made in excess	Ensure whether mechanism is introduced to record the payment against an invoice. The system should not allow selection of the same invoice again for payment.	Indicates suspicion about excess payments against all the invoices. Controls relating to disallowance of selecting the same invoice again for payment will help in preventing these errors
2	Misclassification	Control test deviation	Classification	Important to ensure proper presentation of all the transactions	Verify whether mechanism was introduced to correctly classify and review the same periodically	Indicates possible misstatements in acquis ions journal and depreciation calculations. Periodical review of acquisitions journal will eliminate such errors
3	Not initialed	Control test deviation	Completeness	Important to ensure that the workflow is properly followed as per defined authorities	Verify whether Delegation of authority is implemented and communicated to all	Indicates suspicion about proper authorisation of transactions. Strict implementation of delegation of authority will eliminate such errors.
4	Delayed recording	Control test deviation	Cutoff	Important to ensure timely recording of transactions in books	Verify whether transactions are being recorded in time	Indicates possible misstatements in time of transactions recorded. Presence of periodical review of invoices received and recorded will eliminate such errors.
5	Errors in invoices	Control test deviation	Accuracy	Important to ensure all the fields in invoices are verified and then initialed for further processing and invoices are safely documented	Verify whether at least two people verify the invoice before sending for further processing and invoices are maintained in a file in order	Indicates possible recording of fictitious transactions due to absence of invoices. Proper verification of invoices ensures no such errors
6	Difference in amount	Monetary misstatement	Accuracy	Important to ensure proper processing of invoices and payments	Verify whether there is maker-checker control to ensure amounts on the checks are accurate	Indicates possible excess or short payments and differences in checks and invoices. Presence of maker-checker control will eliminate such errors
7	Missing check	Control test deviation	Completeness	Important to ensure safe maintenance of unused or void checks	Verify whether check register is maintained and they are kept in safe custody	Indicates possible theft of checks. Safe custody and maintenance of check register will help to avoid such errors