Question

Key Assignment Final Draft

Group Portion (Key Assignment Draft with revisions)

Your final Key Assignment should include any revisions or recommendations that were made by the instructor on your Key Assignment Draft.

Over the past year, it has been determined that there may be some control issues in each of the major transaction cycles. The following is a chart of each cycle with the areas of concern identified.

Transaction Cycles	Areas of Concern
The procurement and payment cycle	There were 4,000 purchase orders that totaled $55 M for raw material. There is concern that not all purchases were completed using formal purchase orders, receipts did not match payment authorizations, and purchase orders were missing.
The capital acquisition and repayment cycle	Two capital projects totaling $2.5 M may have been overspent by $600,000 and may not reflect the reported capital spending.
The sales and cash receipt cycle	There were 15,000 invoices totaling $122 M in sales. Unauthorized discounts applied to invoices, credit terms applied to invoices may be incorrect, and unaccounted for invoice sequence numbering may be present.
The accounting for inventory	There were 6,000 stock keeping units (SKUs) that totaled $22 M. Physical inventories reported inventory losses of $300,000.

Each member of your team should take 1 of the 4 specific transaction cycles and complete the following:

Determine the appropriate methodology for designing tests of controls and substantive tests of transactions.

Submit a 1-page chart with the following column headings:

Transaction-Related Audit Objective

Key Internal Control

Common Test of Control

Common Substantive Test of Transactions

In preparation for the year-end audit at Bovar Company, your team will create a presentation to management for its approval. Complete the following:

Each member should present the methodology that he or she developed for his or her transaction cycle to the group, which should address the aforementioned control issues.

The team should agree on how to address the identified control issues.

The team should provide outlines regarding the methodology for each of the 4 major transaction cycles for the following:

Designing tests of controls

Designing substantive tests of transactions

Individual Portion

Part 1

During the audit, the following occurred:

Bovar Company’s management restricted the auditors by not allowing them to audit Overall Manufacturing Company's financial statements. Management changed the inventory accounting from first in, first out (FIFO) to last in, first out (LIFO) and did not accurately revalue the inventory. The lead auditor was the cousin of Bovar Company’s chief financial officer (CFO).

The American Institute of Certified Public Accountants (AICPA) professional standards provide uniform wording and format for the audit report. Consider the above events and write a 1-page audit report for Harrison that includes all 7 parts of a standard audit report, as follows:

Report title

Audit report address

Introductory paragraphs

Scope paragraph

Opinion paragraph

Name of the Certified Public Accountant (CPA) firm

Audit report date

Part 2

At the end of the audit, the audit team completed the fieldwork and signed the auditor report on March 20, 2014. Harrison sold some of assets in the rectangular heat exchangers line on March 31, 2014. The team is concerned about this event transaction occurring after December 31, 2013 that may affect the 2013 financial statements. Discuss the following questions in a 1-page document:

What general types of subsequent events require consideration and evaluation by the management and the audit team?

Describe the financial statement effect of the subsequent event that is described above.

Answer 1

		Sales and Cash receipt cycle
Transaction related audit objective	Nature	Description	key Internal control	Common test of control
Existence	Sales	Recorded sales are for shipments actually made to nonfictious customers	Credit is automatically approved by computer program, sales are supported by authorized documents, batch totals of quantities shipped are compared with quantities billed, monthly statements are sent to customers.	Examine customer order for evidence of customer approval, examine sales invoice for supporting bill of lading and customer order, examine file of batch totals for initials of data control clerk, observe if statements are sent.
Completeness	Sales	Existing sales transactions are recorded	Shipping documents are prenumbered and accounted for weekly, batch totals of quantities shipped are compared with quantities billed.	Account for sequence of shipping documents, examine file or batch totals for initials of data control clerk.
Accuracy	Sales	Recorded sales are for the amount of goods shipped and are correctly billed and recorded	supported by authorized documents, quantities shipped and billed match, selling prices are taken from an approved list, monthly statements.	examine invoice for supporting documents, examine file of batch totals for initials, examine approved price list for accuracy and proper authorization, observe statements being sent
Classification	Sales	Sales transactions are properly classified	Account classifications are internally verified.	Examine document package for internal verification
Timing	Sales	Sales are recorded on the correct dates	Shipping documents are prenumbered and accounted for weekly by accountant.	Account for a sequence of shipping documents.
Posting & Summarization	Sales	Sales transactions are properly included in the A/R master file and are correctly summarized	omputer automatically posts transactions to the A/R master file and general ledger, A/R master file is reconciled to the general ledger on a monthly basis, monthly statements.	examine evidence that A/R master file is reconciled to the general ledger and that monthly statements are sent.
Existence	Cash receipt		accountant independently reconciles bank account, batch totals of cash receipts are compared with computer summary reports.	Observe bank reconciliation being done, examine file of batch for proper initials.
Completeness	Cash receipt		prelisting of cash receipts is prepared, checks are restrictively endorsed, batch totals are compared with computer summary, monthly statements to customers.	observe prelisting of cash, endorsement of checks, examine file of batch totals for initials, observe monthly statements being sent.
Accuracy	Cash receipt		accountant independently reconciles bank account, batch totals are compared with computer summary, monthly statements.	observe accountant reconciling bank acounts, examine file of batch for proper initials, and observe monthly statements being sent.
Classification	Cash receipt		cash receipts transactions are internally verified.	examine evidence on internal verification.
Timing	Cash receipt		procedures require recording of cash on a daily basis.	observe unrecorded cash at a point in time.
Posting & Summarization	Cash receipt		monthly statements are sent, computer automatically posts transactions to the A/R master file and ledger, A/R master file is reconciled to the general ledger on a monthly basis.	observe monthly statements being sent, examine evidence that A/R master file is reconciled to general ledger.
Existence	Acquisitions	Recorded acquisitions are for goods and services received, consistent with the best interests of the client
Completeness	Acquisitions	Existing acquisitions are recorded
Accuracy	Acquisitions	Acquisitions are accurately recorded
Classification	Acquisitions	Acquisitions are correctly classified
Timing	Acquisitions	Acquisition transactions are recorded on the correct dates
Posting & Summarization	Acquisitions	Acquisition transactions are properly includedin the accounts payable and inventory master files and are properly summarized
methodology for designing tests of controls and substantive tests of transactions for sales?
(1) Understand internal controls - sales, (2) Assess planned control risk - sales, (3) Determine extent of testing controls, (4) Design tests of controls and substantive tests of transactions for sales to meet transaction-related audit objectives. (These will include using the right audit procedures, sample size, selection of items to be tested, and timing of tests.)
A subsequent event is an event that occurs after a reporting period, but before the financial statements for that period have been issued or are available to be issued. Depending on the situation, such events may or may not require disclosure in an organization's financial statements.
The two types of subsequent events are:
Additional information. An event provides additional information about conditions in existence as of the balance sheet date, including estimates used to prepare the financial statements for that period.
New events. An event provides new information about conditions that did not exist as of the balance sheet date.