Question

Listed below are several misstatements of inventory, accounts payable, and accrued liabilities accounts. Design a substantive audit procedure that provides reasonable assurance of detecting each misstatement.

1. A bonus earned by the president of the company has not been recorded.

2. Several accounts payable to vendors that the company has never purchased from before are omitted from the accounts payable listing.

3. When client employees counted the physical inventory, they included a number of items that were consigned to, but do not belong to, the company.

4. There is no disclosure in the financial statements that a large accounts payable is due to a related party.

5. Accrued payroll is understated.

6. One-third of the inventory of diamond jewelry is actually cubic zircona or white sapphires.

7. The client paid the same vendor invoice twice, although it is still shown as an account payable.

8. Client personnel informed the auditors that underground petroleum tanks contained an inventory of high-octane gasoline when they actually contained water.

9. The client failed to record warranty expenses incurred after year-end applicable to sales made before year-end.

10. Inventory in one corner of the warehouse is overlooked and not counted during the client’s physical inventory count.

Answer 1

1. A bonus earned by the president of the company has not been recorded:

Specifically for this transaction, it would be detected when auditor look at the reconciliation statements of cash and bank and the bank balances of the company and the year end cash balance and when there detects a difference, he would get an evidence that the amount is missing which was off the records.

2. Several accounts payable to vendors that the company has never purchased from before are omitted from the accounts payable listing.

In this case, the accounts payable which are omitted are of new vendors, for which there would be no past records with the company. In this case, it would be beneficial if we take a sample of the inventory purchased during the year of audit, so that the missing parties would be found.

3. When client employees counted the physical inventory, they included a number of items that were consigned to, but do not belong to, the company.

In this case, auditor himself can go and check the inventory or he can review the stock records so that the actual inventory can be known.

4. There is no disclosure in the financial statements that a large accounts payable is due to a related party.

For this, the auditor can review the documents related to related parties of the company and can look into the accounts for their transactions, or if the amounts are relatively low or high we can easily get that the amounts are not reasonable.