Question

Similar to what you did with the Revenue Cycle, I want you to prepare a planning document for the audit of Apollo Shoes as of December 31, 2017, listing the major errors that could occur in the purchasing system and to describe the tests of control procedures for auditing related purchasing controls required to determine whether reliable control exists.  I don’t think that Apollo has enough purchase transactions that we need to rely on the controls (in other words, we’ll audit all transactions), but we need to document our findings for our audit of internal controls over financial reporting. I suggest formatting the planning document in the following manner.

In the first column, use an index number (S-# or W-#) to indicate potential strength or weakness. If you have time, you may want to prepare a purchasing cycle flowchart. Not required, but could be helpful.

In the second column, describe the control activity (or lack thereof) that may serve to prevent, detect, or correct errors or frauds. Understand that Apollo may or may not have the control activity in place. If they do, we may test the control if that is cost-effective. If they don’t, we can propose the control as a management letter comment.

In the third column, describe the audit implications of the strengths/weaknesses related to the control activities with respect to transactions or accounts reported in the financial statements (e.g., the presence of a properly completed purchase order check ensures that purchases are authorized).

In the fourth column, describe specifically how (recalculation, reperformance, inquiry and observation, etc.) you would test the control.

Finally, add a fifth column for compensating audit procedures. If the control activity is not in place, or the control activity is in place but not effective, we need to determine what audit procedure (i.e., a compensating test) we could use to catch them. (For example, we can use customer confirmations to test the validity of the transactions if we can’t rely on the client’s controls.)

The employee prepares a purchase requisition and has a supervisor approve it. The supervisor retains Copy 2 of the pre-numbered purchase requisition for the department, sends Copy 1 to the Purchasing Department and Copy 3 to Accounts Payable.

When the Purchase Department receives the purchase requisition, they search the approved vendor list and consult the listed prices for the goods desired for each vendor. Once a vendor has been selected, five copies of a pre-numbered purchase order are prepared. Copy 5 is retained in the purchasing department and filed with the accompanying purchase requisition. Copy 2 is sent back to the department who prepared the purchase requisition, where both source documents are filed by number together. Copy 3 is sent to the Receiving Department. However, their copy is modified so that the quantity of the items ordered is blacked-out. Copy 4 is sent to Accounts Payable. Copy 1 of the purchase order is sent to the selected vendor.

When the goods are received, the invoice is sent to Accounts Payable and the packing slip is retained in Receiving. The Receiving department verifies the order by comparing the external packing slip with the internal purchase order. Then they count and inspect the items received. The blacked-out purchase order helps to ensure accurate counting of the items ordered. To further assure that the items received are counted, the receiving clerk is required to sign the receiving report. Once the manual process is complete, the inventory file is updated to reflect the goods received and three copies of a pre-numbered receiving report are prepared. Copy 1 and the goods received are sent to the department that requested the items, where it is filed with the accompanying purchase requisition and purchase order. The Receiving Department files Copy 2 of the receiving report with the packing slip and their copy of the purchase order. Copy 3 of the receiving report is sent to A/P where it, the purchase order, and the purchase requisition are compared to the vendor’s invoice for accuracy. The voucher package is then filed according to payment date. This allows the potential for taking any vendor discounts offered. When payment is due, a disbursement voucher is prepared and is sent to the cashier and the voucher package is sent to the Finance Department.

Upon receipt of the disbursement voucher, the cashier will review, sign and cancel the disbursement voucher and prepare a check. The VP of Finance will sign the check after reviewing it with the voucher package for consistency and accuracy. The VP of Finance cancels the voucher package and sends it to A/P. The canceled disbursement voucher is sent to A/P from the cashier, where it is matched and filed with the accompanying canceled voucher package. The VP of Finance sends a copy of each signed check to A/P. The copy is then attached to the canceled voucher package and canceled disbursement voucher and filed as paid. A journal entry is recorded to show the payment of the payable.

Answer 1

	Audit Plan - Apollo Shoes - December 31, 2017
#	Control Activity / Process Step	S / W	S/W Description	Assertions	Audit Procedures (for No / Weak Control)
1	Employee prepares PR
2	Supervisor approves PR	W	Weak Control - There should be a 2 level authorization, if the ordered items exceed a threshold amount. For the requests exceeding the threshold - One from the Supervisor and another from the head of the requesting department.	Inquiry
3	Supervisor retains Copy 2 of the pre-numbered purchase requisition for the department	S	Pre-numbering of purchase requisitions helps in avoiding unauthorized procurements.
4	Supervisor sends Copy 1 of PR to the Purchasing Department
5	Supervisor sends Copy 3 to Accounts Payable
6	Purchase department search the approved vendor list and consult the listed prices for the goods desired for each vendor	W	No Control - There are no control procedures defined for the situation where a Requesting Department orders something which is no listed in the approved vendor listing of the Purchase Department.	Inquiry, Observation
7	Five copies of a pre-numbered purchase order are prepared.
8	Copy 1 of the purchase order is sent to the selected vendor.
9	Copy 2 is sent back to the department who prepared the purchase requisition, where both source documents are filed by number together.
10	Copy 3 is sent to the Receiving Department. However, their copy is modified so that the quantity of the items ordered is blacked-out.
11	Copy 4 is sent to Accounts Payable.
12	Copy 5 is retained in the purchasing department and filed with the accompanying purchase requisition.
13	When the goods are received, the invoice is sent to Accounts Payable and the packing slip is retained in Receiving.
14	The Receiving department verifies the order by comparing the external packing slip with the internal purchase order.	S	Two-way match is good practice to ensure that correct quantity of items are procured.
15	count and inspect the items received. The blacked-out purchase order helps to ensure accurate counting of the items ordered. To further assure that the items received are counted, the receiving clerk is required to sign the receiving report.	S	The quantity of the items ordered is blacked-out in the copy of Purchase Order which is sent to the Receiving Department.
16	the inventory file is updated to reflect the goods received and three copies of a pre-numbered receiving report are prepared.
17	Copy 1 and the goods received are sent to the department that requested the items, where it is filed with the accompanying purchase requisition and purchase order.	W	No Control - There is no practice of sending a confirmation to the Purchase Department or AP department to ensure that the goods ordered are up to the specifications, quality and satisfaction of the requesting department.	Reperformance, Observation	- Take a list of purchase requisitions containing the description of the items ordered. Cross-check such list with the list of receiving report as prepared by the receiving department. - Make a general observation in the requesting departments of the items ordered that are being actually put to use.
18	The Receiving Department files Copy 2 of the receiving report with the packing slip and their copy of the purchase order.
19	Copy 3 of the receiving report is sent to A/P where it, the purchase order, and the purchase requisition are compared to the vendor’s invoice for accuracy.
20	The voucher package is then filed according to payment date. This allows the potential for taking any vendor discounts offered. When payment is due, a disbursement voucher is prepared and is sent to the cashier and the voucher package is sent to the Finance Department.	W	No Control - In the entire process, there is no control activity mentioned to identify when the accounting / journal entry to record the purchase is posted in the system.	Reperformance, Observation	- Take a list of all purchase requisition for the period, and match them with the purchasing journal entries to ensure all the journal entries are appropriately posted.
21	the cashier will review, sign and cancel the disbursement voucher and prepare a check	W	Weak Control - There is no timeline defined for the cashier to process the checks. Delay in processing the checks may attract finance charges from the vendors.	Reperformance, Recalculation	- Check Finance charges account and identify if any finance charges are posted because of delay in processing payment by the AP department. - Check A/P ageing report.
22	The VP of Finance will sign the check after reviewing it with the voucher package for consistency and accuracy.	W	Weak Control - Before signing the check to process the payment, the VP of Finance department or the cashier must perform a step where they receive a confirmation from the Requesting Department about the satisfactory delivery of the requested items. This check may include not only the quantitative aspect of the purchase but also the quantitative aspects like specifications, quality, etc. of the ordered items.	Reperformance, Observation	- Take a list of purchase requisitions containing the description of the items ordered. Cross-check such list with the list of receiving report as prepared by the receiving department. - Make a general observation in the requesting departments of the items ordered that are being actually put to use.
23	The VP of Finance cancels the voucher package and sends it to A/P.
24	The canceled disbursement voucher is matched and filed with the accompanying canceled voucher package.
25	The VP of Finance sends a copy of each signed check to A/P.
26	The copy is then attached to the canceled voucher package and canceled disbursement voucher and filed as paid.
27	A journal entry is recorded to show the payment of the payable.	W	Weak Control - The Journal Entry posting should be automated.	Reperformance, Observation	- Take a list of all purchase requisition for the period, and match them with the purchasing journal entries to ensure all the journal entries are appropriately posted.