Question

a. Which voucher packages, if any, are recorded in the wrong accounting period? Prepare an adjusting entry to correct the financial statements for the year ended June 30, 2016. Assume Broughton uses a perpetual inventory system and all purchases are inventory items. b. Assume the receiving clerk accidentally wrote June 30 on receiving reports 7280 through 7282. Explain how that will affect the correctness of the financial statements. How will you, as an auditor, discover that error? c. Describe, in general terms, the audit procedures you would follow in making sure that cutoff for purchases is accurate at the balance sheet date. d. Identify internal controls that will reduce the likelihood of cutoff misstatements related to purchases

Answer 1

Answer:-

a. Vouchers 2528 and 2531 were incorrectly included in the June 2016 acquisitions journal. The associated goods were received after June 30, 2016.

As for July 2016, voucher numbers 2527 and 2530 were incorrectly included because the goods were actually received before the end of June 2016.

Let’s assume the corrections were made in two journal entries as follows:

Accounts payable                       $11,687.99

Inventory                                                        $11,687.99

Inventory                                   $ 6,935.73

Accounts payable                                            $ 6,935.73

b.         Improper dating of dating of receiving reports 7280 through 7282 would result in the improper recording of vouchers 2528, 2529, and 2531 in the June 2016 acquisitions journal. That would result in the overstatement of inventory and accounts payable as of June 30, 2016 by $16,576.32. The auditor might catch this by comparing receiving reports recorded just before year end to vendor invoices or vendor statements to determine if the items reflected as being received by the client just prior to year end are included in the vendor invoice or vendor statement as a balance owed as of June 30.

c.         To verify the appropriateness of the cutoff of inventory acquisitions and the related accounts payable balance at year end, the auditor examines receipts of goods before and after the balance sheet date to ensure those items received before year end are included in the acquisitions journal (and thus the accounts payable balance) in the last month of the fiscal year. The auditor also determines that receipts of goods after year end are not reflected in the acquisitions journal (and thus the accounts payable balance) as of year end.

d.         Possible internal controls that would prevent the errors noted at The Broughton Cap Company include the following:

• Require that receiving reports be completed in sequential order as goods are received.
• Require receiving reports to be to accounts payable daily for immediate voucher preparation.
• Accounts payable clerks account for the numerical sequence of receiving reports and prepare voucher packages in numerical sequence starting based on the order of receiving reports received.
• An independent person matches the purchase order, receiving report, and voucher package and verifies accuracy and correctness of dates of receipts relative to dates of recording of voucher in the acquisitions journal.
• Vendor statements are reconciled on a monthly basis with the accounts payable master file.