Question

In: Accounting

Mincin, CPA, is the auditor of the Raleigh Corporation. Mincin is considering the audit work to...

Mincin, CPA, is the auditor of the Raleigh Corporation. Mincin is considering the audit work to be performed in the accounts payable area for the current year's engagement. The prior year's working papers show that confirmation requests were mailed to 100 of Raleigh's 1,000 suppliers. The selected suppliers were based on Mincin's sample, which was designed to select accounts with large-dollar balances. A substantial number of hours was spent by Raleigh and Mincin in resolving relatively minor differences between the confirmation replies and Raleigh's accounting records. Alternative audit procedures were used for suppliers who did not respond to the confirmation requests.

Required:

a.

Discuss the accounts payable assertions that Mincin must consider in determining the audit procedures to be followed.

b.

Discuss situations in which Mincin should use accounts payable confirmations, and discuss whether Mincin is required to use them.

c.

Discuss why the use of large-dollar balances as the basis for selecting accounts payable for confirmation might not be the most efficient approach, and indicate what more efficient procedures could select accounts payable for confirmation.

(AICPA, adapted)

Solutions

Expert Solution

a) Accounts payable assertions that Mincin must consider in determining the audit procedures to be followed are-

  • Existence: To ascertain the validity of the amounts appearing in the books of accounts & verify the same with the supporting documents, vouchers, external confirmations etc.
  • Completeness : Controls are in place to ensure all the recordings properly & basic totality checks of overall ledger.
  • Valuation : Selecting few vendors from the total list & performing analysis & checks including analyzing balance confirmations.

b) Following are the situations in which Mincin should use accounts payable confirmations-

  • If any of the above assertions (Existence, Completeness etc.) seems to be compromised or there are possible indications of breach.
  • The account payable seems to be inflated as compared to previous years.
  • The Internal controls are not enough to provide reasonable assurance, hence external confirmation could be taken.
  • Previous audit reports indicates possible situations of mistakes / breaches.

Mincin should use account payable confirmations as a base to find out the reasons for differences by further analyzing in detail through reviewing the documents & supportings validiting the account balance. Further, the same would also form part of audit report & findings to discuss with Management.

c) The use of large-dollar balances as basis for selecting accounts payable for confirmation might not be the most efficient approach as it may not represent a right sample for the overall population. Criteria to select the sample should not be dependent only on value as there could be a possibility that numerous accounts which individually may not be big but collectively may impact the operations / books significantly. The balances are fluctuating, hence selecting accounts by covering other aspects is also necessary. For eg- Proper due diligence is required for a small account as well, as the company could increase the transactions in future & may create controls issues afterwards, if any of the control fails.

Efficient Procedures to select accounts payable for confirmation includes-

  • Random Selections from the complete list. While, it seems to be a simple & basic method but it is very logical in its own way, as you glance through the complete listing & select number of accounts which covers a significant chunk (both in count & value)
  • Selection through Trend Analysis. Trend Analysis of account balances covers the fluctuations & steep changes which should be covered for confirmation.
  • Usage of Audit Tools (Softwares) for Substantive Testing.
  • Specifc business related procedures. For eg- If the business is divided & controlled geopraphically (Region Wise), then the sampling analysis should be done on each region separately to capture the accounts from every region.

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