Question

During the spring of 1978, Clark Masters was laid off from his position as a shift manager in a machinery manufacturing plant in Middleton Texas. Although he searched for a job at various other plants in the area, he could not find another similar position. To support his growing family, he started a business in the barn behind his house. He first began the business by powder coating certain parts for local manufacturing businesses and performing custom welding services. After three years in operations, Clark incorporated the business as a C-Corporation under the name of Alpha, Inc. and expanded the business into a 50,000 square foot facility located in Austin, Texas. Since its inception, the Company’s core business has evolved and it now manufactures high end equipment for oil rigs, oil refineries and other factory equipment. At the end of 2011, Alpha, Inc. had 85 full time employees and for the last three years averaged over $60 million in sales. To provide operating funds, the Company established a line of credit with Acme Bank in June 2009. Acme requires the Company to have its financial statements audited on an annual basis. Alpha’s audit committee retained KRS, LP to perform its annual audit.

You are a first year staff associate with KRS, LP and have been assigned to work on the Alpha, Inc. audit. During the audit planning meeting, accounts payable was determined to be a significant account with moderate risk to the audit as a whole. One of the tests the engagement team has decided to perform is a test for proper cutoff of liability transactions in order to search for potential unrecorded liabilities. The audit senior on the engagement has asked you to perform this procedure.

Answer 1

1. To find out what is the standard operating procedures:

As a audit staff, my first job is to review the standard operating procedure. Some companies does not have proper SOP and others never follows the SOP of the company. If the Accounts payable department's work is not reflecting in the SOP, then we as a auditor need to add the same.

2. In the Accounts payable, we as a auditor need to check the entire transaction right from the beginning till the end

3. Need to check the purchase orders, suppliers invoice, journal entries passed, Inventory and bank records.

4. It is not necessary that we need to check the transactions each and every one, which is not possible . At lest need to check 25% of the transaction randomly.

5. Need to take confirmation from the suppliers directly to the auditor and not through our client.

These are the procedures to be conducted while auditing of Accounts payable accounts of our client