18-32 (Objectives 18-2, 18-3, 18-4, 18-6) The following tests of controls and

substantive
tests of transactions audit procedures for acquisitions and cash disbursements
are to be
used in the audit of Ward Publishing Company. You concluded that internal
control
appears effective and a reduced assessed control risk is likely to be cost
beneficial. Wards
active involvement in the business, good separation of duties, and a competent
controller
and other employees are factors affecting your opinion.
Ward Publishing Company Part I
(See page 632 for Part II, and Case 19-28 on pages 655656 for Part III)
Tests of Controls and Substantive Tests of Transactions Audit Procedures
for Acquisitions and Cash Disbursements

1. Foot and cross-foot the acquisitions and cash disbursements journals for 2
months
and trace totals to postings in the general ledger.
2. Scan the acquisitions and cash disbursements journals for all months and
investigate
any unusual entries.
3. Reconcile cash disbursements per books to cash disbursements per bank
statement
for 1 month.
4. Examine evidence that the bank reconciliation is prepared by the controller.
5. Inquire and observe whether the accounts payable master file balances are
peri odically reconciled to vendors statements by the controller.
6. Examine the log book as evidence that the numerical sequence of checks is
accounted
for by someone independent of the preparation function.
7. Inquire and observe that checks are mailed by D. Ward or someone under his
supervision after he signs checks.
8. Examine initials indicating that the controller balances the accounts payable
master
file to the general ledger monthly.
9. Select a sample of entries in the cash disbursements journal, and
a. obtain related cancelled checks and compare with entry for payee, date, and
amount and examine signature endorsement.
b. obtain vendors invoices, receiving reports, and purchase orders, and
(1) determine that supporting documents are attached to vendors invoices.
(2) determine that documents agree with the cash disbursements journal.
(3) compare vendors names, amounts, and dates with entries.
(4) determine whether a discount was taken when appropriate.
(5) examine vendors invoices for initials indicating an independent review of
chart of account codings.
(6) examine reasonableness of cash disbursements and account codings.
(7) review invoices for approval of acquisitions by Ward.

(8) review purchase orders and/or purchase requisitions for proper approval.
(9) verify prices and recalculate footings and extensions on invoices.
(10) compare quantities and descriptions on purchase orders, receiving reports,
and vendors invoices to the extent applicable.
(11) examine vendors invoices and receiving reports to determine that the
check
numbers are included and the documents are marked paid at the time of
check signing.
c. Trace postings to the accounts payable master file for name, amount, and
date.
10. Select a sample of receiving reports issued during the year and trace to
vendors
invoice and entries in the acquisitions journal.
a. Compare type of merchandise, name of vendor, date received, quantities, and
amounts.
b. If the transaction is indicated in the acquisitions journal as paid, trace the
check
number to the entry in the cash disbursements journal. If unpaid, investigate
reasons.
c. Trace transactions to accounts payable master file, comparing name, amount,
and date.
Prepare all parts of a sampling data sheet (such as the one in Figure 15-2 on
page 490) through
the planned sample size for the preceding audit program, assuming that a line
item in the
cash disbursements journal is used for the sampling unit. Use either
nonstatistical or
attributes sampling. For all procedures for which the line item in the cash
disbursements
journal is not an appropriate sampling unit, assume that audit procedures were
performed
on a nonsampling basis. For all tests of controls, use a tolerable exception rate of
5%, and
for all substantive tests of transactions, use a rate of 6%. Use an ARACR of 10%,
which is
considered medium. Plan for an estimated population exception rate of 1% for
tests of con trols and 0% for substantive tests of transactions.
Prepare the data sheet using the computer (instructor optionalso applies to
Part II).
Part II

Assume a sample size of 50 for all procedures, regardless of your answers in Part
I. For
other procedures, assume that an adequate sample size for the circumstance
was selected.
The only exceptions in your audit tests for all tests of controls and substantive
tests of
transactions audit procedures are as follows:

1. Procedure 2Two large transactions were identified as being unusual.

Investigation
determined that they were authorized acquisitions of fixed assets. They were
both
correctly recorded.
2. Procedure 9b(1)A purchase order was not attached to a vendors invoice.
The pur chase order was found in a separate file and determined to be approved
and appropriate.
3. Procedure 9b(5)Six vendors invoices were not initialed as being internally
verified. Three actual misclassifications existed. The controller explained that he
often did not review codings because of the competence of the accounting clerk
doing the coding and was surprised at the mistakes.
a. Complete the sampling data sheet from Part I using either nonstatistical or
attributes
sampling.
b. Explain the effect of the exceptions on tests of details of accounts payable.
Which
balance-related audit objectives are affected, and how do those objectives, in
turn,
affect the audit of accounts payable?
c. Given your tests of controls and substantive tests of transactions results, write
an audit
program for tests of details of balances for accounts payable. Assume:
(1) The client provided a list of accounts payable, prepared from the master file.
(2) Acceptable audit risk for accounts payable is high.
(3) Inherent risk for accounts payable is low.
(4) Analytical procedure results were excellent.

Ward Publishing Company Part III (See Case 18-32 for Parts I and II)

19-28 (Objectives 19-1, 19-2, 19-5) Examine the tests of controls and
substantive tests of
transactions results, including the sampling application in Case 18-32 (pp. 630
632), for
Ward Publishing Company. Assume that you have already reached several
conclusions.
1. Your tests of details of balances for accounts payable are completed, and you
found
no exceptions.
2. Acceptable audit risk for property, plant, and equipment and all expenses is
high.
3. Inherent risk for property, plant, and equipment is high because in the current
year, the
client has acquired a material amount of new and used printing equipment and
has
traded in older equipment. Some of the new equipment was ineffective and

returned;
an allowance was received on others. Inherent risk for expense accounts is low.
4. New computer equipment and some printing equipment are being leased. The
client
has never leased equipment before.
5. Analytical procedures for property, plant, and equipment are inconclusive
because of
the large increases in acquisition and disposal activity.
6. Analytical procedures show that repairs, maintenance, and small tools
expenses have
increased materially, both in absolute terms and as a percentage of sales. Two
other
expenses have also materially increased, and one has materially decreased.
7. In examining the sample for tests of controls and substantive tests of
transactions,
you observe that no sample items included any property, plant, and equipment
or
lease transactions.
a. Explain the relationship between the tests of controls and substantive tests of
trans actions results in Case 18-32 and the audit of property, plant, and
equipment and leases.
b. How will the tests of controls and substantive tests of transactions results and
your
conclusions (1 through 7) affect your planned tests of details for property, plant,
and
equipment and leases? State your conclusions for each balance-related audit
objective.
Do not write an audit program.
c. Explain the relationship between the tests of controls and substantive tests of
trans actions results in Case 18-32 and the audit of expenses.
d. How will the tests of controls and substantive tests of transactions results and
your
conclusions (1 through 7) affect your planned tests of details of balances for
expenses?
Do not write an audit program.

Answer:

Case Ward Publishing Company

18-32
Part I
Computer Solution. Computer prepared data sheets using Excel are contained on
the Companion Web site (Filename P1832.xls). Application of audit sampling is

not appropriate for Procedures 1-8 due to the nature of the procedures. In this
case, audit sampling is also not appropriate for
18-32 - Part I (continued) Procedure 10 because the sampling unit is a line item
in the cash disbursements journal. The sampling data sheet that follows
represents an attributes sampling approach. The only differences between this
approach and a nonstatistical sampling approach are the estimate of ARACR and
the determination of sample sizes. See the footnotes to the sampling data sheet
for further explanations. A sampling data sheet using attributes sampling follows:

PLANNED AUDIT

EPER
0%

TER
6%

ARACR*
10%

1%

5%

10%

77

Documents agree with

disbursements.
Entry in CD journal agrees
with details on vendor's
invoice.
Discount was taken as
appropriate.

0%

6%

10%

38

0%

6%

10%

38

0%

6%

10%

38

9.b.(5)

Vendor's invoice initialed.

1%

5%

10%

77

9.b.(6)

Account coding reasonable.

Purchases approved by
Ward.
P.O. or P.R. properly
approved.
Prices, footings and
extensions are correct.

0%

6%

10%

38

1%

5%

10%

77

1%

5%

10%

77

0%

6%

10%

38

Details on supporting
documents agree.
Documents properly
completed and cancelled
upon payment.

0%

6%

10%

38

1%

5%

10%

77

9.a.
9.b.(1)
9.b.(2)
9.b.(3)
9.b.(4)

9.b.(7)
9.b.(8)
9.b.(9)
9.b.(10)
9.b.(11)

DESCRIPTION OF ATTRIBUTE
Entry in CD journal agrees
with details on cancelled
check.
All supporting documents
attached to vendors invoice.

INITIAL
SAMPLE
SIZE**
38

* For a nonstatistical sampling data sheet, ARACR columns should indicate medium for all attributes.
** For a nonstatistical sampling data sheet, students determination of sample size will vary. While no one
answer
is correct, the sample size chosen for each attribute should reflect the EPER, TER and ARACR for that attribute.

Part II
a. Attributes sampling approach: The results portion of the sampling data
sheet are as follows:

ATTRIBUTE
NO.
9.a.

SAMPLE
SIZE
50

9.b.

*
*
*

(1)
50
(2)
50
(3)
50
(4)
50
(5)
50
(6)
50
(7)
50
(8)
50
(9)
50
(10)
50
(11)
50
Control deviations

EXCEPTIONS
0

EXCEPTION
RATE
0

1*
0
0
0
6*
3**
0
0
0
0
0

2%
0
0
0
12%
6%
0
0
0
0
0

CUER
4.6%
7.6%
4.6%
4.6%
4.6%
over 17.8%
12.9%
4.6%
4.6%
4.6%
4.6%
4.6%

Monetary misstatements

Nonstatistical approach: Because CUER under nonstatistical

sampling is estimated using auditor judgment, students answers to
this question will vary. They will most likely be similar to the CUERs
calculated using attributes sampling. Because the SER is zero for
attributes 9.a., 9.b.(2)-(4), and 9.b.(7)-(11), it is unlikely that
students will estimate CUER greater than the TER of 5% (tests of
controls) or 6% (substantive tests of transactions). For attribute 9.b.
(5) students should conclude that the results are not acceptable
because the SER of 12% clearly exceeds the TER of 5%. For attribute
9.b.(6), even though the SER equals the TER of 6%, the results are
not acceptable because sampling error must be considered in
determining CUER. For attribute 9.b.(1), students estimates of CUER
will be more variable since the SER is only 2%. Some students will
find the results acceptable, and some will not, depending on their
estimates of sampling error.
b. Exception 1 is not an exception, and has no effect on tests of details of
accounts payable. Exception 2 is a control deviation. Even though it is not
a monetary misstatement, controls require the presence of all supporting
documents before a purchase and the related disbursement are
processed. If an invalid purchase is recorded, the liability and the related
debited account may be overstated. If an invalid disbursement is recorded,
accounts payable may be inappropriately reduced.
Thus, misstatements in the occurrence of those transactions could actually
result in both overstatements and understatements of accounts payable.
Tests for occurrence include tracing items on the accounts payable listing

to supporting documents and confirmation of accounts payable and

reconciliation to vendor's statements. Exception 3 is a control deviation
where one-half of those items also contain monetary misstatements.
Misclassification is a serious misstatement. However, it relates to the debit
entry, not the credit to accounts payable. Tests supporting charges to
assets and expense accounts will need to be increased, but tests of
accounts payable will probably not be affected.
c. On the following page is an audit program for accounts payable. The
balance-related audit objectives tested by each procedure are indicated.
Because the appropriate audit risk for accounts payable is high and
inherent risk is low, and because analytical review procedures were
excellent, detailed tests should be held to a minimum. The exception to
this is for procedure 3; this has not been reduced because of the exception
in procedure 9.b.(1)

BALANCE-RELATED AUDIT
OBJECTIVES

3. Obtain vendor's statements for 20 vendors

with greatest volume of purchases, plus 10 others,
by confirmation. Reconcile statements
to accounts payable list.

Obligations

Cutoff

Classification

5. Review the list of accounts payable for proper

classification of accounts due to related parties,
debit balances, or items with unusual terms.

Accuracy

2. Trace all items on the list over $10,000 to

vendor's invoice and supporting documents.

4. Examine all subsequent period disbursements

and payments in process of amounts over $5,000
to determine if they were recorded in
the proper period.

Completeness

Existence

Detail tie-in
1. Obtain list of accounts payable. Foot the list and
agree to general ledger.

Note: Rights and Realizable value are not applicable to accounts payable. No audit work
was
considered necessary for obligations