Chapter 11 case #11-33 Pinnacle Manufacturing Part 2
In Part 1 of this case study pages 274-276 you obtained an understanding of internal control and made an initial assessment of control risk for each transaction related audit objective for acquisition and cash disbursement transactions. The purpose of Part 2 is to continue the assessment of control risk by determining the appropriate tests of control and substantive tests of transactions
Assume that Part 1 is was determined that the key internal controls are the following
1-Segregation of the purchasing, receiving, and cash disbursement functions
2-Review of supportive documents and signing of checks by an independent, authorized person
3-Use of prenumbered checks properly accounted for
4-Use of prenumbered purchase orders promptly accounted for
5-Use of prenumberbed document package property accounted for
6-Internal verification of document package before check preparation
7-Independent monthly reconciliation of bank statement
For requirements a and b you should follow a format similar to the one illustrated for sales in Table 11-2 pages 315-316. You should prepare one matrix for acquisitions and a separate one for cash disbursements. Observe that the first column in each matrix should include the transaction related audit objectives from the top row in the worksheet you prepared for Problem 9-31. Also the key internal controls include only those 7 just listed and the tests of controls include only those you developed in requirement a. The substantive tests of transactions procedures should be designed based on an assumption that the results of the tests of controls will be favorable
Design tests of controls audit procedures that will provide appropriate evidence for each of these controls. Do not include more than 2 sets of control for each internal control
Although controls appear to be well designed and test of control deviations are not expected last year’s results indicate that misstatements may still exist. Therefore you decide to perform substantive tests of transactions for acquisitions and cash disbursements. Design substantive tests of transactions for any objective. Use Tables 11-2 on pages 315-316 and 11-3 on pages 323-324 as frames of reference
Combine the tests of controls and substantive tests of transactions designed in requirements a and b into a performance format. Include both tests of acquisitions and cash disbursements in the same audit program. Use Figure 11-7 on page 325 as a frame of reference for preparing the performance format audit program