Part III of the Pinnacle case study (see Chapter 8) covered the internal control structure and an initial assessment of control risk over purchase and cash payment transactions. Part V develops tests of controls and related substantive tests of transactions for the acquisition and payment cycle.
Assume that the key internal controls in the acquisition and payment cycle are the following:
(i) Segregation of the purchasing, receiving and cash payment functions.
(ii) Independent reconciliation of the monthly bank statements.
(iii) Use of pre-numbered document packages (containing purchase order, receiving report and supplier invoice), properly accounted for.
(iv) Use of pre-numbered cheques, properly accounted for.
(v) Use of pre-numbered receiving reports, properly accounted for.
(vi) Internal verification of document package before cheque preparation.
(vii) Review of supporting documents and signing of cheques by an independent, authorised person.
(viii) Cancellation of documents prior to signing of the cheque.
(ix) Monthly reconciliation of the accounts payable master file with the general ledger.
1. Prepare a table showing, for each of the internal controls listed above, the following:
a. the transaction-related audit objective(s) that it partially or fully satisfies. Express the audit objective in statement form; - e.g., Occurrence - recorded purchases are for goods and services actually received. (9 marks)
b. one procedure to test the control. Use the most relcom iable test of control evidence you can think of. Write the audit procedure in good form. (9 marks)
c. one substantive test of transactions audit procedure to test whether the control failed to be effective. Use the most reliable substantive test of transactions evidence you can think of. Write the audit procedure in good form. (9 marks)
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