In testing cash disbursements for the Jay Klein Company, you obtained an understanding of internal control. The controls are reasonably good, and no unusual audit problems arose in previous years.
Although there are not many individuals in the accounting department, there is a
reasonable separation of duties in the organization. There is a separate purchasing agent who is responsible for ordering goods and a separate receiving department that counts the goods when they are received and prepares receiving reports. There is a separation of duties between recording acquisitions and cash disbursements, and all information is recorded in the two journals independently. The controller reviews all supporting documents before signing the checks, and he immediately mails the checks to the vendors.
Check copies are used for subsequent recording.
All aspects of internal control seem satisfactory to you, and you perform minimum
tests of 25 transactions as a means of assessing control risk. In your tests, you discover the following exceptions:
1. Three invoices were not initialed by the controller, but there were no dollar misstate-
ments evident in the transactions.
2. One check amount in the cash disbursements journal was for $100 less than the
amount stated on the vendor’s invoice.
3. One voided check was missing.
4. One invoice was paid twice. The second payment was supported by a duplicate copy
of the invoice. Both copies of the invoice were approved for payment.
5. Two items in the acquisitions journal were misclassified.
6. Five receiving reports were recorded in the acquisitions journal at least two weeks
later than their date on the receiving report.
7. Two receiving reports for vendors’ invoices were missing from the transaction pack-
ets. One vendor’s invoice had an extension error, and the invoice was initialed that the
amount had been checked.
a. Identify whether each of 1 through 7 is a control test deviation, a monetary misstatement, or both.
b. For each exception, identify which transaction-related audit objective was not met.
Required
Required
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c. What is the audit importance of each of these exceptions?
d. What follow-up procedures would you use to determine more about the nature of
each exception?
e. How would each of these exceptions affect the rest of your audit? Be specific.
f. Identify internal controls that should have prevented each misstatement.
