8.45 Page 349 Fictitious Vendors, Theft, and Embezzlement. The following cases a

Question

8.45

Page 349

Fictitious Vendors, Theft, and Embezzlement. The following cases are designed like the ones in the chapter. Your assignment is to write the audit approach portion of the cases organized around these sections:

Objective. Express the objective in terms of the facts supposedly asserted in financial records, accounts, and statements.

Control. Write a brief explanation of desirable controls, missing controls, and especially the kinds of “deviations” that could arise from the situation described in the case.

Tests of controls. Write some procedures for getting evidence about existing controls, especially procedures that could discover deviations from controls. If there are no controls to test, then there are no procedures to perform; go to the next section. A “procedure” should instruct someone about the source(s) of evidence to tap and the work to do.

Audit of balance. Write some procedures for getting evidence about the existence, completeness, valuation or allocation, or rights and obligations assertions identified in your objective section.

Discovery summary. Write a short statement about the discovery you expect to accomplish with your procedures.

Purchasing Stars

Bailey Books Inc. is a retail distributor of upscale books, periodicals, and magazines. Bailey has 431 retail stores throughout the southeastern states. Three full-time purchasing agents work at corporate headquarters. They are responsible for purchasing all inventory at the best prices available from wholesale suppliers. They can purchase with or without obtaining competitive bids. The three purchasing agents are R. McGuire in charge of purchasing books, M. Garza in charge of purchasing magazines and periodicals, and L. Collins (manager of purchasing) in charge of ordering miscellaneous items such as paper products and store supplies.

One of the purchasing agents is suspected of taking kickbacks from vendors. In return, Bailey is thought to be paying inflated prices, which first are recorded in inventory and then in cost of goods sold and other expense accounts as the assets are sold or used.

The duties of Collins, the manager in charge, do not include audit or inspection of the performance of the other two purchasing agents. No one audits or reviews Collins's performance.

The purchasing system is computerized and detail records are retained. An extract from these records is in Exhibit 8.45.1.

EXHIBIT 8.45.1

This kickback scheme has been going on for two or three years. Bailey Books could have overpaid by several hundred thousand dollars.

Accounts Payable Confirmations. Partners Clark and Kent, both CPAs, are preparing their audit plan for the audit of accounts payable on Marlboro Corporation's annual audit. Saturday afternoon they reviewed the thick file of last year's documentation and they both remembered too well the six days they spent last year on accounts payable.

Last year, Clark had suggested that they mail confirmations to 100 of Marlboro's suppliers. The company regularly purchases from about 1,000 suppliers and these account payable balances fluctuate widely, depending on the volume of purchase and the terms Marlboro's purchasing agent is able to negotiate. Clark's sample of 100 was designed to include accounts with large balances. In fact, the 100 accounts confirmed last year covered 80 percent of the total dollars in accounts payable. Both Clark and Kent had spent many hours tracking down minor differences reported in confirmation responses. Nonresponding accounts were investigated by comparing Marlboro's balance with monthly statements received from suppliers.

Required:

Identify the accounts payable audit objectives that auditors must consider in determining the audit procedures to be performed.

Identify situations when auditors should use accounts payable confirmations and discuss whether they are required to use them.

Discuss why the use of large dollar balances as the basis for selecting accounts payable for confirmation is not the most effective approach and indicate a more effective sample selection procedure that could be followed when choosing accounts payable for confirmation.

LO 8-4

Search for Unrecorded Liabilities. C. Marsh, CPA, is the independent auditor for Compufast Corporation (Compufast), which sells personal computers, peripheral equipment (printers, data storage), and a wide variety of programs for business and games. From experience on Compufast's previous audits, Marsh knew that the company's accountants were very much concerned with timely recording of revenues and receivables and somewhat less concerned with keeping up-to-date records of accounts payable and other liabilities. Marsh knew that the control environment was strong in the asset area and weak in the liability area.

List substantive procedures that Marsh and the audit staff can perform to obtain reasonable assurance that Compufast's unrecorded liabilities are discovered and adjusted in the financial statements currently under audit.

LO 8-7

Page 349

Fictitious Vendors, Theft, and Embezzlement. The following cases are designed like the ones in the chapter. Your assignment is to write the audit approach portion of the cases organized around these sections:

Objective. Express the objective in terms of the facts supposedly asserted in financial records, accounts, and statements.

Control. Write a brief explanation of desirable controls, missing controls, and especially the kinds of “deviations” that could arise from the situation described in the case.

Tests of controls. Write some procedures for getting evidence about existing controls, especially procedures that could discover deviations from controls. If there are no controls to test, then there are no procedures to perform; go to the next section. A “procedure” should instruct someone about the source(s) of evidence to tap and the work to do.

Audit of balance. Write some procedures for getting evidence about the existence, completeness, valuation or allocation, or rights and obligations assertions identified in your objective section.

Discovery summary. Write a short statement about the discovery you expect to accomplish with your procedures.

Bailey Books Inc. is a retail distributor of upscale books, periodicals, and magazines. Bailey has 431 retail stores throughout the southeastern states. Three full-time purchasing agents work at corporate headquarters. They are responsible for purchasing all inventory at the best prices available from wholesale suppliers. They can purchase with or without obtaining competitive bids. The three purchasing agents are R. McGuire in charge of purchasing books, M. Garza in charge of purchasing magazines and periodicals, and L. Collins (manager of purchasing) in charge of ordering miscellaneous items such as paper products and store supplies.

One of the purchasing agents is suspected of taking kickbacks from vendors. In return, Bailey is thought to be paying inflated prices, which first are recorded in inventory and then in cost of goods sold and other expense accounts as the assets are sold or used.

The duties of Collins, the manager in charge, do not include audit or inspection of the performance of the other two purchasing agents. No one audits or reviews Collins's performance.

The purchasing system is computerized and detail records are retained. An extract from these records is in Exhibit 8.45.1.

EXHIBIT 8.45.1

This kickback scheme has been going on for two or three years. Bailey Books could have overpaid by several hundred thousand dollars.

Please cite it using apa

EXHIBIT 8.45.1

Explanation / Answer

The vendors through a myriad of fraud and corruption schemes where supply chains are exploited.

The vendor audits are expensive, difficult to conduct excessively time consuming and have an adverse impact on the efficiency of the organization. Loss of faith and confidence by customers loss and large amount of monies leaking from the company are some the drawbacks.

A well designed vendor management assessment and management process incorporating vendor audits can be efficient, cost effective. Companies undertake vendor audits as part of a wider compliance program, for a variety of reasons.

Vendor audits are increasingly being perceived as best practice and particularly in logistics where the business has large number of third parties. The dependency on the large third parties has historically resulted in getting into hot water for fraud, bribery and corruption.

A compliance focused vendor audit should take into account the risk assessment, scope, limitation, strength of audit rights and documentation. The aim should not be to audit every vendor engaged by the organization but to conduct a thorough audit with greater frequency for targeted high risk vendors.

Vendor audits focus on the third parties books and records, and in particular accounting areas where it is commonly used to record or disguise improper transaction. Vendor audits include but are not limited to

The third party vendors’ behavior and transaction pattern may include

The compliance related procedures can be incorporated

The ease with which documentation, for example contracts and invoices, is made available to audit team has a direct impact on the efficiency of the audit and this can be achieved by way of good documentation and records maintenance by the team. The historical working relationship information that can be provided by the team. As the team serve as a valuable starting point for vendor audit teams as they plan their reviews.

Where vendor audits are effectively incorporated into an organizations compliance program, it can yield valuable information and demonstrates sound vendor management efforts.

Rigorous and thorough vendor audits send strong, compelling compliance messages throughout the organization and to the company’s third party vendors. Vendors should in turn be less inclined to engage intentionally in unethical conduct if they know that an audit may be conducted at any time.

AUDIT OF UNRECORDED LIABILITIES

Accounts payable provides evidence about the most significant current liability of many companies. When the obligation is related to the acquisition of goods for resale or manufacture. Accounts payable reference the obligations to vendors for purchases of inventory, supplies or services on credit. Purchases related to accounts payable may be reported at the gross method or the net method. When testing accounts payable assertions about purchases and cost of goods sold are also involved.

Copleteness

Reconcile accounts payable ledger with control account

Purchases cutoff test tests to determine if goods for which title has passed or not passed are appropriately accounted for.

Analytical procedures: Accounts payable turnover is very important. Unusual relations should be investigated.

Cash disbursements cutoff test. Test if cash disbursement and accounts payable reduction are reconcilable. Inspect the last check written and trace it to the accounts payable subsidiary ledger.

Trace subsequent payments to record payables. Match checks issued subsequent to the year end with related payable

Checks should be issued only for payables that existed on the balance sheet   at year end. Any check that cannot be matched may represent an unrecorded liability at year end. Companies may delay recording a liability to improve their current ratio.

Search for unvouchered payables. A voucher cannot be prepared until the requisition, after receiving report and sellers invoice are reconciled with the purchase order. Auditors search open files for unmatched documents.

B. Existence Occurrence

1.   Confirmations. If confirmations are used, small and zero balances should be sampled as well as large balances. For example, if orders are placed with a vendor on a consistent basis, a confirmation should be sent to the vendor regardless of the balance due at year end.

2.    Vouch recorded payables to documentation.

C.    Rights and Obligations. (Does the balance of accounts payable reflect the liability of this entity?) Not tested very much.

         1. Inquire of management about the types of payables.

D.     Valuation/Allocation. (Are accounts payable valued in accord with GAAP?)

E.    Presentation/Disclosure. (Is the accounts payable balance properly presented and disclosed?)

            1.    Inspect the financials. Accounts payable should be listed as a current liability. Purchases should be listed in the calculation of cost of goods sold.

          2.    Read the footnotes. Unusual transactions involving accounts payable should be disclosed, such as related party transactions involving accounts payable.

           3.    Obtain a management representation letter with assertions relating to accounts payable and purchases.

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