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    Auditing and Company Procedures

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    1. Management may delay recording of liabilities to improve the current ratio. However, financial statements that fail to report all liabilities at year-end are misstated.
    In assessing inherent risk for expenditure cycle assertions, the auditor should consider pervasive factors, such as pressures, to understate payables in order to report a higher level of working capital when the entity is experiencing liquidity problems or ongoing-concern doubts.

    Describe one common procedure used by the auditor to search for unrecorded accounts payable.

    2. In the finance and investment cycle, upper level management is normally involved in making decisions. Therefore, the traditional segregation of duties is difficult to use. In this cycle, a common compensating control would be to have the involvement of two or more persons in each kind of important functional responsibility. When involvement of multiple persons is not specified, then oversight or review can be substituted. Sometimes, high-ranking officials are involved in investment schemes resulting from improper authorizations.
    Auditors usually direct their control risk assessment work toward the senior managers, the board of directors, and their authorization and design of investment and finance programs.

    What is a control that would most likely be used by an entity to safeguard against the loss of trading securities?

    3. At Keller Company, the payroll clerk obtains the plant signature plate from the accounting department and signs the payroll checks. Next, an employee of the personnel department picks up the checks and holds them until they are delivered to the department supervisors for distribution to the employees.
    What are some shortcomings in the payroll procedures at Keller Company? What corrective actions should be taken?

    4. Please read the scenario below, select the correct answer and provide a reason for your choice:
    Matthew Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employee's record time in and out with magnetic cards. The computer system automatically updates all payroll records. Because of this change:

    a) A generalized computer audit program must be used.
    b) Part of the audit trail is altered.
    c) The potential for payroll-related fraud is diminished.
    d) Transactions must be processed in batches.

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    Solution Preview

    1. The auditor can compare the receiving reports for inventory against accounts payable entries. The largest entries should always be checked by the auditor because moving one large entry out of accounts payable is an immediate way that management can reduce the total amount of accounts payable. By comparing receiving reports to accounts payable entries, unrecorded accounts payable entries can be detected.

    2. Most companies have a control based on transaction amounts, when dealing with trading securities and other investments. All transactions over a certain amount must be approved by a third person. Also, ...

    Solution Summary

    This solution thoroughly discusses each audit risk and control question presented.