accounting-A summary of key information from the audit of the acquisition

10-43 (Objective
10-5) In Parts I and II of
this case, you performed preliminary analytical procedures and assessed
acceptable audit risk and inherent risk for Pinnacle Manufacturing. Your team
has been assigned the responsibility of auditing the acquisition and payment
cycle and one related balance sheet account, accounts payable. The general
approach to be taken will be to reduce assessed control risk to a low level, if
possible, for the two main types of transactions affecting accounts payable:
acquisitions and cash disbursements. The following are furnished as background
information:

A summary of key information from the audit of
the acquisition and payment cycle and accounts payable in the prior year, which
was extracted from the previous audit firm’s audit files (Figure 10-12)

A flowchart
description of the accounting system and internal controls for the acquisition
and payment cycle (Figure 10-13,p. 334)—the flowchart shows that although each
of the company’s three divisions has its own receiving department, the
purchasing and accounts payable functions are centralized

The purpose of Part
III is to obtain an understanding of internal control and assess control risk
for Pinnacle Manufacturing’s acquisition and cash disbursement transactions.

Required

1. Familiarize yourself with the internal control system for
   acquisitions and cash disbursements by studying the information in Figure
   10-12 and Figure 10-13.

FIGURE 10-12 Information
for Audit of Accounts Payable — Previous Year

b. Prepare a control
risk matrix for acquisitions and a separate one for cash disbursements using
Figure 10-5 on page 308 as a guide. A formatted control risk matrix is provided
on the textbook Web site. The objectives should be specific transaction-related
audit objectives for acquisitions for the first matrix and cash disbursements
for the second matrix. See pages 608–612 in Chapter 18 for transaction-related
audit objectives for acquisitions and cash disbursements. In doing Part III,
the following steps are recommended:

(1) Controls

a. Identify key controls
for acquisitions and for cash disbursements. After you decide on the key
controls, include each control in one of the two matrices.

b. Include a “C‚” in
the matrix in each column for the objective(s) to which each control applies.
Several of the controls should satisfy multiple objectives.

(2) Deficiencies

a. Identify key deficiencies for acquisitions
and for cash disbursements. After you decide on the deficiencies, include each
significant deficiency or material weakness in the bottom portion of one of the
two matrices.