HOC #5 - Controls Testing PDF

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Hands-On-Case (HOC) #5

EarthWear Hands-on Mini-case Chapter 6 - Tests of Controls (Part A) © The McGraw-Hill Companies, Inc., 2010

In this mini-case you will complete the tests of internal controls on accounts payable for the audit of EarthWear Clothiers' 2010 financial statements. A sample size of 78 accounts payable voucher packets has been selected for the test of internal controls on the accounts payable system. The sample size is designed to provide high level of assurance (or confidence) that a control is operating effectively so long as one or fewer control deviations is observed for each control activity tested. The first 74 voucher packets have already been tested by other staff members and no errors have been found. Your task is to review the remaining four voucher packets.

INSTRUCTIONS:

1

Review the list of control activities you are to test as indicated on Work Paper 6-1. The numbers to the left of the control activities correspond with the control activity numbers on Work Paper 6-2. To better understand the control activities you are to observe, please read Exhibit 11-1 in the textbook, which provides a description of EarthWear's purchasing system.

2

Complete the review of the internal control activities for the vouchers enclosed. Recordyour findings in the fields on Work Paper 6-2. The list of control activities that correspond with the control activity numbers on the schedule can be found on Work Paper 6-1 and a description of the controls can be found in Exhibit 11-1 and Figure 11-1 of the textbook. For each control activity indicate whether there is evidence that the control operated effectively by writing "Effective" or that it did not operate effectively by writing "Deviation" in each of the cells in the schedule.

3

Return to Work Paper 6-1 and evaluate the test results by completing all the fields (Use your test results on Work Paper 6-2 to populate the schedule on Work Paper 6-1 where you will evaluate your findings). For any control activities that are not operating effectively, you are asked to briefly describe the implications for the audit plan (i.e. additional substantive testing to obtain evidence related to a particular assertion, etc.)

4

When you have completed the work papers, turn in Work Papers 6-1 and 6-2.

1

Workpaper 6-1

Name: Class: EARTHWEAR CLOTHIERS Controls Testing Evaluation Summary: Accounts Payable December 31, 2010

Test Results and Evaluation* Description of Control Activities

1

Assertion Document package includes all documents appropriate for the transaction. Occurrence

2 The purchase requisition is signed by a supervisor.**

Number of Deviations Observed

Maximum Number of Deviations Accept/Reject 1

Authorization

3 The purchase order is signed by an authorized purchasing agent.***

Authorization

4 Quantities on vendor's invoice agree with related receiving report and

Accuracy

Describe Any Necessary Revisions to the Audit Plan

1

1

1

purchase order, and invoice is mathematically correct.

5 All documents in voucher package have been stamped "paid".

Occurrence

1

* Controls Testing for the accounts payable process typically involves more control activities. This mini-case provides good hands-on practice, but it is not intended to represent a full and complete illustration of accounts payable controls activities that would be tested by auditors. ** Supervisors include: David Christensen, Daryl Mortensen, Mary Anne Kline, Fynn Amsel, Hanna Kirsch, Paul Pfeffer, Tsubasa Watanabe, and Akina Aoyama. *** Authorized purchasing agents include: Alan Sheperd, Michelle Anders, Lukas Weber, Michael Kaufmann, Taisei Takahashi, and Leiko Katayama.

2

Name:

Workpaper 6-2

Class: EARTHWEAR CLOTHIERS Controls Testing Deviation Report: Accounts Payable December 31, 2010 Sample Testing Documentation

Document Number

1

2

Control Activity* 3

4

5

Effective

Effective

Effective

Effective

Effective

164210 185423 190214 195840 74 addit ional items Total Number of Exceptions

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