IDENTIFICATION OF AUDIT TESTS

Comprehensive Assurance & Systems Tool (CAST) An Integrated Practice Set 3e Laura Ingraham, Gregory Jenkins

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IDENTIFICATION OF AUDIT TESTS

FOR THE EXPENDITURE CYCLE

(ACQUISITIONS AND CASH

DISBURSEMENTS):

The Winery at Chateau Americana

LEARNING OBJECTIVES

After completing and discussing this case, you should be able to:

• Recognize common business documents used with purchases and cash disbursements • Recognize common control activities used to process purchases and cash disbursements • Identify control activities that reduce the likelihood of material misstatements and link the activities to management assertions • Design tests of controls for control activities related to purchases and cash disbursements • Design substantive tests of transactions to detect material misstatements for non-payroll accounts in the expenditure cycle • Design analytical tests to detect potential material misstatements for non- payroll accounts in the expenditure cycle • Design substantive tests of balances to detect material misstatements for accounts payable • Link tests of controls and substantive tests to management assertions related to purchases, cash payments, and accounts payable • Identify significant deficiencies and material weaknesses for non-payroll expenditure cycle accounts

INTRODUCTION

Chateau Americana (CA) has an annual production of approximately 385,000 cases of wine. Production of the 385,000 cases of wine requires roughly 3,200 tons of grapes. One-fourth of the needed grapes are harvested from CA's 125-acre vineyard, the remaining grapes are predominantly purchased from California vineyards. Other purchases associated with the production of wine include oak barrels, bottles, cork, neck wrappers, and labels. CA also has non-payroll administrative, marketing, and maintenance expenditures associated with its wine operations. Marketing expenditures such as priority distribution, special promotions, and print advertising have substantially increased in the past year to improve CA's market penetration. 2 / 4

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BACKGROUND INFORMATION ABOUT THE AUDIT

CA has the following general ledger accounts related to purchasing and cash

disbursement activities:

• Inventory – Production • Prepaid Expenses • Accounts Payable • Accrued Expenses • Cost of Goods Sold • Occupancy Expense • Marketing Expense • Communications Expense • Professional Services Expense • Supplies Expense • Data Processing Expense • Travel and Entertainment Expense • Insurance Expense • Dues and Subscriptions Expense • Tax Expense • Maintenance Expense • Automobile Expense • Lease Expense • Other Operating Expense • Miscellaneous Expense

In accordance with professional standards, Mikel Frucella, audit manager, reviewed CA's control environment, risk assessment policies, and monitoring system and has assessed them as strong. Julia Granger, staff auditor, reviewed CA's information system and control activities related to purchases and cash disbursements and prepared the enclosed flowcharts (referenced in the top right hand corner as E-110, E-111,and E-112). Mikel has decided there is no need to document the company's policies nor perform tests of controls for purchase returns and allowances as the number and size of purchase returns and allowances is relatively small.

As the audit senior, you have been assigned responsibility for (1) identifying internal control activities that assure that non-payroll purchase and cash disbursement transactions are properly stated in all material respects, (2) developing tests of controls that test the design and operating effectiveness of identified internal control activities, and (3) identifying substantive tests to detect material misstatements related to non-payroll expenditure cycle accounts. You have conducted some preliminary discussions with client personnel and noted the following

• Purchase returns and allowances transactions are recorded in the purchases journal • Purchase discounts are recorded in the cash disbursements journal • Adjustments to expenditure cycle accounts are recorded in the general journal and require preparation of a prenumbered adjustment memo

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CAST: Identification of Audit Tests

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REQUIREMENTS

Complete steps 5 through 8 in the Expenditure Cycle Planning Audit Program (audit schedule E-100) and document your work on audit schedules E-100, E-120, E-121, E-130, E-140, E-141, E-150, E-151, E-160, E-161, E-170, and E-171. Julia Granger has already completed steps 1 through 4 and has documented the results of her work on audit schedules E-100, E-110, E-111, and E-112. Assume that the client performs the control activities identified in the flowcharts.

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