acct444 Part 4—Problem 12-37 (Due Week 5, 25 points)

Part 4—Problem 12-37 (Due Week 5, 25 points)

In this part, you will have an opportunity to participate in brainstorming related to fraud as part of the audit planning stage. The purpose of this part is to identify risks and to address those risks in the audit.

You will begin by using the fraud triangle and information from Parts 1 through 3 to identify incentives and pressures, opportunities, and attitudes and rationalizations. Then you will identify risks and accounts that will be affected. You will then look at revenue and identify at least two ways that fraud can happen and how you would find it in the audit.

You will finish up by looking back to Parts 1 and 2 and identifying fraud risks related to all areas covered there.

Integrated Case Application— Pinnacle Manufacturing: Part IV

1. 12-37 (Objectives 12-1 ,12-2) In Parts I and II of this case, you performed preliminary analytical procedures and assessed acceptable audit risk and inherent risk for Pinnacle Manufacturing. In Part III, you considered fraud risks. 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 12-12)

   • A flowchart description of the accounting system and internal controls for the acquisition and payment cycle (Figure 12-13)—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

   Figure 12-12

   Information for Audit of Accounts Payable — Previous Year

   Figure 12-12 Full Alternative Text

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

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

2. Prepare a control risk matrix for acquisitions and a separate one for cash disbursements using Figure 12-3 as a guide. A formatted control risk matrix is available online. The objectives should be specific transaction-related audit objectives for acquisitions for the first matrix and cash disbursements for the second matrix. See Chapter 18 for transaction-related audit objectives for acquisitions and cash disbursements. In doing Part IV, the following steps are recommended:

   1. Controls

      1. 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.

      2. 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.

         Figure 12- 13

         Pinnacle Manufacturing — Acquisition and Payment Cycle

         Figure 12- 13 Full Alternative Text

   2. Deficiencies

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

      2. Include a “D” in the matrix in each column for the objective(s) to which each control deficiency applies.

   3. Assess control risk as high, medium, or low for each objective using your best judgment. Do this for both the acquisitions and cash disbursements matrices.