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accounts payable also are down substantially. Gross profit has
increased, but this increase has not carried through to net income
because of increased executive salaries. Management informs you that
sales prices and purchase prices have not changed significantly during
the past year, and there have been no changes in the product line. Star
Corporation relies on the periodic inventory system. Your initial
impression of internal control is that several weaknesses may exist.
Suggest a possible explanation for the trends described, especially the
decrease in accounts payable while sales and inventory were constant
and gross profit increased. Explain fully the relationships involved.
For this question, you’ll need to look at the ratios presented and
analyze the trends. What do the trends mean?
Problem 14-38
The following are typical questions that might appear on an internal
control questionnaire for accounts payable.
1. Are monthly statements from vendors reconciled with the accounts
payable listing?
Monthly statements from vendors should be reconciled to the
payables ledger.
2. Are vendors’ invoices matched with receiving reports before they
are approved for payment?
The two procedures are test controls that provides auditors the
evidence to access control risk of financial statements.
Required:
a. Describe the purpose of each of the above internal control
activities.
b. Describe the manner in which each of the above procedures might
be tested.
c. Assuming that the operating effectiveness of each of the above
procedures is found to be inadequate, describe how the auditors might
alter their substantive procedures to compensate for the increased
level of the risk of material misstatement.
Questions Requiring Analysis 15-30