This Question Requires Knowledge of Specific Account Balance Assertions, General

question 88

Essay

This question requires knowledge of specific account balance assertions, general audit procedures, and trade accounts payable.
You are assigned to audit the accounts payable of Green Corporation whose business is wholesale and retail trade. The company purchases products from 1,002,000 manufacturers ("vendors") and sells the products to its retail and wholesale customers. The general ledger shows the Accounts Payable control balance as of the balance-sheet date in the amount of $42 million (which is 70 percent of current liabilities, 50 percent of total liabilities, and 35 percent of total liabilities and owners' equity). Green's management accountants post the summary entries from the purchases journal and from the cash disbursements journal each month to the Accounts Payable control account. The accounts payable manager gave you a detailed trial balance that lists all recorded unpaid invoices (recording date, vendor name, vendor invoice number, invoice date, and amount) subtotaled by vendor.
Other members of the audit team have already decided to assess control risk at the maximum for the accounts payable work. The engagement manager gave you last year's audit working papers but said the audit plan was missing (!). Thus, the first part of your assignment is to write the audit plan for audit of the Green Corporation trade accounts payable.Required:For each of the balance assertions (existence, completeness, and valuation or and allocation), write two or more specific audit procedures designed to produce evidence related to the accounts payable balance of $42 million.
(Hints: [1] For each of the three balance assertions, think about a specific assertion before you write a procedure to gather evidence. [2] Write specific procedures as adaptations of the general audit procedures: recalculation, observation, confirmation, document examination, inquiry, scanning, analytical procedures. [3] Most procedures are two-part statements: "Select a sample of... [identify the population]...and "do something"... [specify an action].)

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Definitions:

Collecting Data

The process of gathering and measuring information on variables of interest in a systematic fashion, enabling one to answer stated research questions.

Scatter Plot

A graphical representation with points plotted on a Cartesian plane to show the relationship between two or more variables.

Correlation Coefficient

A statistical measure that indicates the extent to which two variables fluctuate together. Values range from -1 to 1, where 1 means perfect positive correlation, and -1 means perfect negative correlation.

Horizontal Line

In geometry, a straight line that runs left and right across the page, parallel to the horizon, and has a slope of zero.