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:

Price Floor

A government-imposed minimum price set above the equilibrium price, preventing market prices from falling below it.

Shortage/Surplus

Conditions where the quantity demanded is greater than the quantity supplied (shortage) or the quantity supplied is greater than the quantity demanded (surplus) in a market.

Quantity Demanded

The total amount of goods or services that consumers are willing and able to purchase at a specific price level.

Quantity Supplied

The volume of a good or service available for sale from suppliers at a certain cost.