Part A: Findings and Recommendations for Management What recommendations do you
ID: 2602686 • Letter: P
Question
Part A: Findings and Recommendations for Management
What recommendations do you have for management, based on the audit information for B, P, & J Truck Repair Service?
Recommendations should include:
· Purchases and accounts payable: Explain the results of the analytic procedures related to the accounts payable audit and what those results indicate.
· Internal control: Identify management's assertions regarding the internal controls and the effectiveness of each internal control within human resources.
· Production control: Identify the control objectives. Test the control activities (or procedures) of the parts inventory reporting system and explain the strengths and weaknesses.
Scenario
B, P, & J Truck Repair Service is a heavy-duty truck maintenance shop that performs various services for its customers. The company has two categories of purchases, stock purchases for ordinary maintenance and special purchases for major repairs. Stock purchases include shop supplies (shop towels, cleaning products, et cetera), general parts (oil, brake fluid, coolant, et cetera), and high-demand specialty parts (truck parts that are common to many vehicles). Specialty purchases include low-demand specialty parts (truck parts that are specific to a vehicle) and equipment (tools, truck lift, air compressors, et cetera). Stock purchases are estimated and made in advance of demand. Specialty purchases are only ordered on an “as needed” basis for specific parts or equipment.
Accounts Payable Audit
You have been assigned to perform the audit procedures related to the accounts payable balance for the audit of the 2016 financial statements. After reviewing and testing internal controls for accounts payable, you determine that the control risk is fairly low. Below is the information that you have requested and received from the company.
Table 1: ACCOUNTS PAYABLE LEDGER BALANCES AS OF DECEMBER 31, 2016
Accounts
2014
2015
2016
Bass Truck Parts
$32,000
$35,000
$32,800
Inland Wholesale
10,400
10,900
0
Hunter Tire
11,200
12,000
6,200
Air Brake Specialty
40,000
42,410
57,600
Trucker’s Haven
19,200
17,600
8,000
BKS Fleet Supply
38,400
53,400
92,000
Made in USA Parts and Accessories
0
4,400
0
Table 2: PURCHASES SUBSIDIARY LEDGER AS OF DECEMBER 31, 2016
Purchases
2014
2015
2016
Stock Purchases
$840,000
$849,000
$744,000
Special Purchases
1,570,000
1,690,000
1,177,000
Table 3: COST OF GOODS SOLD LEDGER BALANCE AS OF DECEMBER 31, 2016
Goods
2014
2015
2016
Cost of Goods Sold
$1,864,000
$2,105,000
$1,752,000
Additional Information:
· All purchases are made on credit.
· The 2014 beginning balance for accounts payable was $159,000.
Instructions for Accounts Payable Audit
Perform analytical procedures for accounts payable of B, P, & J Truck Repair Service in the following manner:
(a)Calculate and list all necessary figures and comparisons to analyze accounts payable.
(b)Explain what the result of each may indicate for the balance in accounts payable.
(c)Using the information for B, P, & J provided above and the results of analytical procedures performed, explain the substantive audit procedures, audit evidence, and related management assertions that you would need for the test of details of the accounts payable balance.
Internal Control Audit
For each of the following items relating to an audit of B, P, & J Truck Repair Service, identify what establishes appropriate control, the problem or control that might arise if the control is missing, and a test that can be performed to verify that the control is operating effectively.
1.What is the proper segregation of duties between the supervisor, human resources, and payroll processing department for authorization to input changes to pay rates and payroll deductions?
2.What is the proper segregation of duties for authorization to hire and fire employees?
3.What approvals are required on time worked by employees before payroll is processed?
4.What happens when an employee’s bank information for EFT is improper and the transfer is not completed?
5.For hourly workers, what is required to verify check-in and check-out at the beginning and end of shifts?
6.How is the payroll checking account funded and reconciled?
Set up your answer in a table such as the one below.
Appropriate Control
Potential Problem or Misstatement
Test of Control
1.
2.
3.
4.
5.
6.
Production Control Audit
Each of the following audit procedures is being used in the audit of B, P, & J Truck Repair Service to test the production control activities.
1.Select a sample of the documents prepared when parts are released from inventory. Examine and tie the job number to the cost accounting records.
2.Select a sample of the parts release documents in the production department file. Examine the documents for the supervisor’s signature or initials.
3.Select a sample of the parts release documents in the production department file. Examine for issue date and parts usage report date.
4.Select a sample of the parts release documents in the production department file. Examine for the name and item number of the part.
5.Select a sample of the parts release documents in the production department file. Examine for the parts department employee’s signature or initials indicating who issued the parts.
6.Select a sample of the parts release documents in the production department file. Examine for a matching parts requisition in the inventory file, noting the date of requisition.
For each of these procedures identify the strength of the internal control procedure being tested and the internal accounting objectives being addressed. Format your answer in tabular form.
Audit Procedure
Strength
Objective
Accounts
2014
2015
2016
Bass Truck Parts
$32,000
$35,000
$32,800
Inland Wholesale
10,400
10,900
0
Hunter Tire
11,200
12,000
6,200
Air Brake Specialty
40,000
42,410
57,600
Trucker’s Haven
19,200
17,600
8,000
BKS Fleet Supply
38,400
53,400
92,000
Made in USA Parts and Accessories
0
4,400
0
Explanation / Answer
A. PURCHASES AND ACCOUNTS PAYABLE AUDIT:-
We can calculate the "CREDITORS PAYMENT RATIOS FOR DIFFERENT YEARS" by using the formulae:-
TOTAL CREDIT PURCHASES / AVERAGE ACCOUNTS PAYABLE
It indicates the speed with which a company pays its suppliers .I f the turnover ratio declines from one period to the next,this indicates that the company is paying its suppliers more slowly,it could be an indicator of worsening financial condition.
2014:- total accounts payable in the beginning of the year is $159000
total accounts payable at the end of the year shall be calculated in the manner given below:-
$32000+$10400+$11200+$40000+$19200+$38400=$151200
average accounts payables =159000+151200/2 =310200/2 =$155100
Total purchases for the year = $84000+$1570000=2410000
creditors turnover ratio=2410000/155100=15.54 times
2015:-
accounts payables in beginning=$151200
accounts payables at the end= [35000+10900+12000+42410+17600+53400+4400] =$175710
average accounts payables = 151200+175710/2 = 163455
Total purchases for the year=849000+1690000=$2539000
creditors turnover ratio=2539000/163455=15.54 times
2016:-
accounts payables in the beginning =$175710
accounts payables at the end =[32800+6200+57600+8000+92000=196600]
average accounts payables =175710+196600/2=186155
Total purchases for the period :-744000+1177000=$1921000
creditors payment period : 1921000/186155=10.32 times
CONCLUSION:- FOR THE YEAR 2016 CREDITORS PAYMENT RATIO IS 10.32 TIMES WHICH IS EXTREMELY LESS THAN PREVIOUS YEARS RATIO I.E 15.54 TIMES , IT INDICATES COMPANY IS PAYING ITS SUPPLIERS MORE SLOWLY AND IT COULD BE AN INDICATOR OF WORSENING FINANCIAL CONDITION.
B:- INTERNAL CONTROL AUDIT
To secure a system of checks and balances, designate a payroll clerk as a supervisor with the authority to process payroll. This person acts as an authorized signer for checks in the payroll account and has the authority to electronically transmit payroll and applicable taxes via electronic funds transfer. Also, proper separation of duties suggests this individual not have access to bank routing and accounting numbers. This prevents an employee from improperly accessing bank accounts.
Failing to Have a Signed Employment Agreement or Offer Letter
Not Putting Standard Policies in Writing
Not Having Proper Appraisal Documentation
SERIAL NO APPROPRIATE CONTROL MISSTATEMENT TEST OF CONTROL 1To secure a system of checks and balances, designate a payroll clerk as a supervisor with the authority to process payroll. This person acts as an authorized signer for checks in the payroll account and has the authority to electronically transmit payroll and applicable taxes via electronic funds transfer. Also, proper separation of duties suggests this individual not have access to bank routing and accounting numbers. This prevents an employee from improperly accessing bank accounts.
1. Are pay rates, payroll deductions, and terminations authorized by the personneldepartment?
Fraud is a concern using such techniques as a ghost employee or false hours/salary reported. Authorization should start with the department who hires. Test for time card approvals starting with department supervisors and a second approval in Personnel or HR. Pay rates can be traced to personnel files. 2
- Understanding the various laws involved with recruiting and hiring and conducting regular legal and regulatory reviews
- Preparing policies and procedures that comply with the law and applicable regulations
- Training management and staff on your policies and procedures and their legal obligations at work
Failing to Have a Signed Employment Agreement or Offer Letter
Not Putting Standard Policies in Writing
Not Having Proper Appraisal Documentation
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