Over the past year, it has been determined that there may be some control issues in each of the major transaction cycles. The following is a chart of each cycle with the areas of concern identified.
Transaction Cycles
Areas of Concern
The procurement and payment cycle
There were 4,000 purchase orders that totaled $55 M for raw material. There is concern that not all purchases were completed using formal purchase orders, receipts did not match payment authorizations, and purchase orders were missing.
The capital acquisition and repayment cycle
Two capital projects totaling $2.5 M may have been overspent by $600,000 and may not reflect the reported capital spending.
The sales and cash receipt cycle
There were 15,000 invoices totaling $122 M in sales. Unauthorized discounts applied to invoices, credit terms applied to invoices may be incorrect, and unaccounted for invoice sequence numbering may be present.
The accounting for inventory
There were 6,000 stock keeping units (SKUs) that totaled $22 M. Physical inventories reported inventory losses of $300,000.
Determine the appropriate methodology for designing tests of controls and substantive tests of transactions.
Submit a 1-page chart with the following column headings:
Transaction-Related Audit Objective
Key Internal Control
Common Test of Control
Common Substantive Test of Transactions
In preparation for the year-end audit at Bovar Company, your team will create a presentation to management for its approval. Complete the following:
Each member should present the methodology that he or she developed for his or her transaction cycle to the group, which should address the aforementioned control issues.
The team should agree on how to address the identified control issues.
The team should provide outlines regarding the methodology for each of the 4 major transaction cycles for the following:
Designing tests of controls
Designing substantive tests of transactions
Deliverable Length: 400–500 words, 8–10 slides (not including cover and references) with notes
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