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.
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Transaction Cycles
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Areas of Concern
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The procurement and payment cycle
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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.
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The capital acquisition and repayment cycle
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Two capital projects totaling $2.5 M may have been overspent by $600,000 and may not reflect the reported capital spending.
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The sales and cash receipt cycle
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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.
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The accounting for inventory
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There were 6,000 stock keeping units (SKUs) that totaled $22 M. Physical inventories reported inventory losses of $300,000.
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Each member of your team should take 1 of the 4 specific transaction cycles and complete the following:
- Determine the appropriate methodology for designing tests of controls and substantive tests of transactions.
Submit a 1-page chart with the following column headings:
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Transaction-Related Audit Objective
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Key Internal Control
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Common Test of Control
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Common Substantive Test of Transactions
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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