The LP4 Seminar  Assessment

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LP4 Seminar – Part 1:

LP4 Seminar – Part 2:

Problem 8-45

Fictitious Vendors, Theft, and Embezzlement.

The following cases are designed like the ones in the chapter. Your assignment is to write the audit approach portion of the cases organized around these sections.

Objective. Express the objective in terms of the facts supposedly asserted in financial records, accounts, and statements.

Control. Write a brief explanation of desirable controls, missing controls, and especially the kinds of “deviation” that could arise from the situation described in the case.

Test of controls. Write some procedures for getting evidence about existing controls, especially procedures that could discover deviations from controls. If there are no controls to test, then there are no procedures to perform; go to the next section. A “procedure” should instruct someone about the source(s) of evidence to tap and the work to do.

Audit of balance: Write some procedures for getting evidence about the existence, completeness, valuation or allocation, or rights and obligations assertions identified in your objective section.

Discovery summary. Write a short statement about the discovery you expect to accomplish with your procedures.

Purchasing Stars

Bailey Books Inc. is a retail distributor of upscale books, periodicals, and magazines. Bailey has 431 retail stores throughout the southeastern states. Three full-time purchasing agents work at corporate headquarters. They are responsible for purchasing all inventory at the best prices available from wholesale suppliers. They can purchase with or without obtaining competitive bids. The three purchasing agents are R. McGuire in charge of purchasing books, M. Gaza in charge of purchasing magazines and periodical, and L. Collins (manager of purchasing) in charge of ordering miscellaneous items such as paper products and store supplies.

One of the purchasing agents is suspected of taking kickback from vendors. In return, Bailey is thought to be paying inflated prices, which first are recorded in inventory and then in cost of goods sold and other expense accounts as the assets are sold or used.

The duties of Collins, the manager in charge, do not include audit or inspection of the performance of the other two purchasing agents. No one audits or reviews Collin’s performance.

The purchasing system is computerized and detail records are retained. An extract from these records is in Exhibit 8.45.1.

This kickback scheme has been going on for two or three years. Bailey Books could have overpaid by several hundred thousand dollars.


Problem 8-46

Building Process

Maine Construction builds office buildings. The buildings generally cost between $5 million and $8 million to build, and the plumbing can cost between $300,000 and $600,000 depending on the building requirements. Therefore, Maine always sends the plumbing work out for bid before deciding on whom to use as a subcontractor. The company has had21 projects over the last five years with $10 million dollars in plumbing contracts being sent out for bids.

Over the past five years, Maine has asked for bids from these contractors; Beltran Plumbing; Delgado Plumbing Services; Wright Contracting – Plumbing Specialists. Each vendor has been reviewed by Maine and is on Maine’s approved list.

For each of the following situations (each situation is independent), determine whether the auditor should be concerned about the controls over the bidding process. If yes what control would you recommend to Maine to ensure a fair and honest bidding process?

  1. Of the 21 projects sent out for bid, Wright had the winning bid on 12 of the projects

  2. Of the 21 projects sent out for bid Wright had the winning bid on 12 of the projects. In each of these bidding processes, Wright’s bid was the last bid received.

  3. Of the 21 projects sent out for bid, each vendor had the winning bid on 7 of the projects.

  4. Of the 21 projects sent out for bid, Delgado was awarded 5 contracts even though he did not have the lowest bid.


Exhibit 8.45.1 is attached

Business Finance

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