Question

Balley Books Inc, is a retail distributor of upscale books, periodicals, and magazines. Balley 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 avallable from wholesale suppllers. They can purchase with or without obtaining competitive bids. The three purchasing agents are R. McGuire in charge of purchasing books. M. Garza in charge of purchasing magazines and periodicals. and L Collins (manager of purchasing) in charge of ordering miscellaneous ltems such as paper products and store supplies. One of the purchasing agents is suspected of taking kickbacks from vendors. In return, Balley 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 Collins's performance. The purchasing system is computerized and detall records are retained. An extract from these records is in This kickback scheme has been going on for two or three years. Balley Books could have overpaid by several hundred thousand dollars. Your assignment is to write the audit approach portion of the cases organized around these sections: Control. Write a brief explanation of desirable controls. missing controls, and especially the kinds of "deviations" that could arise from the situation described in the case. Tests of controis. Wite 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.

Answer 1

An audit approach for Balley Books should include identifying missing controls, conducting tests of transactions against market norms, reviewing contracts, and examining the inventory valuation process. The discovery is aimed at identifying overpayments and kickback schemes.

Step-by-step explanation:

Control Explanation

Desirable controls in a purchasing system would include segregation of duties, periodic reviews by an independent party, competitive bidding policies, and a limit on purchase authorization. In the scenario described, missing controls include audit or review of purchasing agents' performance and validation of pricing from vendors. Deviations that could occur include overcharging, kickbacks, and failure to follow competitive bidding procedures.

Tests of Controls

Procedures might involve analyzing purchasing patterns for unusual activity, comparing prices paid to average market prices, interviewing employees, and reviewing authorization trails for transactions. In the absence of formal controls, the focus should be on reviewing detailed transaction records and potential patterns indicating kickbacks, deviations from normative practices.

Audit of Balance

To verify the existence and valuation of inventory, auditors could conduct physical inventory counts and reconcile them to records. To ensure the completeness of inventory and cost of goods sold, auditors could trace transactions from purchase orders to payment and into the financial records. For rights and obligations, it's important to examine contracts and agreements with vendors.

Discovery Summary

The discovery process is expected to reveal whether there have been overpayments to vendors and if the feared kickback scheme exists, ultimately affecting the accuracy of Balley Books' financial statements.