Problem

(Objective 18-3) Even though Bergeron Wholesale Company is privately held, management has
decided that it is worthwhile to have effective internal controls to the extent it is practical in a small
company, as a way to reduce the likelihood of error and fraud. They have implemented the following
system for acquisitions and payments.

Prenumbered purchase orders are approved and initialed by the vice president of finance for all
purchases, including both tangible and service acquisitions. When goods are received, the goods are
counted and a prenumbered receiving report is prepared with a copy sent to accounting. The goods
are stored in the warehouse under the control of the shipping manager. The receiving report is used
to update the perpetual records, which include only quantities and are used to determine the need
to reorder goods and for control over the physical quantities of inventory. When a vendor’s invoice is
received, the chief accountant compares it to the purchase order and, for tangible goods, the
receiving report, for both accuracy and appropriateness of the expenditure, then staples the
documents and initials each vendor’s invoice. She then records the transaction in the purchases

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journal and related records using small business accounting software. Password protection is used
for all records to prevent unauthorized access. The chief accountant prepares the checks and updates

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the cash disbursements journal using the same accounting software and submits the checks to
Bergeron’s president for signature along with all supporting documentation. The president reviews

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and initials all support before signing checks and mails them to vendors on his way home from work.
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The controller receives the monthly bank reconciliation directly from the bank and does a detailed
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reconciliation, including examining cancelled checks and supporting documentation for larger and
unusual amounts. The controller also receives the monthly accounts payable listing from the chief
accountant, compares the total to the general ledger, initials the listing and files it. Once each
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quarter the inventory is counted and compared to the perpetual records, both as a check on record
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keeping and to determine if there are inventory losses. Differences are listed, used for discussion
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with the controller and shipping manager, and filed.

a. List at least ten internal controls in the Bergeron acquisition and payment cycle. Be as specific as
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possible.
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b. For each control, identify the transaction-related audit objective(s) to which the control relates.
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c. For each control, list one test of control that is useful to test the effectiveness of the control. Be as
specific as possible.

Objective 18-3

Understand internal control, and design and perform tests of controls and substantive tests of
transactions for the acquisition and payment cycle.

Step-by-step solution

1. Step 1 of 1

Following is the list of possible internal controls, transaction related audit objectives and test of
control in the acquisition and payment cycle of B:

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