AUDIT PROGRAM DESIGN PART II Audit Program Design Part II During the audit process it is important to design tests

of controls, substantive tests of transactions, and analytical procedures. This subject of this paper is to explore the sales andcollection, payroll and personnel, and acquisition and payments cycles for Apollo Shoes. It willexplain the various objectives related to the test of controls processes. It will also identify the keyinternal controls used by Apollo Shoes, Inc. Sales and Collection Cycle Performance of the analytical procedures in the sales and collection cycle at Apollo willconsist of scanning the sales journal to look for large and unusual transactions, compute thereceivables turnover ratio and compare with prior years, calculate the gross margin percentageand compare with prior years, and review sales by month over a period of 18 months for inconsistencies (Arens et al., 2006). Test of Controls The test of controls, substantive tests of transactions and analytical procedures in thesales and collection cycle at Apollo will focus on each transaction-related audit objective. Theseobjectives include existence, completeness, accuracy, classification, timing, and posting andsummarization. Existence Objective The test of controls the auditors will perform to verify that the existence objective is metwill be to examine customer orders for evidence of customer approval, examine sales invoicesfor supporting bill of lading and customer order, and determine if monthly statements are sent. The substantive test of transactions will include accounting for the sequence of sales invoices,reviewing sales journals and master files for unusual transactions and amounts tracing sales journal entries to supporting documents (Arens et al., 2006). Completeness, Accuracy, and Classification Objectives The test of controls the auditors will perform for the completeness, accuracy, andclassification of transactions will include accounting for a sequence of shipping documents,observing whether monthly statements are sent, and examining document packaging for internalverification. The substantive tests for these objectives are tracing selected shipping documents tothe sales journal, trace entries in sales journal to sales invoice, and examine duplicate salesinvoice for proper account classification (Arens et al., 2006). Timing, Posting, and Summarization Objective The test of controls for the timing objective will be limited to accounting for a sequenceof shipping documents and the substantive tests will be to compare the date of recording the salein the sales journal with duplicate sales invoices and bills of lading. Finally, the test of controlsfor the posting and summarization objective will be to examine evidence that the accountsreceivable master file is reconciled to the general ledger and observe whether monthly statementsare sent to customers. The substantive tests to verify these tests of controls include tracingselected sales invoices from the sales journal to the accounts receivable master file and test for amount, date, and invoice number. Finally, the auditors at Apollo should use audit software tofoot and crossfoot the sales journal and trace totals to the general ledger (Arens et al., 2006). 4AUDIT PROGRAM DESIGN PART II Payroll and Personnel Cycle The payroll cycle contains only one class of transactions that are more significant thanrelated balance sheet accounts. An effective payroll control will reduce the risk of harsh federaland state

penalties for errors in payroll taxes. Therefore, the auditor needs to emphasize tests of controls, substantive tests of transactions, and analytical procedures in the audit for payroll.Before designing tests of controls and substantive tests of transactions, it is essential tounderstand and familiarize oneself with the business functions and records in the payroll and personnel cycle for Apollo Shoes, Inc. This includes personnel records, deduction authorizationform, time card, payroll journal, payroll check, and payroll bank reconciliation. The efficientmethod to perform tests of controls and substantive tests of transactions for payroll and personnelcycle starts with understanding the internal control over the payroll process as well as todetermine the strengths and weaknesses identified by number on the payroll flowchart. Internal Controls Some of the key controls the auditor may consider consist of:1 . A d e q u a t e separation of duties2 . P r o p e r a u t h o r i z a t i o n 3.Adequate documents and records4.Independent checks on performance5.Preparation o f P a yr o l l T a x F o r m s 6.Relationship between payroll and inventory valuation. Apollo Shoes Internal Controls Below are presented a few key internal controls used by Apollo Shoes to enhance thecontrol over payroll and personnel cycle:1.Hourly employees (clerical and warehouse personnel) are paid biweekly based onhours recorded on the time cards using a time clock machine;2.Time cards are approved by the supervisors, who take the approved time cards tothe payroll department3.The personnel department must approve new hires, termination, and hourly ratechanges.4.The payroll department maintains the individual employees payroll records andthe forms signed by employees for pay deductions; Test of Controls For these key internal controls, the efficient test of controls and test of transactions haveto be based on:1.Examine the card for indication of approval; Review and examine personnel policies2.Review the payroll journal, general ledger, and payroll earnings records for unusual amounts;3 . E x a m i n e i n d i c a t i o n o f i n t e r n a l v e r i f i c a t i o n ; 4.Examine payroll records and authorization in payroll file5 . R e c o m p u t e h o u r s w o r k e d f r o m t i m e c a r d s 6. Compare pay rates with the contract approved by Apollo Shoes Board of DirectorsThe analytical procedures are used in the payroll and personnel cycle to detect anymisstatements in payroll expense accounts, and direct labor and inventory and are based oncomparison of the payroll expense account balance with the previous year. Acquisition and Payment Cycle In auditing the acquisition and payment cycle, the accounts affected by the acquisitions of goods and services and the cash disbursements are evaluated to ensure that they are fairlyrepresented in accordance with the generally accepted accounting principles (GAAP). Theacquisition and payment cycle involves the decisions and processes necessary for obtaining thegoods and services for operating a business. In this cycle, there will be a test of controls,substantive tests of transactions, and analytical procedures related to Apollo Shoes, Inc. (Arens etal., 2006). Tests of Controls Extensive tests of controls will be used for the acquisition and payments cycle to detectunderstatements. Tests of controls for this cycle would include:1 . P u r c h a s e o r d e r , p u r c h a s e r e q u i s i t i o n a n d v e n d o r s i n v o i c e a r e a t t a c h e d t o t h e voucher and examined for existence.

2.Acquisitions are approved at the proper level and the approval examined.3.Accounts payable master file contents are i n t e r n a l l y v e r i f i e d w i t h a n e x a m i n a t i o n of the internal verification.4 . B a t c h totals are compared with computer summary reports with the file o f b a t c h totals examined for initials of data control clerk, and the totals are compared tosummary reports (Arens et al., 2006). Substantive Tests of Transactions The substantive tests of transactions that would be included in this audit will include:1 . R e v i e w t h e a c q u i s i t i o n s j o u r n a l , g e n e r a l l e d g e r , a n d a c c o u n t s p a y a b l e m a s t e r f i l e for large or unusual amounts.2 . E x a m i n e underlying documents for reasonableness and authenticity.3.Test clerical accuracy by footing the journals and tracing postings to g e n e r a l ledger and accounts payable and inventory master files.4 . R e c o m p u t e d t h e clerical accuracy on the vendors invoice (Arens et al., 2006). Analytical Procedures The use of analytical procedures is important in the acquisition and payment cycle for uncovering misstatements in accounts payable. Some procedures can include:1 . C o m p a r e acquisition-related expense account balances with prior years. 2.Review list of accounts payable for unusual, non-vendor, and i n t e r e s t - b e a r i n g payables.3 . C o m p a r e i n d i v i d u a l a c c o u n t s p a y a b l e w i t h p r e v i o u s y e a r s . 4.Calculate ratios, such as p u r c h a s e s d i v i d e d b y a c c o u n t s p a y a b l e , a n d a c c o u n t s payable divided by current liabilities (Arens et al., 2006). Conclusion In this paper the subject explained is the sales and collection, payroll and personnel, andacquisition and payments cycles for Apollo Shoes. It offered a better understanding of thevarious objectives related to the test of controls processes as well as identified the key internalcontrols used by Apollo Shoes, Inc. Through this paper it is learned why it is important to designtests of controls, substantive tests of transactions, and analytical procedures. References Arens, A. A., Elder, R.J., & Beasley, M.S. (2006). Auditing and assurance services: An Integrated approach (11th Ed.). New York, New York: Pearson.Louwers, T.J., & Reynolds, J.K. (2002). Apollo Shoes Casebook. New York, New York:McGraw-Hill