Download Norwood Office Supplies (NOS) Case AC 432 – DeZoort Fall 2004

Norwood Office Supplies (NOS) Case
AC 432 – DeZoort
Fall 2004
This introductory document provides an overview of the NOS case, general instructions, an introduction
to CAATs, and case (NOS) background. Assignments 1, 2, and 3 will be provided in separate documents.
PROJECT OVERVIEW AND INSTRUCTIONS
This project consists of three assignments. Assignment #1 asks you to access ACL, learn some basic ACL
functions, and complete a basic assignment. Assignment #2 asks you to prepare and hand in an audit plan
for the Norwood Office Supplies audit. This plan will include understanding the client and its industry,
identifying key business and audit risks, developing audit objectives, and proposing audit procedures.
Assignment #3 asks you to complete audit procedures using ACL, document your findings, and describe
their implications. The learning objectives for each assignment are detailed below.
Assignment #1 (completed individually) (20%)
Upon completing assignment #1 you should be able to:
• Gain access to ACL software
• Describe some basic functions and capabilities of the ACL software
• Perform some basic functions using the ACL software
Assignment #2 (completed as an audit team) (35%)
Upon completing assignment #2 you should be able to:
• Understand the client and its industry, including unique accounting and auditing issues within
the industry
• Identify audit risks and business risks associated with an office supply company
• Describe audit objectives for each of the risks areas
• Design audit procedures that address each of the risks areas
• Identify additional professional services that can be performed to address operational and
control deficiencies of an office supply company
Assignment #3 (completed as an audit team) (35%)
Upon completing assignment #3 you should be able to:
• Use the ACL software to conduct appropriate audit procedures
• Document, in a clear and concise manner, the results of audit tests
• Describe the implications of audit-test findings
Presentation (10%)
At the end of the project, your team should hand in a professional document that you would be
comfortable delivering to a potential client. Specific deliverables are described on the next page.
-1-
Audit Team Formation
Assignments 2 and 3 require you to work in audit teams of four. You are responsible for forming your
own teams and coming to terms on how you will complete your work. However, you should divide the
workload as evenly as possible.
Before starting work on the assignment, each team needs to provide me with a typed and signed contract
that includes (at a minimum):
- acknowledgment and specification of responsibilities - agreement that all group members
will participate equally in the completion of the project.
- the specific agreement the team has reached regarding penalties should any member shirk
(i.e., not participate as expected by the team). The entire team gets the same grade unless a
serious, unresolvable problem is brought to my attention in a timely manner by the team.
- an agreement that no previous auditing or accounting projects, project notes, or other
individuals will be used to complete the assignment.
This contract must be typed and signed by each team member.
Conflicts and Conflict Resolution
When problems arise with the project or group, they should be handled immediately. Serious problems
should be brought to my attention as soon as they arise and not at the end of the project. When the
assignment is complete, each member will prepare a peer review sheet (provided by me) to assess each
individual’s performance. However, each team receives only one grade unless other arrangements are
approved by me.
Signed Statement of Originality
After completing Assignment #3, each group should prepare a signed statement verifying that no previous
auditing or accounting projects, notes, or other individuals were used in completing the project.
Self Evaluation
After completing Assignment #3, each group should prepare a thoughtful and honest self evaluation.
Each evaluation should consider what went well, what did not go well, and what skills were learned and
used. This document should be typed and signed by each group member.
Deliverables
At the end of the project, your team should hand in a professional document that you would be
comfortable delivering to a potential client. You can use your own judgment and preferences in this area,
but please understand that substance and form count. At a minimum, the document should be bound and
include:
1. Title Page
2. Table of Contents
3. Approved Contract
3. Signed Statement of Originality
4. Group Self-Evaluation
5. Body of Project (Assignments 1, 2, & 3, divided by assignment number)
6. References
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AN INTRODUCTION TO COMPUTER ASSISTED AUDIT TECHNIQUES (CAATs)
Objectives: After studying the introduction you should be able to:
1. Identify the uses of CAATs
2. Identify the market leading CAATs
The use of computer assisted auditing techniques (CAATs) has become common, and for some clients is
absolutely essential. Audit clients of all sizes are increasingly processing transactions electronically.
Indeed, for certain clients, electronic data interchange (EDI), XML (and XBRL), and other forms of
business-to-business electronic communication have made traditional paper-based audit trails disappear.
In such cases, the auditor may have to incorporate CAATs as a primary audit tool to examine the
electronic audit trails and other data repositories. In other cases, the use of CAATs would greatly reduce
the professional service hours required to complete the audit. Pragmatically, students who learn to use
such tools before entering the auditing profession will have a distinct advantage in the marketplace. The
overall objective of CAATs is to improve the efficiency and effectiveness of an audit. This case uses
some basic functions of ACL software to illustrate how CAATs can be used. ACL is the market-leading
software tool.
Auditing in an Electronic Environment
Auditing in an electronic environment will affect how an auditor will gain an understanding of the
internal control environment and assess the related control risk. Control risk (see SAS 47) is the risk that
the client’s system of internal control will fail to prevent or detect errors in the client’s accounting system.
For example, lack of segregation of duties and recent changes to the computer programs are but two
indicators of higher risk of fraud, errors, and material misstatements. At the same time, inherent risk may
exist regardless of the methods used to process accounting-related events. Characteristics of the client’s
business determine inherent risk. For example, competition in the organization’s industry and pressure on
management to achieve certain results can raise the possibility that there will be material misstatements,
such as bogus revenues, regardless of the methods used to record accounting transactions. You will find
only a few clues regarding risk assessment in the Norwood Office Supplies case study. An important
objective of this case study is to help you understand how to develop audit objectives and audit
procedures with only some consideration of the risks of material misstatements.
CAATs
Broadly defined, CAATs include the completion of audit tasks with the assistance of the computer.
CAATs allow the auditor to directly access a client’s computerized information. CAATs software
packages allow auditors with little or no computer background to perform tasks that had been reserved for
IT auditors. The functions of CAATs software generally include:
•
•
•
•
•
•
Footing of fields, such as amount due in an accounts receivable file
Selecting samples and printing confirmations
Scanning for unusual transactions, balances and other situations. Using powerful software
permits the auditor to perform this and other tests on an entire population rather than on a
sample.
Performing analytical procedures such as aging of accounts receivable
Sorting files to find, for example, duplicate invoices or checks
Automatically preparing documentation of audit work
-3-
Auditors use generalized audit software, such as the ACL software used in this project, to read and
analyze machine-readable records. Auditor also use generalized audit software to detect exceptions in a
file’s data. Exceptions may indicate the failure of a control. For example, an auditor may test a file of
disbursements to determine whether all disbursements were allocated to appropriate cost centers. In this
project, you will use ACL to perform tests on a client’s files to determine indirectly the extent that
controls were operating during the year being audited.
In addition, auditors use generalized audit software to determine if the data in the files agree with the
summarized data on the financial statements. For example, an auditor might summarize an accounts
payable file to determine that the client’s reported accounts payable is reasonable. In this project, you
will develop and perform tests on files to determine if the data in the files are accurate.
I encourage you to invest sufficient time completing these assignments to become comfortable with ACL.
The ACL software is the product of ACL Services Ltd., based in Vancouver, BC, Canada. This software
is the market leader in technology tools for data inquiry, analysis, and reporting. As an auditor, you will
need to be able to design the procedures suggested by these assignments and execute them with this
software or a similar package (e.g., IDEA - a product developed by the Canadian Institute of Chartered
Accountants). The understanding and the skill that you develop here can be applied in future courses or
in a variety of audit and other work situations.
-4-
NOS CASE BACKGROUND
Norwood Office Supplies, Inc. (Norwood), located in Norwood, Massachusetts, sells office supplies to
customers located in eastern Massachusetts, New Hampshire, and Rhode Island. Norwood uses a PCbased accounting package, such as Peachtree, for all its data processing needs. Norwood refers to this
software package as PCAC. Your audit is for the year-end, December 31, 2003.
Norwood’s target market is divided into nine sales territories; sales are made through five sales
representatives who are assigned to specific sales territories. Sales are made on account to established
customers. Inventory, sales, accounts receivable, and related records are maintained on Norwood's
computer facility located in the home office. Norwood's computer facility consists of a PC equipped with
a Pentium III processor and a 40 GB hard drive. The PCAC software is used for all their accounting and
record-keeping needs. Because the PCAC software was installed in November, 2003, much of the sales,
receivable, and inventory historical data are still being developed.
Norwood has experienced many changes in the last year of operation. National-chain competitors have
moved into their sales territory. For example, Staples, Office Max, and Office Depot have all opened
retail outlets in Norwood. In addition, each of these companies, along with W. B. Mason, now offers
wholesale sales and delivery. In addition, these chains are conducting sales over the Internet. Margins
have become quite slim as the large chains are able to keep their prices and costs down by obtaining bulkrate reduced prices from their suppliers. Norwood has been able to survive because it has loyal customers
and an experienced sales staff that has developed close relationships with Norwood customers.
SALES AND INVENTORY SYSTEMS
Sales Procedures
Norwood’s sales representatives visit customers in their assigned territories, record customer orders on a
two-part sales order, give one copy to the customer and forward the other copy to the Norwood office.
The following are Norwood’s sales territories:
Territory
1
2
3
4
5
6
7
8
9
Location
Southern New Hampshire
Central and Northern New Hampshire
Metro Boston – North
Metro Boston – South
Southern Massachusetts
Northern Massachusetts
Rhode Island
City of Boston
City of Providence
The following are Norwood’s sales representatives, along with their assigned territories:
Representative
Bob
Doug
Kay
Phil
Shannon
Territory
3,6
4,5
8
1,2
7,9
-5-
At the Norwood office (see the flowchart in Figure 1), the data-entry clerk keys the sales orders into the
computer. The next sales order number is taken from the Control File; customer data (including credit
data) are taken from the Customer Master File, while inventory data (including available quantities) are
taken from the Inventory Master File. After the clerk indicates final acceptance of the sales order input
data, a sales order record is created on the Sales Order Master File. In addition, the Customer Master File
is updated to indicate current orders and to allocate the inventory to be shipped by placing the quantity
ordered in the “quantity allocated” field of the inventory record. The computer also prints a sales order
that is sent to the warehouse. The Terms File and Control File provide data to be printed on the sales
order.
Warehouse Procedures
In the warehouse, clerks pick goods from the bins using the sales order as a picking ticket. They complete
a two-part shipping document, sending one copy with the goods to the customer and sending the other
copy to the data entry clerk. Goods should not be shipped until a few days before the customer due date.
After a sales order has been initially input and the inventory allocated, within a few days the goods should
be shipped and the shipment recorded.
Invoicing Procedures
Using the shipping document, the order-entry clerk keys in the shipment data. The computer processes the
shipment data by first reducing the balance in the Inventory Master File and then recording an open
invoice on the Accounts Receivable Master File. Next, the Customer Master File is updated to reflect the
open receivable (i.e., the customer file contains the customer’s current accounts receivable balance). The
computer then calculates the trade discounts as well as the sales tax to be assessed based on the state in
which the customer is located. Payment terms are assigned to each sale based on the following schedule:
Term
NET 10 Days
NET 15 Days
NET 30 Days
2% 10/NET 30
5% 10/NET 30
Terms Code
3
4
5
6
7
Customer Credit Limit
$100
$100
$250
$500
$500
Finally, the Sales Order Master File is updated to reflect the shipment and a customer invoice is printed
and mailed to the customer.
Inventory Management
Inventory items are assigned item numbers in the range 10000 - 60000. Items are assigned to five product
groups as follows:
Product
Group
1
2
3
4
5
Product Description
Paper, note pads, envelopes, typing ribbons
Pens, markers, rulers, erasers, chalk, inkpads, rubber stamps
Fasteners, paper clips, tape and dispensers, staplers, tacks
Computers and computer supplies
Wastebaskets, clocks, bulletin boards, adding machines, calculators, furniture
Inventory levels are maintained as follows. Replenishment stock is ordered from vendors when the onhand balance reaches or falls below the order point. When this occurs, the amount that is ordered is the
order quantity. The goal is to have just enough stock on hand and/or on order to fill open orders and to
satisfy expected demand for that item.
-6-
Figure 1: Norwood Office Supplies, Inc. Systems Flowchart
Available Data Files
Customer Master File
Field Title
Customer Code
Customer Name
Add1
Add2
City State
Zip
Salesperson
Territory
Tax Rate
Terms
Credit Limit
Sales YTD
Current Orders
Current AR
Field Description
Customer code
Customer name
Address Line 1
Address Line 2
City and state
Zip code
Sales representative for this account
Sales territory
Tax rate (%)
Terms code
Credit limit ($)
Year-to-date sales ($)
Current orders ($)
Current accounts receivable ($)
Inventory Master File
Field Title
Item_Number
Group
Description
Unit_Cost
Unit_Price
Quantity_on_Hand
Quantity_on_Order
Allocated
Order_Point
Order_Quantity
Date_of_Last_Transaction
Field Description
Item number
Product group
Item description
Unit cost ($)
Unit price ($)
Quantity on hand in warehouse
Quantity on order from vendor
Quantity allocated to open sales orders
Order point
Order quantity
Date of last transaction
Accounts Receivable Master File
Field Title
Customer_Code
Invoice_Number
Invoice_Date
SO_Number
Terms
PO_Number
Balance
Field Description
Customer Code
Invoice Number
Invoice Date
Sales Order Number
Invoice Terms Code
Customer Purchase Order Number
Invoice Balance ($)
-8-
Sales Order Master File
Field Title
Sales Order Number
Customer Code
Salesperson
PO Number
Sales Date
Taxable
Terms
Line
Item Number
Quantity Ordered
Unit Price
Due Date
Quantity Shipped
Field Description
Sales order number
Customer code for this sales order
Salesperson for this sale
Customer purchase order number
Sales order date
Y = Taxable, N = Not taxable
Sales order terms code
Detail line for sales order
Item number
Quantity ordered
Line item unit price ($)
Line item due date
Quantity shipped
Assumptions
The following assumptions can be made about the Norwood audit:
a. All standing data (i.e., customers, inventory, etc.) were loaded into the computer on November
30, 2003. No changes were made to the inventory or customer standing data after that date.
Norwood started using the PCAC system for the month of December.
b. You have been provided transactions for the month of December, 2003. Assume that these are all
the transactions for the year and that you are conducting an audit of the financial statements as of
December 31, 2003 (see Exhibits 1 and 2). For purposes of this assignment, you should be
concerned with only the following five accounts on those statements:
• Accounts Receivable - Trade
• Merchandise Sales
• Accounts Payable - Sales Tax
• Inventory
• Cost of Goods Sold
c. The account “Received/Not Vouchered” includes the merchandise receipts for which vendor
invoices have not been received. Do not consider this account for this case study. In addition, the
AP - Sales Tax account represents the amount collected from customers that is payable to the
jurisdiction for which the tax was collected.
d. The actual shipping documents are not available in this case. However, you should assume that
in all cases where a sales order indicates a shipment, a shipping notice exists. Also, assume that
there is a sales order record indicating a shipment for every shipment that was actually made (i.e.,
the Sales Order Master File is valid, accurate, and complete).
-9-
Exhibit 1
Norwood Office Supplies, Inc.
Income Statement Information – Gross Profit
For the year ended December 31, 2003
Month of December
Account Description
-----------------------Revenue:
Merchandise Sales
Amount
---------
Year to Date
%
-------
Amount
---------
%
-------
5382.17
100.0
5382.17
100.0
3097.44
------2284.73
57.6
------42.4
3097.44
------2284.73
57.6
-----42.4
Expenses:
Cost of Goods Sold
Gross Profit
-10-
Exhibit 2
Norwood Office Supplies, Inc.
Balance Sheet
December 31, 2003
Assets:
Current Assets:
Cash in Bank
Petty Cash
Inventory
Accounts Receivable - Trade
Notes Receivable
140457.30
297.00
17858.79
5584.07
5990.77
--------------
Total Current Assets
Fixed Assets:
Equipment and Vehicles
Accumulated Depreciation
Office Furniture
Accumulated Depreciation
170187.93
-------------39812.72
-10376.69
13734.29
-5197.00
------------37973.32
-------------
Total Fixed Assets
Other Assets:
Lease Deposit
TOTAL ASSETS
Liabilities:
Current Liabilities:
Accounts Payable – Trade
Customer Deposits
Accounts Payable – Payroll Tax
Received/Not Vouchered
Accounts Payable – Sales Tax
3227.54
-------------
211388.79
===========
11383.94
300.96
1228.71
14753.72
201.90
------------27869.23
-------------
Total Current Liabilities
Long-Term Liabilities:
Notes Payable
3227.54
-------------
29725.59
------------29725.59
-------------
Total Long-Term Liabilities
57594.82
===========
TOTAL LIABILITIES
Stockholders’ Equity:
Common Stock ($20 Par value. 100,000
shares authorized)
Paid-in Surplus
Retained Earnings
18000.00
43693.01
89816.23
------------2284.73
-------------
Earnings, year to date
153793.97
-----------
Total Stockholders’ Equity
TOTAL LIABILITIES &
STOCKHOLDERS’ EQUITY
211388.79
===========
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