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Question: Town and Country Hardware (T&CH) is


Town and Country Hardware (T&CH) is a closely owned business founded six years ago by Caleb and Jasmine Wright. T&CH has retail hardware stores located at three lake communities along the Virginia and North Carolina border. T&CH sells products for home improvement and recreational fishing that include building materials, plumbing supplies, electrical supplies, cleaning products, paint products, lawn and garden products, housewares, tools, and hunting and fishing supplies.
BACKGROUND
T&CH is required to have an audit of its annual financial statements to fulfill requirements of loan agreements with financial institutions. This audit is to be completed in accordance with the AICPA professional standards for the audit of nonpublic companies. Your audit firm is in the process of completing the audit for the Fiscal 2018 financial statements in accordance with these professional standards. Saura Gupta, audit senior, reviewed T&CH policies and procedures related to purchases and prepared the enclosed flowcharts (referenced in the top right hand corner as E 10-1 and E 10-2).The general ledger accounts related to purchasing activities at TCH include the following:
 Cash
 Inventory Purchases
 Purchase Discounts
 Purchase Returns and Allowances
 Freight In
 Administrative Expenses
 Selling Expenses
 Prepaid Expenses
 Accounts Payable
 Accrued Liabilities
The two staff auditors assigned to this engagement are Tyrone Henderson and you. Tyrone has already performed walkthrough procedures to test the design of controls related to purchasing activities. Based on the walkthrough procedures already completed, Saura decided to test the client’s control activities associated with the receiving report exception report.The receiving report exception report indicates the numerical sequence of receiving reports used in that given week and it documents any unused receiving report numbers. Tyrone Henderson has already selected and requested exception reports from the client. Tyrone has also reviewed the exception reports previously reviewed by client personnel and documented his work on audit schedule E 11. Saura has asked you to review the work completed by Tyrone and to complete the procedures noted below.
REQUIRED
[1] COSO's Internal Control -- Integrated Framework discusses technology general controls and application controls. What are technology general controls and application controls? How do technology general controls differ from application controls?
[2] The audit schedule E 11 indicates that the client’s internal control related to purchase transactions includes both manual and automated components (see control type section). Describe the difference between manual and automated controls. Review the flowcharts on audit schedules E 10-1 and E 10-2, what are the manual controls and automated controls in T&CH’s Purchase Ordering and Receiving?
[3] Review the control description section on audit schedule E 11, what aspects of the client’s review control (review of Receiving Report Exception Report) are manual and how might that be dependent on automated components?
[4] When a client internal control is manual with an automated component, what is the auditor's responsibility related to the automated component of a manual control? What should the auditor do to meet his or her responsibility when testing manual controls that have an automated component? Describe how Tyrone’s testing of the manual aspects of the Receiving Report Exception Report review control might need to differ from his testing of the automated component of the control.
[5] Review the flowcharts on audit schedules E 10-1 and E 10-2 and become familiar with the accounting documents and records used with purchase activities at T&CH. Also review audit schedule E 11 and client Receiving Report Exception Reports to understand the work performed by Tyrone Henderson related to testing the Receiving Report Exception Report review control. Evaluate the adequacy of Tyrone’s documentation of the work performed and identify any suggestions for him to consider.
[6] Based on your review of the work completed by Tyrone Henderson, document your evaluation of the test of controls related to the Receiving Report Exception Report review control in the “Evaluation” section of audit schedule E 11. Based on your evaluation, document your conclusion about the operating effectiveness of that control in the “Conclusion” section and then document whether the final risk of material misstatement for accounts payable and cost of goods sold are “low,” “medium”, or “high” for the relevant assertion(s) on audit schedule E 11. If you conclude that the client internal control is not effective, what additional work would you need to perform to conclude the control is effective?

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