Audit 4 Transaction cycles

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What test of control should be done to test the following audit assertion.
Revenue Cycle:
Testing control related to Sales
Billing/ A/R
(EXISTENCE)

Vouch a sample of sales invoices (select approved sales orders from the sales journal) to shipping documents and approved sales orders.

What test of control should be done to test the following audit assertion.
Revenue Cycle:
Testing control related to Sales
Billing/ A/R
COMPLETENESS

Trace a sample of shipping documents (selection
from prenumbered shipping documents) to sales
invoice, sales journal, and AIR master file

What test of control should be done to test the following audit assertion.
Revenue Cycle:
Testing control related to Sales
Billing/ A/R
VALUATION

Reperform pricing check: From a sample of sales
invoices, check pricing with master price list
(valuation).

Segregation of Duties?
Revenue Cycle:
Billing/ A/R
Testing control related to Sales
Name the Three and what they are doing

Authorization: Sales Order & Credit, Treasurer
Recordkeeping: Billing/Accounts Receivable/Accou nting
Custody: Warehouse & Shipping

What tests audit assertion(s) are being tested related to.....
Revenue Cycle
Cash Receipts
Cashier
1. "Observe preparation of cash summary"
2. "inspect deposit slip and compare to cash summary

1. Existence, completeness, valuation
2. inspect deposit slip and compare to cash summary

What tests audit assertion(s) are being tested related to.....
Revenue Cycle
Cash Receipts
1. "inspect evidence of independent check
2. reperform independent check for selected dates
3. inspect bank reconciliation

1. existence, completeness valuation
2. existence, completeness valuation
3.existence, completeness valuation

Segregation of Duties?
Revenue Cycle:
Cash receipts

Recordkeeping: Accounts Receivable/Accounting
Custody: Mailroom & Cashier (Treasurer)

Substantive Procedures Related to the Revenue Cycle
1. Auditing Accounts Receivable
To test completeness what should auditor do?

The auditor should obtain an aged trial balance of accounts receivable and trace
the total to the general ledger control account.

Substantive Procedures Related to the Revenue Cycle
1. Auditing Accounts Receivable
Do to test Valuation, allocation, and accuracy?

The auditor should examine the results of confirmations and test the adequacy of
the allowance for uncollectible accounts

Substantive Procedures Related to the Revenue Cycle
1. Auditing Accounts Receivable
Do to test Existence and Occurrence?

The auditor should confirm a sample of accounts receivable
Existence is generally a more relevant assertion than completeness when auditing the revenue
cycle because the risk that accounts receivable and sales will be overstated (existence) is high
while the risk that accounts receivable and sales will be understated (completeness) is low.

Substantive Procedures Related to the Revenue Cycle
Auditing Sales Transactions

Do to test Completeness of sales transactions?

The auditor should trace a sample of shipping documents to the corresponding
sales invoices and to the sales journal and accounts receivable subsidiary
ledger.

Substantive Procedures Related to the Revenue Cycle
Auditing sales Transactions Cut-off?

The auditor should compare a sample of sales invoices from shortly before and
after year-end with the shipment dates and with the dates the sales were
recorded in the sales journal. The auditor should also analyze the record of
sales returns after year-end.

Substantive Procedures Related to the Revenue Cycle
Auditing Sales Transactions
Do to test valuation, allocation and accuracy

The auditor should compare prices and terms on a sample of sales invoices with
authorized price lists and terms of trade to determine whether sales are recorded
at the appropriate amount.

Substantive Procedures Related to the Revenue Cycle
Auditing Sales Transactions
Do to test Existence and Occurrence?

The auditor should vouch a sample of saies transactions from the sales journal to
the sales invoice back to the customer order and shipping documents.

Substantive Procedures Related to the Revenue Cycle
Auditing Sales Transactions
Understandability and Classification

The auditor should examine a sample of sales invoices for proper classification
into the appropriate revenue accounts.

3. Auditing Presentation and Disclosure
Substantive Procedures Related to the Revenue Cycle
a. Completeness
The auditor should ensure that all required disclosures related to accounts
receivable and sales have been included in the notes to the financial statements.
Revenue cycle disclosures include:

1. Revenue recognition method(s).
2. Revenue by reportable segment.
3. Related party revenues and receivables.
4. Receivables by type (trade, officer/employee, affiliates) and term (shortterm
and long-term).
5. Pledged or discounted receivables.

Auditing Presentation and Disclosure
Substantive Procedures Related to the Revenue Cycle
Valluation, allocation and accuracy

The auditor should read the footnotes and other information related to accounts
receivable and sales to determine whether the information is accurate and
presented at the appropriate amounts.

Substantive Procedures Related to the Revenue Cycle:
Auditing Presentation and Disclosure:
Rights Obligations and Occurrence

The auditor should determine whether any receivables have been piedged,
assigned or discounted and, if so, determine if disclosure is required. The
auditor should compare disclosures to other audit evidence to ensure that all
disclosed information related to accounts receivable and sales has occurred.

Misstatements
A confirmation exception would be indicative of misstatement if the exception is
due to any of the following errors or frauds:

1) Fictitious sale
(2) Misappropriation of cash
(3) Goods sent to the wrong customer
(4) Invoice sent to the wrong customer
(5) Payment applied to the wrong customer account
(6) Incorrect price or quantity charged to the customer

Expenditure cycle:
Controls Related to purchases
Department: Receiving
1. Existence
2.Completeness

1. Inspect receiving report for signed receipt
2. Trace a sample of receiving reports (selection made from prenumbered documents) to purchase order, requisition, invoice, and entry in the purchase journal and a/p master file.

Expenditure cycle:
Controls Related to purchases
Department:Accounts Payable.
1. Existence
2. Completeness
3. Valuation

1. (a.) Inspect vouchers for supporting documents and evidence of independent checks
(b.) vouch a sample of vouchers(slection made from teh purchases journal) to all required supporting documents
2. observe procedure, reperform
3. observe evidence of independent check; reperform.

Expenditure cycle:
Controls Related to purchases
Department:Accounts Payable.
Segregation of duties:

Authorization: Purchasing/Requisitioning Dept.
Recordkeeping: Accounts Payable/Accounting
Custody: Receiving

Expenditure cycle:
Controls related to Payables and cash Disbursements
Department Accounts Payable.
1. Existence (2)
2. Completeness

1. (a) Compare debits to a/p to properly cancelled voucher packages
(b) Vouch cash disbursement journal entries back to cancelled voucher packages
2. trace from cancelled voucher packages to cash disbursement journal entries

Expenditure cycle:
Controls related to Payables and cash Disbursements
SEGREGATION OF DUTIES:

Authorization: Purchasing/Requisitioning Department
Record keeping: Accounts Payable/Accounting
Custody: Receiving (purchased item) and Treasurer (cash)

Substantive Procedures Related to the Expenditure Cycle
1. Auditing Accounts Payable
a. Completeness
The auditor should perform the following procedures:

(1) Agree the accounts payable listing to the general ledger.
(2) Obtain a sample of vendor statements and agree to the vendor accounts.
(3) Perform a Search for Unrecorded Liabilities

Substantive Procedures Related to the Expenditure Cycle
1. Auditing Accounts Payable
Valuation, Allocation, and Accuracy
The auditor should perform the following procedures:

(1) Obtain the accounts payable listing, foot the listing, and agree the listing to
the general ledger.
(2) Obtain a sample of vendor statements and agree the amounts to the
vendor accounts.
(3) Review the results of accounts payable confirmations

Auditing the Ending Cash Balance
Bank Reconciliation
The year-end bank reconciliation for every account should be tested by:

(a) Footing the bank reconciliation and the list of outstanding checks.
(b) Agreeing the balance per the books to the general ledger.
(c) Agreeing the balance per the bank confirmation to the balance per
the bank on the bank reconciliation.
(d) Agreeing deposits in transit and outstanding checks to the cut-off
bank statement.

Auditing the Ending Cash Balance
Bank Reconciliation
The following tests of details are generally performed as dual-purpose tests.
1. completeness
2. cut-0ff
3. Valuation, allocation and accuracy
4. Existence and Occurrence
5. Understandability and classification

1. For cash receipts the auditor should trace a sample of remittance advices to the cash receipts journal and deposits slips.
2. The auditor should verify the cut-off of cash receipts and cash disbursements
shortly before and after year-end for recording in the proper period.
3. For cash receipts, from a sample of daily deposits, the auditor should foot the
remittance advices and entries on the deposit slip and agree to the cash receipts journal and bank statement.
4. For cash receipts, the auditor should vouch a sample of entries in the cash receipts journal to remittance advices, deposit slips, and the bank statement.
5. The auditor should examine a sample of remittance advices and canceled
checks for recording in the proper account.

Auditing the Ending Cash Balance
Auditing Presentation and Disclosure
a. Completeness
The auditor should ensure that ali required disclosures related to cash have been
included in the notes to the financial statements. Required disclosures related to
cash include:

1. Policy defining cash and cash equivalents.
2. Restrictions on cash, including sinking fund requirements.
3. Compensating balance requirements.

INVENTORY CYCLE
Valuation, Allocation, and Accuracy
The auditor should perform the following procedures:

(1) Test the mathematical accuracy of the inventory report and reconcile it to
the general ledger inventory accounts.
(2) Inquire about obsolete or damaged goods, scan the perpetual records for
slow-moving items, and be alert during the inventory observation for
damaged goods or signs of obsolescence.
(3) Examine vendor invoices, review direct labor rates, test the computation of
standard overhead rates, and examine standard cost variance analyses.
(4) Perform inventory price tests for a sample of inventory items to determine
whether the inventory is valued appropriately.

INVENTORY CYCLE
Auditing Presentation and Disclosure
a. Completeness
The auditor should ensure that all required disclosures related to inventory have
been included in the notes to the financial statements. Inventory disclosures
include:

1.Cost method (LIFO, FIFO, weighted average) and valuation method (net
realizable value or lower of cost or market).
2.Raw materials, work-in-process, and finished goods inventory balances.
3.Consigned inventory.
4.Pledged or assigned inventory.
5. Significant losses from inventory write-downs or purchase commitments.
6. Warranty obligations.

Auditing the Ending Investment Balances
a. Completeness

If the entity has a high volume of material investment transactions, the auditor should search for unrecorded purchases of securities by examining transactions for a few days after year-end. The auditor should also confirm securities held by
the third party custodian or count securities on hand to determine that all securities have been recorded, although these are primarily tests of existence.

Auditing the Ending Investment Balances
Valuation and Allocation
The auditor should perform the following procedures:

(1) Obtain and foot a listing of investments by category (trading, available for
sale, held-to-maturity, derivative, and equity method) and agree the totals
to the general ledger.
(2) Obtain evidence corroborating the quoted year-end fair value by comparing
assigned values to prices published by various sources or obtained from a
third party, such as an independent broker-dealer or appraiser.
(3) Recalculate the ending values of investments not reported at fair value,
including investments classified as held-to-maturity and accounted for
using the equity method.
(4) Determine whether there has been any permanent impairment in the value
of individual securities.
(5) Assess the reasonableness and appropriateness of assumptions, market
variables, and valuation models, and of any decline in fair value.

Auditing the Ending Investment Balances
c. Existence
(1) Confirmation
(2) Examination of Securities on Hand

(1) Confirmation

Confirmations should be requested from the custodian for securities that are in the possession of third parties. It is also advisable to send confirmations to the broker-dealer and to counterparties concerning any unsettled transactions.

(2) Examination of Securities on Hand

An examination of the securities on hand should be made to coincide with the examinations of other liquid assets, such as cash. This procedure prevents the concealment of theft by making it impossible for one asset to serve as a substitute for another (i.e., to conceal a stolen asset

Auditing the Ending Investment Balances
d. Rights and Obligations

The confirmation of securities and the count of securities on hand provide
evidence of the entity's ownership of investments. Additionally, the auditor may
examine broker's advices for a sample of securities purchased during the year to
verify the entity's ownership.

Auditing Investment Transactions
a. Completeness

The auditor should perform analytical procedures testing the reasonableness of
dividend and interest income to determine that all investment income has been
recorded.

Auditing Investment Transactions
b. Cut-off

A cut-off review should be performed to ensure that purchases, sales, and
investment income were recorded in the proper period.

Auditing Investment Transactions
c. Valuation, Allocation, and Accuracy

Independent calculations should be made to determine the validity of recorded
gains or losses from security sales and of discount and premium amortization. In
addition, a recalculation should be made to determine the accuracy of recorded
dividend and interest income. Investment income from dividends may be
recalculated by comparing recorded income with dividend records produced by
investment advisory services such as Moody's.

Auditing Investment Transactions
Existence and Occurrence

The analytical procedures performed to test the reasonableness of dividend and
interest income provide evidence of the existence of investment income.

Auditing Investment Transactions
e. Understandability and Classification

The auditor should examine a sample of investment transactions to determine
that the transactions were recorded in the proper accounts. For example,
unrealized gains and losses on available-for-sale securities should be recorded
in other comprehensive income, while unrealized gains and losses on trading
securities should be recorded in earnings.

Auditing Investment Transactions
3. Auditing Presentation and Disclosure
a. Completeness

The auditor should ensure that all required disclosures related to investments
have been included in the notes to the financial statements. Specifically, the
auditor should determine whether all required marketable security and derivative
disclosures have been made.

Auditing Investment Transactions
3. Auditing Presentation and Disclosure
b. Valuation, Allocation, and Accuracy

The auditor shouid read the footnotes and other information related to
investments to determine whether the information is accurate and presented at
the appropriate amounts.

Auditing Investment Transactions
3. Auditing Presentation and Disclosure
c. Rights and Obligations and Occurrence

The auditor should inquire of management and review loan agreements, minutes
and other documents to determine whether investments have been pledged as
collateral. The auditor should compare disclosures to other audit evidence to
ensure that all disclosed information related to investments has occurred.

Auditing Investment Transactions
(1) Marketable Securities

Trading and available-for-sale securities over which the investor has no
significant influence shouid be carried at fair value, and held-to-maturity
securities should be carried at amortized cost. The auditor should inquire
of management and obtain written representation concerning
management's intent and ability with respect to holding versus selling
securities.

Auditing Investment Transactions
(2) Equity Method Investments

For investments using the equity method, the auditor should examine the
audited financial statements of the investee. The auditor should inquire of
management regarding the entity's abiiity to exercise significant influence
over investments to determine whether investments have been properly
ciassified.

Auditing Investment Transactions
(3) Derivatives

An entity may invest in derivatives to hedge against risks, such as the risk
associated with fluctuating prices. Under these circumstances, generally
accepted accounting principles specify that, in order to qualify for hedge
treatment, the entity must demonstrate and disciose a number of
transaction features, including risk exposure. The auditor would therefore
need to examine the contracts to evaluate the character of the hedge and
the degree to which losses should be recognized in the determination of
income, as well as to determine the appropriate character of any
disciosures.

Substantive Procedures Related to Property, Plant and Equipment
1. Auditing the Ending Property, Plant, and Equipment Balance
a. Completeness

The auditor should obtain and foot the fixed asset schedule and agree the total to
the general ledger, obtain and foot a schedule of additions and dispositions of
fixed assets and agree amounts to the fixed asset schedule, and select a sample
of actual fixed assets and trace to the fixed assets subsidiary ledger

Substantive Procedures Related to Property, Plant and Equipment
1. Auditing the Ending Property, Plant, and Equipment Balance
b. Valuation and Allocation

The auditor should recalculate accumulated depreciation for reasonableness.
The auditor should also evaluate fixed assets for impairment by examining the
entity's documented impairment analysis, indentifying circumstances that could
indicate that the book value of fixed assets is not recoverable, and reperforming
the entity's impairment analysis to determine whether recorded impairment
losses are reasonable. If the entity uses IFRS, the auditor should verify the
reasonableness of any fixed asset revaluations

Substantive Procedures Related to Property, Plant and Equipment
1. Auditing the Ending Property, Plant, and Equipment Balance
c. existence

The auditor should vouch additions to the fixed asset accounts by examining
internal documents (such as the asset requisition form), by examining external
evidence (such as invoices), and by inspecting the actual asset. The auditor
should also consider selecting older fixed assets from the subsidiary ledgers and
then trying to locate those assets, as a means of testing for unrecorded
retirements.

PASS KEY

The examiners sometimes try to trick the candidates with questions about the repairs and
maintenance account. Keep in mind that the auditor often reviews this account in order to
locate items that should have been capitalized.

Substantive Procedures Related to Property, Plant and Equipment
Auditing Presentation and Disclosure
a. Completeness
The auditor should ensure that all required disclosures related to fixed assets
have been included in the notes to the financial statements. Required
disclosures include:

1. Depreciation methods and useful lives.
2. Depreciation expense for the period.
3. Balance of each class of capital assets by nature or function.
4. Accumulated depreciation allowances by class or in total.
5. Liens and mortgages.
6. Capital and operating lease information.

PAYROLL AND PERSONNEL CYCLE
Segregation of duties?

1. Authorization of employ and pay
2. supervision-approval of pay weekly/monthly
3. timekeeping and cost acct....Data on which pay is based, such as hours worked or jobs completed, should be accumulated independent of any other function.
4. payroll and check preparation... the payroll department computes salary based on information received, for example, total hours worked for hourly employees. This department is responsible for issuing the unsigned payroll checks that are later signed by the treasurer.

PASS KEY

Remember that the payroll department is a recordkeeping department, not a custodial
department. While employees in this department compute salaries, create the payroll register,
and prepare unsigned checks, they should not have the authority to initiate changes in hours or
rates, nor should they have the ability to sign checks.

PAYROLL AND PERSONNEL CYCLE
independent Check to Maintain Asset Accountability

(1) Calculation of payroll amounts should be internally verified.
(2) Account classification of payroll transactions should be internally verified.
(3) The accounting department should prepare a voucher for the amount of
the payroll based upon input from the payroll department.
(4) A bank reconciliation of the imprest payroll account should be prepared by
an individual independent of custody or recordkeeping functions.
(5) Unclaimed payroll checks should be returned to an independent individual
for follow up.

PAYROLL AND PERSONNEL CYCLE
Internal Control Evaluation
The auditor should evaluate whether internal controls provide reasonable assurance
that only valid employees are being paid. that payment is for the actual hours worked.
and that the correct rate of pay is used. The following procedures should be
performed:

a.Compare the personnel records for each department with the actual time cards
and the employees actually working in each department:
b.Observe payroll distribution on a surprise basis to ensure that all personnel being
paid are actually employed by the company;
c.Observe the use of time clocks and investigate time cards not used; and
d.Test transfers and underlying employee authorizations if direct deposit is used

.

Substantive Procedures Related to Payroll and Personnel
1. AUditing the Payroll Accrual
(usually related to valuation assertion)
A. completeness
b. valuation and allocation
c. existence
d. rights and obligation

a. Completeness
The auditor should test the completeness of the payroll accrual when performing
the search for unrecorded liabilities.
b. Valuation and Allocation
The auditor should recalculate any year-end payroll accrual and compare the
calculated amount to the reported accrual.
c. Existence
The auditor should vouch amounts from the client's calculation of the payroll
accrual to supporting documentation.
d. Rights and Obligations
The auditor should examine supporting documentation to verify that the payroll
accrual is an obligation of the entity.

Substantive Procedures Related to Payroll and Personnel
Valuation, Allocation, and Accuracy
The auditor should test the accuracy and valuation of payroll expense by
performing the following procedures:

(1) Compare total recorded payroll with total payroll checks issued;
(2) Test extensions and footings of payroll;
(3) Verify pay rates and payroll deductions with employee records from
personnel;
(4) Recalculate gross and net pay on a test basis;
(5) Compare payroll costs with standards or budgets;
(6) Recompute the mathematical accuracy of a sample of paychecks.

Substantive Procedures Related to Payroll and Personnel
Existence and occurrence

Vouch time on payroll summaries by selecting a sample of payroll register entries
and comparing to time cards and approved time reports. From a sample of
payroll transactions, the auditor should find the related employee to verify the
existence and current employment status.

Substantive Procedures Related to Payroll and Personnel
Auditing Presentation and Disclosure
a. Completeness
The auditor should ensure that all required disclosures related to payroll have
been included in the notes to the financial statements. Required disclosures
include:

1. Pension and post-retirement benefit disclosures.
2. Stock-based compensation disclosures.
3. Deferred compensation and profit-sharing plans.

Substantive Procedures Related to Debt
1. Auditing the Ending Debt Balance
a. Completeness

The auditor should review board minutes for evidence of new debt, obtain new
debt agreements, and trace all new debt contracts to the financial statements.
The auditor should obtain a listing of all debt and agree the total to the general
ledger. Any debt disclosed on the standard bank confirmation should be traced
to the debt agreements and the financial statements. Notes and bonds shouid
be confirmed directly with creditors. The auditor should inquire of management
regarding new debt and any off-balance sheet financing transactions.

Substantive Procedures Related to Debt
1. Auditing the Ending Debt Balance
b. Valuation and Allocation

The auditor should examine new debt agreements to determine whether they
were recorded at the proper amount. The auditor should recompute any interest
payable and recompute the amortization of premiums or discounts.

Substantive Procedures Related to Debt
Auditing Presentation and Disclosure
a. Completeness
The auditor should ensure that all required disclosures related to debt have been
included in the notes to the financial statements. Required disclosures include:

1. Details of maturity dates, interest rates, call and conversion privileges, and
assets piedged as security.
2. Future sinking fund payments and maturities for each of the next five
years.
3. Restrictive loan covenants.

Substantive Procedures Related to Owners' Equity and Treasury Stock

When auditing equity, the auditor is primarily concerned about completeness, valuation, and
existence and occurrence. The auditor should also focus on evaluating classification and
understandability.

The auditor should ensure that all required disclosures related to equity have been
included in the notes to the financial statements. Required equity disclosures include:

a. Number of shares authorized, issued, and outstanding.
b. Rights and privileges of securities, including dividend and liquidation
preferences, participation rights, call prices and dates, conversion or exercise
prices or rates and pertinent dates, sinking-fund requirements, unusual voting
rights, and significant contracts to issue additional shares.
c. Stock option plans.
d. Restrictions on retained earnings and dividends.

Substantive Procedures Related to Owners' Equity and Treasury Stock
Valuation

...The auditor may recompute the value assigned to stock transactions during the period.
The auditor should also analyze the retained earnings account from inception (or since
the last audit) and should review the propriety of any direct entries to retained earnings.

Substantive Procedures Related to Owners' Equity and Treasury Stock
Existence and Occurrence

Existence and occurrence can be tested by vouching transactions recorded during the
current period to board minutes. The stock transfer agent confirmation and the
inspection of the stock certificate book also provide evidence of existence.

Substantive Procedures Related to Owners' Equity and Treasury Stock
Understandability and Classification

The auditor should determine whether there are restrictions on retained earnings
resulting from loans, agreements, or state laws. The auditor should also inquire of
management regarding any appropriations of retained earnings. Restrictions and
appropriations must be properly disclosed.

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