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rittenberg summary

rittenberg summary

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Published by kevinlim186
rittenberg summary
rittenberg summary

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Published by: kevinlim186 on Jan 19, 2013
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03/30/2015

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The major accounts in the acquisition and payment cycle are inventory, cost of goods sold, accountspayable and expense.Existence and valuation assertion are usually high risk for inventory.Completeness and valuation are usually higher risk for expense and payables.Because of volume of transactions, as well as the ability to physically move inventory, the acquisitionand payment cycle is often the subject of fraud.
Ratios like inventory turnover, gross profit margin, number of day’s sales in inventory
and shrinkageratio can be compared with prior years, industry averages and auditor expectation.
Understanding internal controls
1.
 
Requisition of goods and servicesa.
 
The auditor must thoroughly understand the client’
s relationships with its suppliers andshould examine major contracts that specify delivery, quantity timing and qualityconditions.b.
 
Normally, a requisition form is forwarded to the purchasing department by a supervisor,although some have the authority for individual purchases.2.
 
Purchase of goods and servicesa.
 
The rationale for separate purchasing function is:i.
 
Promotes efficiency and effectivenessii.
 
Eliminates potential favoritism that could take place if individual departmentheads were allowed to place orders
Requisitionfor goods andservicespurchase of goods orservicesaccording tocompanypoliciesreceipt of andaccountingfor goods andservicesapproval of items forpaymentcashdisbursement
 
iii.
 
Reduces the opportunity for fraud by segregating the authorization to purchasefrom the custody and recording functionsiv.
 
Centralizes control in one functionb.
 
The most important control is an authorized vendor database.c.
 
Prenumbered forms are used to establish the uniqueness of each order and thecompleteness of the purchase order population.d.
 
Purchase order is used by receiving department to determine whether a shipment of goods should be accepted. The accounting department uses the purchase order todetermine whether a purchase was authorized and wh
ether the vendor’s invoice is
correct.3.
 
Receipt of and accounting for, goods and servicesa.
 
Prenumbered receiving documents- completenessb.
 
Electronically scans bar codesc.
 
Departments may receive goods directlyd.
 
Goods are received directly into the production process4.
 
Approval of items for paymentsa.
 
Three way match among the vendor invoice, the purchase order and the receivingreport.b.
 
Internal control should assure that all items are recorded in a timely manner that theauthorization process includes a review of documents and the supportingdocumentation is canceled on payment to avoid duplicate payment.c.
 
Automated controlsi.
 
Authorized vendorsii.
 
Restricted access(vendor and purchasing database)iii.
 
Automatic processiv.
 
Reconciliations inherent in the processv.
 
Automation of error-prone activitiesvi.
 
Restricted access to transferring fundsvii.
 
Monitoring5.
 
Cash disbursementa.
 
Review the completeness of the documentations and cancel supporting documents toavoid duplicate payments.
Substantive test
1.
 
Substantive tests of accounts payablea.
 
The major concern with accounts payable is that the account will be understated.b.
 
The most relevant serration is the completeness assertion.c.
 
If there is little risk, the testing might be limited to substantive analytical procedures,such as a comparison of underlying expenses with that of the prior year and relatedtests of the underlying asset or liability account.d.
 
If there is material weakness in internal control
 
i.
 
Analytical review of related expense accounts and comparison with otherunderlying economic dataii.
 
Testing of subsequent disbursementsiii.
 
Requests for vendor statements.2.
 
Substantive testing of expense accountsa.
 
It should be considered that management is more likely to understate rather thanoverstate expenses and classify expense items as assets rather than vice versa.b.
 
If control risk is low, analytical procedures can be used (relationship of client’s volume of 
activity with accounts payable)c.
 
Legal expense- possible indicator of litigation that requires disclosured.
 
Travel and entertainment expense- examine for questionable or non-business relateditems.e.
 
Repairs and maintenance-examine with fixed asset additions to assure properdistinction has been made between expenditure that should be expensed andexpenditures that should be capitalized. (existence and classification)f.
 
Expenses that do not have accompanied documentations are interest expense anddepreciation.
Inventory
The auditor will normally test perpetual inventory records to determine that authorized receipts andsales of inventory are recorded accurately and promptly and only authorized receipts and sales of inventory have been recorded.The auditor selects item from perpetual records and traces them back to the source documents todetermine that only authorized transactions have been recorded. The auditor also selects items fromthe source documents and traces them to the perpetual recorded to determine that all receipts andsales are recorded accurately and on a timely basis.When multiple locations contain inventory, the auditor should review a variety of locations to determinethat they are comparable and should use analytical procedures to see if the locations not visited seem tohave inventory levels that are significantly different from those observed.If internal controls are strong, the client may concentrate on testing the accuracy and completeness of the perpetual records by counting all inventory at least once during the year and using statisticalsampling to select items to be physically counted.If auditor cannot physical observe inventory, inspecting documents related to the subsequent sale ospecific inventory items to valudate theor existence and valuation.
Review for obsolescence
a.
 
Monitoring turnover or age of products with past performanceb.
 
Monitoring the ipact of competitors new product introduction

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