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Auditing Notes - Chapter 4

Auditing Notes - Chapter 4

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Published by Future CPA

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Categories:Types, Business/Law
Published by: Future CPA on Mar 27, 2009
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07/24/2013

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Becker Auditing 2008 Edition Chapter 4 1
AUDITING & ATTESTATION – 4
TIP PI
E
ACDO = EvidenceReview:Strong Internal Control
P – 
Pre-numbered Documents
A – 
Authorization of Transactions
I – 
Independent Checks
D – 
Documentation
T – 
Timely and Appropriate Performance Reviews
I – 
Information Processing Controls
P – 
Physical Controls
S – 
Segregation of DutiesManagement Assertions:
C
 – Completeness
P
 – Proper period cut-off 
A
– Accuracy
C
 – Classification
O
 – Occurrence
C
 – Completeness
A
 – Allocation and Valuation
R
– Rights and Obligations
E
 – ExistenceAbout
C
 – Completeness
U
 – Understandability and Classification
R
 – Rights, Obligations, and Occurrence
V
 – Valuation and accuracyed assertionsSubstantive Testing:
N
– Nature
E
– Extent
T
 – Timing
Transaction Cycles:
 Cycle: Description1.
 
Revenue: includes sales revenues, receivables, and cash receipts2.
 
Expenditure: Includes purchases, payables, and cash disbursements3.
 
Payroll and Personnel: Includes payroll (salaried and hourly) and personnel functions4.
 
Inventory and Production: Includes perpetual inventory, physical counts, and manufacturing costs5.
 
Property, Plant, and Equipment: includes acquisitions and disposals and related depreciation expense6.
 
Investments: includes investments, related interest and dividend payments, proceeds from issuance and from payments of principal,and payments for treasury stock7.
 
Other Liabilities: includes accrued liabilities, warranty costs, deferred income taxes, and lease obligations
Revenue Cycle:
includes sales revenues, receivables, and cash receiptsVouch down
Biggest concern is overstatement of revenue.Sales
 
Preparation of the Sales Order:
P
aid Tips (Pre-numbered)1)
 
Receipt of a customer purchase order by the sales department2)
 
A serially numbered sales order is prepared and sent to the credit department for approval
 
Credit Approval: Valuation assertion and Authority1)
 
Decides if the customer may receive goods on open account = Authority2)
 
If approved, copy of approved sales order is sent to shipping department, billing department, and the accounting department
 
Shipment: Custody
 
Becker Auditing 2008 Edition Chapter 4 2
1)
 
Serially numbered bill of lading is prepared and copy is sent to customer2)
 
Goods are shipped and receivable arises
 
Billing: Recordkeeping1)
 
Prepares serially numbered sales invoice2)
 
Shipping documents, sales orders, and invoices are compared to assure that all shipments were based on valid customerorders and properly billed3)
 
Prices and discounts are applied to the invoice, and extensions and footings are computed4)
 
Invoice is sent to customer and accounts receivable department
 
Accounting: Recordkeeping1)
 
Sale is entered into sales journal, and receivable is recordedAccounts Receivable
 
Sales1)
 
Receivable is recorded in the A/R control account in the general ledger and in A/R subsidiary ledger2)
 
Periodically, an independent person should reconcile these two records
 
Collection of Cash Receipts1)
 
When payment is received from customer, receivable is eliminated
 
Uncollectible Receivables1)
 
Aging schedule is prepared and sent to credit department for use in carrying out its collection program2)
 
At some point, uncollectible receivables should be written off 3)
 
Controls for writing off include proper authorization by treasurer and recordkeeping4)
 
The auditor
observes
the preparation of the aging schedule as part of the study of internal control
 
Sales Returns1)
 
Returned goods examined to ensure they correspond with the reason for return before credit is given2)
 
Serially numbered receiving report may be used as a sales return slip3)
 
Once return is approved, the related receivable is eliminated
 
Sales discounts1)
 
Discount procedures and records should be reviewed to ensure that discounts are properly given and recordedCash Receipts1.
 
Collection of Cash Receipts1)
 
Incoming mail must be opened by a person who does not have access to the accounts receivable ledger2)
 
The receipts should be listed in detail with one copy and the actual receipts sent to cashier for bank deposit3)
 
Another copy sent to accounts receivable department for entry in the accounts receivable subsidiary records4)
 
Third copy sent to accounting department for entry in general ledger accounts receivable control account5)
 
Accounts receivable department should match bank deposit ticket with remittance advices6)
 
Cash registers or lock boxes should be used as safeguards***Treasury makes deposit if no cashier!Order &Credit Department
AuthorityWarehouse & Shipping Department
CustodyBilling/Accounts Receivable Department
Record KeepingAccounting Department
Record KeepingMailroom Department
CustodyCashier / Treasurer Department
CustodyAccounts Receivable Department
Record KeepingAccounting Department
Record Keeping
Must review pages A4-7 to A4-9
Audit Procedures Related to the Revenue CycleSales:1.
 
Verify that recorded sales are based on approved sales orders and shipping documents2.
 
Determine that sales are recorded at appropriate amount and in proper period3.
 
Books and Records
 
 
Becker Auditing 2008 Edition Chapter 4 3
 
match sales invoices with supporting shipping documents
 
compare sales journal with subsidiary ledgers
 
test mathematical accuracy of trial balance
 
compare the total in subsidiary ledgers with general ledger4.
 
Cut-off 
 
 
Examine sales invoice before and after year-end
 
Analyze sales returns after year-endAccounts Receivable:
o
 
Review accounts receivable schedule for accuracy and collectability
o
 
Confirmation
 
 
Follow up on error reports (Rights and Obligations)
 
Confirm receivables
o
 
Adequacy of Uncollectible Accounts
 
 
Subjective judgment = “Risk”
 
Calculate the adequacy of allowance for uncollectible accounts
 
Aging schedule of accounts receivable should be constructed
 
Tests of adequacy of allowance relate to the FS assertion of Valuation and Allocation
 
Test credit approvalAudit Procedures regarding Cash Receipts: see below
Expenditure:
Includes purchases, payables, and cash disbursementsTrace up
Biggest concern is understatement of expenses and liabilitiesPurchases:
 
Purchase Requisition1)
 
Starting of purchasing cycle2)
 
Department in need of asset or services sends a properly approved, serially numbered requisition to purchasing dept
 
Purchase Orders1)
 
Consider the relevance of the time and quantity of the request2)
 
Obtain competitive bids from various suppliers to make sure that the best price is obtained3)
 
Issue order after proper approval4)
 
It is best if the purchase orders are pre-numbered5)
 
Multiple copies sent to the requisitioning dept, the vendor, the receiving department, and accounting department6)
 
If order is cancelled, all copies should be recalled and filed
 
Receipt of Goods or Services1)
 
They received their copy from the purchasing department, preferably it should be a blind copy2)
 
If blind copy, then receiving dept is forced to count the goods upon arrival3)
 
A receiving report is prepared and forwarded to the accounting department4)
 
Goods are forwarded to the requisitioning departmentAccounts Payable:
 
Has three functions: record the payable, approve the invoice for payment, and record the payment after it is paid by treasurer
 
Recording the payable
o
 
A/P = approval of bill
o
 
They received their copy from the purchasing department
o
 
Receiving report is compared with the purchase order and vendor`s invoice as to quantity
o
 
Comparison is made to prevent payment of charges for goods in excess of those ordered/received
o
 
Records the goods received in inventory and records a payable
 
Approving Invoice for Payment and Recording Payment
o
 
Indicate the debit and credit
o
 
Accounting department approves invoice by matching the invoice, purchase order, receiving report, and requisition
o
 
Confirm invoice amount is correct and reflects any purchase discounts before approving it for paymentCash Disbursements:
 
Best if invoices paid by check
 
The functions of approving the payment and signing the checks should be segregated
 
Approved voucher (invoice, purchase order, receiving report, and requisition) prepared by A/P are received by treasurer

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