Professional Documents
Culture Documents
ANALYSIS APPROACH
5th edition
Larry F. Konrath
Electronic Presentation
by Harold
O. Wilson
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Chapter 11
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KEY CONCEPTS OVERVIEW
Internal Controls; Irregularities
Sales transactions; Accounts
Receivable Balances
Cash Receipts transactions; Cash
Balances
Audit Programs (Instructions)
Analytical Procedures
Working Papers
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Learning Objectives
Define substantive testing.
Identify audit objectives related to
revenues.
Develop revenue cycle audit
programs.
Modify audit programs (internal
controls, warning signs, study of
industry, analytical procedures).
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The Accounting Cycle:
What companies do!
SALES
Various*
Ac Rec Ac Pay
CASH
CR DR DR
bal. bal. bal.
SALES CASH RECEIPTS
Sales Invoices & Deposit Slips &
Shipping Tickets Remittance
Advices 6
Cash & Receivables at FYE:
Basic Documentation!
DR DR
Bal. Bal.
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Auditor Focus, on any selected
account, is...
The Debits The Internal
Controls
The Credits
The Audit Program
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AUDIT PROGRAM
DEVELOPMENT
• Interim work compared documents
(e.g., deposit slips) to bookkeeping
outputs, account postings, etc.
• The Audit Trail is known.
• Working Papers support many,
but not all, Account Balances.
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REVENUE RECOGNITION
THEORIES & CLIENTS
Clients--Desire early recognition of
revenue; often pressured to do so.
Auditors--Conservative!
Uncertainly/Contingencies = Problems!
Franchisee problems.
Debt transfer problems.
Credit policies & problems.
Guarantees are problems.
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JUDGMENT, ETHICS,
LIABILITIES & RISKS
The auditor must know GAAP to audit
GAAP!
“Thick skin” is necessary! The auditor
controls his/her ethics & opinions!
Departures from GAAP, sometimes
unintentional, do happen.
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COMPUTER-ASSISTED
SUBSTANTIVE TESTS
Computers aid in gathering, analyzing and
evaluating evidence (e.g., testing math, prices,
selecting specific criteria, using industry data).
Computer programs aid in amortization printouts,
statistical sampling analysis, calculations, aging
accounts receivable, etc.
Downloading client data into PCs, use known “test
data” to obtain confidence in the client’s CIS.
Reports and OCR software aid in data analysis,
spreadsheet templates, & working trial balances.
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FAQ?
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After the sale…and before the
MONEY IS HERE!
Credit & price approvals on all
customer orders.
Shipment: order picking, packing,
shipping tickets.
Sales Invoices based on the above;
reviewed for support before
recording, mailing.
Monthly Statements.
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INTERNAL CONTROL
CHECKLIST: Revenues
Customer orders required for Sales Orders.
Credit approval required for Shipping Tickets.
Shipping Tickets required for loading.
Shipping Tickets required for Sales Invoices.
Sales Invoices (reviewed for pricing, clerical
accuracy) required for A/R entries.
Monthly statements reconciled to A/R ledgers,
and mailed by disinterested parties (DIP).
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INTERNAL CONTROL
CHECK LIST: Cash Receipts
Remittances deposited intact daily.
Receipts recorded daily by DIP.
Receipted deposit slips matched to other cash
details, as Remittance Advices.
Monthly bank reconciliations of all cash
accounts by DIP.
Approved pre-numbered documentation
required; subsidiary ledgers’ support.
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INTERNAL CONTROL
CHECK LIST: Cash Receipts
Credit memos & non-cash credits (e.g., bad
debt write-offs) properly authorized.
Approved documentation & security codes
required for computer inputs to Cash, A/R
and Inventory.
Sales Tabulations reviewed, approved, and
reconciled to Customer Orders and
Unfilled Orders Files, Unbilled shipments.
Cash & Sales Tabulations compared to plans
& budgets, etc.
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Monitoring
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FAQ?
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GENERAL AUDIT
PROGRAMS always include...
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FAQ: Conservatism at FYE?
If inherent risk and control risk are
[still] assessed at “maximums” after
interim testing, is the auditor being
conservative, realistic, or just
oversampling at fiscal year end?
C Confirmed c Calculated
^ Footed ^^ Crossfooted
c Examined cancelled check
X Exception Matched (below)
~ Various (standard marks)
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And other notations…that
MUST BE INITIALED!
N/C/M
Not Considered
Material
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AUDIT PROGRAM:
Accounts Receivable (1/4)
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AUDIT PROGRAM: Allowance
for Uncollectibles
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AUDIT PROGRAM:
Cash (4/4)
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Audit Programs = Verbs!
(Can you define these 28?)
Confirm; Reconcile Inspect; Observe
Trace; Prepare Sample; Test count
Verify; Substantiate Investigate; Clear
Foot; Crossfoot Compare; Review
Vouch; Prove Inquire; Assess
Calculate; Recalculate Suggest; Draft
Schedule; Analyze Scan; Scrutinize
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AFTER ALL CAPITONS, the
In-charge CPA will…
Review for GAAP consistency and/or
violations.
Consider materiality, potential for
fraud, misleading data.
Make decisions as to Presentations,
Footnotes, Disclosures.
Draft the Audit Report.
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CRITICAL KEY TERMS
Aged analyses Proof of cash
Cutoff procedures Bank cutoff
Positive statements
confirmations Interbank transfers
Negative Kiting
confirmations Lapping
Bank confirmations Window dressing
Substantive testing Revenue cycles
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End of Chapter 11
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