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AUDITING & ATTESTATION – 4

TIP PIE ACDO = Evidence
Review:
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 Duties
Management 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 – Existence
About
C – Completeness
U – Understandability and Classification
R – Rights, Obligations, and Occurrence
V – Valuation and accuracy
ed assertions
Substantive Testing:
N – Nature
E – Extent
T – Timing
Transaction Cycles:
Cycle: Description
1. Revenue: includes sales revenues, receivables, and cash receipts
2. Expenditure: Includes purchases, payables, and cash disbursements
3. Payroll and Personnel: Includes payroll (salaried and hourly) and personnel functions
4. Inventory and Production: Includes perpetual inventory, physical counts, and manufacturing costs
5. Property, Plant, and Equipment: includes acquisitions and disposals and related depreciation expense
6. Investments: includes investments, related interest and dividend payments, proceeds from issuance and from payments of principal,
and payments for treasury stock
7. Other Liabilities: includes accrued liabilities, warranty costs, deferred income taxes, and lease obligations
Revenue Cycle: includes sales revenues, receivables, and cash receipts
Vouch down Biggest concern is overstatement of revenue.
Sales 
Preparation of the Sales Order: Paid Tips (Pre-numbered)
1) Receipt of a customer purchase order by the sales department
2) A serially numbered sales order is prepared and sent to the credit department for approval 
Credit Approval: Valuation assertion and Authority
1) Decides if the customer may receive goods on open account = Authority
2) 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

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  1) Serially numbered bill of lading is prepared and copy is sent to customer 2) Goods are shipped and receivable arises Billing: Recordkeeping 1) Prepares serially numbered sales invoice 2) Shipping documents. Collection of Cash Receipts 1) Incoming mail must be opened by a person who does not have access to the accounts receivable ledger 2) The receipts should be listed in detail with one copy and the actual receipts sent to cashier for bank deposit 3) Another copy sent to accounts receivable department for entry in the accounts receivable subsidiary records 4) Third copy sent to accounting department for entry in general ledger accounts receivable control account 5) Accounts receivable department should match bank deposit ticket with remittance advices 6) Cash registers or lock boxes should be used as safeguards ***Treasury makes deposit if no cashier! Order &Credit Department  Authority Warehouse & Shipping Department  Custody Billing/Accounts Receivable Department  Record Keeping Accounting Department  Record Keeping Mailroom Department Custody Cashier / Treasurer Department  Custody Accounts Receivable Department  Record Keeping Accounting Department  Record Keeping Must review pages A4-7 to A4-9 Audit Procedures Related to the Revenue Cycle Sales: 1. receivable is eliminated  Uncollectible Receivables 1) Aging schedule is prepared and sent to credit department for use in carrying out its collection program 2) At some point. Verify that recorded sales are based on approved sales orders and shipping documents 2. sales orders. and invoices are compared to assure that all shipments were based on valid customer orders and properly billed 3) Prices and discounts are applied to the invoice. Books and Records  Becker Auditing – 2008 Edition Chapter 4 2 . and extensions and footings are computed 4) Invoice is sent to customer and accounts receivable department Accounting: Recordkeeping 1) Sale is entered into sales journal. the related receivable is eliminated  Sales discounts 1) Discount procedures and records should be reviewed to ensure that discounts are properly given and recorded Cash Receipts 1. an independent person should reconcile these two records  Collection of Cash Receipts 1) When payment is received from customer. uncollectible receivables should be written off 3) Controls for writing off include proper authorization by treasurer and recordkeeping 4) The auditor observes the preparation of the aging schedule as part of the study of internal control  Sales Returns 1) Returned goods examined to ensure they correspond with the reason for return before credit is given 2) Serially numbered receiving report may be used as a sales return slip 3) Once return is approved. and receivable is recorded Accounts Receivable  Sales 1) Receivable is recorded in the A/R control account in the general ledger and in A/R subsidiary ledger 2) Periodically. Determine that sales are recorded at appropriate amount and in proper period 3.

and requisition o Confirm invoice amount is correct and reflects any purchase discounts before approving it for payment Cash Disbursements:  Best if invoices paid by check  The functions of approving the payment and signing the checks should be segregated  Approved voucher (invoice. 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. and accounting department 6) If order is cancelled. the vendor. receiving report. payables. purchase order. Cut-off      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 ledger   Examine sales invoice before and after year-end Analyze sales returns after year-end Accounts 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 approval Audit Procedures regarding Cash Receipts: see below Expenditure: Includes purchases. preferably it should be a blind copy 2) If blind copy. approve the invoice for payment. the receiving department. serially numbered requisition to purchasing dept  Purchase Orders 1) Consider the relevance of the time and quantity of the request 2) Obtain competitive bids from various suppliers to make sure that the best price is obtained 3) Issue order after proper approval 4) It is best if the purchase orders are pre-numbered 5) Multiple copies sent to the requisitioning dept. purchase order. then receiving dept is forced to count the goods upon arrival 3) A receiving report is prepared and forwarded to the accounting department 4) Goods are forwarded to the requisitioning department Accounts Payable:  Has three functions: record the payable. receiving report.4. all copies should be recalled and filed  Receipt of Goods or Services 1) They received their copy from the purchasing department. and cash disbursements Trace up Biggest concern is understatement of expenses and liabilities Purchases:  Purchase Requisition 1) Starting of purchasing cycle 2) Department in need of asset or services sends a properly approved. and requisition) prepared by A/P are received by treasurer Becker Auditing – 2008 Edition Chapter 4 3 .

and obtain bank cut-off statements o Related accounts:  Almost all asset. payroll. and see if they incurred in November or December Audit Procedures regarding Cash Payments: see below Cash: Audit procedures related to cash Look at all bank reconciliations and confirmations Obtain bank cut-off statements Internal control: o Used for testing of lapping and kiting o Segregation of duties relating to cash demands that close consideration be given to check-writing authority o Good control would include: use of voucher system for cash disbursements Cut-off: o Obtain cut-off bank statements ten to fifteen days after year-end o Verify cut-off of cash receipts and cash disbursements o Examine all wire and inter-account cash transfers close to year-end Books and Records: o Foot and crossfoot all books and records o Mathematically test calculations in the cash journals. purchases. cash “still in” bank #1 (lying) ◊ Audit procedure: bank cut-off statement ◊ Bank transfer schedule compares the dates checks are drawn (on the disbursing bank account) to the dates checks are deposited (in the receiving bank) ◊ Indication: date stamped by the receiving bank on the rear of returned (paid) check precedes the date on which the disbursement was recorded o Transfer schedules. signs. and bank statements  Main emphasis: verification of ending balances (existence) and detection of theft or kiting Becker Auditing – 2008 Edition Chapter 4 4 . and miscellaneous expense  Accounts be reconciled to appropriate journals o Identification and prevention of fraudulent schemes with respect to cash  Lapping: the theft of cash is often concealed by failing to account for cash receipts ◊ “Today’s cash receipts cover yesterday’s theft” ◊ Inspect when checks are deposited/cash and compare to when A/R was booked with “credit” ◊ Best ways to guard against lapping is use of “lock box” system ◊ Detect lapping by: comparing the dollar amounts and dates on bank deposit slips with customer remittance credits recorded in the A/R ledger  Kiting: when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank ◊ Used to cover cash shortage or to pad a company’s cash position ◊ Cash is in bank #2. and expense accounts are related to the cash disbursement function  Specific attention given to petty cash.  Treasurer prepares. include counting the cash on hand and reconciling it with the journals  Obtain external evidence would include confirming amounts on deposit with banks. reconcile bank statements. and verify cash transactions o Compare cash receipts journal with deposit slips o Evidence: Internal and External  Examine all internal evidence. and mails the checks and cancels all supporting documents after payment Paid vouchers are returned to accounting dept for posting of payment and filing of documents Must review pages A4-13 to A4-14 Audit Procedures Related to the Expenditure Cycle:  Confirmations  o Not required of payables but may be used o Confirm especially those showing small or zero balances  Search for Unrecorded Liabilities o Select cash disbursements made subsequent to year-end and examine the supporting documentation o Look for items that should have been recorded at the balance sheet date. liability. but were not o Review bills in January. confirming all securities on deposit. bank confirmations. vouch postings to ledger accounts.

Failure to record payments 3. but it is auditor’s property) Report Release Date: the date on which the auditor grants client permission to use the report. info on actual loans and contingent liabilities. regardless of whether there is a year-end balance to confirm  detect kiting! Purposes of bank confirmation: verify year-end balances. conducting. and should consider: o risk of material misstatement  Objective of detailed substantive testing is to detect material misstatement o extent to which judgment was required in performance and evaluation o nature of specific auditing procedure Becker Auditing – 2008 Edition Chapter 4 5 . pledged collateral. the conclusions reached. or other media oral evidence alone is not sufficient. Pressure to overstate sales and/or receivables tin order to improve the balance sheet and liquidity ratios c. Pressure to overstate revenues to achieve EPS targets b. quality control reviews. Other Potential Problems: a. type. prevent unauthorized changes. Errors – increased due to high volume of transactions b. and guarantee or security agreements Risks to Consider 1. and conclusions reached -belong to the CPA Purpose: Support for the auditor’s report.  Standard bank confirmation should be sent to all banks with whom the client has done business during the year. but may be used for clarification of information specific quantity. Shipping goods that were not ordered at or near year-end (goods are generally returned in the following period) d. Recording fictitious sales (existence assertion) b. Incentives/Pressures: a. and content of audit documentation are based on the auditor’s judgment. evidence obtained. Potential Misstatements: a. sufficient understanding of the entity and its environment was obtained. discounted notes. and how the accounting records reconcile with FS Demonstrate compliance with the standards of fieldwork by showing that work performed was adequately planned and supervised. emphasizing that the audit team is responsible for its work Information that may be useful for future audits. electronic form. etc Nature and Extent of Audit Documentation: may be in paper form. or peer reviews Requirements: Audit documentation should indicate that accounting records are in compliance with the FS Record of evidence and results of audit tests and procedures Details of audit procedures performed. Usually is the date on which the report is delivered to the client o Private companies: retain documents for five years o Public companies: retain documents for seven years per PCAOB Documentation Completion Date: the time following the report release date in which to assemble final audit documentation file o Private companies: audit documentation must be filed within 60 days following the report release date o Public companies: audit documentation must be filed within 45 days following the report release date per PCAOB  Requires preparation of “engagement completion document” Safekeeping of Audit Documentation: establish appropriate controls for audit documentation to protect its integrity. and supervising the audit Accountability. Theft of cash collections – sales adjustments may be used to conceal thefts of cash collections c. including evidence that the audit was conducted in accordance with GAAS Assistance in planning. and sufficient appropriate audit evidence was obtained Retention: Audit Documentation: the property of independent auditor (may be useful to client. Omission – existing sales and purchases may not be recorded (completeness assertion) Audit Documentation  Supports auditor’s opinion -known as “working papers” -principal record of audit procedures performed. Holding open the sales journal to include next year`s sales (improper cut-off) c. the evidence obtained. Pressure to understate liabilities in order to improve balance sheet and liquidity ratios 2.

Insurance Company. such as retracing procedural steps. or symbols indicating the work that has been performed Confidentiality: Must obtain permission to disclose audit documentation. stock options. Example: checks. uncertainties) Possible material misstatements in FS Suggest a need to revise the auditor’s previous risk assessment Cause significant difficulty in applying necessary audit procedures or significant revision of planned audit procedures May result in modification to the auditor’s standard report Tickmarks: Use tickmarks. electronic. leases. state CPA society. and worksheets. actions taken. and reconciliation. observable assets or activities). bond indentures. such as retracing procedural steps. recalculation. industry analysts’ reports. unusual transactions. Evidence in Electronic Form  auditor should consider the time during which info exists or is available in determining the NET of audit procedures. contracts. confirmations. complexity. Third Standard of Fieldwork: “the auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit” Objective is to detect material misstatement in financial statements Becker Auditing – 2008 Edition Chapter 4 6 . test of controls. recalculation. invoices. and internal information Current File: documentation applicable to the year under audit o Audit plan (audit program) o FS and auditor’s report o Working trial balance. confirmation responses) o Analyses. Underlying accounting records  consists of records of initial entries and any supporting records. or under state statutes o Your defence team: Lawyers/Court. schedules or commentaries. pension plans. Provides additional support and gives validity to the recorded accounting data. Expert Witness Audit Evidence: All the information auditor uses to arrive at the conclusions of the audit opinion (written. articles of incorporation. Auditor tests the accounting records through analytical procedures and substantive tests. The auditor tests the accounting records through analytical procedures and substantive tests. Corroborating Evidence  includes meeting minutes. adjusting journal entries. data about competitors. It must be obtained to support auditor conclusions with respect to risk assessment. and inspection. Auditor should have access to all pertinent accounting data and corroborating evidential matter. and reconciliation. management representation letter. and substantive testing. journal entries. inquiry. and information obtained through observation. minutes of meetings. records of EFT. worksheets. estimates. bylaws. otherwise it is a scope limit. such as contracts or agreements o Summaries of significant audit findings. conclusions reached o Records of tests of controls and substantive tests Significant Audit Findings: Selection and application of accounting principles (consistency.o o o significance of evidence obtained nature and extent of any problems identified need to document conclusions that may not be obvious Specific Contents: Permanent (continuous) File: o Include continuing interest from year to year (such as contracts. o Abstracts or copies of entity documents. ledgers. EXCEPT the following without client’s permission: o If documentation used as part of voluntary quality review program under the auspices of AICPA or state society of CPAs o If documentation is subpoenaed by a court o If documentation is part of an official investigation being conducted by the AICPA. and reclassification entries o Letters of confirmation and representation (attorneys.

Auditor is not a guarantor. Quality of audit evidence: less audit evidence may be required when that evidence is of higher quality Evidence Hierarchy: A – Auditor observation and knowledge E – External Evidence I – Internal Evidence O – Oral Evidence Evidence must relate to the FS assertion under consideration. Vital planning function. Analytical procedures generally include a review of the current and prior year’s FS and current year’s budget. actual to budget) of recorded amounts to independent expectations developed by auditor. Purpose: to assist the auditor in final review of overall reasonableness of account balances. and must rely on evidence that is persuasive. Sufficiency of audit evidence: Must be Valid and Relevant Amount of evidence gathered directly affects the level of detection risk (risk that auditor’s evidence gathering procedures will not be sufficient to support the FS assertions. auditor might use procedures to substantiate the ending balance while also performing extensive procedures on samples of transactions and related accounts Example 2: test the details supporting FS amounts and disclosures through inspection. Analytical procedure in final review: Required. auditor will concentrate more on the ending balance total. This approach is used when the account being substantiated has relatively few transactions occurring during the year. recalculation. Auditor develops independent expectations for comparison to recorded amounts. Evaluation of audit evidence must take into consideration and achievement of audit objectives. and disclosures) Substantive analytical procedures These tests are designed to substantiate the validity of management assertions regarding the FS. The evidence is circumstantial and generally. additional corroborating evidence (such as documentation) must be obtained. etc. Example: a) Financial information for comparable prior periods b) Anticipated results from budgets and forecasts Becker Auditing – 2008 Edition Chapter 4 7 . rather than conclusive. Analytical Procedures: Evaluations of financial information made by a study of financial and nonfinancial data Comparisons (Ratios. Substantive procedures consist of: Test of details (as applied to transactions. inquiry.Audit evidence must persuade the auditor that the ending balances in the FS are fairly presented. balances. Risk of material misstatement: greater risk implies more evidence will be required 2. confirmation. Tests of details: Procedures used to gather evidence to support the account balances Tests of details are performed on ending balances. Must use analytical procedures in planning and overall review. Combination of both: when auditing sales revenue account. Cost benefit may be a valid reason for performing only certain procedures. and may use analytical procedures as substantive tests Analytical procedure in planning: Required. cost alone or difficulty in obtaining evidence is not a valid basis for omitting a procedure for which there is no appropriate alternative. Purpose: to assist the auditor in planning the NET of auditing procedures. observation. Used for risk measurement to alert the auditor to problem areas requiring attention. reperformance. Audit provides reasonable assurance regarding the fairness of the FS. Substantive procedures: Not Required. Purpose: as substantive test to obtain audit evidence about specific management assertions related to account balances or transactions. the details of transactions. percentages. o Auditor must be satisfied that internal control is strong! Alternative approach: test the details of transactions. Auditor’s decision regarding the sufficiency of evidence is influenced by: (Evaluate Management assertions) 1. or a combination of the two Example: account has high turnover rate with many transactions.

Coverage and completeness assertion. Test of Details: Directional testing – testing either forward or backward. obligations. or substantive tests:            F – Footing. Vouch down/backward for existence and occurrence. and should consider whether additional audit procedures are needed. but simply indicate the need for further investigation. Results of the comparison of expectation to recorded amounts 4. Auditor’s expectation 2. Availability and reliability of data used to develop the expectation: for reliability. auditor should obtain sufficient appropriate evidence about the related assertion by performing alternative substantive procedures Analytical procedures in overall review  required. and Recalculation: verify the mathematical accuracy I – Inquiry: requesting information from knowledgeable parties both internally (managers) and externally (attorneys) V – Vouching: directional testing starting at accounting records and moving down. Trace up/forward for completeness and coverage. E – Examination/Inspection: evidence about existence assertion. Crossfooting. where the risk is understatement of expenses and liabilities. S – Subsequent Events Review: perform certain procedures between the balance sheet date and date of auditor’s report. where risk is overstatement of revenues and assets. Factors considered in development of expectation 3. see evidence hierarchy (AEIO) 4. but the evidence provided applies to only to the point in time during which observation occurred T – Tracing: directional testing starts from source documents and moving up. Additional audit procedures performed in response to significant unexplained differences 5. Existence and occurrence assertions. Precision of expectation: more precise expectations = more effective in detecting misstatements Documentation requirements when analytical procedures are uses as substantive test: 1. Differences do not necessarily indicate errors or fraud. Standard Auditing Procedures: FIVE CARROTS used in audit as risk assessment procedures. Other procedures include:  Performing a cut-off review of year-end transactions  Auditing related accounts simultaneously  Requesting a comprehensive management representation letter Becker Auditing – 2008 Edition Chapter 4 8 .c) Relationships among data within the current period d) Industry norms e) Relationships of financial data with nonfinancial data • • Income statement has more predictable relationships than the balance sheet Accounts with management discretion are less predictable Analytical procedures used as substantive tests = NOT required: The efficiency and effectiveness of analytical procedures detecting potential misstatements depends on: 1. Auditor should: investigate significant differences or unusual items reconsider the manner in which the expectation was developed make inquiries of management may expand audit procedures if no explanations obtained. Plausibility and predictability of the data relationship: must have clear understanding of data and analytical procedures should be based on predictable relationships. May discover additional unusual or unexpected balances. Nature of assertion being tested: analytical procedures are most effective and efficient for assertions in which potential misstatements are not apparent from an examination of the detailed evidence or when such detail is unavailable 2. valuation. tests of controls. Scanning) R – Reperformance: auditor performs procedures/controls that are performed as part of an entity’s internal control R – Reconciliation: substantiates the existence and valuation of accounts O – Observation: auditor looks at a process or procedure performed by others. Provides the auditor with direct personal knowledge. C – Confirmation: specific type of inquiry that involves obtaining representations from independent third parties A – Analytical Procedures: evaluations of financial information made by studying relationships among data (ex. Results of such additional procedures Investigation of significant differences: may indicate possible material misstatement. Evaluate the overall FS presentation and to assess the conclusions reached. rather than about ownership. rights. 3.

then observation should be performed at year-end. and examination Review Inquiry of management Inventory and Production: Includes perpetual inventory. inspection. confirmation of such is sufficient. Storage (custody) 4. When physical inventory count is impossible. such as the minutes of board of directors’ meetings. = This is timing of the Nature. and Recalculation I – Inquiry V – Vouching E – Examination/Inspection C – Confirmation A – Analytical Procedures R – Reperformance R – Reconciliation O – Observation T – Tracing S – Subsequent Events Review C Assertion Completeness P A Proper Period Cut-off Accuracy C O CA Classification Occurrence Allocation and Valuation R E Rights and Obligations Existence CU R V Understandability and Classification Procedure Tracing Analytical Review Observation Cut-off Procedures Inspection Footing Inspection Vouching Independent recalculation Reconciliation Inspection Confirmation Observation. Receiving 3. or after the end of the audit period. If control risk is high. and manufacturing costs Inventory – Internal Control – Segregate the following duties: 1. Otherwise. and Timing *Should observe all inventory held in public warehouses if inventory is significant. shareholder meetings. Shipping Observation of beginning and ending physical inventory counts is required by GAAP. If internal control is strong and inventories are well-kept perpetual inventories. then physical counts may be performed before. • • • • • • • • • • • Reading pertinent information. Purchasing 2. and management committee meetings F – Footing. Crossfooting. during. Extent. physical counts. Becker Auditing – 2008 Edition Chapter 4 9 . must use alternative procedures.

sales returns and allowances. and ask client to intervene May perform alternative procedures when confirmation responses are not received Provide evidence regarding existence and rights and obligations. small balances. b/c we’re looking for understated liabilities and expenses Unrecorded liabilities surface when unpaid vendors stop delivering goods Search for unrecorded liabilities: 1. Investment income is properly reported iv. but may also result in lower response rate Non-responses should be followed up with second/third requests. COGS Examine purchase invoices and receiving reports for several days before and after year-end Examine sales invoices and compare them to shipping documents for several days before and after year-end Determine whether inventory adheres to lower of cost or market principles and whether it is pledged or subject to liens Examine vendor invoices. Investments exists and owned by client Segregation of duties: 1 person authorizes purchase/sale. weak internal controls “Blank” confirmations: greater degree of assurance. and third person maintains records Control risk: 1. Valuation is fairly stated and disclosed v. Reconciliations to ensure accuracy 3. another person asks as custodian. GAAP is consistently applied ii. direct labor rates. sales. NOT provide valuation or completeness Negative confirmations – recipient is asked to respond only if amount stated is incorrect Not as good as positive Used when low control risk. expect customer attention Accounts Payable Confirmations  Not Required Positive confirmations and generally “blank” Objective: determine if A/P are understated Confirmations of A/P sent when weak internal control Vendors with small or zero balances would be selected.Existence Client Physical Inventory Report List Completeness Existence Completeness CPA Test Counts Company Pre-Numbered Inventory Tags Accuracy Auditor should confirm that consigned inventory on hand is excluded from physical inventory count Related accounts: inventories. Subsequent events. Post balance sheet review Long-term Investments – auditor must determine: i. expect errors and disputes. purchases. 2. Proper authorization and approval 2. Continuous monitoring and review Becker Auditing – 2008 Edition Chapter 4 10 . Gains and losses are accurately computed and disclosed iii. and test the computation of standard overhead rates RM: Raw Material DL: Direct Labor FOH: Factory Overhead: applied consistently and using GAAP Accounts Receivable Confirmations Positive Confirmations – request response from the recipient (may be blank) Best type of confirmation for large accounts.

Board of directors should approve acquisitions. cost. Responsible for issuing unsigned payroll checks that are later signed by the treasurer. Detailed information concerning each asset is kept in the subsidiary ledger. o Unclaimed payroll checks should be returned to an independent individual for follow up D – Documentation: all changes to payroll should have authorized change documents. depreciation method. Hours worked be documented by approved time records = Payroll register T – Timely and Appropriate Performance Reviews: I – Information Processing Controls: P – Physical Controls for Safeguarding Assets: treasurer should sign the payroll checks. it is advisable to use time clocks. and payroll change documents A – Authorization: I – Independent Check to Maintain Asset Accountability: o Accting dept prepares a voucher for amount of payroll based upon input from payroll dept o Bank reconciliation of the imprest payroll account prepared by individual independent of custody or recordkeeping functions. Helps in assessing cash and removing asset and depreciation from subsidiary ledger. (i. etc) should be approved by immediate supervisor  Timekeeping and Cost Accounting  ARC  Data on which pay is based should be accumulated independent of any other function. and Equipment: includes acquisitions and disposals and related depreciation expense Acquisition: a special requisition form is generated for acquisitions. location.  Payroll Check Preparation  ARC  Payroll department computes salary based on information received (ex. Where there are employees who are paid by the hour. and approval. An imprest payroll account be used S – Segregation of duties: o Authorization: operating dept and personnel dept o Recordkeeping: payroll dept o Custody (payroll checks): treasurer should sign and distribute checks See chart on pg. checks. Plant. Control Procedures: P – Prenumbering: time cards. Serial number on plate should be listed in control account. which board of directors approve. cost. includes description. Analytical procedures may also be used to test the reasonableness of dividend and interest income Management representation letter required! Review board minutes  slope limitation if denied access Payroll and Personnel: Includes payroll (salaried and hourly) and personnel functions Segregation of duties –  Authorization to Employ and Pay  ARC  Function of HR to hire new employees  Supervision  ARC  All pay base data (hours. Hours x pay). Retirements of assets should be documented on sequentially numbered work order. Specific capitalization policies are also necessary to prevent misstatement of revenue and expenses. Review retirements and recalculate any gains and losses thereon. amount.  Check Distribution  ARC  Treasury signs checks and distributes. Recalculation should be made to determine the accuracy of recorded dividend and interest income. time off. Becker Auditing – 2008 Edition Chapter 4 11 .Confirmation of EXISTENCE and RIGHTS & OBLIGATIONS – Request from custodian for securities to confirm Independent calculations should be made to determine the validity of recorded gains or losses from security sales and of discount and premium amortization. Auditor should vouch down (existence and support) for additions to fixed asset accounts. amount of depreciation) Fixed assets should have identification plates. ID #. date. Written depreciation policies and records be maintained. known as paymaster. reason for acquisition.e. Physical controls to safeguard assets from theft be in place. A4-43 Property. Acquisitions are tied to capital budget. description.

management. Transactions should be traced to accounting records (cash accounts) and to authorization in board meeting minutes Stock transactions should be vouched to supporting documentation (cash receipts. Review the status of long-term leases 4. dividend declarations. comparing terms and authorization of indebtedness to board approval.Review repair and maintenance expense accounts to test for completeness of asset additions. minutes) All stock issuances.  classification and understandability Audit Evidence: Miscellaneous Items Related Party Transactions Related Party Transactions  Valuation and Accuracy  make sure properly recorded and dkisclosed Related parties may include reporting entity’s affiliates. Discuss sales contracts 7. Perform cut-off tests to determine whether purchase/sale was recorded in proper period Confirm the purchase/sale was properly authorized Determine if appropriate controls are in place to safeguard fixed assets and prevent theft or destruction Recalculate depreciation Alert for evidence indicating a lien on assets. Review bank confirmations for hidden bank loans. discounted drafts. compare interest expense with bond payable amount Contingencies: 1. Investments / Long-term debt: 1. All debt has been recorded 5. Becker Auditing – 2008 Edition Chapter 4 12 . For LTD. Valuation is fairly stated 4. third-party confirmations should be used to provide evidence. Interest expense should be computed independently.    Company do no/cannot insure fixed assets they do not have Companies do not pay real estate taxes on property they do not own Tour plant and inquire Liabilities Examine notes payable. guarantee of notes 2. treasury stock purchases must be authorized by board of directors. Related party transaction is not considered to be an arm’s length transaction. Consider whether any appropriations of retained earnings are necessary. Review status of tax returns for open years 5. GAAP is consistently applied 2. Articles of incorporations should be in the permanent audit file. If client uses stock certificate book. Send inquiry letter to client’s attorneys 6. Obtain client representation letter Owner’s Equity Examine all shares of treasury stock and reconcile the number of shares stated in treasury stock account. such as a missing insurance policy. Objective: properly disclosed in accordance with GAAP. This would be to locate items that should have been capitalized. Auditor focuses on evaluating the presentation and disclosure of FS. Review the interim FS after year-end 8. and members of their immediate families. Interest expense is properly reported 3. then examine the stubs for proper recording. Discuss long-term purchase commitments 3. principal owners. If client uses a stock transfer agent. Review minutes from board of directors’ and shareholder meetings 9.

Lawyer’s response to letter of inquiry should include a professional opinion on the expected outcome of any lawsuit and likely outcome of any liability. IRS correspondence  It is management’s responsiblitiy to identify and account for litigation. and assessments. Becker Auditing – 2008 Edition Chapter 4 13 . Letter sent to client’s lawyer is simply a means of corroborating information provided by management. market value or estimates and valuation methods may be used  Changes in fair value mearsurement may be treated in different ways under GAAP (net income.  Ask management about pending or possible litigation and controls adopted to identify. Claims. Letter of Inquiry to Client’s Attorneys This letter is signed by the cleitn and sent by the auditors to the attorneys. Litigation. nonrecurring transactions year year-end Accounting Estimates  Management’s responsibilities and are subjective judgements = risk  Assess management’s written policies and practices of acctng estimates  Verify that all material estimates have been developed  Determine that acctng estimates are reasonable  Ensure that acctng estimates are properly presented and disclosed per GAAP  Test for reasonableness  Is management using the same methods/consistency for estimates?  Past track record of estimates is good?  Justify any changes in approach Auditing Fair Values  For fair values. claims. and consistency of evidence obtained with respect to fair value measurements and disclosures  When auditor tests fair value measurements and disclosures. claims. invoices from lawyers. and assessments through the entity’s policies.  Review meeting minutes. Lawyer refuses to respond  scope limitation  qualified or disclaimer opinion Client refuses to permit inquiry  disclaimer ***Management is primary source of information regarding litigation. and Assessments  Esternal inquiry of entity’s attorney is the auditor’s primary means of obtaining verification of management information about these issues. competency. auditor may determine whether managemetn’s significant assumptions provide a reasonable basis for fair value measurements. including court costs. Investments)  Compenstating balance arrangements  Loan guarantees  Unusual. comprehense income and equity)  Management should identify and support any significant assumptions used  Auditor – assess the risk of material misstatement of fair value measurements  Auditor – evaluate the sufficiency. evaluate. and account for such items. and confirmations  Review material transactions (esp. board minutes.Determining the existence of related parties:  Evaluate company’s procedures and policies for related party transactions  Inquire management and predecessor auditor  Revieiw entity’s filings with the SEC.