Sherry Lynn R.

Babalo BSA-5 Audit Midterm Exam October 24, 2020

1.) TRANSACTION CYCLES

– the means through which an accounting system processes transactions of related activities
Transaction Cycles

Revenue & Expenditure & Human Production or Finance and

Receipt Disbursement Resources & Conversion Investment
Cycle Cycle Payroll Cycle Cycle Cycle

2.) REVENUE & RECEIPT CYCLE

Recognizing
effect of this Receiving a
process on customer’s
other related order
accounts

Approving
Collecting
credit for a
cash
sale

Determining
whether
Billing the
goods are
customers
available for
shipment

Shipping the
goods

Activities involved:
(1) Exchange of goods and services with customers;
(2) collection of revenue in cash
Accounts affected:
(1) Sales and related sales adjustments;
(2) Cash in bank;
(3) Accounts receivable and related allowances;
(4) Uncollectible accounts expense; and
(5) Inventories
Documents used and Audit Significance

Documents Significance

- Provides evidence that a customer actually ordered the goods.

Customer’s purchase order - PO numbers are recorded on sales invoices to determine to which
PO an invoice relates.
- Contains the seller’s understanding of the terms.
Sales order - Numerical sequence helps ensure that shipments are made for
sale orders and all sales are billed.

- Signature of carrier provides evidence that goods have been

Bill of Lading (Shipping shipped.
Documents) - Numerical sequence helps ensure that all shipments are recorded
as sales.
- Provides evidence that the seller has reduced the amount billed to
Credit memo a customer.
- Numerical sequence helps ensure that CMs are recorded.

Remittance Advice - Indicates date and amount of payment and the invoices paid.
Uncollectible account
- Numerical sequence helps ensure that all write – offs are recorded.
authorization form

- Reports the beginning balance and transactions that occurred

Monthly statements
during the period.

Accounting records employed: (1) Sales journal; (2) Sales returns and allowances journal; (3) Cash
receipts journal; (4) General journal; (4) accounts receivable ledgers; and (5) Accounts receivable TB

I. TEST OF CONTROL OVER SALES TRANSACTION

(1) Inquiry, (2) Observation, and (3) Review

CONTROLS TEST OF CONTROLS

Assertion:
EXISTENCE/OCCURRENCE,
recorded sales are for shipments
actually made to customers

Recording of sales is supported by

- Examines approved customer PO, sales order, shipping
customer’s PO, sales
documents and sales invoice.
orders are approved by the credit
 Contains required approval
departments and approved and
 Terms and descriptions should be consistent
executed shipping documents
Independent personnel prepares
and mails monthly statement - Observe whether these duties are segregated.
(follows up on complaints) and - Examine files on complaints received
records accounts receivable

Assertion: COMPLETENESS, all sales

transactions that occurred are
recorded

Prenumbered shipping documents - Observe the procedure

are accounted to determine that all - Examine the invoice that bills the sale (sample)
sales invoice is prepared for all  A copy of sales invoice indicates that the shipment
shipments was billed.

Prenumbered sales invoices are - Observe the recording process if the personnel accounts
accounted to determine for the numerical sequence
that all sales are recorded - Trace sales invoice to sales journal (sample)

- Inquire how the procedures are followed.

Procedures are put in place to
- Observe if the procedures are followed.
ensure timely recording of
- Inspect the report in the last shipment sent by the shipping
sales and proper cut – off are
clerk to the billing clerk.
established
 Proper cut – off provides evidence of existence.

Assertion: RIGHTS AND

OBLIGATIONS, sales recorded
represent only sales transactions

Clerk checks sales orders and sales

- Observe whether such procedure is being performed
invoices for terms

Assertion: VALUATION AND

ALLOCATION, sales are correctly
billed and recorded

(For goods shipped) Counted and

- Observe whether such procedure is being performed.
descriptions on sales order are
- Examine shipping orders for signature on the shipping
compared with the shipping
documents (sample)
document

Customer credit is approved by a

- Examine sales order for credit approval prior to shipment
responsible official prior
(sample)
to shipment.
 Sales invoices are checked to - Inquiry on the updating of price list.
pricing, mathematical accuracy and - Examine copies to determine that they contain signature
terms that they have been checked (sample)

AR subsidiary ledger is balanced to - Observe whether such procedure is being performed.

the general ledger control account - Foot the subsidiary ledger and compare to the balance of
regularly. the control account.

Assertion: PRESENTATION AND DISCLOSURE, sales and accounts receivable are recorded in accordance with
PFRS
- Determine whether the invoice copy contains approval signature
Sales must be properly classified
for account classification used.

II. SUBSTANTIVE TEST OF SALE TRANSACTIONS

ASSERTIONS AUDIT OBJECTIVES AUDIT PROCEDURES
1. Review sale journal, GL and accounts
To determine that recorded receivable masters file or TB.
sales are 2. Trace sales journal entries to supporting
a. Occurrence and
authorized and are for documents.
Validity
shipments 3. Trace shipping documents to entry of
b. Rights and Obligations
actually made to real shipments in perpetual inventory records.
customers. 4. Compare prices on sales invoice with
authorized price list or contracts.
5. Trace shipping documents to sales invoices
To determine that existing sales
and entry to sales journal and AR master file.
transactions are recorded on a
c. Completeness 6. Compare date sales are recorded and date
timely
on
basis.
shipping records (perform sales cutoff test)
To determine that recorded
sakes are 7. Recompute information on sales invoices.
for the amount of goods 8. Trace entries in sales journal to sale invoices.
d. Valuation or Allocation
shipped and 9. Trace details on sales invoices to related
are correctly billed and documents.
recorded.
To determine that sales
10. Examine document supporting sales
e. Presentation transactions
transactions for proper classification.
are properly classified.

III. TEST OF CONTROLS OVER SALE ADJUSTMENTS TRANSACTIONS

Cash Discounts – substantive test of account balances
Sales returns, allowances, corrections – emphasis is on testing the existence of recorded transactions as
a means of uncovering any diversion of cash from the collection that have been covered up by fictitious
sales returns and allowances (existence); understatement of these may lead to management reporting
overstated net income (completeness)
Uncollectible Accounts – most important audit objective is existence because of the possibility that the
management may use this account to cover up misappropriations of company assets. The control to
prevent this is to employ proper authorization when writing off uncollectible accounts

IV. SUBSTANTIVE TEST FOR SALES RETURNS AND ALLOWANCES

The same audit objectives with sales except for the following:
(1) Materiality – if amount reflected in the CMs are immaterial, they can be ignored
(2) Emphasis on the objective – emphasis is on testing the validity of recorded transactions as a means
of uncovering any diversion of collections that has been covered by a fictitious sales returns and
allowances

Audit procedures normally include:

- Review of the use and authorization of CM; CMs must be serially numbered signed by an employee
separate from the handling of cash or maintenance of the customer’s ledger
- Review of credits for returned merchandise supported by receiving report on the return shipment
- Verify prices, extensions and footings.
- Trace postings from sales returns journal and other accounting records to the customer’s accounts in
the SL

V. TEST OF CONTROLS OVER CASH RECEIPTS TRANSACTIONS

CONTROLS
Assertion: EXISTENCE/OCCURRENCE, recorded receipts
represent actual cash collections from customers
An employee prepares a prelisting of cash receipts
A validated receipt is obtained for deposits and compared
to cash receipts summary
Segregation of duties: handling cash and posting to AR
Preparation of a bank reconciliation by a person
independent if cash, AR, or GL records
Assertion: COMPLETENESS, all receipts are processed and
recorded
Prelisting and monitoring of cash register procedures
Checks are restrictively endorsed immediately after
receipts.
Preparation of daily cash summary and reconciliation of
OTC receipts and prelisting.
TEST OF CONTROLS
- Observe whether a prelisting is prepared
- Inquire about the procedures followed
by the employee
- Compare the validated slips to the cash
receipts summary
- Observe the separation of duties
- Inquire from personnel about their
responsibilities.
- Observe whether a bank reconciliation
had been prepared by an independent
employee
- Observe the monitoring of this
procedure
- Observe whether the procedure is
followed.
- Inquire from responsible employees
about the regularity
 and consistency of the performance of
this procedure.
- Observe the procedures.
Reconciliation of cash receipts journal to the total posted to
- Inquire from employees who perform
AR
the procedures.
Assertion: RIGHTS AND OBLIGATIONS, all cash receipts are
deposited in the bank account of the client
- Observe whether the procedure is
Cash receipts are deposited intact daily in the company’s followed
bank account - Compare cash in the prelisting and
validated deposit slip.
Assertion: VALUATION AND ALLOCATION, the DR to cash and
CR to AR are valued at amount actually received
- Compare entries made in the cash
Cash receipts should be recorded at the amount indicated
receipts journal to
in the remittance advice
remittance advices.
Assertion: PRESENTATION AND DISCLOSURE, cash receipts
transactions are recorded in accordance with PFRS
- Determine whether the accounting
An accounting supervisor approves classifications made in
supervisor approval is
journalizing
recorded.

VI. SUBSTANTIVE TESTS OF CASH RECEIPTS TRANSACTIONS

ASSERTIONS AUDIT OBJECTIVES
To determine that recorded
a. Existence or
cash receipts represent actual
occurrence
collection from customers.
To determine that all cash and
b. Completeness
checks are recorded.
To determine that debits to
c. Valuation or Allocation cash and credits to AR are
values at amounts received.
To determine that cash receipts
transactions are presented and
d. Presentation
disclosures are prepared in
accordance with PFRS.
AUDIT PROCEDURES
1. Trace cash receipts journal to prelisting of
cash receipts and to remittance advice.
(sample)
2. Reconcile daily deposits to validated
deposit ticket. (from a sample of entries)
3. Reconcile daily listings and validated
deposit ticket to cash receipts journal to
verify that all cash receipts are recoded
4. Examine remittance advice and verify that
discount taken was appropriate (sample)
5. Foot AR subsidiary ledger and reconcile
with GL account.
6. Review account coding in the cash
receipts journal (sample).

3.) EXPENDITURE AND DISBURSEMENT CYCLE

 Debit Credit Debit
Merchandise Accounts Cash
Inventory Payable Purchase
Raw Materials Discounts
Inventory Purchase
Purchases
Prepaid Expenses
Plant Assets
Other Assets

Purchase Payment

Activities involved:
(1) Acquisition of goods and services;
(2) payment for these acquisitions
Accounts affected:
(1) Purchases and related adjustments,
(2) Accounts payable and trade notes payable,
(3) cash in bank,
(4) inventories, and
(5) manufacturing and operating expenses

Documents used and Audit Significance

Documents Significance
- Provides evidence that the purchasing department was authorized to
Purchase requisition
initiate purchase.
- Contains signature of an employee who authorized purchase from a
Purchase order
vendor.
Receiving report - Provides evidence that goods were received.
Vendor’s invoice - Provides evidence about a purchase of goods or services
Debit Memo - Provides evidence that the amount owed to vendor has been reduced.
Voucher - Provides documentation for recording of a transaction.
- A canceled check provides evidence about payments that the entity
Check
has made.
- Used to determine that all transactions recorded on the statements
Vendor’s statement
have been recorded in the books.

Accounting records employed:

(1) Purchase journal;
(2) Cash disbursement file/journal; and
(3) Accounts payable master file/subsidiary ledger

I. TEST OF CONTROLS FOR ACQUISITION

CONTROLS TEST OF CONTROLS
Assertion: EXISTENCE/OCCURRENCE, recorded
acquisitions are for items that were acquired
Acquisitions approved by authorized personnel as - Examine the approval signature.
 evidenced by signature on PO.
- Observe the procedure.
- Examine file documents.
When vouchers are not prepared:
Preparation of voucher for the purchase of goods. - Review entries in the purchase journal.
- Examine documents underlying them for
authenticity and
reasonableness.
Check signer examine supporting documents and cancel
- Examine cancellations on the documents.
the documents when paid.
Assertion: COMPLETENESS, all acquisitions that occurred
recorded
Prenumbered receiving reports are used and accounted - Observe the procedure and account for the
to determine that a liability is recorded. numerical sequence of receiving report.
Vouchers are prenumbered and accounted ad they are - Observe the procedure and account for the
entered in the voucher register. numerical sequence of the voucher.
Assertion: RIGHTS AND OBLIGATIONS, recorded
acquisitions are the entity’s purchases and liabilities
Receiving reports are prepared by persons who have
- Observe that the procedure is performed.
access to a blind copy of PO details.
Assertion: VALUATION AND ALLOCATION, acquisitions are
recorded in the proper amounts.
Invoice amounts are verified by reference to the PO and - Examine the voucher for signature indicating
receiving report. Mathematical accuracy is also checked. performance.
Assertion: PRESENTATION AND DISCLOSURE, acquisitions
are recorded in accordance with PFRS
Employees are required to use a chart of accounts.
- Examine the chart of accounts and signature of
Account coding is assigned to one person and checked by
employee performing the verification.
another.

II. SUBSTANTIVE TESTS OVER ACQUISITION TRANSACTION

ASSERTIONS AUDIT OBJECTIVES AUDIT PROCEDURES
1. Examine underlying documents for
authenticity.
2. Scan voucher register for large or unusual
To determine that recorded
items.
a. Existence or purchases are for items that
3. Inspect asset acquired.
occurrence were
4. Trace inventory purchased to perpetual
acquired.
records.
5. Scan voucher register for duplicate
payments.
6. Trace a sequence of receiving reports to
To determine that purchases entries in the voucher register.
b. Completeness that 7. Test cutoff.
occurred are recorded. 8. Account for sequence of entries in
voucher register.
c. Rights and obligations To determine that purchases 9. Trace from invoices to perpetual
 are the entity’s acquisitions and inventory records.
liabilities. 10. Examine vendor’s invoices.
To determine that purchases
11. Recompute the invoices and compare
d. Valuation or Allocation are recorded for proper
invoice price to purchase order.
amounts.
To determine purchases are
presented and disclosures are 12. Check accuracy of accounts on invoices
e. Presentation
prepared in accordance with by reference to chart of accounts
PFRS.

III. TEST OF CONTROLS OVER CASH DISBURSEMENT TRANSACTIONS

CONTROLS TEST OF CONTROLS
Assertion: EXISTENCE/OCCURRENCE, recorded cash disbursement occurred.
- Inquire/observe whether the procedure is
Authorized individual signs and mails promptly the checks.
followed.
A person independent to handling of disbursement reviews - Inquire whether the procedure is followed.
whether checks are processed on a timely basis. - Examine outstanding checks list.
Assertion: COMPLETENESS, all cash disbursements made
are recorded
- Observe whether employee who prepares
the check
Checks are prenumbered and accounted for.
register accounts for the sequence of the
checks.
- Observe the procedure with emphasis on
Preparation of bank reconciliation by a person independent the segregation
of cash disbursements and cash receipts. of duties.
- Inspect reconciliation.
Assertion: RIGHTS AND OBLIGATIONS, all cash
disbursements made are for obligations of the entity.
- Inquire about the segregation of duties.
- Observe whether separation really exists.
Examination of supporting documents before check signer,
- Inquire about the check signer’s
who is independent of voucher preparation, signs check.
procedures for reviewing
documents.
Assertion: VALUATION AND ALLOCATION, amounts
recorded are valued at proper amounts.
Verify amounts and calculations on vendor’s invoices. - Observe the procedure.
Employee signs voucher after this procedure. - Examine signature on paid invoices.
Assertion: PRESENTATION AND DISCLOSURE, cash
disbursements are recorded in accordance with PFRS
Chart of accounts adequately describe the account to be
used and account coding and checking is assigned to - Observe the procedure.
different persons.

IV. SUBSTANTIVE TESTS OVER CASH DISBURSEMENTS

ASSERTIONS AUDIT OBJECTIVES AUDIT PROCEDURES
 - Examine paid checks for appropriate
a. Existence or To determine that recorded cash endorsements.
occurrence disbursements occurred. - Examine documents underlying
payments.
- Reconcile cash disbursements per
To determine that all cash books with cash disbursements per
b. Completeness
disbursements made are recorded. bank.
- Test bank reconciliation.
To determine that all cash
- Examine documents underlying
c. Rights and obligations disbursements made were the
payments
entity’s obligations.
To determine that purchases are
d. Valuation or Allocation - Recalculate invoices paid.
recorded for proper amounts.
To determine purchases are
- Check accuracy of accounts on
e. Presentation presented and disclosures are
invoices.
prepared in accordance with PFRS.

4.) HUMAN RESOURCES AND PAYROLL CYCLE

START

Employee
Information

Check
Recommendations
for Bonus/Increment

Check
Attendance

Check
Advance/Loans

Check Approved
Additions &
Deductions

Prepare Salary
Transfer

Produce
Payments END

Activities involved:
(1) acquisition of employee services;
(2) compensation

Accounts affected:
(1) Salaries Payable;
(2) Cash in bank; and
(3) Payroll expenses
Documents used and Audit Significance
Documents Significance

Time Card
Deduction authorization
Certification of Taxes withheld
Labor ticket and labor ticket
summary
Payroll tax returns
Other personnel records
- Provides evidence about the validity of the hours employee is paid for
working.
- Indicates that the employee authorized an amount to be withheld
from a paycheck.
- Indicates that taxes withheld were reported to the various taxing
authorities.
- Records specific activity of a laborer and the labor used in production
on any given day.
- Provides evidence that amount withheld are paid to the appropriate
authorities.
- Numerical sequence helps ensure that all write – offs are recorded.

Accounting records employed:

(1) Payroll register;
(2) Employee Earnings Record;
(3) Labor Distribution journal; and
(4) General journal

I. TEST OF CONTROL OVER PAYROLL TRANSACTION

(2) Inquiry, (2) Observation, and (3) Review
CONTROLS TEST OF CONTROLS
Assertion: EXISTENCE/OCCURRENCE, recorded payroll
transactions occurred
Personnel department authorizes the addition of an - Observe the procedures followed
employee to the payroll or any changes in employees’ - Examine written approvals for selected
status payrolls
Segregation of duties between the employee who reviews
details of payroll and signs checks, and another for - Observe this procedure.
distribution of checks
Requiring supervisor approval for hours entered in the time - Observe whether the procedure is
cards followed.
Assertion: COMPLETENESS, all payroll earned by employees is
recorded
Prenumbered checks and accounted for in the bank - Observe whether the reconciliation is
reconciliation done by a personnel separate from the routinely prepared by a person
payroll preparation independent of the payroll function.
Assertion: RIGHTS AND OBLIGATIONS, recorded payroll
transactions are for services received.
- Observe whether such procedure is
Employees are required to record the time work using a
being followed.
time clock
- Examine signature on card.
Assertion: VALUATION AND ALLOCATION, payroll transactions
recorded for proper amount.
- Examine payroll register for signature
Verification of accuracy of payroll calculations.
indicating verification.
Control total of hours worked and verified independently of - Examine worksheet that documents the
 payroll accounting and compared to hours for which
comparison.
payment is recorded
Assertion: PRESENTATION AND DISCLOSURE, payroll
transactions are recorded in accordance with PFRS
Employees use chart of accounts in assigning codes for - Examine payroll summary for the
labor charges. Another employee would check work of the signature indicating that this procedure is
employees who assigned the codes. being followed.

II. SUBSTANTIVE TEST OF PAYROLL TRANSACTIONS

ASSERTIONS AUDIT OBJECTIVES AUDIT PROCEDURES
1. Check the personnel records to determine
To determine that whether the employees are actually employed.
a. Existence or
recorded payroll 2. Observe actual payroll distribution.
Occurrence
transactions occurred. 3. Investigate the method of the company in
handling unclaimed pay.
4. Trace payroll tested to summaries.
To determine that all
5. Trace postings to summary totals to the GL and
b. Completeness payroll earned by
subsidiary ledgers.
employees is recorded.
6. Check propriety of the accounting distribution.
To determine that
7. Examine the canceled employee payroll checks
recorded payroll
c. Rights and obligations for propriety.
transactions are for
8. Examine receipts signed by employees.
services received.
9. Check the recorded pay against the original
To determine that payroll record for hours worked or units produced.
d. Valuation or Allocation transactions are recorded 10. Compare the rates paid with authorization
for the proper amounts. forms/contracts.
11. Check computations and deductions
To determine that payroll 12. Compare the total amount of payroll tested
e. Presentation transactions are recorded with appropriate recorded disbursements from
in accordance with PFRS. general bank account.

5.) PRODUCTION/CONVERSION CYCLE

- transforms input resources, raw materials, labor, and overhead into finished products or
services for sale.
 Subsystems

1. Production System – Involves the planning, scheduling and control of the physical product
through the manufacturing process
- determining raw materials requirement
- authorizing the release of raw materials into production
- authorizing work to be conducted in the production process
- directing the movement of work through the various stages of production
2. Cost Accounting System
- records the financial effects of the events occurring in the production process
- initiated by the work order
- cost accounting clerk creates a new cost record for the batch and files in WIP file
- the records are updated as materials and labor are used
- receipt of last move ticket signals completion of the production process
- clerk removes the cost sheet from WIP file
- prepares a journal voucher to transfer balance to a finished goods inventory account and
forwards to the General Ledger department

Finished Goods

Audit Step 1:
A. Use the understanding of the client and its environment to consider inherent risks, including fraud
risks, related to inventories and cost of goods sold.
B. Obtain an understanding of internal control over inventories and cost of goods sold.
C. Assess the risks of material misstatement and design further audit procedures.
D. Perform further audit procedures—tests of controls.
1. Examples of tests of controls:
a. Examine significant aspects of a sample of purchase transactions.
b. Perform tests of the cost accounting system.
2. If necessary, revise the risks of material misstatement based on the results of tests of controls.

Audit Step 2:
E. Perform further audit procedures—substantive procedures for inventories and cost of goods sold.
1. Obtain listings of inventory and reconcile to ledgers.
2. Evaluate the client’s planning of physical inventory.
3. Observe the taking of physical inventory and make test counts.
4. Review the year-end cutoff of purchases and sales transactions.
Audit Step 3:
E. Perform further audit procedures
5. Obtain a copy of the completed physical inventory, test its clerical accuracy, and trace test counts.
6. Evaluate the bases and methods of inventory pricing.
7. Test the pricing of inventories.
8. Perform analytical procedures.
9. Determine whether any inventories have been pledged and review purchase and sales commitments.
10.Evaluate financial statement presentation of inventories and cost of goods sold, including the
adequacy of disclosure.

Risks of Material Misstatements

1. Inventories constitute a large asset and very susceptible to major errors and fraud.
2. The accounting profession allows numerous alternative methods for valuation of inventories, and
different methods may be used for various classes of inventories.
3. The determination of inventory value directly affects the cost of goods sold and has a major impact on
net income for the year.
4. The determination of inventory quality, condition, and value is inherently a more complex and
difficult task than is the case with most other elements of financial position.

Potential Misstatements – Inventory

1. Misstatement of Inventory Costs

Fraud:
 Intentional misstatement of production costs assigned to inventory.
 Intentional misstatement of inventory prices
Errors:
 The assignment of direct labor costs, direct material costs, or factory overhead to inventory
items is inaccurate.
 Erroneous pricing of inventory.

2. Misstatement of Inventory Quantities

Fraud:
 Items are stolen with no journal entry reflecting the theft.
 Inventory quantities in locations not visited by auditors are systematically overstated.
Error:
 Miscounting of inventory by personnel involved in physical inventory.

3. Early(late) recognition of purchases – “cutoff problems”

Fraud:
 Intentional recording of purchases in the subsequent period.
Error:
 Recording purchases of the current period in the subsequent period.

Considerations in Planning a Physical Inventory

 Selecting of the appropriate date
 Suspending production
  Segregating obsolete and defective goods
 Establishing control over the counting process
 Achieving proper cutoff of sales and purchases
 Arranging for the services of specialists

6.) FINANCE AND INVESTMENT CYCLE

Activities involved:
(1) planning the cash need;
(2) raising capital; and
(3) investing funds
*cover the non – operating activities of the company

Financing Transactions:
1. Borrowing from third parties excluding open trade accounts with creditors (short – term and long –
term)
2. Share capital and dividend transactions share issuance and reacquisition, shares returned and
dividend declarations
*Authorizing, executing, and recording transaction

Investing Transactions:
1. Acquisitions and disposals of financial assets
2. Lending to third parties, other than open trade accounts with customers
 Accounts affected:

(1) Notes Payable (non – trade); (9) Intangible assets

(2) Bonds Payable; (10) Cash in Bank
(3) Mortgage Payable (11) Interest Expense (Payable)
(4) Long – term Liability (finance lease) (12) Share premium
(5) Share capital (13) Retained earnings
(6) Investment in securities (14) Treasury Shares
(7) Accounts Receivable (non – trade) (15) Dividends
(8) PPE and related adjustment (16) Capital Account

Documents used and Audit Significance

Documents used in the expenditure cycle.
Documents Significance
Share Certificate - Shows the number of shares owned by a shareholder.
Bond Certificate - Shows the number of binds owned by a bondholder
Bond Indenture - (contract) States the terms of the bond issue
Broker’s Advice - Specifies the details of an investing transaction.

I. INTERNAL CONTROL OVER FINANCING TRANSACTION

*Three operative objectives: proper execution, recording and custody of assets

EXISTENCE OR OCCURRENCE & RIGHTS AND OBLIGATIONS: Financing cycle transactions actually
occurred.
a. The BOD authorizes the issuance of long – term notes, bonds, and share capitals, the legal
requirements and
proceeds are promptly deposited intact.
b. Authorized (BOD or management) payments of interest and dividends to proper payees.
c. Authorized execution of redemption and reacquisition of bonds and share capital transactions.
d. Notes are cancelled when they are paid to avoid double payment.
e. Recorded balances are periodically verified with bondholders and shareholders

VALUATION/COMPLETENESS/CLASSIFICATION: Financing cycle transactions are properly valued and

recorded.
a. Transactions and events are correctly recorded as to amount, classification, and accounting period.
b. Transactions are promptly and correctly posted to individual accounts.

II. TESTS OF CONTROL SUBSTANTIVE TESTS OF FINANCING CYCLE TRANSACTIONS

o Conduct test of compliance – since transactions are few in volume but large in value; follow the
approach of substantiating the individual transactions

III.
INTERNAL CONTROL OVER INVESTING TRANSACTION
 *Audit risks are kept at a very low level because
- infrequent occurrence of the transactions
- effective control can be implemented at a little cost
*Three operative objectives: proper execution, recording and custody of assets

EXISTENCE OR OCCURRENCE & RIGHTS AND OBLIGATIONS: Investing cycle transactions actually
occurred.
a. The management authorizes the acquisition/sale of PPE, securities and intangible assets.
b. Interest and dividends checks are promptly deposited intact.
c. Access to PPE, securities and intangible assets are restricted to authorized personnel.
d. Recorded balances are compared with existing assets at reasonable intervals.

VALUATION/COMPLETENESS/CLASSIFICATION: Investing cycle transactions are properly recorded.

c. Transactions and events are correctly recorded as to amount, classification, and accounting period.
d. Transactions are promptly and correctly posted to individual accounts investment.

IV. TESTS OF CONTROL SUBSTANTIVE TESTS OF FINANCING CYCLE TRANSACTIONS

o Test of control is limited because the number of transactions are relatively small.
o The auditor may decide to proceed directly to substantive tests of balances after a preliminary review
of the flow
of transactions through the accounting system. (cost – benefit relationship)
o When the entity has an extensive investment portfolio and numerous transactions, the auditor may
decide to
complete his review of internal control and perform compliance tests on the controls.

Test of Control
1. Trace transactions for purchases and sales of PPE, securities and intangible assets through the system.
2. Review reports by internal auditor on their periodic inspections to PPE, securities and intangibles.
3. Review monthly reports by officer of client company on securities owned, purchased, and sold, and
revenue earned.
4. Review significant changes in the composition of PPE and related liens and mortgages.