Lecture-22

Confirmation of account receivable

The primary purpose of accounts receivable confirmation is to satisfy the existence, accuracy,
and cutoff objectives. Auditing standards requires the confirmation of accounts receivables in
normal circumstances but SAS permits an unqualified report when these three circumstances
happened such as:
(i) Accounts receivables are immaterial,
(ii) It is expected that the use of confirmations would be ineffective,
(iii) The combined level of inherent risk and control risk is low and other substantive
evidence can be accumulated to provide sufficient evidence.

Design of confirmation request

When designing the confirmation request, the auditor should consider the following factors:
a) Form of confirmation request
b) Auditor's prior experience with the client
c) Nature of information being confirmed
d) Characteristics of respondents

Inventory Audit
The overall objective in the audit of the inventory and warehousing cycle is to provide assurance
that the financial statements fairly account for raw materials, work-in-process, finished goods
inventory, and cost of goods sold.
The auditor obtains an understanding of internal controls over these three functions and then
performs tests of controls and substantive tests of transactions in both the acquisition and
payment cycle and the payroll and personnel cycle. These tests should satisfy auditors that
controls affecting the acquisitions of raw materials and manufacturing costs are operating
effectively and that acquisition transactions are correctly stated. When direct labor is a significant
part of manufactured inventory, auditors should verify the proper accounting for these costs in
the payroll and personnel cycle

Cost Accounting.
The accounting records concerned with the manufacture and processing of the goods and storing
finished goods. Cost accounting systems and controls of different companies vary more than
most other audit areas because of the wide variety of items of inventory and the level of
sophistication desired by management.
Cost accounting controls are those related to processes affecting physical inventory and the
tracking of related costs from the time raw materials are requisitioned to the completion of the
manufactured product and its transfer to storage. It is convenient to divide these controls into two
broad categories:
1. Physical controls over raw materials, work-in-process, and finished goods inventory
2. Controls over the related costs