Auditing Operations

and
Completing the Audit

1
Revenue/Expenses
Audit should address the following assertions:
1.Occurrence
2.Completeness
3.Accuracy
4.Cut-off
5.Presentation and disclosure

2
Revenue/Income
Relationship of Revenue to BS accounts:

Balance Sheet Items Revenue

Accounts Receivable Sales/Service income
Notes Receivable Interest
Securities and Investments Interest, dividends, gains
on sales
Property, Plant and Equipment Rent, Gains on sale
Intangible Assets Royalties

3
Expenses/Costs
Relationship of expenses to BS accounts:
Balance sheet items Expenses/costs
Accounts receivable Bad debts
Inventories Purchases/Cost of Sales
Property, plant and equipment Depreciation, repairs,
impairment, depletion
Intangible assets Amortization
Notes payable Interest
Accrued liabilities Other expenses

4
Expenses/Costs
Substantive audit procedures for other expenses:
1. Perform analytical procedures
a. Develop an expectation of the account balance
b. Determine the amount of difference from the
expectation that can be accepted without
investigation.
c. Compare the company’s account balance with
the expected account balance.
d. Investigate significant deviations from the
expected account balance.
2. Prepare analyses of selected expense accounts
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Audit of payroll
Internal control over payroll:
1. Human resource dept.
a. Authorized rate of salary
b. Approval of employment
c. Change in rate
c. Notice of termination
2. Timekeeping
a. Use of electronic time-recording equipment
b. Reports on units produced
c. Review by supervisors

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Audit of payroll
Internal control over payroll:
3. Payroll preparation and distributing pay
a. Payroll staff should not be the same person whose
function is timekeeping and distribution of pay.
b. Pay distribution should be made by staff other
than those who prepare the payroll.
c. Payment should be direct deposit, paychecks or
cash.

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Audit procedures for payroll
1. Perform test of controls over payroll
transactions for selected periods:
a. Compare names and salary rates to records
maintained by the HRD.
b. Compare time to time cards and reports
approved by supervisors.
c. Determine basis of deductions from payroll
d. Compare total payroll with payroll checks
e. Check documents proving receipt of salary
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Audit procedures for payroll
1. Perform test of controls over payroll
transactions for selected periods:
f. If wages are paid with direct deposit, compare
list of deposits made in behalf of employees.
g. Observe the use of time clocks by employees
reporting for work and investigate cards not used.
2. Perform analytical procedures to test
reasonableness of payroll expenses.
3. Investigate any extraordinary fluctuations in
salaries, wages and commissions.
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Audit procedures for payroll
4. Prepare a summary of compensation of
officers for the year and compare to
contracts, minutes of directors’ meetings or
other authorization.
5. Test the period end accrual.
6. Test computations of compensation earned
under profit-sharing or bonus plans.
7. Test commission earnings by examining
contracts.
8. Test pension obligations.
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Completing the Audit

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Further audit procedures before
completing the audit.
1. Search for unrecorded liabilities.
2. Review the minutes of meetings.
3. Perform analytical procedures.
4. Perform procedures to identify loss
contingencies.
5. Perform review of subsequent events.
6. Obtain representation letter.

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Perform review of subsequent
events.
1. Events that happened after balance sheet
date but whose conditions existed at the
balance sheet date.
2. Events whose conditions existed after the
balance sheet date but has a profound effect
on the financial statements.

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Audit procedures relating to
subsequent events:
1. Review the latest available interim FS,
minutes of directors’, stockholders and
committee meetings.
2. Obtain information for any pending litigation.
3. Include in the representation letter a
representation from management
concerning subsequent events.

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Evaluate audit findings
1. Evaluation Materiality – considering
quantitative factors
2. Evaluation Materiality – considering
qualitative factors
3. Evaluation Materiality – considering the
effect of prior year uncorrected
misstatements
4. Review the Financial Statement disclosures

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