AUDITING & ATTESTATION – 4
Becker Auditing – 2008 Edition
Chapter 4
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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
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
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
U– Understandability and Classification
R– Rights, Obligations, and Occurrence
V – Valuation and accuracy
ed assertions
Substantive Testing:
N– Nature
E– Extent
T– Timing
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,
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 downBiggest
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
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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, 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, and extensions and footings are computed
4)Invoice is sent to customer and accounts receivable department
3)Prices and discounts are applied to the invoice, and extensions and footings are computed
4)Invoice is sent to customer and accounts receivable department
Accounting: Recordkeeping
1)
Accounts Receivable
Sa les1)Receivable
is recorded in the A/R control account in the general ledger and in A/R subsidiary
ledger
2)Periodically, an independent person should reconcile these two
records
Collection of Cash Receipts
1)When payment is received from customer, 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, uncollectible receivables should be written off
3)Controls for writing off include proper authorization by treasurer and recordkeeping
4)The auditorobserves the preparation of the aging schedule as part of the study of internal control
2)At some point, uncollectible receivables should be written off
3)Controls for writing off include proper authorization by treasurer and recordkeeping
4)The auditorobserves 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, the related receivable is eliminated
2)Serially numbered receiving report may be used as a sales return slip
3)Once return is approved, 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.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
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 DepartmentCustody
Cashier / Treasurer Department Custody
Accounts Receivable Department Record Keeping
Accounting Department Record Keeping
Warehouse & Shipping Department Custody
Billing/Accounts Receivable Department Record Keeping
Accounting Department Record Keeping
Mailroom DepartmentCustody
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.Verify that recorded sales are based on approved sales orders and shipping documents
2.Determine that sales are recorded at appropriate amount and in proper period
3.Books and Records
Sales:
1.Verify that recorded sales are based on approved sales orders and shipping documents
2.Determine that sales are recorded at appropriate amount and in proper period
3.Books and Records
Becker Auditing – 2008 Edition
Chapter 4
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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
compare sales journal with subsidiary ledgers
test mathematical accuracy of trial balance
compare the total in subsidiary ledgers with general ledger
4. Cut-off
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
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, payables, and cash disbursements
Trace upBiggest
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, 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, the vendor, the receiving department, and accounting department
6)If order is cancelled, all copies should be recalled and filed
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, the vendor, the receiving department, and accounting department
6)If order is cancelled, all copies should be recalled and filed
Receipt of Goods or Services
1)They received their copy from the purchasing
department, preferably it should be a blind copy
2)If blind copy, 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
2)If blind copy, 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, approve the invoice for
payment, 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 toquantity
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,
purchase order, receiving report, 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, purchase order, receiving report, and requisition) prepared by A/P are received by treasurer
The functions of approving the payment and signing the checks should be segregated
Approved voucher (invoice, purchase order, receiving report, and requisition) prepared by A/P are received by treasurer
