Audit Exam 3- 14, 15, 20

Indications of Potential Misstatement in Tax Form

Causes need for Auditor to review at least one of each type of form and perform a detailed reconciliation of info on for and the payroll records: includes payment of penalties/interest in the past for improper payments new personnel in the payroll department responsible for preparing, lack of internal verification of information, and cash flow problems.

Non-Sampling Risk

Risk that an auditor reaches an incorrect conclusion for any reason not related to sampling risk. 1. Fail to recognize an exception because of exhaustion, boredom, or lack of understanding. 2. Ineffective/Inappropriate audit procedure (wrong direction for testing)

Blank Confirmation

Type of Positive Confirmation: A letter addressed to the debtor, requesting for the recipient to fill in the amounts of accounts receivable balance. (Most reliable)

Invoice Confirmation

Type of Positive Confirmation: in which an individual invoice is confirmed, rather than the customer's entire account receivable balance. (May increase confirmation response rate but do not directly confirm ending balances)

Posting and Summarization (Cash Receipts)

Cash receipts are correctly included in the accounts receivable master file and are correctly summarized. Key existing controls: 1. Statements sent to customer each month 2. Computer automatically posts transactions to the accounts receivable master file and general ledger. 3. Accounts receivable master file is reconciled to the general ledger on a monthly basis. Test of Controls: 1. Observe whether monthly statements are sent. 2. Examine evidence that accounts receivable master file is reconciled to the general ledger.

Accuracy (Cash Receipts)

Cash receipts are deposited and recorded at the amounts received. Key existing controls: 1. Accountant independently reconciles bank account. 3. Batch totals of cash receipts are compared with computer summary reports. 4. Statements are sent to customers each month.

Timing (Cash Receipts)

Cash receipts are recorded on the correct dates: Key existing control: 1. Procedures require recording of cash on a daily basis. Test of Controls: 1. Observe unrecorded cash at a point in time. Substantive Test of Transactions: 1. Compare date of deposit per bank statement to the dates in the cash receipts journal and prelistings of cash receipts.

Classification (Cash Receipts)

Cash receipts transactions are correctly classified: Key Existing Controls: 1. Cash Receipts transactions are internally verified. Test of Controls: 1. Examine evidence of verification. Substantive Test of Transactions: 1. Examine prelisting for proper account classification.

Completeness (Cash Receipts)

Cash received is recorded in the cash receipts journal: Key Existing Controls: 1. Prelist cash receipts prepared 2. Checks are restrictively endorsed. 3. Batch totals of cash receipts are compared with computer summary reports. 4. Statements are sent to customers each month.

Evaluating Sampling Risk by Calculating Sampling Error

(TER-SER)=______ which should evaluate whether it is sufficiently large to conclude the true population is acceptable. IT is much more likely that the true population exception rate is less than or equal to the tolerable exception rare in the 1st case than in the 2nd one.

Common Test of Controls for Completeness in Payroll and Personnel.

1. Account for a sequence of payroll checks. 2. Discuss with employees and observe reconciliation.

Test of Controls-Completeness (Sales)

1. Account for a sequence of shipping documents. 2. Examine file of batch totals for initials of data control clerk.

Key Internal Controls for Classification in Payroll and Personnel.

1. An adequate chart of accounts is used. 2. Account classifications are internally verified.

Detect embezzlement

1. Auditor compares the names on cancelled checks or account into whic h payroll has been deposited with times cards and other records for authorized signatures and reasonableness of endorsements. 2. Use auditing software to compare all account numbers and search for duplicates. 3. Scan endorsements on cancelled checks for unusual or recurring second endorsements.

Circumstances Where Negative Confirmation is Acceptable (Need to fit all)

1. Auditor has assessed the risk of material misstatement as low, and obtained sufficient appropriate evidence regarding the resin and operating effectiveness of control 2. Population of items are large number of small homogeneous account balances. 3. Auditor expects low exception rate. 4. Believe negative confirmation will give the requests adequate consideration. Auditor puts considerable emphasis on the effectiveness of internal controls, STofT, and analytical procedures.

Test for Nonexistent Employee

1. Auditors can trace selected transactions recorded in the payroll journal to hr department to see if they were actually employed. 2. Endorsement on cancelled check written to employee compared with authorized signature on employee's withholding authorization forms.

Key Internal Controls for Accuracy in Payroll and Personnel.

1. Calculations and amounts are internally verified. 2. Batch totals are compared with computer summary reports. 3. Wage rate, salary, or commission rate is properly authorized. 4. Withholdings, including amounts for insurance and payroll savings are properly authorized.

Common Test of Transactions for Classification in Payroll and Personnel.

1. Compare classification with chart of accounts or procedure manual. 2. Review time record for employee department and job ticker for jog assignment and trace through labor distribution.

Common Test of Transactions for Timing in Payroll and Personnel.

1. Compare date of recorded payment in the payroll journal with date on cancelled check of direct deposit and time record. 2. Compare date on check with date the check cleared the bank.

Test of Controls Occurrence- (Sales)

1. Examine customer order for evidence of credit approval. 2. Examine sales invoice for supporting bill of lading and customer order. 3. Examine file of batch totals for initials of data control clerk. 4. Observe whether monthly entries are sent.

Test of Controls- Posting and Summarization (Sales)

1. Examine evidence that accounts receivable master file is reconciled with general ledger. 2. Observe whether monthly statements are sent.

Common Test of Controls for Posting and Summarization in Payroll and Personnel.

1. Examine indication of internal verification. 2. Examine initial summary total reports indicating that comparisons have been made.

Common Test of Controls for Accuracy in Payroll and Personnel.

1. Examine indication of internal verification. 2. Examine file of batch totals for initials of data control clerk; compare totals to summary reports. 3. Examine payroll records for indication of authorization. 4. Examine authorizations in human resources file.

Common Test of Controls for Timing in Payroll and Personnel.

1. Examine procedures manual and observe when recording takes place. 2. Examine indication of internal verification.

Test of Controls- Accuracy (Sales)

1. Examine sales invoice for supporting docs. 2. Examine file of batch totals for initials of data clerk. 3. Examine the approved price list for accuracy and proper authorization. 4. Observe whether monthly statements are sent.

Common Test of Controls for Occurrence in Payroll and Personnel.

1. Examine time records for indication of approvals. 2. Review human resource policies and examine hr files. 3. Review org chart, discuss with employees, and observe duties being performed. 4. Examine printouts of transactions rejected by the computer for non-existent employee numbers. 5. Examine payroll records for indication of approval.

Evaluate the results.

1. Generalize from the sample to the population. 2. Analyze exceptions. 3. Decide the acceptability of the population.

Methodology for Designing Test of Details of Balance for Accounts Receivable

1. Identify clients business risk affecting accounts receivable (study industry/environment/managements objectives/business processes/identify business risk/ preform preliminary analytical procedures) 2. Set performance materiality/assess inherent risk 3. Assesses control risk for sales and collections cycle 4. Design/perform ToC & STofT for the sales and collections cycle.(Does assessed control risk need revise) 5. Design and perform analytical procedures for accounts receivable balance.(during planning, when performing detailed test at completion of audit) 6. Design test of details of balances of accounts receivable to satisfy balance related audit obj.

Difference between transaction related objectives for processing credit memo vs. sales

1. Materiality: Sales returns and allowances are so small they can be ignored. 2. Emphasis on Occurrence for Sales returns/Allowance: auditors emphasize testing recorded transactions to uncover theft of cash from the collection of AT that was covered up by fictitious sales returns and allowance.

Test of Controls- Completeness (Cash Receipts)

1. Observe prelisting of cash receipts and endorsement of incoming checks. 2. Prelisting of cash is used to verify recorded cash receipts. 3. Examine file of batch totals for initials of data control clerk. 4. Observe whether monthly statements are sent.

Test of Controls- Accuracy (Cash Receipts)

1. Observe whether accountant reconciles bank account. 2. Examine file of batch totals for initials of data control clerk. 3. Observe whether monthly statements are sent.

Substantive Test of Transactions- Completeness (Cash Receipts)

1. Obtain prelisting of cash receipts and trace amounts to the cash receipts journal, testing for names amount and dates. 2. Compare prelisting with the duplicate deposit slip

Substantive Test of Transactions- Accuracy (Cash Receipts)

1. Obtain prelisting of cash receipts and trace amounts to the cash receipts journal, testing for names amount and dates. 2. Prepare proof of cash receipts.

Difference in Transaction Related Audit Objectives and Accounts Receivable Balance Related Objectives- Cash Receipts

1. Occurrence affects completeness. (Increase in cash receipt decreases accounts receivable that is still outstanding no longer on included in the records) 2. Completeness affects existence. 3. Accuracy affects accuracy. 4. Posting and Summarization affects detail tie in. 5. Classification affect classification 6. Timing affects Cutoff. (Realizable value and rights balance related objectives are not affected by assessed control risk for class of transactions)

Difference in Transaction Related Audit Objectives and Accounts Receivable Balance Related Objectives- Sales

1. Occurrence affects existence. (Increase in sale decreases accounts receivable Both overestimate) 2. Completeness affects completeness. 3. Accuracy affects accuracy. 4. Posting and Summarization affects detail tie-in 5. Classification affects classification. 6. Timing affects Cutoff (Realizable value and rights balance related objectives are not affected by assessed control risk for class of transactions)

Analysis of Reported Difference in Confirmation

1. Payment already made before confirmation: cash receipts cutoff misstatements, lapping, or theft of cash 2. Goods have not yet been received: goods in transit, investigation to determine possibility or not receiving goods at all or cutoff errors. 3. Goods have been returned: failure to record a credit memo timing differences or improper recording of sales returns and allowances.

Key Internal Controls for Completeness in Payroll and Personnel.

1. Payroll checks are pre-numbered and accounted for. 2. Bank accounts are independently reconciled.

Key Internal Controls for Posting and Summarization in Payroll and Personnel.

1. Payroll master file contents are internally verified. 2. Payroll master file totals are compared with general ledger totals.

Three phases for test of controls and substantive tests of transactions.

1. Plan the sample- make sure the audit tests are performed in a manner that provided the desired sampling risk and minimizes non-sampling error. 2. Select the sample- decide how a sample is selected from a population, can only perform test after sample items are selected. 3. Evaluating the results- drawing conclusions based on audit tests.

Key Internal Controls for Timing in Payroll and Personnel.

1. Procedures require recording transactions as soon as possible after the payroll is paid. 2. Dates are internally verified.

Business Functions for the Sale

1. Processing Customer Orders (Sales) 2. Granting Credit (Sales) 3. Shipping Goods (Sales) 4. Billing Customer and Recording Sales (Sales) 5. Processing and recording cash receipts (Cash Receipts) 6. Processing and recording sales returns/allowances. (Sales Returns and Allowances) 7. Writing off non-collectible accounts receivable. (Write-off of uncollectible accounts) 8. Providing for Bad Debts (Bad Debt Expense)

Common Test of Transactions for Accuracy in Payroll and Personnel.

1. Recompute hours worked from time records. 2. Compare pay rates with union contracts/approval by board of directors. 3. Recompute Gross Pay/Net Pay. 4. Check withholdings by referring to tax tables and authorization forms in human resources file. 5. Compare cancelled check or direct deposit with payroll journal amount.

Common Test of Transactions for Completeness in Payroll and Personnel.

1. Reconcile the disbursements in the payroll journal with the disbursements on the payroll bank statement. 2. Prove the bank reconciliation.

Design Test of Controls and Substantive Test of Transactions for Acquistions

1. Relate each internal control to a transaction-related audit objective. 2. Related test of controls (operating effectively) to internal controls 3. Relate substantive test of transactions to transactions related audit objectives after considering controls and deficiencies in the system (if operating effectiveness of controls improves and is supported by test of transactions the auditor can reduce substantive testing)

Processing and Recording Cash Receipt Documents

1. Remittance Advice: document mailed to customer and returned with cash payments. Used as a record of the cash received to permit immediate deposit of cash. 2. Pre-listing of Cash Receipts: list prepared when cash is received by someone who has no responsibility of recording sales, accounts receivable or cash and has no access to accounting records. Verify whether cash received was recorded/deposited at correct amount on timely basis. (Lockbox/EFT bank provides this info) 3. Cash Receipts Transaction File: Includes all cash receipts transactions processed by the accounting system for a period of time. 4. Cash Receipts Journal: Generated from transaction file and permits AR master file/General Ledger.

Substantive Test of Transactions- Occurrence (Cash Receipts)

1. Review cash receipts journal and master file for unusual transactions and amounts. 2. Trace from prenumbered remittance advice or prelist of cash receipts to the cash receipts journal and subsidiary accounts receivable records to the bank statement. 3. Prepare a proof of Cash Receipts- total cash receipts recorded in the cash receipts journal for given period are reconciled with the actual deposits made in the bank

Common Test of Controls for Classification in Payroll and Personnel.

1. Review chart of accounts. 2. Examine indication of internal verification.

Common Test of Transactions for Occurrence in Payroll and Personnel.

1. Review the payroll journal, general ledger, and payroll earning records for large or unusual amounts. 2. Compare cancelled checks/direct deposit information with HR records OR payroll journal for name/amount/date. 4. Examine cancelled checks for proper endorsements.

When TER-SER is too small to conclude population is acceptable

1. Revise TER or ARO: only when original specification were too conservative. 2. Expand the Sample Size: Increase in size, has the effect of decreasing sampling error if the actual sample exception rate does not change. (Auditor believe initial sample was not representative) 3. Revise Assessed Control Risk: Results of TOC of STofT do not support preliminary assesed control risk, increase the risk which will increase STofT and TofDB. 4. Communicate with the Audit Committee or Management (Required to communicate in timely manner to allow management to correct deficiency before year-end by writing regarding significant deficiencies and material weaknesses in I/C.

Classes of Transactions in The Sales And Collection Cycle

1. Sales (Cash and Sales on Account) 2. Cash Receipts 3. Sales Returns and Allowances 4. Write-off of Uncollectible Accounts 5. Estimate of Bad Debt Expense

Billing Customers and Recording Sales Documents

1. Sales Invoice: Indicates to the customer the amount of a sale and the payment due date. (description, quantity, price of goods sold, freight chargers, insurance, terms) 2. Sales Transaction File: Includes all sales transactions processed by the accounting system for each transaction for a period of time. (Used in sales journals and AR master file) 3. Sales Journal or Listing: generate from sales transaction file, simultaneously posted to general ledger and accounts receivable master file. 4. Accounts Receivable Master File: file used to record individual sales, cash receipts, returns/allowances for each customer to maintain customer balances. Equal to the total balance of AR in the general ledger. 5. Account Receivable Trial Balance: Report amount receivable from each customer at a point in time (aged trial balance) 6. Monthly Statements: send to customers indicating beginning balance of AR, amount/date of sales, cash received, credit memo issued, and ending balance due.

Sampling Decision For Receivables

1. Sample size affected by: performance materiality, inherent risk, control risk, acheieved detection risk from other substantivve tests, types of confirmation, 2. Stratrification for selecting the balances for confirmation, consider both dollar size (larger balance) and time account has been outstanding (longest) because those are most like to contain misstatements, evaluate the resonableness of denial of confirmation (litigation/negotiation)

Test for Proper Handling of Terminated Employees

1. Select several files from hr records for employees who were terminated to determine whether each received termination pay consistent with company policy. 2. Compare termination dates in HR records to payroll disbursements dates in the payroll journal to verify the employee is no longer being paid.

Select the Sample and perform the audit procedures

1. Select the sample. 2. Perform the audit procedures.

Plan the Sample

1. State the objectives of audit test (Test the operating effectiveness controls, determine if transactions contain monetary misstatements) 2. Decide whether audit sampling applies (manual I/C) 3. Define attribute/exception conditions (Audit proced) 4. Define the population (Test for completeness and detailed tie-in before sample selected, clearly defined/ related to objective of the audit test) 5. Define the sampling unit (based on population/ objective of audit test- starting point for audit tests) 6. Specify tolerable exception rate. 7. Specify acceptable risk of over reliance. 8. Estimate the population exception rate 9. Determine the initial sample size.

Common Test of Transactions for Posting and Summarization in Payroll and Personnel.

1. Test clerical accuracy by footing the payroll journal and tracing postings to the general ledger and payroll master file.

2 categories of Test of Controls and Subsequent Test of Transactions (Acquisition and Payment Cycle)

1. Test of acquisitions: concerned with 3 business functions processing purchase orders, receiving goods and services and recognizing the liability. 2. Test of payments, concerned with 1 business function processing and recording cash disbursements.

Key Internal Controls for Occurrence in Payroll and Personnel.

1. Time records approved by supervisor. 2. Time clock used to record time. 3. Adequate human resources files maintained. 4. Employment is authorized. 5. Separation of duty (HR, Timekeeping, Payroll Disbursements) 6. Only employees existing in computer data files are accepted when entered. 7. Disbursements are authorized before issuance.

Substantive Test of Transactions- Accuracy (Sales)

1. Trace entries in sales journal to sales invoices. 2. Recalculating information such as, prices and extensions on sales invoices, by comparing it on difference documents like approved sales list, invoices with shipping records and documents. 3. Trace details on sales invoices to: shipping docs, sales orders, and customer orders. 4. Compare an amount on duplicate sales invoice to either sales journal or sales master file entry. Computer programming reduces these test if auditor believes it is programmed correctly to price list.

Substantive Test of Transactions- Posting and Summarization (Sales)

1. Trace from selected sales invoices from the sales journal to the accounts receivable master file and test for amount, date, and invoice number. 2. Use accounting software to foot/Cross-Foot trace totals from the sales journal to the general ledger. 3. Include footing journals, master file records, and ledgers, and tracing from one to another.

Substantive Test of Transactions- Posting and Summarization (Cash Receipts)

1. Trace selected entries from the cash receipts journal to the accounts receivable master file and test for dates and amounts. 2. Trace selected credits from the accounts receivable master file to the cash receipts journal and test for dates and amounts. 3. Use audit software to foot and cross-foot the sales journal and trace totals to the general ledger.

Methodology For Designing ToC and STofT (Acquisition and Payment Cycle)

1. Understand Internal Controls: performing risk assessment procedures by studying client's flow charts, reviewing internal control questionnaire and performing walk-through acquistion/payment trans 2. Assess Planned Control Risk: Key Controls- 1. Proper authorization for acquisitions ensure goods & services acquired are for authorized company purposes and avoid excessive/unnecessary items, Purchasing department separate from authorizing acquisition or receipt of goods, prenumbered and accounted for purchase orders. 2. Separation of Custody of Assets from other functions receiving department independent of storeroom personnel and accounting department, accounting dep: records transfer of responsibility. 3. Timely Recording and Independent Review of Transactions- personnel who record acquistion do not havbe assess to cash, AP dep compares purchase orders/receiving reports/vendor invoice. 4. Authorization of Payment: Signing of check by an individual with proper authority, separation of signing checks and performing AP function, careful examination of supporting docs by check signer, prenumber to make it earies to account for, physical control over blank, voided, or signed checks.

Assess Planned Control Risk- Sales

1. Use 6 transaction related objectives as a framework. 2. Identify the key internal controls and deficiencies for sales. 3. Associate the key internal controls and deficiencies with a transaction related objective. 4. Assess control risk for each objective by evaluating the controls and deficiencies for each objective. (Affects decisions about test of controls and substantive test)

Methodology of Test of Details of Balance for Accounts Payable

1a. Identify client business risks affecting accounts payable: just in time inventory, e-commerce allows access to accounting records if not properly control. 1b. Set performance materiality and assess inherent risk for accounts payable. (Relatively high) 1c. Assess control risk for the acquisition and payment cycle. (Depend of effectiveness of controls) 2. Design and perform test of controls and substantive test of transactions for the acquistion and payment cycle. 3a. Design and perform analytical procedures for accounts payable. (Compare with prior year acquisition related expense, review unusual amount and vendor, calculate ratios) 3b. Design test of details of accounts payable to satisfy balance related audit objectives (audit procedures, sample size, items to select, and timing) main focus is on understate and omitted liability. (Realizable value and Rights are not applicable)

Providing for Bad Debts

1st Business Function Associated with Bad Debt Expense: recording of the bad debt expense for amount they do not expect to collect under accounting principals.

Processing and Recording Cash Receipts.

1st Business Function Associated with Cash Receipts includes receiving, depositing, and recording cash. Most important concern is theft, important that all cash receipts are deposited in the bank at the proper amount on a timely basis and recorded in the cash receipts transaction file to prepare cash receipts journal as well as updating the account receivable/general ledger master files.

Processing and Recording Sales Returns and Allowances

1st Business Function Associated with Sales Returns and Allowances: seller accepts the return of goods and grants reduction in charges, company prepares receiving report for goods and returns them to storage, Returns and Allowances are recorded in return and allowance transactions file and AR master file, credit memos are issued to reduce the amount due for the customer and facilitate record keeping.

Processing Customer Orders

1st Business Function Associated with Sales-Customers request for goods initiates the entire cycle, results in the immediate creation of the sales order (document communicating description/quantity of order)

Writing Off Uncollectible Accounts Receivable

1st Business Function Associated with Write-off of uncollectible accounts: after concluding amount can't be collected the company must write off account receivable with internally created uncollectible account authorization form.

Granting Credit

2nd Business Function Associated with Sales- Before goods are shipped, a properly authorized person approve credit to the customer for sales on account, lowers bad debts and accounts receivable that may be uncollectible. Only proceed when sales order total+balance is less than limit on master file.

Substantive Test of Transactions- Occurrence (Sales)

3 types of misstatement: A. sales included in journal for which no shipment was made (Vouch selected entries in the sales journal to related copies of shipping/supporting documents.(duplicate sales invoice, bill of lading, sales order, customer order), may need to trace amounts to the perpetual inventory record to see in it reduced. B. Sales recorded more than once: reviewing a numerically sorted list of recorded sales transactions from sales joural for duplicate numbers/ test proper cancelation of shipping documents. C. shipments made to non-existent customers and recorded as sales: occurs when person recording sales is also in position to authorize shipments. The auditor can trace customer information on sales invoice to customer master file/Review sales journal and master file for unusual transactions and amounts. D. Trace the credit in account receivable master file to its source.

Shipping Goods

3rd Business Function Associated with Sales- Initates sales of goods at this point, shipping document prepared at the time of shipment by customer sales order information. Bill of lading is written contract between carrier and the seller of the receipt and shipment of goods generate the sales invoice, entry in sales journal and update to perpetual inventory records.

Billing Customer and Recording Sales

4rd Business Function Associated with Sales- Includes preparation of multicopy sales invoice, update to sales transactions file and accounts receivable master file, and general ledger master file for sales and accounts receivable. (use this information to generate sales journal/to prepare accounts receivable trial balance) Most important aspects: 1. All shipments made have been billed (Completeness) 2. No shipment has been billed more than once (Occurrence) 3. Each one is billed for the proper amount. (Accuracy)

Realizable Value (Accounts Receivable is Stated at Realizable Value)

=gross AR less allowance for uncollectible accounts. 1. To begin by evaluating of allowance for uncollectible accounts: the auditor review the results of the TOC that are concerned with clients credit policy. (Gain insight by examining credit files, discussions with credit manager, and review of client's corresponding file) a. No change the tests of credit policy and credit approval should be consistent with preceding year or change reflects changes in economic condition/ sales volume. b. Examine non-current accounts on trial balance to determine which have been paid subsequent to balance sheet date. 2. Verify bad debt expense: beginning balance was verified last year, uncollectible written off were verified STofT, ending balance also verified. Auditor must verify the appropriateness of percentage used and be careful to modify the calculations for change in condition.

Sampling Distribution

A frequency distribution of results of all possible samples of a specified size that could be obtained from a population containing some specific characteristic. (Allow auditor to make probability statements about the likely representativeness of any sample in a distribution.

Positive Confirmation

A letter addressed to the debtor, requesting that the recipient indicate directly on the letter where the stated account balances are correct or incorrect. If incorrect by what amount. More reliable evidence than negative confrimation: auditor can perform follow-up procedures if response not recieve.

Negative Confirmation

A letter, addressed to the debtor, requesting a response only if the recipient disagrees with the amount of the stated account balance. May be considered correct even if debtor ignores confirmation. Cost less no second request or follow up to non-responses.

Block Sample Selection

A non-probabilistic method of sample selection in which items are selected in measured sequence.

Physical Control Over Assets in Payroll and Personnel

Access to unsigned payroll checks, signature machine, and direct deposit system should be restricted. Checks should be signed by a responsible employee and payroll should be distributed by someone independent of payroll and timekeeping functions. (Unclaimed checks return/redeposit)

Sales Returns and Allowances Cutoff

Accounting standards require sales returns and allowance to be matched with related sales in amounts are material are recorded in period that they occur (As long as not material) Auditor can examine supporting docs for a sample of sales returns and allowances recorded several weeks subsequent to the closing date to determine the date of the original sale. (If significantly different from those at beginning of period must consider an adjustment)

Test of Details of Balances For Liability and Expense Accounts

Accrued payroll, already been tests 1. Identify Business Risks: complex compensation arrangements (bonus, stock options, renegotiation of union contracts) 2. Set performance materiality/assess inherent risk: (typically low) Focus on risk of payroll fraud because of cash, classification between payroll and inventory, complexity of stock compensation plan. 3. Assess control risk and perform ToC/TofT 4. Perform analytical procedures: Comparison of prior years payroll expense, accrued payroll tax, direct labor% of sales, Commissions as % of sales with prior year. 5. Design/Perform Test of DB: Accrual liabilites: a. Accruals in trial balances are stated at the correct amount (accuracy) b. Accrual transactions in the payroll and personnel cycle are recorded in proper period. (Cutoff) Recalculate the client's accrual, verify with superiors. Expenses Accounts: Already tested in ToC SToT

Sample Exception Rate (SER)

Actual number of exceptions in the sample divided by the actual sample size.

Audit of prepaid expenses

Amount is usually immaterial, do analytical procedures to test that all charges arose from credit to prepaid insurance. (Compare to previous years and budget on policy by policy basis) The auditor must review the insurance coverage listen on the prepaid insurance schedule with broker from adequacy of cover to make sure company is not under-insured. 1. Existence/Completeness: examine insurance invoice and policy in comparison schedule, obtain confirmation from insurance agent. 2. Rights: The part will receive benefit if insurance claim is file. (Collateral posted) 3. Accuracy/Detailed Tie In: Verify the amount of insurance premium, length of policy, and allocation of premium to unexpired insurance. The schedule of prepaid insurance footed, totals traced to GL. 4. Classification: Charging the correct accounts and consistency with previous years.

Property Plant and Equipment

Assets have expected lives more than one year and are used in business/not acquired for resale Verifed different than current asset because infrequent, often large material amounts, kept/maintained in records for year, and subject to board of directors approval. (Emphasis on current period additions) 1. Fixed asset master file: Accounting record for this asset, includes detailed record of each piece of property owed, contains details of property added/ disposed of during the yer. . The totals for all recorded in this file equal the general ledger accounts for equipment, depreciation expense, and accumulated depreciation.

Proper Authorization- Sales

Auditor concerned about 3 points: 1. Credit must be properly authorized before sale takes place. (Loss from shipping to fictitious customer) 2. Goods should be shipped only after authorization.(Loss from shipping to fictitious customer) 3. Prices, terms, freight, and discounts must be authorized. (Correct price)

Non-Probabilistic Sample Selection

Auditor uses professional judgement to select sample items using non-probabilistic method that approximate a random sampling approach. (Haphazard Sample Selection, Block Sample Selection) Useful in situations where the cost of more complex sample selections method outweighs the benefit of those approaches.

Non-statistical sampling

Auditors do not quantify sampling risk, never acceptable to evaluate this type of sample using statistical means. (Can make non statistical evaluations using probabilistic sampling)

Understanding Internal Controls- Sales

Auditors study the client's flowcharts, make inquiries of the client using an internal control questionnaire, and perform walk-through test of sales.

Detail Tie-In (Account Receivable are Correctly Added and Agree with Master File and the total is added and agrees with the General Ledger)

Auditors test the information on the aged trial balance for this objective, before any other test verify that the population tested agrees with the general ledger and accounts receivable master file. 1. The total column and columns of aging must be test footed and the total on the trial balance is compared with the general ledger. 2. The auditor trace a sample of individual balances in supporting docs (duplicate sales invoice) to verify the customers name, balance and proper aging. 3. Can use audit software to foot and cross-foot the aged trial balance and recalculate the aging. Testing depends on: number of accounts involved, degree it was tested by ToC and STofT, extent internal auditor verified balance.

Detail Tie-In (Account Payable)

Balance Related Audit Objective: Accounts payable in the accounts payable list agrees with related master file and the total is correctly added and agrees with general ledger. Audit Procedures: 1. Re-add or use computer to total AP list. 2. Trace the total to the general ledger. 3. Trace individual vendor invoices to master file for name and amounts.

Accuracy (Account Payable)

Balance Related Audit Objective: Accounts payable in the accounts payable list are accurate. Audit Procedures: 1. Perform same procedures as those used for existence objective (Trace from accounts payable list to vendor invoices and statements/Confirm accounts payable, focus on large/unusual amounts) 2. Perform out-of-period liability tests

Existence (Account Payable)

Balance Related Audit Objective: Accounts payable in the accounts payable list exist. Audit Procedures: 1. Trace from accounts payable list to vendor invoices and statements. 2. Confirm accounts payable, emphasizing large and unusual amounts.

Classification (Account Payable)

Balance Related Audit Objective: Accounts payable in the accounts payable list is correctly classified. Audit Procedures: 1. Review the list and master file for related parties, notes or other interest bearing liabilities, long term payable, and debit balance.

Obligations (Account Payable)

Balance Related Audit Objective: Company has an obligation to pay the liabilities included in accounts payable. Audit Procedures: 1. Examine vendors' statements and confirm accounts payable.

Completeness (Account Payable)

Balance Related Audit Objective: Existing accounts payable are included in the accounts payable list. Audit Procedures: 1. Perform out-of-period liability tests

Cutoff (Account Payable)

Balance Related Audit Objective: Transactions in the acquisition and payment cycle are recorded in the proper period. Audit Procedures: 1. Perform out-of-period liabilities test. 2. PErform detailed test as part of physical observation of inventory. 3. Test for inventory in transit.

Cutoffs (Equipment Additions)

Balance Related Audit Objectives- Current year acquisitions are recorded in the correct period. Audit Procedures: 1. Review transactions near the balance sheet date for correct periods.

Classifications (Equipment Additions)

Balance Related Audit Objectives- Current year acquisitions as listed are accurate. Audit Procedures: 1. Examine vendors' voices in various equipment accounts to uncover items that should be classified as manufacturing or office equipment, part of the building, or repairs. 2. Examine vendors' invoices of closely related accounts such as repairs to uncover items that should be recorded as equipment. 3. Examine rent and least expense for Capitalization of leases. 4. Vouch larger amounts debited to the expense accounts (maintenance expense, lease expense, repairs and rents)

Accuracy (Equipment Additions)

Balance Related Audit Objectives- Current year acquisitions as listed are accurate. Audit Procedures: 1. Examine vendor invoices.

Exisitence (Equipment Additions)

Balance Related Audit Objectives- Current year acquisitions as listed exist. Audit Procedures: 1. Examine vendor invoices and receiving reports. 2. Physically examine assets.

Detail Tie-In (Equipment Additions)

Balance Related Audit Objectives- Current year acquisitions in the acquisitions schedule agree with related master file, amounts, and the total agrees with the general ledger. Audit Procedure: 1. Foot the acquisition schedule 2. Trace the individual acquisitions to the master file for amounts and descriptions. 3. Trace the total to the general ledger.

Completeness (Equipment Additions)

Balance Related Audit Objectives- Existing acquisitions are recorded. Audit procedures: 1. Examine vendors' invoices of closely related accounts like repairs/ maintenance to uncover items that should be recorded as equipment. 2. Review lease and rental agreements

Rights (Equipment Additions)

Balance Related Audit Objectives-The client has rights to current year acquisitions. Audit Procedures: 1. Examine vendors' invoice 2. Examine purchase or lease contracts to determine whether capitalization of equipment is appropriate.

Detail Tie-in (Sales and Collection Cycle)

Balance related audit objective: Accounts Receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger. Audit Procedures: 1. Obtain the accounts receivable aged trial balance and trace the balances to the general ledger. 2. Use audit software to foot and cross-foot the aged trial balance. 3. Trace 10 accounts from the trial balance to accounts on the master file.

Realizable Value (Sales and Collection Cycle)

Balance related audit objective: Accounts receivable at realizable value. Audit Procedures: 1. Trace 10 accounts from the aged trial balance to the accounts receivable master file to test for correctness of aging and the balances. 2. Use audit software to foot and cross-foot the aged trial balance. 3. Discuss with credit manager the likelihood of collecting older accounts. Examine subsequent cash receipts and the credit file on all account over 90 days to evaluate whether they are collectible. 4. Evaluate whether the allowance is adequate after performing other audit procedures for collectibility of receivables.

Accuracy (Sales and Collection Cycle)

Balance related audit objective: Accounts receivable on the aged trial balance are accurate. Audit Procedures: 1. Confirm accounts receivable, using positive confirmation. Confirm all accounts over 100,00 and a statistical sample of the remainder. 2. Perform alternative procedures for all confirmations not returned on the 1st/2nd request 3. Review accounts receivable trial balance for large and unusual transactions.

Rights (Sales and Collections Cycle)

Balance related audit objective: The client has rights to accounts receivable on the trial balance. Audit Procedures: 1. Review the minutes of the board of directors meetings for any indication of pledged or factored accounts receivable. 2. Inquires of management whether any receivables are pledged or factored.

Cutoff (Sales and Collection Cycle)

Balance related audit objective: Transactions in the sales and collection cycle are recorded in the proper period. Audit Procedures: 1. Select the last 20 sales transactions from the current year's sales journal and the first 20 from the subsequent year's and trace each to the related shipping documents, checking for the date of actual shipment and correct recording. 2. Review large sales returns and allowances before and after balance sheet date to determine whether they were recorded in correct period.

Classification (Sales and Collection Cycle)

Balance related audit objective: accounts receivable on the aged trial balance are correctly classified. Audit Procedures: 1. Review the receivables listed on the aged trial balance for notes and related party receivables. 2. Inquires of management whether there are any related party notes or long-term receivables included in the trial balance.

Completeness (Sales and Collection Cycle)

Balance related audit objective: existing accounts receivable are included in the aged trial balance. Audit Procedures: 1.Trace 5 accounts from the accounts receivable master file to aged trial balance.

Existence (Sales and Collection Cycle)

Balance related audit objective: the accounts receivable on the aged trial balance exist. Audit Procedures: 1. Confirm accounts receivable, using positive confirmation. Confirm all accounts over 100,00 and a statistical sample of the remainder. 2. Perform alternative procedures for all confirmations not returned on the 1st/2nd request 3. Review accounts receivable trial balance for large and unusual transactions.

Accuracy (Accounts Receivable are Accurate)

Balance related objective for accounts receivable: 1. Confirmation of accounts selected from the trial balance. 2. No Response: auditor examines supporting documents for shipments and accounts receivable like existence objective.

Recognizing The Liability for Receipt of Goods and services(Acquisition and Payment Cycle)

Business Function in the acquisition and payment cycle: 3. Require prompt and accurate recording, initial recording affects financial and actual cash disbursements includes all acquisition transactions, and only acquisition that occurred at proper amounts. Documents: 1. Vendor Invoice: received from vendor and shows amount owed for acquisition (indicates amount recorded in acquisition transaction file. 2. Debit Memo: document receive from vendors indicates reduction in amount owed from return of goods or allowance. 3. Voucher: Sequential numbering system (brings together purchase order, packing slip, receiving report, vendor invoice, copy of check) 4. Acquisition Transaction File: Includes all acquisition transactions processed by accounting system for a period of time for each transaction (used for Acquisition journal and AP master) 5. Acquisition Journal: generated from the acquisition transaction files identifies if cash or account, post at same time to master/General Ledger 6. Accounts Payable Master File: records acquisitions, cash disbursements, and acquisition returns/allowances transactions for each vendor. Updated from those transactions files. Total individual account balances in the master file= total balance in accounts payable general ledger. 7. Accounts Payable Trial Balance: listing of the amount owed to each vendor or invoice prepared directly from the accounts payable master file. 8. Vendor Statements: prepared monthly by vendor, beginning balance, acquisition, r&a, end balance. Accounts payable master= Vendor Statements.

Processing Purchase Orders (Acquisition and Payment Cycle)

Business Function in the acquisition and payment cycle: Start of Cycle- The request for goods or services from the clients authorized personnel depends on company policy. Documents: 1. Purchase Requestion: used to request goods by authorized personnel (internal request) 2. Purchase Order: document used to order goods or services from vendors include description and quantity the client intends to order.

Receiving Goods and Services (Acquisition and Payment Cycle)

Business Function in the acquisition and payment cycle:2. The receipt by the company of goods or services from the vendor, recognize the acquisition and related liability on records. Requires controls for examination (description, quantity, arrival, condition) 1. Receiving Report: prepared at the time goods are received includes description of goods, quantity received, and date received.

Processing and Recording Cash Disbursements (Acquisition and Payment Cycle)

Business Function in the acquisition and payment cycle:4. Activity that reduces balances in the liability account. Documents: 1. Check: used to pay for the acquisition when payment is due. Prepared off of acquisition transaction file at time goods received. (Cancelled Check- When check is cashed by vendor /clears client's bank it becomes a supporting doc) 2. Cash Disbursements Transaction File: All cash disbursement transactions processed by the accounting system, where individual checks recorded 3. Cash Disbursement Journal: Report generated from cash disbursements transactions files, includes all transactions for the time period, then is included in AP master file and general ledger.

Statistical Sampling

By applying mathematical rules, auditors can quantify (measure) sampling risk in planning the sample and evaluating the results. The sample must be a probabilistic one and appropriate statistical evaluation method must be used with sample results to make sampling risk computations.

Precision of Initial Sample Estimate

Combination of two factors has the greatest effect on Sample Size (TER-EPER) the difference between these is called the __________________. The Smaller the decision the more _______ the estimate and larger the sample.

Existence (Recorded Accounts Receivable Exist)

Confirmation of customer balance is most important for determining this balance related objective for AR. When customers don't answer: (Alternative evidence) examine supporting docs to verify the shipment of goods and evidence of subsequent cash receipts to determent if amount has been collected.

Classes of Transactions in The Acquisition and Payment Cycle

Cycle begins with the initiation of a purchase requisition by an authorized employee who needs the goods or services and ends with payment of accounts payable. 1. Acquisition of goods and services 2. Cash Disbursements 3. Purchase returns, allowances, and purchase discounts.

Cutoff Tests

Determine whether transactions recorded a few days before and after the balance sheet date are included in the correct period. 1. Coordinate tests with physical examination of inventory- (If acquisition is in AP/purchases but not ending inventory, the result is an understatement in earnings from COGS) Auditor should: Review the procedures in the receiving department to determine that all inventory received is counted and obtain last receiving report number of inventory physical count. (Trace the previously documented receiving report numbers to the accounts payable record to verify if they are correctly included or not) 2. Inventory in Transit: a. FOB destination title passed to buyer when inventory is received (Receipt-on/before balance sheet date) b. FOB origin: record inventory and accounts payable in current period- shipment occur on/before b/s.

Confirmation of Accounts Receivable

Direct written response received directly from a 3rd party on paper, Primary purpose is to satisfy the existence, accuracy, and cutoff objectives (highly reliable) The US auditing standards require confirmation of accounts receivable by should not be used if responses rate is lower inherent/control risk is low and other substantive evidence is sufficient enough. (Send as close to balance sheet date as possible or at interim dateif I/C adequate)

Stratified Sample Selection

Divide the population into sub-populations and take the larger sample from the sub-populations with larger sizes, evaluated using non statistical sampling or variable statistical sampling.

Initial Sample Size

For factors determine this for audit sampling: population size, TER, ARO, EPER Sample size determined by professional judgement (non-statistical sampling) or by statistical tables (attribute sampling) Increase with increase in population size/EPER Decrease with Increase in TER/ARO

Substantive Test of Transactions- Completeness (Sales)

Done to test not billed shipments, when there is no independent internal tracing from shipping docs to sales journal: 1. Trace selected shipping documents from a file in the shipping department to related duplicate sales invoice to the sales journal to be sure that each one is included. 2. Account for numerical sequence of doc, use software to identify duplicates/gaps in the numerical sequence.

Verify Current Yeats Additions for Equipment

Emphasis on this because assets have long-term effect on financial statements. Failure to capitalize a fixed asset or recording acquisition at incorrect amount affects the balance sheet until company disposed of the asset and income statement affected until fully depreciated. Test of details of balance are for existence, completeness, accuracy, classification, cutoff, detail tie in, and rights and obligations. (Heavily depend on performance materiality, interest risk, and assessed control risk)

Test for Fraudulent Hours

Employee reports more time than actually worked, 1. Reconcile the total hours paid according to the payroll records with an independent record of hours worked. 2. Test the reasonableness of hours worked or total pay for each employee and unusual amounts identified for follow up testing. 3. Observe an employee clocking in more than one time card under the buddy approach.

Audit of Accrued Liabilities

Estimated unpaid obligations for services or benefits that have been received before balance sheet date. Evaluate the reasonableness of property tax on each property used. Verify by recalculating the portion of the total tax applicable to the current year for each piece of property, totals added and compared to general ledger. 1. Completeness: Existing properties for which accrual taxes is appropriate are on the schedule. Failure to include understates property tax liability. 2. Accuracy: Accrued property taxes are accurately recorded. Concerned with consistent treatment of accruals from year to year.

Estimated Population Exception Rate (EPER)

Exception rate the auditor expects to find in the population before testing begins. Estimate to plan the appropriate sample size, direct relationship with sample size, can be estimated from previous year and is usually non precise.

Completeness (Sales)

Existing sales transactions are recorded: (no omissions) Key Controls: 1. Shipping documents are prenumbered and accounted for weekly. 2. Batch totals of quantities shipped are compared with quantities billed.

Timing Differences (Cutoff Accounts Receivable)

Happens in sales, sales returns and allowances, and cash cuttoff- A reported difference in a confirmation from a debtor that is determined to be a timing difference between client and the debtor which isn't a misstatement. (Due to shipments and payments in transit at year end)

Test for Payroll and Inventory Valuation

Improper account classification of Payroll materially affects: 1. Asset valuation for accounts of work in process, finished goods, or construction in process. 2. Overstated overhead charged to inventory if salary for admin personnel charged to indirect manu-overhead. 3. Direct labor is charged to wrong job. a. Consistency tested by tracing jobticket of an employee having worked on job accounting records that affect inventory. b.Trace from job cost records to timecard to test for non-existent payroll added.

Shipping Goods Documents

Initiates shipments for goods, indicating the description of merchandise/quantity shipped. Sends original to customer and retains one internally. Bill of lading- written contact between carrier and the seller of the receipt and shipment of goods. Once goods have been shipped, sales invoices and entry in sales journal are generates. (Perpetual Inventory records updated)

Sales and Collection Cycle

Involves the decisions and processes necessary to transfer ownership of good and service to customers after they are made available for sale. Begins with request by customer and ends with the conversion of material or service into an account receivable and ultimately cash.

Verify Ending Balance of Asset Account

Key Controls: 1. Use of master file for individual fixed assets. 2. Adequate physical control over movable assets. 3. Assignment of identifications numbers to each plant assets, and period physical count of fixed assets and their reconciliation by the accounting department. 1. Detail tie-in: equipment listed in the master file agrees with general ledger. (Foot/Cross-foot master) 2. Existence: verify existence of items included in master file, select sample and examine assets. 3. Completeness: Physically examine a sample of major equipment items and trace them to master file. 4. Realizable value: evaluate whether equipment on hand is should be written down (obsolete) 5. Presentation and Disclosure: pledged assets as collateral (leters to lawyers, read terms of loan agremmentm send confirmation request to bank)

Cash Receipts Cutoff

Less important than ethier sales or sales returnsa and allowances cutoff because the improper cutoff of this only affects the cash and accounts receivable (not earnings) Tracing cash receipts to subsequent period bank deposit on the bank statement. (Delay may indicate misstatement)

Sales Cutoff

Many companies record a sale based on shipment of goods or record invoices at the time title passes (before shipment, at the time of shipment,after shipment) Verify the cutoff by obtaining the shipping document number for the last shipment made at the end of period and compare that number with current/ subsequent recorded sales. 1. Determine the procedures in use 2. Segregation of duties between shipping and billing enhances the likelihood of recording transactions in proper period.

Pre-numbered Documents

Meant to prevent both the failure to bill or record sales and the occurrence of duplicate billing and recordings, need to be properly accounted for in sequential order after billed, while someone else periodically accounts for all numbers and investigates missing documents.

Verify Disposals In Current Year

Misstatement occurs when internal controls lack ability to inform management of the sale, trade-in, abandonment, or theft of recorded machinery and equipment. (Look for overstated accounts) Internal Controls: 1. Adequate internal verification of recorded disposal to make sure removed from accounting record. 2. Periodically take inventory on fixed asset to find assets that have been lost or stolen. Audit Procedures:1. Review if newly acquired asset replaced the old asset. 2. Analyze gains and losses on the disposal of asset miscellaneous income for receipt of disposed asset. 3. Review plant medications/change in product line, purchase of computer equipment, property tax, insurance coverage for indication of deleted items. 4. Iquiries of management and production personell about possible disposal of assets.

Roll-Forward Confirmation Schedule

Most reliable confirmations send as close to balance sheet date as possible (allows auditor to make no inference about transactions)Confirm accounts receivable at interim date, if internal controls are adequate and provide reasonable assurance about transactions close to balance sheet date. This schedule reconciles the accounts receivable balance at confirmation date to accounts receivable balance at balance sheet date.

Designing Test of Details of Balances for Accounts Receivable

Must meet all 8 balance-related audit objectives: 1. Accounts receivable in the aged trial balance agree with related master file amounts, the total is correctly added/agrees with general ledger. (Detail tie in) 2. Recorded Accounts Receivable Exist (Existence) 3. Existing Accounts Receivable are included (Completeness) 4. Accounts Receivable are accurate (accuracy) 5. Accounts receivable correctly classified (classification) 6. Cutoff for accounts receivable is correct (Cutoff) 7. Accounts receivable is stated at realizable value. 8. The client has rights to accounts receivable (rights)

Verification of Depreciation

Often do analytical procedures to determine if reasonable (consider usefullife, method of depreciation, salvage value and policy for depreciation in years of addition/disposition) 1. Accuracy: determine whether the client followed a consistent depreciation policy from period to period and whether the client's calculations are correct. 2. Detail tie-ib: foot the depreciation expense on the property master file and reconciling the total with the general ledger. (Make sure properly master file agrees with general leger.)

Proper Authorization in Payroll and Personnel

Only human resources department should be authorized to add/delete employees from the payroll or change pay rate and deductions. Hours worked by each employee should be authorized by their super visor.

Design and Perform Analytical Procedures (Sales and Collections Cycle)

Performed during planning, when performing detailed test, and as part of completing the audit. (This cycle are done after balance sheet date before TofDB) if the auditor finds possible misstatements in sales or returns/allowances, compare current year with previous year and industry trends/budget, auditor should review accounts receivable for large/ unusual balances (aged trial balance) Conclusions about procedures for this cycle are Incorporated to evidence planning and can reduce extent to which auditor needs to test details of balances.

Rights (Client Has Rights to Accounts Receivable)

Portion of receivables pledged as collateral, assigned to someone else, factored or sold at discount. (Limited rights to receivable. Auditor should: Review the minutes of Board of Director, discuss with client, confirm with bank, examine debt contracts for evidence

Follow-Up for Non Responses Positive Confirmation (Alternative Procedures of ending balances)

Positive Confirmation No response from multiple confirmation requests, No audit evidence. Necessary to do procedures to determine means other than confirmation to prove existence and accuracy: 1. Subsequent Cash Receipts: evidence of cash receipts after confirmation date (remittance advice, entries to cash receipts or credit to AR master) 2. Duplicate Sales Invoice: Verifying the actual issuance of ta sales invoice and actual date of billing. 3. Shipping Docs: Whether shipment was actually made and tests cutoff. Extent and nature depend on materiality of non responses, types of misstatements discovered, subsequent cash receipts for non responses, auditors assessment of internal controls.

Lapping of Accounts Receivable

Postponement of entries for the collection of receivables to conceal an existing cash shortage, Perpetrated by someone who handles cash receipts and records them. This party defers recording cash receipts from one customer and covers the shortage with receipt from another. Prevented by: segregation of duties and a mandatory vacation policy for employees who handle cash and enter cash receipts.

Segregation of Duties Payroll and Personnel Cycle

Prevents over-payments and payment of non-existent employees. 1. Payroll function (timekeeping) independent from human resources function. (Add, delete, changing rate and data) 2. Payroll Processing independent from the issuance of payroll disbursements. (HR, Timekeeping, Payroll Disbursements)

Write off of Uncollectible Accounts

Primary concern is the possibility of client personnel covering up embezzlement by writing of are that has already been collected (occurrence objective) Prevented through: proper authorization of write off of uncollectible accounts by designated personnel. If auditor thinks the accounts written off in g/l are handled correctly they can select item and trace them to the accounts receivable master file to test it.

Simple Random Sample

Probabilistic Sampling Method- every possible combination of the population items has an equal chance of being included in the same. No emphasis on one or more types of population items. (Generate random numbers through- electronic spreadsheets, random number generator, generalized audit software)

Occurrence (Cash Receipts)

Recorded cash receipts are for funds actually received by the company. Key Existing Controls: 1. Accountant independently reconciles bank account. 2. Batches totals of cash receipts are compared with computer summary report. Test of Controls: 1. Observe whether accountant reconciles bank account. 2. Examine file of batch totals for initials of data control clerk.

Accuracy (Payroll and Personnel)

Recorded payroll transactions are for the amount of time actually worked and are at the proper pay rates, withholding are correctly calculated.

Accuracy (Sales)

Recorded sales are for the amount of goods shipped and are correctly billed and recorded: (Concerns shipping the amount ordered and accurately billing and recording for goods shipped) Key Controls: 1. Sales are supported by authorized shipping docs and approved customer orders. 2. Batch totals of quantities shipped compared with quantities billed. 3. Unit selling price obtained from price list master file of approved prices. 4. Statements are sent to customers each month.

Exception

Refers to both deviations from the client's control procedures and amount that are not monetarily correct, whether caused by unintentional error or not.

Business Functions in the acquisition and payment cycle

Related to Recording Goods/Services on account: 1. Processing Purchase Orders 2. Receiving Goods and Services 3. Recognizing the liability Recording Cash Disbursements to Vendors 4. Processing and recording cash disbursements.

Sampling Risk

Risk that auditor reaches an incorrect conclusion because the sample is not representative of the population. (Inherent risk of testing less than 100%) Can control by: 1. adjusting sample size (reduces risk) 2. Use an appropriate method of selecting sample items from population (increase likelihood of representativeness, no change in this risk)

Classification (Sales)

Sales transactions are correctly classified: Key Control: 1. Account Classifications are internally verified. Test of Control: 1. Examine document package for internal verification. Substantive Test of Transactions: 1. Examine duplicate sales invoice for proper account classification.

Posting and Summarization (Sales)

Sales transactions are correctly included in the accounts receivable master file and are correctly summarized. Accuracy of sales transaction affects clients ability to collect these receivables- Key Controls: 1. Computer automatically posts transactions the sales journal is totaled and added to accounts receivable master file and general ledger. 2. Accounts receivable master file is reconciled to the general ledger on a monthly basis. 3. Statements are sent to each customer each month.

Timing (Sales)

Sales transactions are recorded on the correct dates: Key Controls: 1. Shipping documents are prenumbered and accounted for weekly by the accountant. Test of Controls: 1. Account for a sequence of shipping documents. Substantive Test of Transactions: 1. Compare date of recording of sale in sales journal with duplicate sales invoice and bill of lading. 2. Compare date on selected bills of lading or other shipping docs with date on duplicate sales invoices, the sales journal, and accounts receivable master file.

Probability Proportional To Size Selection

Sample in which the probability of selecting any individual population item is proportional to its recorded size. Evaluated using non-statistical sampling or monetary unit statistical sampling.

Monthly Statements

Sending these monthly is a useful control because it encourages customers to respond if the balance is incorrectly stated. These are handled by someone who has no responsibility of handling cash or recording sale/ accounts receivable. All disagreements sent to that person.

Verification of Current Year Disposals

Starting point is the client's schedule of recorded disposals (date disposed of, selling price, person who acquired the assets, original cost, and accumulated depreciation. Detailed Tie In: footing the recorded disposals schedule, tracing the totals on the schedule to the recorded disposal in the general ledger, and tracing the cost/ accumulated depreciation of disposal to master file. Accuracy: verified by examining sales invoice and property master file. Compare cost and accum depreciation from master file with general ledger and recompute gain or loss and compare to records. Completeness:verify the disposal schedule, all equipment disposed of is recorded. Existence: gone from the factory.

Test of Controls Occurrence (Transactions for Acquisition)

Tests for improper transactions, duplicate, and recorded transactions that don't exist. 1. Examine documents in voucher package for existence. 2. Examine indication of approval. 3. Attempt to input transactions with valid and invalid vendors. 4. Examine indication of cancellation. 5. Examine indication of internal verification.

Substantive Tests of Transactions Occurrence (Transactions for Acquisition)

Tests for improper transactions, duplicate, and recorded transactions that don't exist. 1. Review the acquisitions journal, general ledger, and AP master file for large/unusual amounts. 2. Examine underlying docs for reasonableness and authenticity (vendor invoice, receiving reports, purchase orders and purchase requisition. 3. Examine vendor master file for unusual vendors. 4. Trace inventory acquisitions to inventory master files. 5. Examine fixed assets acquired.

Performance Format Audit Program

The audit procedures for a class of transactions organized in the format that they will be performed. (Prepared from design format audit program) 1. Eliminates duplicate procedures, 2. makes sure that when a given doc is examined all procedures to be performed on it are done at that time 3. Helps auditor do procedures in more effective order

Design Format Audit Program

The audit procedures resulting from the auditors decisions about the appropriate audit procedures for each audit objective: audit program used to prepare performance format audit program.

Systematical Sample Selection

The auditor calculates an interval and then selects items for the sample based on the size of the interval. (Interval determined by dividing population size by desired sample size, than select random number as start point) Advantage: ease of use Concerns: Bias and if characteristics of interest are not randomly spread around and occur at certain times.

Probabilistic Sample Selection

The auditor randomly selects items such that each population item has a known probability of being included in the sample. (Simple random sample selection, systematical sample selection, probability proportional to size sample selection, Stratified Sample Selection)

Characteristic or Attribute

The characteristic being test in the application, auditors estimate the % of items in a population containing this.

Representative Sample

The characteristics in the same are approximately the sample as those of the population. (Increase likelihood of this by using care in designing the sampling process, sampling selection, and evaluation of sampling results.

Tolerable Exception Rate (TER)

The exception rate that the auditor will permit in the population and still be willing to conclude the control is operating effectively and or the amount of monetary misstatement in the transactions established during planning is acceptable. (Consider the degree of reliance and significance of control for the audit for each attribute) A lower the rate the larger sample size.

Out Of Period Liabilities Test

The extent of test to uncover unrecorded payable or the search for unrecorded accounts payable (accessed control risk/materiality of balance) 1. Examine underlying documents for subsequent cash disbursements: trace current period liabilities to AP trial balance to see if included. 2. Examine underlying documents for bill not paid for several weeks after the year end. 3. Trace Receiving Reports issued before year end to related vendor invoices. (For unrecorded obligation) 4. Trace vendor statements that show balance due accounts payable trial balance. (reported obligation) 5. Send Confirmations to client vendors: (searching for omitted amounts, misstated account balance)

Sampling Error

The likelihood that the sample exception rate differs from the actual population acceptance rate.

Acceptable Risk of Over-reliance (ARO)

The risk that the auditor (sampling risk) is willing to take of accepting a control as effective or a rate of monetary misstatements as tolerable when the true population exception rate is greater than the tolerable exception rate (Over-reliance on a control impacts effectiveness of audit, reliance on ineffective control=incorrect reduction in substantive testing) Low ARO implies test of controls are importance, there will be low assessed control risk, and reduce STofDB. Less reliance on the internal control, both assessed as high.

Audit Sampling

The selection and evaluation of less than 100 % of the population of audit relevance such that the auditor expects the items to be representative of the population and likely to provide reasonable basis for conclusions and the population.

Direction of Testing (Sales)

The starting point for testing the occurrence and completeness transaction related objectives: 1. Completeness (omitted transactions): Starts by selecting a sample of shipping documents and traces them to duplicate sales invoices and the sales journal to test for omissions. 2. Occurrence (Non-existent transactions): Starts by selecting a sample of invoice numbers from the journal and vouches them to duplicate sales invoices, shipping documents, and customer orders. (Accuracy can be checked by testing sales invoices or shipping documents it does not matter for it.)

Completeness (Existing accounts receivable are includes)

The understatement of sales and accounts receivable is best uncovered by: 1. Substantive test of transaction for shipping 2. Analytical procedures. 3. Send confirmations to customers with zero balances

Computed Upper Exception Rate (CUER)

The upper limit of the probable population exception rate; the highest exception rate in the population at a given ARO.

Inverse Relationship

There is a ___________ between ARO and planned sample size. If the auditor reduces ARO from low to high, planned sample size must be ____

Cutoff (Cutoff for Accounts Receivable is Correct)

These misstatements exist when current period transactions are recorded in the subsequent period or vice versa, trying to verify near the end of accounting period transactions. (Can occur for sales, sales returns/allowances and cash receipts) 1. Need to decide the appropriate criteria for cutoff 2. Evaluate whether the client has established adequate procedures to ensure reasonableness of cutoff. 3. Test whether the cutoff was corrected.

Separation of Duty Sales

To prevent fraud: 1. Management should deny cash access to anyone responsible for entering sales and cash receipts transactions. 2. Credit-granting function should be separate from the sales function- credit checks try to offset sale personnel to optimize volume at expense of high write offs. 3. Personnel responsible for internal comparison should be independent from those entering the original data.

Classification (Accounts Receivable Properly Classified)

To satisfy this balance-related objective the auditor must determine whether the client has correctly separated different classifications of accounts receivable. 1. Evaluated by reviewing the aged trial balance for material receivables from affiliated officers, directors, or other related parties. 2. Verify that notes receivable or accounts that should be classified as noncurrent assets are separated from regular accounts. 3. Significant credit balances in accounts receivable are reclassified to accounts payable.

Completeness (Payroll and Personnel)

Transaction related audit objective- Existing payroll transactions are recorded.

Classification (Payroll and Personnel)

Transaction related audit objective- Payroll transactions are correctly classified.

Posting and Summarization (Payroll and Personnel)

Transaction related audit objective- Payroll transactions are correctly included in the payroll master file and correctly summarized.

Timing (Payroll and Personnel)

Transaction related audit objective- Payroll transactions are recorded on the correct dates.

Occurrence (Payroll and Personnel)

Transaction related audit objective- Recorded payroll payments are for work actually performed by existing employees.

Posting and Summarization (Cash Disbursements)

Transaction related objective, Cash disbursement transactions are correctly included in the AP master file and correctly summarized. Key controls: 1. AP master file contents are internally verified. 2. AP master file or trial balance totals are compared with general ledger balances. Test of controls: 1. Examine indication of internal verification. 2. Examine initials on general ledger accounts indicating comparison. Substantive Test of Transactions: 1. Test clerical accuracy by footing journals and tracing postings to general ledger and AP master.

Classification (Cash Disbursements)

Transaction related objective, Cash disbursements are correctly classified. Key controls: 1. Adequate chart of accounts used. 2. Account classifications are internally verified. Test of Controls: 1. Examine procedures manual/chart of accounts. 2. Examine indications of internal verification Substantive Test of Transactions: 1. Compare classification with chart of account by referring to vendor invoice and acquisition journal.

Accuracy (Cash Disbursements)

Transaction related objective, Recording Cash Disbursements transactions are accuracy. Key controls: 1. Calculations/amount are internally verified. 2. Bank Reconciliation done monthly by independent Test of Controls: 1. Examine indication of internal verification. 2. Examine bank reconciliation and observe prep Substantive Test of Transactions: 1. Compare cancelled checks and e-bank records of disbursements with related acquisitions journal and cash disbursements journal entries. 2. Recompute cash discounts. 3. Prepare a proof of cash disbursments.

Occurrence (Sales)

Transaction related objective- recorded sales are for shipments actually made not fictitious customers. (No duplicates) Key Controls: 1. Credit approved automatically by computer by comparison to authorized credit limit. 2. Sales supported by authorized shipping docs and approved customer orders. 3. Batch totals of quantity shipped are compared with quantities billed. 4. Statements are sent to customer each month.

Posting and Summarization (Transactions for Acquisition)

Transaction related objective: Acquisition transactions are correctly included in the accounts payable and inventory master file and are correctly summarized. Key Controls: 1. AP master file content is internal verified 2. AP master file or trial balance totals are compared with general ledger balances. Test of Controls: 1.Examine indication of verification. 2. Examine initials on general ledger accounts Substantive Tests of Transactions: 1. Test clerical accuracy by footing the journal and tracing posting to general ledger and accounts payable and inventory master file.

Timing (Transactions for Acquisition)

Transaction related objective: Acquisition transactions are recorded on the correct date. Key Controls: 1. Procedures require recording transactions as soon as possible after the goods or sales have been received. 2. Dates are internally verified. Test of Controls: 1. Examine procedures manual and observe whether unrecorded vendor invoice exist 2. Examine indication of internal verification. Substantive Test of Transactions:1. Compare dates of receiving reports and vendor invoices with dates in the acquisition journal.

Classification (Transactions for Acquisition)

Transaction related objective: Acquisitions are correctly classified in the acquisitions journal. concerned with acquisition of fixed assets improperly expense and not capitalized. Key Controls:1. An adequate chart of accounts used. 2. Account classifications are internally verified. Test of Controls: 1. Examine procedures manual/chart of accounts. 2. Examine indication of internal verification. Substantive Test of Transactions: 1. Compare classifications with chart of accounts by referring to vendor invoices.

Completeness (Transactions for Acquisition)

Transaction related objective: Existing acquisition transactions are recorded. Failure to record the acquistion of goods and services understates accounts payable/ overstates NI and owner equity. Key Controls: 1. PO's are prenumbered/accounted for. 2. Receiving reports are prenumbered/accounted for. 3. Vouchers are prenumbered/accounted for. Test of Controls: 1. Account for sequence of Purchase orders, receiving reports, and/or vouchers. Substantive Test of Transactions: 1. Trace from a file of receiving reports to the acquisitions journal. 2. Trace from a file of vendor invoices to the acquisitions journal.

Accuracy (Transactions for Acquisition)

Transaction related objective: Recorded acquisition transactions are accurate. Key Controls: 1. Calculations/amount internal verified 2. Batch totals compared to comp summary report. 3. Acquisitions are approved for purchases/discount Test of Controls: 1. Examine indication of internal verification. 2. Examine file of batch totals for initials of data control clerk, compare totals to summary reports. 3. Examine indication of approval. Substantive Tests of Transactions: 1. Compare recorded trans from acquisition journal vendor invoice, receiving report, support docs. 2. Recompute the clerical accuracy on the vendor invoice including discount and freight.

Occurrence (Transactions for Acquisition)

Transaction related objective: Recorded acquisitions are for goods and services received, consistent with the best interest of our client. Adequate controls prevent client from including a business expense or asset fraudulent transactions for personal items. Key Internal Controls: 1. Purchase requisition, PO, receiving report and vendor invoice all attached to voucher. 2. Acquisition approved at proper level. 3. Computer accepts entries of purchase only from authorized vendor in vendor master files. 4. Documents are cancelled to prevent reuse. 5. Vendor invoice, receiving report, PO and purchase requisition are internally verified.

Occurrence (Cash Disbursements)

Transaction related objective: Recorded cash disbursement are for good/services actually received. Key Controls: 1. Adequate separation of duty between Accounts Payable and custody of assets or authority to disburse funds electronically 2. Supporting Docs examined before signing checks or electronic disbursement by authorized person. 3. Approval of payment on supporting doc gien at the time checks are signed. Test of controls: 1. Discuss with personnel and observe activities. 2. Examine Indication of approval. Substantive Test of Transactions: 1. Review cash disbursements journal, general ledger and AP master file for large/unusual trans. 2. Trace cancelled checks to the related acquisition journal entry and examine payee name and amount. 3. Examine cancelled checks for authorized signature, proper endorsement, cancellation by bank to or use of bank records to verify payment. 4. Examine supporting docs

Timing (Cash Disbursements)

Transaction related objective: cash disbursement transactions are recording on the correct date- Key Control: 1. Procedures require recording of trans as soon as possible after check signed. 2. Dates are internally verified. Test of Controls: 1. Examine procedures manual and observe whether unrecorded checks exist. 2. Examine indication of internal verification. Substantive Test of Transactions: 1. Compare dates on cancelled checks or e-bank records with cash disbursements journal. 2. Compare date on cancelled checks or e-bank records with bank cancellation date.

Completeness (Cash Disbursements)

Transaction related objective:Existing cash disbursements transactions are recorded. Key controls: 1. Checks prenumbered/accounted for. 2. The bank reconciliation is prepared monthly by an employee independent of recording cash disbursements or custody of assets. Test of Controls: 1. Account for sequence of checks. 2. Examine bank rec and observe their preparation. Substantive Test of Transactions: 1. Reconcile recorded cash disbursements with the cash disbursements on bank statement (proof)

Does not, Unacceptably high

When SER exceeds the EPER used in designing the sample auditors usually conclude that the smpling results _____ support the preliminary control risk. In that case the auditor is likely to conclude that there is an ___________ risk that the true deviation rate in the population exceeds TER.

Haphazard Sample Selection

a non-probabilistic method of sample selection in which items are chosen without regard of their size, source, or other distinguished characteristics. (Hard to overcome bias)

Attribute Sampling

a statistical, probabilistic method of sample evaluation that results in an estimate of the proportion of items in a population containing a characteristic or attribute of interest.