Ch 11 Audit Final

The event Obsolescence affects what accounts

Loss on write down inventory/inventory

Accuracy misstatement control activities for purchase transactions

Mathematical accuracy of vendor invoice verified Purchase order agreed to receiving report and vendor's invoice for product, quantity, and price Vouchers reconciled to daily accounts payable listing (or daily postings to purchases journal) and then reconciled with postings to accounts payable subsidiary records Voucher register or accounts payable subsidiary records reconciled to general ledger control account

Authorization misstatement for purchase transactions (1)

Purchase of goods or service not authorized

Cutoff misstatement for purchase transaction

Purchase transactions recorded in the wrong period

This document records the receipt of goods. Normally, this is a copy of the purchase order with the quantities omitted. This procedures encourages receveing department personell to make an adequate, independent count of the goods received. Receiving department personnel record the date, description, quantity, and other information on this document. The Receiving report is important because it is what normally leads to recognition of the liability of the entity

Receiving report

The auditors previous experience with an entity should be a starting point for determing

inherent risk

The event purchase inventor affects what accounst

inventory and accounts payable

control activities for classification for purchase transaction

1) Chart of accounts 2) independent approval and review of accounts charged for acquisitions

What are the primary steps in the search for unrecorded liabilities?

1) Examine unmatched invoices, reports, and purchase orders 2) Review cash disbursements after year-end; match to invoice and receiving report 3) Inquire about procedures for identifying and recording liabilities and confirm AP with normal suppliers.

what to do when you are evaluating controls and there are deficiencies

1) Assess deficiencies to determine severity 2) Modify control risk assessment 3) Document implications of deficiencies

Misstatement for accuracy for cash disbursement

1) Cash disbursement recorded at incorrect amount 2) Cash disbursements not properly recorded

In evaluating controls what you do when they aren't deficiencies

1) Is preliminary CR assessment below maximum appropriate 2) Are controls evidence of account balance reasonableness 3) Determine planned substantive procedures

2 possible errors or fraud related to reutrn inventory to supplier

1) Overstate returns 2) Record returns in wrong period

What are the Reliability Risks related to electronic confirmations?

1) Process might not be secure or properly controlled 2) Respondent is not authorized to respond 3) Integrity of the transmission might have been compromised

Three types of transactions are processed through the purchasing process

1) Purchase of goods or services for cash or credit 2) Payment of liabilities arising from such purchases 3) Return of goods to suppliers for cash or credit

The 7 major business functions of the purchasing department

1) Requisitioning 2) Purchasing 3) Receiving 4) Invoice Processing 5) Disbursements 6) Accounts payable 7) General Ledger

5 Possible errors or fraud related to purchase inventory

1) Under-record purchases 2) Record purchases in wrong period 3) Unrecorded purchases 4) Fictisous supplier 5) Cash to wrong suplier

The major steps in setting control risk for the purchasing process are:

1) Understand and document the purchasing process based on a reliance strategy 2) Plan and perform tests of controls on purchase transactions 3) set and document the control risk for the purchasing process

The two inherent risk factors for the acquisitions cycle

1) Whether the supply of raw materails is adequate 2) How volatile raw material prices are

Two factors are particularly important when the auditor consider the control environment and the purchasing process

1) the entity organizational structure 2) Its methods of assigning authority and responsibility

the 5 controls to achieve matching

1. Authorized vendors 2. Restricted access for entering, altering, approving 3. Reconciliations built into process 4. Automation of error-prone activities 5. Restricted access to transferring funds

What are the major financial statement accounts in the acquisition cycle?

1. Cash 2. Accounts payable 3. Inventory 4. Expense Accounts 5. Factory Overhead 6. Cost of Goods Sold

Typical tests of controls

1. Inquiries of personnel who perform control 2. Observation of control being performed 3. Inspection of documentation that control has been performed 4. Reporformance of control by auditor

The automoated 3 way match

1. Purchase order entered into database, changeable only by receiving 2. Receipt recorded by RFID or bar code, cross referenced to PO 3. Matching of invoice, receiving docs, purchase order. If matched invoice is approved. 4. Date scheduled, check generated on scheduled date, signed by authorized party.

The Key Segregation of duties in the purchasing process 1. The purchasing function should be segregated from the ____ and ____ functions 2. The invoice-processing function should be segregated from the ____ ___ function. 3. The disbursement function should be segregated from the ____ ___ function. 4. The accounts payable function should be segregated from the ____ ___

1. requisitioning and receiving functions 2. accounts payable 3. accounts payable 4. general ledger

The confirmation process includes:

1. selecting items for confirmation 2. Designing the request 3. Communicating the request to the appropriate third party 4. obtaining the response 5. Evaluating the information received, including its reliability

Standards state that electronic confirmations can be considered reliable audit evidence if the auditor is satisfied that

1. the process is secure and properly controlled 2. there is direct communication 3. the information is obtained form a third party who is the intended respondent

the completeness misstatement for purchase transactions control activities

Accounting for numerical sequence of purchase orders, receiving reports, and vouchers Receiving reports matched to vendor invoices and entered in the purchases journal

When a purchases journal is utilized, this subsidiary ledger records the transactions with, and the balance owed to, a vendor. When a voucher register system is used, the subsidiary ledger is a listing of the unpaid vouchers. The total in the subsidiary ledger should equal the balance in the general ledger accounts payable account.

Accounts payable subsidiary ledger

Control Activities for cutoff misstatement for purchase transaction

All receiving reports forwarded to the accounts payable department daily Existence of procedures that require recording the purchases as soon as possible after goods or services are received

The event inventory is sold affects what accounts

Cogs and inventory

What assertion does the search for unrecorded liabilities relate to?

Completeness

Control activities for accuracy assertions for cash disbursement

Daily cash disbursements report reconciled to checks and EFTs issued Vendor statements reconciled to accounts payable records and independently reviewed Cash disbursement report reconciled with postings to cash disbursement journal and accounts payable subsidiary records Monthly cash disbursements journal agreed to general ledger posting Accounts payable subsidiary records reconciled to general ledger control account

cutoff transaction control activities cash disbursement

Daily reconciliation of checks issued with postings to the cash disbursements journal and accounts payable subsidiary records

What is the search for unrecorded liabilities?

The search for unrecorded liabilities is an extensive tests used by auditors to ensure that all liabilities are recorded

Accuracy misstatement for purchase transaction (1) + (2)

Vendor invoice improperly priced or improperly calculated Purchase invoices not posted correctly

This document is frequently used by entites to control payment for acquiried goods and services. this document serces as the basis for recording a vendor's invoice in the voucher register or purchase jorunal. In many purchase systems it is attached to the purchase requisition, purchase order, receicinvg report and vendor invoice to create a voucher packet.

Voucher

used to record the vouchers for goods and services. The ____ ______ contains numerous columns for recording the account classifications for the goods or services, including a column for recording credits to accounts payable, and columns for recording debits to asset accounts such as inventory and expense accounts such as repairs and maintenance. The ____ _____ also contains columns for miscellaneous debits and credits. Some entities use a purchases journal instead of a ____ ____. With a purchases journal, either vouchers or vendors' invoices may be used to record the liability. The major difference between a ____ _____ and a purchases journal is in the way individual vouchers or vendor invoices are summarized. When a ____ ____ is used, the details of accounts payable are normally represented by a list of unpaid vouchers. With a purchases journal, subsidiary records are normally maintained by the vendor in much the same manner as an accounts receivable subsidiary ledger.

Voucher Register/Purchase Journal

is also responsible for ensuring that all vendor invoices, cash disbursements, and adjustments are recorded in the accounts payable records.

accounts payable

Recompute the mathematical accuracy of a sample of vendors' invoices.

accuracy

The event return inventory to supplier affects what accounts

acounts payable and inventory

Authorization misstatement for purchase transactions control activities (1)

approved acquisitions, requisitons, and purchase orders

in FOB shipping point the buyers records the purchase of goods when the goods ____

are shipped

in FOB destination the buyer records the purchase of goods when the goods_________

arive at the buyers destination

Test a sample of purchase requisitions for proper authorization.

authorization

When confirming accounts payable, auditors generally use a form of proistive confirmation referred to as a ____ confirmation

blank

a) To reduce the possibility that the invoice will be paid twice, all documentation (such as purchase order, receiving report, and vendor invoice) should be marked ______ or ____ by the cashier's department. Finally, if checks are used, they should be mailed to the vendor by the cashier's department or treasurer.

cancelled paid

Classification misstatement cash disbursement

cash disbursement charged to wrong account

This journal records disbursements made by check and electronic funds transfer. It is sometimes referred to as a check register. The ___ ___ ___ contains columns for recording credits to cash and debits to accounts payable and cash discounts

cash disbursement journal

misstatment for completeness cash disbursement

cash disbursement made but not recorded

Misstatement for authorization cash disbusrsement

cash disbursement not authorized

occurrence assertion for cash disbursement misstatement

cash disbursement recorded but not made

Cutoff transaction missatement cash disbursement

cash disbursement recorded in wrong period

classification control activity cash disbursement

chart of accounts approval and review of general ledger account on voucher packet

These disbursements, approved by an authorized individual, pay for goods or services.

check or electronic funds transfer

Controls for misstatement for authorization for cash disbusrment

checks prepared only after all source documents have been properly approved segregation of duties

Verify classification of charges for a sample of purchases transactions.

classification

Control activities for missttatment for purchase transactions (2)

competitive bidding procedures followed

Confirmation of selected accounts payable.

completeness

Obtain listing of accounts payable and agree total to general ledger.†

completeness

Obtain selected vendors' statements and reconcile to vendor accounts.

completeness

Search for unrecorded liabilities by inquiring of management and examining post-balance sheet transactions.

completeness

Tracing of a sample of vouchers to the purchases journal.

completeness

While accounts payable confirmations provide evidence on a number of assertions, the assertion of primary interest with liabilities is the ________ assertion

completeness

If an intermediary is used to facilitate confirmations the auditor should obtain an understanding of the ____ over the procedures used by the intermediary to process the confirmation requests and responses

controls

Compare dates on a sample of vouchers with the dates transactions were recorded in the purchases journal.

cutoff

Test transactions around year-end to determine if they are recorded in the proper period.

cutoff

is responsible for preparing and signing checks for paying vendors and authorizing electronic funds transfers. Adequate supporting documentation must verify that the disbursement is for a legitimate business purpose, that the transaction was properly authorized, and that the account distribution is appropriate.

disbursements

Confirmation of selected accounts payable.†

existence

Obtain selected vendors' statements and reconcile to vendor accounts.

existence

Vouch selected amounts from the accounts payable listing and schedules for accruals to voucher packets or other supporting documentation.

existence

1 possible error or fraud related to obsolescence

fail to write off inventory

substantive analytical procedures can effectively identify accounts payable and accrual accounts that are misstated, as well as provide evidence regarding the ______ of the recorded accounts

fairness

ensure that all purchases, cash disbursements, and payables are properly accumulated, classified, and summarized in the accounts.

general ledger

The accounts payable department processes invoices to ensure that all goods and services received are recorded as assets or expenses and that the corresponding liability is recognized. This function involves matching purchase orders to receiving reports and vendor invoices as to terms, quantities, prices, and extensions. The invoice-processing function also compares the account distributions with established account classifications. The invoice-processing function is also responsible for purchased goods returned to vendors. Appropriate records and control activities must document the return of the goods and initiate any charges back to the vendor.

invoice processing

the completeness misstatement for purchase transactions

purchases are made but not recorded

Test a sample of vouchers for the presence of an authorized purchase order and receiving report.

occurence

fundamental differences in what constitutes revenue or expense for GAAP and tax purposes

permanent differences

In the confirmation process auditors should 1. Excercise ________ skepticism 2. Authenticate responding ____ 3. Validate authorized _____ 4. maintain _____ 5. Directly communicate with the _____

professional entity respondent control respondent

this document includes the description, quality, and quantity of and other information on, the goods or services being purchased. The purchase order also indicates who approved the acquisition and represents the authorization to purchase the goods or services.

purchase order

requests goods or services for an authorized individual or department within the entity

purchase requisition

A purchase transaction usually begins with a ____ _______being generated by a department or support function. The purchasing department prepares a ____ ____ for the purchase of goods or services from a vendor. When the goods are received or the services have been rendered, the entitys records a ____ to the vendor. Finally the entity pays the vendor.

purchase requisition purchase order liability

Misstatement for classification for purchase transaction

purchase transaction not properly classified

authorization misstatement for purchase transaction (2)

purchases of goods or services at unathorized prices or unathorized terms

executes properly authorized purchase orders. This function is normally performed by a purchasing department, which is headed by a purchasing manager (or agent) and has one or more buyers responsible for specific goods or services. The purchasing function ensures that goods and services are acquired in appropriate quantities and at the lowest price consistent with quality standards and delivery schedules. Using multiple vendors and requiring competitive bidding are two ways the ____ ___ can achieve its objectives.

purchasing function

Provides audit evidence to address the risk of material misstatement due to fraud and because of the importance of cash to a company's liquidity and ongoing operations

reason to confirm cash

responsible for receiving, counting, and inspecting goods received from vendors. The personnel in the ______ complete a receiving report that is forwarded to the accounts payable function.

receiving

2 possible errors or fraud related to inventory is sold

record at incorrect amount Cogs or inventory not adjusted

a request for goods or services by an authorized individual from any department or functional area within the entity. The important issue is that the request meets the authorization procedures implemented by the entity.

requisitioning

Review voucher packets for presence of purchase requisition, purchase order, receiving report, and vendor invoice.

rights and obligations

control activities for possible misstatement cash disbursement occurence

segeregation of duties Vendor statements independently reviewed and reconciled to accounts payable records monthly bank reconciliations prepared and reviewed

control activities for misstatement for completenss cash disbursement

segregation of duties accounting for the numerical sequence of checks Daily cash disbursement reconciled to posting to accounts payable subsidiary records

the occurence misstatement control activities for purchase transactions

segregation of duties purchase not recorded without approved purchase order and receiving report accounting for numerical sequences of receiving reports and vouchers

Unless you properly document and retain evidence of your work others will not be able to rely on the ____ ____

testing performed

The occurence possible misstatement for purchase transactions

the purchase is recorded but the goods are not ordered or received

simply timing differences between the recognition of revenue or expense under GAAP and tax that are ultimately expected to reverse

timing differences

This document is the bill from the vendor. The vendor invoice includes the description and quantity of the goods shipped or services provided, the price including freight, the terms of trade including cash discounts and the date billed

vendor invoice

This statement is sent monthly by the vendor to indicate the beginning balance, current-period purchases and payments, and ending balance. The ____ ____ represents the purchase activity recorded on the vendor's records. It may differ from the entity's records because of errors or, more often, timing differences due to delays in shipping goods or recording cash receipts. The entity verifies the accuracy of its records by comparing ____ ___with the accounts payable records.

vendor statement

Contains all the relevant documentation supporting a purchase transaction

voucher

The auditor develops an understanding of the purchasing process by conducting a

walkthrough