audit ch 13, cash, AR
Summary of the Audit Process Phase IV (Wrap-Up)
-Review for contingent liabilities. -Review for subsequent events. -Accumulate final evidence. -Evaluate results. -Issue audit report. -Communicate with audit committee and management.
objectives of cash
-cash exists (existence) -all cash included (completeness and cutoff) -adequately disclosed, not restricted (presentation and disclosure) -rights and obligations -valuation, allocation and accuracy
standard bank confirmation includes
-balances in all deposit accounts as the balance sheet date -outstanding loan balances at that date -collateral agreements on loans (including agreements for compensating balances)
Summary of the Audit Process Phase III (End of Fieldwork)
-determine likelihood of misstatements in financials -perform analytical procedures -perform tests of key items -perform additional tests of details of balances
8 balance related audit objectives
-existence or completeness accuracy detail tie in classification cutoff realizable value rights and obligations
Client 1 is a large company with sophisticated internal controls and low inherent risk. - what evidence mix should be used?
-extensive tests of controls - small amount of substnative tests of transactions -extensive analytical procedures -small amounts of tests of details of balances
Cash Receipts and Disbursements: Key Control Activities
-info processing -physical controls over the security of assets -segregation of duties -performance reviews -reconciliations
Client 4 is a situation where the original plan was to follow the approach used in client 2; however, the auditor found extensive control test deviations and significant misstatements while performing substantive tests of transactions and controls were not effective. - what evidence mix should be used?
-medium tests of controls - extensive amount of substantive tests of transactions -extensive analytical procedures -extensive amounts of tests of details of balances
Client 2 is medium sized with some controls and a few inherent risks. - what evidence mix should be used?
-medium tests of controls - medium amount of substantive tests of transactions -extensive analytical procedures -medium amounts of tests of details of balances
Client 3 is medium sized but has few effective controls and significant inherent risks. - what evidence mix should be used?
-no tests of controls - extensive amount of substantive tests of transactions -medium analytical procedures -extensive amounts of tests of details of balances
six transaction related audit objectives
-occurrence -completeness -accuracy posting and summarization -classification -timing
cutoff bank statement
-partial period bank statement with the related -cancelled checks deplicate deposit slips other bank stm. docs which is mailed BY THE BANK DIRECTLY TO THE AUDITOR -collected a couple weeks after year end to give time for checks to flow through
best evience of completeness is to
-perform cutoff tests on shipments occurring immediately before and after BS date -tracing of shipping docs to sales invoices -examination of numerical sequence of shipping docs and sales invoices
risk assessment procedures 4
-procedures to gain an understanding of the entity and its environment, including internal control) -help the financial statement auditor obtain info to make an initial assessment of control risk -performed to assess the risk of material misstatement in the financials -helps in designing and performing further audit procedures
for audits of internal control over financial reporting, the auditor only performs which two tests?
-procedures to obtain an understanding of internal control -tests of controls
which documents should be reconciled to verify cash receipts?
-remittance listing, -subsidiary accounts receivable -deposit slip DONE DAILY
blank confirmation (receivables)
customer asked to provide amount without being told value on client's records USED WHEN -large balance -active account -delinquency -high assessed level of risk of material misstatement -expectation that customer won't pay attention to negative confirmation
negative confirmation (receivables)
customer asked to respond only if amount is incorrect -used for small balances -no news is good news -implicit evidence
positive response (receivables)
customer asked to verify correctness of amount -for large balances -explicit evidence
vouching goes with which audit objective?
existence or occurence
when is proof of cash used? and what is it?
in situations where controls are weak -it combines 2 bank reconciliations, reconciling all transactions that occurred during the period tot he clients CASH RECEIPTS JOURNAL AND CASH DISBURSEMENTS JOURNAL
interbank transfer schedule
includes all checks written from one of the client's accounts to another for the few days surrounding year end
in the audit or a larger public company, computer performed controls (automated controls) must be tested if the auditor considers them to be
key controls for reducing the likelihood of material misstatements in the financials
Stronger controls will allow the auditor to assess control risk below the
maximum
substantive test of transactions are audit procedures testing for
monetary misstatements to determine whether the six transaction related audit objectives have been satisfied for each class of transaction
what is the primary concern of the auditor with respect to receivables? under or overstatement?
overstatement
ex of a test of details of balances for acquisition and payment cycle is to
physically examine a sample of the client's fixed assets
Summary of the Audit Process - Phase II (Begin Field Work)
plan to reducde assessed level of control risk? if yes then -perform test of controls -perform substantive tests of transactions -assess likelihood of misstatements in financials -if no then jump straight to tests of transactions
voucher packet
purchase requisition purchase order receiving report invoive -gets matched prior to cash disbursement authorization
when planned detection risk is increased planned substantive tests would be
reduced
type of evidence= observation, what type of test would be used?
risk assessment procedures and tests of controls
what audit procedures may uncover kiting?
schedule of interbank transfers made for a few days before and after audit date -cutoff bank statements covering the 7-10 day period after the balance sheet date
if controls are found to be effective and functioning...
substantive evidence may be reduced
type of evidence= recalculation, what type of test would be used?
substantive tests of transactions and tests of details of balances
type of evidence= reperformance, what type of test would be used?
tests of controls, substantive tests of transactions and tests of details of balances
type of evidence= confirmation, what type of test would be used?
tests of details of balances
type of evidence= physical examination, what type of test would be used?
tests of details of balances
substantive evidence includes evidence from
tests of transactions, analytical procedures detailed tests of balances
The purpose of the cutoff bank statement is to verify
the reconciling items on the client's year-end reconciliation with evidence that is inaccessible to the client.
substantive test of transaction audit procedure to test that approved wage rates are used to calculate employees earnings
to compare a sample of rates actually paid, as indicated in the earnings record, to authorize pay rates on rate authorization forms
tests of details of balances
verify the ending balance in an individual account (inventory AR) on the financial statements
the auditor can be satisfied with the substantive tests of transactions when BLANK, unless BLANK
-results of the tests of controls are as good or better than the assumptions that were originally made -unless the substantive tests of transactions themselves indicate the existence of misstatements
the 5 types of audit tests auditors use to determine whether financial statements are fairly stated
-risk assessment procedures -tests of controls -substantive tests of transactions -analytical procedures -tests of details of balances
procedures when customer doesn't repspond to positive or blank confirmation
-send a second -ask client to contact customer and request response -review cash receipts in subsequent period -inspect shipping docs -examine customer correspondence with client -consider audit adjustment
revenue and collection cycle: key control procedures
-separation of duties (recording, authorization, custody) -authorization of transactions -access to assets -adequate docs and records (prenumbered docs, remittance device) -independent checks on performance (monthly stm to customer, sub to GL)
auditing AR
-test accounts receivable aged trial balance -confirm balances - perform analytical procedures -test sales cutoff
test of controls are procedures to
-test the operating effectiveness of control policies and procedures in support of a reduced assessed control risk and -provide the primary basis for the auditor's report on internal controls over financial reporting
further audit procedures and the audit risk model
-tests of controls + -substantive tests of transactions + -analytical procedures + -tests of details of balances = sufficient appropriate evidence per GASS
Several factors influence the auditor's choice of the types of tests to select including
-the availability of the eight types of evidence, -the costs of each type of test, -the effectiveness of internal controls, and inherent risks
valuation- best way to do it
-valuation of receivables for subsequent collections -inspecting aging of receivables -examining credit ratings for customers
four examples of substantive tests of trnasacctions
1. recalculation of amounts on selected sales invoices and tracing amounts to sales journal 2. examination of vendor invoices in support of amounts recorded in the acquisitions journal for purchases of inventories 3. recalculation of gross pay for selected entries in the payroll journal 4. tracing of selected customer names and accounts
The more evidence an auditor collects from tests of trans, analytical procedures, details of balances, the lower the BLANK risk.
Detection Detection risk must be lower when control risk is higher.
an increase in tolerable misstatement or reduction of either inherent or control risk will lead to
a reduction in the planned tests of details of balances
type of evidence= inquiries of the client, what type of test would be used?
all 5 types
type of evidence= documentation, what type of test would be used?
all except analytical procedures
way to detect lapping
comparison of the dates on checks deposited to the bank w/ the posting dates in the receivables records -make a surprise count of the cash and customers checks on hand -compare remittance lists, deposit slips and entries in cash receipts journal
tracing goes with which objcective?
completeness/ cutoff
inherent risks of A/R
-- improper revenue recognition (cut-off, bill and hold, channel stuffing) --returns and allownces --collectibility of receivables
The types of tests are listed below in order of increasing cost: (most expensive at bottom)
-Analytical procedures -Risk assessment procedures, including procedures to obtain an understanding of internal control -Tests of controls (need a greater extent of testing required) -Substantive tests of transactions -Tests of details of balances (sending procedures and counting inventories is expensive)
summary of the audit process- phase I PLanning
-accept client and perform intital planning -understand business and industry -assess clients business risk -perform preliminary analytical procedures -set materiality and assess acceptable audit and inherent risk -understand internal control and assess control risk -develop overall audit plan and audit program
substantive analytical procedures
-assess the overall reasonableness of transactions and balances -for AR to identify possible misstatements in the account balance and to reduce audit tests
four examples of testing of controls over financial reporting
1. examination of vendor invoices for indication that they have been clerically tested, compared to a receiving report and purchase order, and approved for payment 2. examination of employee time cards FOR APPROVAL 3. EXAMINATION of Jes for PROPER APPROVAL 4. EXAMINATION OF APPROVALS for the write-off of bad debts
Most audits design an audit program in the following three parts:
A.Tests of Controls and Substantive Tests of Transactions B Analytical Procedures C. Tests of Details of Balances
audit evidence used to test cash
Cash receipts journal Cash disbursements journal Bank reconciliations Cancelled checks Year-end bank statement Cutoff bank statement
if tolerable misstatement is LOW, and inherent risk and control risk are HIGH, planned tests of details of balances which the auditor must perform will be
HIGH
lapping of AR
attempt to cover theft of receivables collection by posting subsequent collection from another customer to that subsidiary account
kiting
attempt to overstate cash by showing deposit in current year and disbursement per books in subsequent years
steps to reconcile a bak statement
balance per bank (confirmed with bank) + deposits in transit - outstanding checks +/- other debt/ credit memos = balance per books (trace amount to trial balance)
first procedure in an audit of cash is to obtain a
bank reconciliation for each cash account
which employee would be the one to lap?
bookeeper or employee in collusion w/ keeper
which type of industries would lapping be easy ?
companies that receive payments of the same amount from all customers (cable)
substantive evidence is obtained to reduce BLANK risk. Substantive evidence includes evidence from 3
detection risk 1. substnative tests of transactions 2. analytical procedures 3. tests of details of balances
test of control audit procedure to test that approved wage rates are used to calculate employees earnings
examine rate authorization forms to determine the existence of authorized signatures