Auditing

1. ACCO.304-part 4
Jose Cintron, MBA-CPC
http://josecintron.com
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jose@mba4help.com

2. Revenue Cycle test
of controls
For testing sales orders, the auditor can
enter test data to evaluate program results for:
a missing or invalid customer number
an invalid product code
an order that exceeds the customer’s credit limit
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3. Substantive Tests of
Sales Transactions
Recorded sales are valid
Test for recorded sales for which
there were no shipments, the auditor can
trace from selected entries in the sales
journal to make sure a related copy of the bill
of lading exists.
Sales are properly authorized
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4. Substantive Tests of Sales
Compare actual prices charged with the
authorized price list:
Cash Receipts Functions
1. receiving cash receipts
Entails two risks:
1. theft
2. possibility of errors occurring in receipt
processing
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5. Control procedures “Sales”
Control procedures are aimed at reducing
risks.
Many firms use a lockbox to minimize risks.
Companies that process their own mail receipts
should mark all checks “for deposit only.”
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6. Example audit procedures
for revenue recognition
Perform a thorough review of original
source documents including: invoices,
shipping documents, customer purchase
orders, cash receipts, and written
correspondence between the client and
customer
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7. Example audit procedures
for revenue recognition
Analyze and review credit memos and
other A/R adjustments for the period
subsequent to the balance sheet date.
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8. Example audit procedures
for revenue recognition
Analyze all large or unusual sales made in
the last month prior to the end of the
period. Vouch to original source
documents. Confirm terms of the
transaction directly with the customer.
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9. Billing Customers
Accounts Receivable
When a delivery or shipment is complete, the system finishes the
transaction by filing a shipment record and preparing a final invoice for
the customer (which is recorded as sales revenue and accounts
receivable). A sales invoice is the bill sent to the customer that indicates
the amount due. Any person who has the power to enter or alter these
transactions or to change the invoice before it is mailed to the customer
should not have any authorization, custody, or recording responsibilities.
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10. Account Receivables
Be alert for the following, which may be
present when the frauds described already
are occurring or have occurred:
Unexplained differences noted by
customers on their A/R confirmations
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11. Account Receivables
Significant delays between the date the
customer states a payment was made and
the date payment was recorded as received
by the firm.
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12. Account Receivables
A significant number of credit entries and
other adjustments made to the A/R records.
Discrepancies between customer names
and amounts on deposit slips and subledger
accounts and amounts credited
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13. Example audit procedures
Account Receivables
Confirm account activity with customers
directly. Confirm credit memo and sales
return activity, as well as the dates on which
payments were made.
perform analytical reviews of credit memo
and writeoff activity by comparing to prior
periods. Look for unusual trends or patterns
such as large numbers of credit memos.
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14. Expenses Cycle
Expenditure cycle–consists of activities
related to the acquisition of and payment
for plant assets and goods and services.
Two major transaction classes:
1–purchases transactions
2-cash disbursements
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15. Expenses Cycle
Transactions in the expenditure cycle often
affect more financial statement accounts
than other cycles combined. The auditor
often seeks a low level of risk of material
misstatements in the financial statements
due to expenditure cycle transactions.
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16. Control Activities for
expenses cycle
The following functions should be assigned to
different individuals or departments:
1 requisitioning goods and services
2 preparing purchase orders
3 receiving the goods
4 storing goods received for inventory
5 preparing the payment voucher
6 recording the liability
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17. Investment and Finance
auditing Cycle
This pertains to activities relating to
ownership of securities issued by other
entities. The types of instruments included
are: certificates of deposit, preferred and
common stocks, and bonds. The investing
cycle interfaces with cash receipts and
disbursements transactions.
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18. Investing Activities
Investing activities–the purchase and sale of
land, buildings, equipment, and other assets
not generally held for resale. These activities
also include the purchase and sale of financial
instruments not intended for trading.
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19. Financial Activities
Financing activities–include transactions and
events whereby cash is obtained from or
repaid to creditors or owners. Financing
activities would include acquiring debt,
capital leases, issuing bonds or stock. These
activities also include retiring debt, buying
treasury stock and payment of dividends.
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20. Materiality, Risk, and
Audit Strategy
It is crucial that an auditor obtain an intimate
understanding of the client’s business and
industry. There can be a sizable variation
between industries in the importance of
financing and investing activities. Industry
knowledge is important for developing
expectations with regard to financial
statement line items.
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21. Substantive test for
plant assets
Auditing information on the beginning balances
for plant assets is one of the largest risks in an
initial engagement. You may need to look at
transactions that happened in years past.
Initial Procedures
As auditor, you must be sure that the starting G/L
balance for plant assets agrees
with the prior year’s working papers.
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22. Test of details of balances
There are various procedures or substantive
tests that should be considered.
These are:
1. Inspect plant assets
2. Examine title documents and contracts
3. Tests of accounting estimates for
depreciation and asset impairment
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23. The Financing cycle
The two major transaction classes in the
financing cycle are long-term debt
transactions and stockholders’ equity
transactions. The financing cycle interfaces
with the expenditure cycle when cash is
disbursed for bond interest, the redemption
of bonds, cash dividends, and the purchase of
treasury stock.
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24. Substantive Tests of LongTerm Debt Balances
The auditor’s main concern is
understatement (completeness assertion).
Initial Procedures
The schedules associated with long-term debt
may include separate schedules on L-T notes
payable, obligation under capital leases, and
listings of registered bond holders.
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25. Confirm Debts-Financing
The auditor should have direct communication
with lenders and bond trustees to confirm the
existence and terms of L-T debt. All confirmations
should be compared with the records and any
differences should be investigated.
Recalculate Interest Expense
Interest payments are traced to supporting vouchers,
canceled checks, and confirmation responses.
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26. AUDIT EVIDENCE USED TO TEST CASH
Cash Disbursements Journal
The cash disbursements journal is the company's checkbook. It contains
all detailed entries for checks written during the period being audited
(cash disbursements). Because all cash disbursements (other than those
from a petty cash account) should be made via check or electronic
transfer, the cash disbursements journal contains the cash credit entries
that provide a population for testing cash disbursements.
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27. AUDIT EVIDENCE USED TO TEST CASH
Bank Reconciliations
The company's bank reconciliation is the primary document used to test
the cash balance in the financial statements. The amount of cash in the
bank is almost always different from the amount in the general ledger
(financial statements), and the reconciliation is designed to explain the
difference between these two amounts. In addition, a bank account
reconciliation that compares the book cash balance to the bank cash
balance provides management with an opportunity to monitor the
separation of duties for cash receipts and cash disbursements as well.
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28. Bank Reconciliation
When auditing the bank reconciliation, the auditor should begin by
confirming the account balance listed as the “balance per bank” on the
top of the bank reconciliation for each bank account from each bank that
the client utilizes in the business. A confirmation letter is required to be
sent by the auditor and received in the mail directly back from each bank
at the offices of the public accounting firm.
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29. Balance in the bank
Once the “balance in the bank” has been confirmed and cross-referenced
to the balance in the bank reconciliation, the following additional
procedures are typically used in auditing the bank reconciliation:
Verify the mathematical accuracy of the reconciliation, including the
listing of outstanding checks and deposits in transit.
Examine reconciling items to ensure they are appropriately classified
(e.g., that they were legitimate outstanding checks that were written but
not paid by the bank at the statement date).
Agree the book balance to the trial balance, which has been traced to the
general ledger.
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30. AUDIT EVIDENCE USED TO TEST CASH
Canceled Checks
Describes the information found on a typical check. Whether the auditor
examines the actual check or a scanned image obtained from the bank,
knowledge of the codes for Federal Reserve districts, offices, states, and
bank identification numbers could enable an auditor to spot a crude
check forgery. A forger's mistakes with the optional identification
printing or the magnetic check number might provide a tip-off. If the
amount of a check is altered after it has cleared the bank, the alteration
would be noted by comparing the magnetic imprint of the amount paid to
the amount written on the check face.
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31. The reverse side of a
check carries the
endorsement(s) of the
payees and holders in
due course; the date
and the name and
routing number of the
bank where the check
was deposited; and
the date clearing.
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32. Characteristic signs of
check-kiting schemes
Frequent deposits and checks in rounded and the same amounts.
Frequent deposits with checks written on the same (other) banks.
1Short time lags between deposits and withdrawals.
2Frequent ATM account balance inquiries.
3Large periodic balances in individual accounts with no apparent
business explanation.
4Low average balance compared to high level of deposits.
5Many checks made payable to other banks.
6“Cash” withdrawals with deposit checks drawn on another bank.
7Checks drawn on foreign banks with lax banking laws and regulations.
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33. AUDIT EVIDENCE USED TO TEST CASH
Individuals engaging in fraudulent schemes involving cash often try to
conceal their crimes by removing canceled checks they made payable to
themselves or endorsed on the back with their own names. Missing
canceled checks are a red flag.
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34. AUDIT EVIDENCE USED TO TEST CASH
Bank Statements
Most of the information shown on the bank statement is self-explanatory.
However, auditors should not overlook the usefulness of some of the
information: the number and dollar amount of deposits and checks can be
compared to the detail data on the bank statement; the account holder's
federal business identification number is on the statement, and this can
be used in other databases; and the statement itself can be studied for
alterations.
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35. Professional Skepticism
Professional skepticism and professional judgment are necessary
responsibilities of auditors throughout the entire audit process.
Professional skepticism is a state of mind that is characterized by
appropriate questioning and a critical assessment of audit evidence.
Auditors evaluate and consider:
1.Contradictory audit evidence obtained through different procedures.
2. The reliability of documentary evidence.
3. The reliability of information obtained from management.
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36. Substantive Procedures
Effective internal control reduces the control risk, and auditors thus have
a reasonable basis for reducing the necessary effectiveness of further
audit procedures.
Ineffective internal control increases control risk, and auditors must
increase the necessary effectiveness of further audit procedures.
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37. Audit Evidence
The final element of the performance principle requires that the audit
team collect and evaluate sufficient appropriate evidence to afford a
reasonable basis for their opinion. Evidence is the information used by
auditors in arriving at the conclusions on which the audit opinion. To be
considered appropriate, evidence must be relevant and reliable
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38. Client Acceptance or Continuance
An important element of a public accounting firm's quality control
policies and procedures is a system for deciding whether to accept a new
client and, on a continuing basis, deciding whether to continue providing
services to existing clients. Public accounting firms are not obligated to
accept undesirable clients, nor are they obligated to continue to serve
clients when relationships deteriorate.
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39. Engagement Letters
Professional standards require auditors to reach a mutual understanding
with clients concerning engagement requirements and expectations and
to document this understanding, usually in the form of a written letter.
When a new client is accepted or when an audit engagement continues
from year to year, an engagement letter should be prepared.
This letter sets forth the understanding with the client, including in
particular: (1) the objectives of the engagement, (2) management's
responsibilities, (3) the auditors' responsibilities, and (4) any limitations
of the engagement.
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40. jose@mba4help.com
http://josecintron.com
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http://www.linkedin.com/in/josecintron
http://www.youtube.com/user/josecintronmba
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