Session four-Auditing Spriing 2010

Session four-Auditing Spriing 2010 - Session Four Auditing...

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Unformatted text preview: Session Four Auditing Tuesday May 25, 2009 Professor Roger Mayer, DBA, CPA, CIA 9178870448 Announcements Quiz 3 Quiz 4 Toy Central part 4 Accounting Issues The scope paragraph in the standard audit letter states: "An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation." In this paper you are to assess significant accounting principles addressed in the case study. What is the appropriate accounting presentation of the capitalized costs/licensing fees. Is it appropriate to amortize this cost over the life of the contract? What accounting issues arise with respect to the Delgo movie? What other accounting issues must be assessed by the auditors? Be sure to cite the appropriate FASB references that provide support for your decision. The paper is worth 40 points and is due five days after the conclusion of chat session four. Questions A basic premise underlying the application of analytical procedures is that A. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations. B. Statistical tests of financial information may lead to the discovery of material errors in the financial statements. C. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. D. These procedures cannot replace tests of balances and transactions. In determining whether transactions have been recorded, the direction of the audit testing should be from the A. General ledger balances. B. Adjusted trial balance. C. Original source documents. D. General journal entries CPA T/F Questions A. B. Sampling is used in an audit but normally only when the risk of a material misstatement is relatively low. True False The auditor does inform the reader of financial statements that sampling was utilized rather than the 100 percent testing of items. True False The primary benefit of using statistical sampling is that it reduces the amount of risk that the auditor faces in performing a test. True False A. B. A. B. Cash Sale Ch 10 Overview of the Revenue Process Credit Sale Purchases Cash collection Purchases Cash sales Account receivable Inventory Inventory Credit sales Types of Transactions and Financial Statement Accounts Affected The revenue process affects numerous accounts in the financial statements. The most significant accounts are: Types of Documents and Records The Major Functions Functions of the Purchasing Process Order entry Acceptance of customer orders for goods and services into the system in accordance with management criteria. Appropriate approval of customer orders for Credit authorization creditworthiness. Shipping Shipping of goods that has been authorized. Issuanace of sales invoices to customers for goods Billing shipped or services provided; also, processing of billing adjustments for allowances, discounts, and returns. Cash receipts Processing of the receipt of cash from customers. Recording of all sales invoices, collections, and credit Accounts receivable memoranda in individual customer accounts. Proper accumulation, classification, and summarization of General ledger revenues, collections, and recivables in the financial statement accounts. Key Segregation of Duties Segregation of Duties for Revenue and Accounts Receivable Functions by Department Inherent Risk Assessment The four inherent risk factors that may affect the revenue process are: 1. Industry-related factors. 2. The complexity and contentiousness of revenue recognition issues. 3. The difficulty of auditing transactions and account balances. 4. Misstatements detected in prior audits. Control Risk Assessment Understand and document the revenue process based on a reliance approach. Plan and perform tests of controls on revenue transactions. Sett and document the control risk for the revenue process. Assertions about Classes of Transactions and Events for the Period Under Audit Occurrence All revenue and cash receipt transactions and events that have been recorded have occurred and pertain to the entity. All revenue and cash receipt transactions and events that should have been recorded have been recorded. All revenue and cash receipts transactions and events are properly authorized. Amounts and other data relating to recorded revenue and cash receipt transactions and events have been recorded appropriately. Completeness Authorization Accuracy All revenue and cash receipt transactions and events have been recorded in the correct accounting period. All revenue and cash receipt transactions and events Classification have been recorded in the proper accounts. Cutoff Revenue Transactions Cash Receipts Transactions Substantive Analytical Procedures Ratios used for comparative purposes 1. Receivables turnover and days outstanding in accounts include: 2. 3. 4. 5. receivable. Aging categories on aged trial balance of accounts receivable. Bad-debts expense as a percent of revenue. Allowance for uncollectible accounts as a percent of accounts receivable or credit sales. Large account balances compared to last period. Tests of Details of Transactions For Accounts Receivable, Allowance for Uncollectible Accounts, and Bad-Debt Expense Occurrence A sample of transactions from the sales journal should be traced to the sales invoice, customer order, and shipping document. A sample of shipping documents should be traced to related sales invoice and customer's account. Compare prices and terms for sample of sales invoices with authorized price list. Completeness Authorization and Accuracy Cutoff From a sample, compare date of sales invoice with date of shipment and date sale was recorded. For a sample of sales invoices, determine that each is Classification properly classified in the revenue accounts. Tests of Details of Account Balances and Disclosures For Accounts Receivable, Allowance for Uncollectible Accounts, and Bad-Debt Expense Existence Rights and Obligations Confirmation of selected accounts receivable and alternative procedures for exceptions and nonresponses. Review of bank confirmations for any liens on receivables and inquiry of management. Agree aged trial balance to general ledger and trace Completeness selected shipping documents to subsidiary ledger. Valuation and Allocation Disclosure Examine results of confirmations and review adequacy of allowance for uncollectible accounts. Review financial statements for proper presentation and disclosure of receivables and related accounts. Types of Confirmations Positive Confirmation Requests that customers indicate whether they agree with the amount due to the client. A response is expected whether the customer agrees or disagrees with the balance indicated. Negative Confirmation Requests that the customer respond only when they disagree with the amount due to the client. Negative confirmations are used when the client has many small account balances and control risk is assessed as low. Confirmation Procedures The auditor should mail the confirmation requests outside the client's facilities. A record should be maintained of the confirmations mailed and those returned. A second request may be necessary in some cases. For each exception received, the auditor should examine the reasons for the difference between the balance on the client's books and the balance indicated by the customer. Expenses are outflows or other using up of assets or incurrences of liabilities from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. Chapter 11 Purchasing cycle Expense and Liability Recognition Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Overview of the Purchasing Process A purchase transaction usually begins with a purchase requisition generated by the user department. The purchasing department prepares a purchase order that is sent to the vendor. When the goods are received or the services rendered, a liability is recorded. Finally, the entity pays the vendor. Purchase requisition Purchase order Receiving report and liability recorded Vendor Types of Transactions and Financial Statement Accounts Affected Three types of transactions are processed through the purchasing process: Type of Transaction Purchase Transaction Account Affected Accounts payable Inventory Purchases or cost of goods sold Various asset and expense accounts Cash disbursement transaction Cash Accounts payable Cash discounts Various asset and expense accounts Purchase return transaction Purchase returns Purchase allowances Accounts payable Various asset and expense accounts Types of Documents and Records Purchasing documents and records . . . 1. Purchase Requisition request to purchase goods or services. 2. Purchase Order includes description, quality, and quantity or goods or services being purchased. 3. Receiving Report records the receipt of goods. 4. Vendor Invoice the bill from the vendor. 5. Voucher serves as the basis for recording a vendor's invoice. 6. Voucher Register used to record vouchers for goods and services. 7. Accounts Payable Subsidiary Ledger includes amount owed to individual vendors. 8. Vendor Statement represents the purchase activity with vendor. 9. Check pays for goods or services. 10. Check Register contains columns to record credits to cash and debits to accounts payable and cash discounts. The Major Functions Functions of the Purchasing Process Initiation and approval of requests for goods and services Requisitioning by authorized individuals consistent with management criteria. Approval of purchase orders and proper execution as to Purchasing price, quantity, quality, and vendor. Receiving Receipt of properly authorized goods and services. Processing of vendor invoices for goods and services Invoice processing received; also, processing of adjustments for allowances, discounts, and returns. Disbursements Processing of payment to vendors. Recording of all vendor invoices, cash disbursements, and Accounts payable adjustments in individual vendor accounts. Proper accumulation, classification, and summarization of General ledger purchases, cash disbursements, and payables in the general ledger. Segregation of Duties Key Functions and Duties Possible Errors or Fraud If one individual is responsible for the requisition, purchasing, and receiving functions, fictitious purchases can be made. This can result in the theft of goods and possibly payment for unauthorized purchases. If one individual is responsible for the invoiceprocessing and accounts payable function, purchase The invoice-processing function transactions can be processed at the wrong price or should be segregated from the terms, or a cash disbursement can be processed for accounts payable function. goods not received. This can result in overpayment of goods or the theft of cash. If one individual is responsible for the disbursement function and also has access to the accounts payable The disbursement function should be records, unauthorized checks supported by fictitious segregated from the accounts documents can be issued, and unauthorized payable function. transactions can be recorded. This can result in theft of the entity's cash. If one individual is responsible for the accounts The accounts payable function payable records and also for the general ledger, that should be segregated from the individual can conceal any defalcation that would general ledger function. normally be detected by reconciling subsidiary records with the general ledger control account. The purchasing function should be segregated from the requisitioning and receiving functions. Control Activities and Tests of Controls Purchase Transactions Assertions Occurrence Tests of Controls Observe and evaluate proper segregation of duties. Test a sample of vouchers for the presence of an authorized purchase order and receiving report. Examine paid vouchers and supporting documents for indication of cancellation. Review procedures for accounting for numerical sequence of purchase orders, receiving reports, and vouchers. Trace a sample of receiving reports to their vendor invoices and vouchers. Trace a sample of vouchers to the purchases journal. Examine purchase requisitions or purchase orders for proper approval. Review client's competitive bidding process. Recompute the mathematical accuracy of vendor invoice. Agree information in the sample of vouchers for product, quantity, and price. Examine reconciliation of vouchers to daily accounts payable report. Compare the dates on receiving reports with the dates on the relevant vouchers. Compare the dates of vouchers with the dates they were recorded in the purchases journal. Review purchases journal and general ledger for reasonableness. Examine a sample of vouchers for proper classification. Completeness Authorization Accuracy Cutoff Classification Auditing Accounts Payable and Accrued Expenses Assertions about Account Balances at the Period End: Existence. Accounts payable and accrued expenses are valid liabilities. Rights and obligations. Accounts payable and accrued expenses are obligations of the entity. Completeness. All accounts payable and accrued expenses have been recorded. Valuation and allocation. Accounts payable and accrued expenses are included in the financial statements at appropriate amounts, and any resulting valuation or allocation adjustments are appropriately recorded. Tests of Details of Transactions, Account Balances, and Disclosures Completeness The auditor should conduct a search for unrecorded liabilities that includes the following: 1. Ask management about control procedures used to identify unrecorded liabilities at the end of the period. 2. Obtain copies of vendors' monthly statements and reconcile the amounts to the client's accounts payable records. 3. Confirm vendor accounts, including accounts with small or zero balances. 4. Vouch large-dollar items from the purchases journal and cash disbursements journal for a limited time after year-end. 5. Examine the files of unmatched purchase orders, receiving reports, and vendor invoices for any unrecorded liabilities. Chapter 12 Human Resource Management Process The human resource process starts with the establishment of sound policies for hiring, training, evaluating, counseling, promoting, compensating, and taking remedial actions for employees. The main concern of the auditor involves payroll transactions once an employee has been hired. Types of Transactions and Financial Statement Accounts Affected Two types of transactions are typically processed through the human resource management process. Type of Transaction Payroll transactions Account Affected Cash Inventory Direct and indirect labor expense accounts Various payroll-related liabilitiy and expense accounts Cash Various accruals (such as payroll taxes and pension costs) Accrued payroll liability transactions Personnel records, including wage-rate or salary authorizations. W-4 and other deduction authorization forms. Time card/time sheet. Payroll check/direct deposit records. Payroll register. Payroll master file. Payroll master file changes report. Periodic payroll reports. Various tax reports and forms. Types of Documents and Records The Major Functions Human Resources Authorization of hiring, firing, wage-rate and salary adjustments, salaries, and payroll deductions. Review and approval of employees' attendance and time information; monitoring of employee scheduling, productivity, and payroll cost variances. Processing of employees' attendance and time information and coding of account distribution. Computation of gross pay, deductions, and net pay; recording and summarization of payments and verification of account distribution. Payment of employees' compensation and benefits. Proper accumulation, classification, and summarization of payroll in the general ledger. Supervision Timekeeping Payroll processing Disbursement General ledger Segregation of Duties Payroll Function Initiation of wage or salary changes Initiation of employee hiring and firing Approval of wage and salary changes Updating of personnel records Updating of payroll records Approval of time sheets and job classification Review of time data and payroll distribution Preparation of payroll Preparation and signing of payroll checks Distribution of payroll checks Updating of general ledger for payroll Comparison of payroll expense to budget Calculation and recording of payroll taxes Human TimeOperating Resource keeping X X X X X X X Payroll IT Treasurer X X X X X X X Control Activities and Test of Controls Payroll Transactions Occurrence of Payroll Transactions Authorization of Payroll Transactions Accuracy of Payroll Transactions Classification of Payroll Transactions Relating the Assessed Level of Control Risk to Substantive Procedures If the results of the tests of controls for the payroll system support the planned level of control risk, the auditor conducts substantive procedures of payroll-related accounts at the assessed level. If the tests do not support the level of control risk, the nature and extent of substantive testing will be increased. Auditing PayrollRelated Accounts Substantive Analytical Procedures Payroll Expense Accounts: Compare current year with prior years' payroll expense accounts Compare current and prior years' payroll costs as percent of sales and industry data Compare labor utilization rates and statistics with industry data Compare budgeted payroll expenses with actual payroll expenses Estimate sales commissions with formulas and recorded sales Payroll-Related Accrual Accounts: Compare current and prior years' balances in payroll related accounts Test reasonableness of accrual balances Tests of Detail of Transactions, Account Balances, and Disclosures Assertions about Transactions Occurrence Completeness Authorization Accuracy Cutoff Classification Substantive Tests of Transaction Trace a sample of payroll checks to the master employee list to verify validity. Trace a sample of time sheets to the payroll register. Test a sample of payroll checks for proper authorization. Recompute a sample of payroll checks for gross pay, deductions, and net pay. Trace a sample of time sheets before and after period end to the appropriate payroll report. Examine a sample of payroll checks for proper classification into expense accounts. Tests of Detail of Transactions, Account Balances, and Disclosures Assertions about Account Balances at Period End Existence Rights and obligations Completeness Valuation and Allocation Tests of Details of Account Balances Vouch selected amounts from account schedules for accruals to supporting documents (payroll tax returns, corporate benefit policies, etc.). Review supporting documentation to determne that the entity is legally obligated to pay the liability. Search for unrecorded liabilities. Obtain an account analysis schedule for accrued payroll liabilites; foot schedules for accrued payroll liabilities. Compare amounts accrued to supporting documentation, such as payroll tax returns. Finance's Prime Directive ...
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This note was uploaded on 11/24/2010 for the course TXX 5762 taught by Professor Allen during the Fall '10 term at Nova Southeastern University.

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Session four-Auditing Spriing 2010 - Session Four Auditing...

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