2009 A-4 Class Notes

2009 A-4 Class Notes - Becker CPA Review Auditing 4 Class...

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1 © 2009 DeVry/Becker Educational Development Corp. All rights reserved. AUDITING 4 CLASS NOTES I. AUDITING 4 The main concepts of Auditing 4 are the procedures used to test financial statement balances and transactions (i.e., substantive testing), audit documentation, and audit evidence. A. TRANSACTION CYCLES 1. Transaction cycles include cycles for revenue, expenditures, payroll and personnel, inventory and production, property, plant, and equipment, investments, and other liabilities. 2. For each of these cycles, the auditor wants to answer two crucial questions: a. Are controls operating effectively? b. Have transactions, balances, and disclosures been recorded properly in accordance with GAAP? 3. In the textbook you will see each transaction cycle presented in three ways: in written sentences, as a flowchart, and in a chart. Pay attention to the division of responsibilities as shown in the flowcharts, and how the auditor might test the controls shown in the charts. 4. It is the company's responsibility to properly segregate duties and implement effective controls. The auditor's responsibility is to evaluate those controls, decide whether or not to rely on them, and to determine the nature, extent, and timing of substantive audit procedures. 5. For each transaction cycle, be aware of whether the account being examined is an asset/revenue or a liability/expense. This usually dictates whether the assertion of existence or the assertion of completeness is being tested. a. For assets/revenues, the focus is often on whether the account actually exists (i.e., making sure the accounts are not overstated). b. For liabilities/expenses, the focus is often on whether the items were actually recorded (i.e., making sure the accounts are not understated). 6. If a flowchart is presented on the examination, it will typically present various departments (showing segregation of duties), as well as show how a particular transaction starts with a source document (e.g., a sales order) and is processed to ultimate inclusion in the financial statements. 7. In evaluating each transaction cycle, the auditor should determine whether management has implemented sound internal control (i.e., the auditor should see evidence of PAID TIPS). B. REVENUE CYCLE The revenue cycle includes sales, accounts receivable, and cash receipts. 1. Emphasis is on the existence assertion, as there is often a motivation to overstate revenue and receivables. 2. Another important assertion is valuation. Obtaining credit approval, preparing an aging schedule, and the allowance for doubtful accounts relate to this assertion. 3. Proper segregation of duties is also important (pay attention to the responsibilities assigned to each department). 4.
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This note was uploaded on 02/19/2011 for the course BMGT 360 taught by Professor Spina during the Spring '07 term at Maryland.

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2009 A-4 Class Notes - Becker CPA Review Auditing 4 Class...

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