Substantive Procedures for Detecting Irregularities

Substantive Procedures for Detecting Irregularities -...

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Substantive Procedures for Detecting Irregularities 1 Substantive Procedures for Detecting Irregularities Substantive Procedures for Detecting Irregularities The following report is provided as supplemental information relating to the Apollo Shoes audit. Team B has designed an audit program for detecting audit cycle irregularities. The following audit cycles from Apollo Shoes are discussed in this report:
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Substantive Procedures for Detecting Irregularities 2 1) Accounts Receivable 2) Inventory 3) Fixed Assets The report outlines the substantive procedures for each cycle as well as any know irregularities discovered from the preliminary test of controls. Accounts Receivable The first audit objective in designing the audit program for the accounts receivable cycle is to evaluate whether the account balances are fairly presented in accordance with generally accepted accounting principles (GAAP). To achieve this objective the auditor needs to understand the client’s internal control over accounts receivable, assess planned control risk, identify control deficiencies and associate these with the audit objectives, and finally assess the control risk for each objective by evaluating the controls and deficiencies for each objective. Then substantive tests of transactions of accounts receivables have to be designed to determine whether significant misstatements exist in the transactions. The test of controls over accounts receivable indicates a high risk potential for Apollo Shoes. Some of the problems noted include errors in billing, failure to adhere to credit approval processes, and inaccurate accounts receivable balances. The test of transactions reported a high deviation rate of 42.5 percent. During the client inquiry portion of the testing an irregularity was uncovered regarding a large shipment of shoes to a client that entered into involuntary bankruptcy. This transaction is also missing a purchase order. Review of meeting minutes indicates a missing disclosure in financials regarding low interest loan to a corporate officer. According to Louwers, Ramsay, Sinason, Strawser, 2007, the substantive procedures for the accounts receivable cycle are outlined below:
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Substantive Procedures for Detecting Irregularities 3 Substantive Audit Procedures 1. Test assertion of existence or occurrence – Confirm accounts receivable including follow-up procedures. a. Test completeness assertion. Confirm proper transaction placement with cutoff tests. b. Compare date of recording of sale in accounts receivable journal with duplicate sales invoice and bill of lading for timing. c. Trace shipping documents to journal and check accuracy and completeness. 2. Test rights and obligation assertion – Check for sale or factoring of receivables. Include bank confirmations, loan agreements, and meeting minutes in analysis. 3.
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