What are the textbook-version (perfect world) internal controls related to PP&E?
Acquisitions should be approved by top management (BoD) and tied to the capital budget
Physical security should be used including
** identification plates
** safeguards to prevent theft or destruction
** periodic physical inspection
Written depreciation policies
Document retirement of assets on an authorized and sequentially numbered work order
** those who authorize the retirement should be separate from those who physically dispose of the asset
Which three assertions are most important when auditing the PP&E balance?
Valuation and Allocation
Existence
Rights and Obligations
When auditing PP&E balances, how does the auditor verify the completeness assertion?
Foot and agree the fixed asset schedule to the general ledger
Foot and agree the additions and dispositions to the fixed asset schedule
Trace the assets to the fixed asset subsidiary ledger
When auditing PP&E balances and transactions, how does the auditor verify the Valuation and Allocation assertion?
Recalculate accumulated depreciation for reasonableness
Reperform the entity’s impairment analysis to determine reasonableness
Ensure gains & losses and the removal of accumulated depreciation for retired fixed assets
Review repair and expense accounts to determine if any should be capitalized (added to the asset's balance)
If IFRS, reperform the fixed asset revaluatons to determine reasonableness
When auditing PP&E balances and transactions, how does the auditor verify the existence assertion?
Vouch additions and known dispositions
Vouch a sample of older assets to test for unrecorded retirements
When auditing PP&E transactions, how does the auditor verify the understandability and classification assertion?
Review repair and expense accounts to determine if any should be capitalized
Leases = operating vs capital
What disclosures are required for PP&E?
Depreciation methods and useful lives
Depreciation expense for the period
Balance of each class of capital assets by nature or function
Accumulated depreciation allowances by class or in total
Liens and mortgages
Capital and operating lease information
What are the textbook-version (perfect world) internal controls related to Payroll and Personnel?
Segregation of duties is most important
Authority: to employ and pay is the function of HR, including personnel records
Supervision: Pay base data (hours work, time off) is approved by the immediate supervisor
Record Keeping: Pay base data is accumulated in a separate system (time clocks, vacation requests)
Record Keeping: Payroll checks are calculated by the payroll dept or a service organization, and blank checks created
Authority: Check approval is performed by the Treasurer or CFO
Custody: Check distribution is either electronic or manually by a paymaster who verifies employee ID before providing the cheque
Internal auditing periodically compares HR files to PR files
True / False: The payroll department is the custodian for personnel records and can make changes to hourly or salary rates.
False
The custodian of personnel records and changes is HR
Payroll is a record-keeping department that processes the base rate provided by HR, x the hours worked provided by Timekeeping, and cannot authorize (sign) the cheques.
Which two assertions are most important when auditing the payroll accrual (balance) when internal controls are effective?
Valuation
Existence
When auditing payroll accruals and transactions, how does the auditor verify the valuation and allocation assertion?
Perform analytical procedures
Recalculate and compare the year-end payroll accrual
Recalculate a sample of recorded payroll (gross and net pay) to cheques issued
Test payroll extensions and footings
Compare payroll costs to standards or budgets
When auditing payroll accruals, how does the auditor verify the existence assertion?
Vouch the employee to the personnel records
Vouch the payroll summary to appropriate time cards or time off requests
What disclosures are required for payroll-related items?
Pension and post-retirement benefits
Stock-based compensation
Deferred compensation and profit-sharing plans
What are the textbook-version (perfect world) internal controls related to debt?
Authorization of new debt by the BoD or upper-level management
Appropriate records or documentation of all financing agreements
Periodic independent verification of amounts between the ledger, details of debt, and the note holder’s records
Controls over interest and principal payments, bond premium and discount amortization amounts
What are the textbook-version (perfect world) internal controls related to equity?
Authorization of new stock issuances or dividend declarations by the BoD (recorded in the minutes)
Periodic independent reconciliation of the stock certificate book with the number of shares outstanding
An officer, or transfer agent, ensures transactions comply with articles of incorporation and regulations
Separation of duties = the person who maintains the stock certificate book has no accounting responsibilities
Which two assertions are most important when auditing the debt balance?
Completeness
Valuation and Allocation
When auditing debt balance and transactions, how does the auditor verify the completeness assertion?
Review board minutes for agreement approval
Trace new debt contracts to the FS and disclosures
Agree the listing of all debt to the general ledger
Trace debt listed in a bank confirmation to their agreements and to the general ledger
Confirm notes and bonds with creditors
Ensure interest payments, or amortization of discounts or premiums is posted
Leases: ensure proper placement as capital or operating lease
When auditing debt balance and transactions, how does the auditor verify the valuation and allocation assertions?
Compare debt agreements to recorded amounts
Recompute interest payable and compare to posting
Recompute amortization of discounts and premiums and compare to posting
When auditing debt transactions, how does the auditor verify the understandability and classification assertions?
Ensure notes and bonds are properly classified as short- or long-term debt
Ensure leases are classified as capital or operating
What disclosures are required for debt-related items?
Details of maturity dates, interest rates, call and conversion privileges, assets pledged as collateral
Future sinking fund payments and maturities for each of the next five years
Restrictive loan covenants
When auditing the equity balance and transactions, how does the auditor verify the completeness assertion?
If the client uses a stock transfer agent, issue a third-party confirmation, else
Review the stock certificate book, foot the shares outstanding and agree to the general ledger
Examine all shares of treasury stock and agree to the general ledger
What disclosures are required for equity?
Number of shares authorized, issued, and outstanding
Rights and privileges of securities
Stock-option plans
Appropriation of retained earnings and restrictions on dividends
