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
- 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.
- 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?
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?
- 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