AUD 4.06 - Other Transaction Cycles

  1. 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
  2. Which three assertions are most important when auditing the PP&E balance?
    • Valuation and Allocation
    • Existence
    • Rights and Obligations
  3. 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
  4. 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
  5. 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
  6. 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
  7. 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
  8. 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
  9. 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.
  10. Which two assertions are most important when auditing the payroll accrual (balance) when internal controls are effective?
    • Valuation
    • Existence
  11. 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
  12. 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
  13. What disclosures are required for payroll-related items?
    • Pension and post-retirement benefits
    • Stock-based compensation
    • Deferred compensation and profit-sharing plans
  14. 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
  15. 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
  16. Which two assertions are most important when auditing the debt balance?
    • Completeness
    • Valuation and Allocation
  17. 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
  18. 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
  19. 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
  20. 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
  21. 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
  22. 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
Author
BethM
ID
332622
Card Set
AUD 4.06 - Other Transaction Cycles
Description
Becker Review 2017
Updated