-
Objectives of Internal Control in Production/Manufacturing Cycle
- Resources obtained and used recorded timely
- Transfers of finished goods recorded timely
- Related expenditures are appropriately classified
- Access to inventory restricted
- Comparison of actual inventory to recorded amounts
-
Records Controls in Manufacturing Cycle
- Pre-numbered purchase orders
- Pre-numbered receivers
- Consider perpetual inventory system for high dollar items
- Adequate support for general ledger accounts
-
Comparison Controls in Manufacturing Cycle
- Actual inventory to recorded inventory
- Underlying accounting records to general ledger
-
Segregation of Duties in Manufacturing Cycle
- Separate authorization, bookkeeping (recording), and custody of inventory
- Sales returns should be counted by receiving clerk and a receiver prepared
-
Internal Control Objectives in Investing/Financing Cycle
- Transactions recorded in accordance with management's authorization
- Investment assets reasonably secure from loss
- Supporting detailed records maintained and compared to general ledger
- Management approves adjusting journal entries
-
Objectives of Internal Controls in Fixed Assets Cycle
- Transactions recorded in accordance with management's authorization
- Estimates used to record depreciation, etc. are reasonable
- Appropriate property insurance in force
- Supporting details records properly maintained
- Management approves adjusting journal entries
-
Access Controls in Manufacturing Cycle
Access to physical inventory and to inventory records and documents limited to authorized personnel
-
Execution of Transaction Controls in Manufacturing Cycles
- Acquisition and distribution of inventory in accordance with management's authorization
- Should establish general approval of transactions with specified limits and require specific approval for amounts over limits
- Any adjusting entries approved by management
-
Comparisons in Payroll Cycle
Payroll checks to payroll register
-
Access Controls in the Payroll System
- Access to personnel files limited to authorized personnel
- Access to payroll checks limited to authorized personnel
- Personnel with access to payroll checks should be bonded
-
Execution of Transactions Controls in Payroll Cycle
- Payroll should be authorized by responsible official
- Computations verified by independent person
- Overtime payments approved by management
- Payroll for management appropriately reviewed and approved
-
Segregation of Duties in the Payroll Cycle
Following activities should be performed by different people:
- Establishing and maintaining employee files
- Timekeeping
- Payroll preparation
- Check distribution
- Reconciling payroll bank account
-
Records Controls in Payroll Cycle
- Maintain current and accurate payroll information
- Pre-numbered payroll checks
- Separate bank account for payroll transactions
-
Nature of Procedures
What procedures to perform
-
Component of Audit Risk Model Auditor Controls
Detection Risk
-
When to perform procedures (interim vs. final)
Timing of Procedures
-
Types of Substantive Tests
Tests of Details
- a. Tests of Ending Balances
- b. Tests of Transactions
-
Extent of Procedures
How large the samples should be
-
Three Purposes of Analytical Procedures
- Required in audit planning
- Useful as a form of substantive evidence
- Required as a final review
-
Two Broad Categories of Audit Evidence
- Underlying accounting data
- Corroborating information
-
Valuation or Allocation
That the dollar amounts attributed to the elements of the company's financial statements are appropriate and in accordance with GAAP
-
Presentation and Disclosure
That the presentation of the financial statements and the footnote disclosures are appropriate and in accordance with GAAP
-
Existence/Occurrence
That the recorded transactions are valid economic events of the period in which they are reported
-
Three General Rules about Competence of Evidence
- Evidence based on direct personal knowledge is better than that obtained indirectly
- Independent outside sources are more reliable than the client
- Evidence obtained under strong internal controls is better than that obtained under weak controls
-
Interim Procedure Considerations
- May increase detection risk
- If not testing controls, consider if substantive tests alone sufficient
- Should consider potential for misstatement in remaining period
-
General Sufficiency of Evidence
Evidence is usually persuasive rather than compelling
-
Five Main Management Assertions
- Existence/Occurrence
- Completeness
- Rights and Obligations
- Valuation or Allocation
- Presentation and Disclosure
-
Rights and Obligations
That the company has all the rights associated with its reported assets and all the obligations associated with its reported liabilities; any limitations on such rights or obligations must be appropriately disclosed
-
Work Normally Performed at Interim
- Planning
- Study and evaluation of internal control
- Substantive tests of transactions
-
Completeness
That there are no omissions of transactions that should have been reported
-
Buzzwords to Use in Preparing Audit Programs
- Observe
- Inquire
- Confirm
- Inspect
- Agree (trace or vouch)
- Recalculate and trace
- Read
- Scan
- Perform analytical procedures
-
Factors Affecting Quantity, Type, and Content of Audit Documentation
- Nature of engagement
- Financial statements under examination
- Type of audit report
- Nature and condition of client's records
- Assessment of control risk
- Experience and skills of audit team
-
Correspondence File
Where letters (and email messages) to and from clients are organized so that the audit team can conveniently review communications related to each client organization
-
Purposes of Audit Documentation
- Provides the principal support for the auditor's report
- To document work was adequately planned and supervised
- To document internal control was reviewed and evaluated as necessary
- That a reasonable basis for the opinion exists
- To assist in controlling the audit
-
Report File
Where prior years' audit reports and management letters are organized (by client) so that the audit team can conveniently review formal reports previously issued for each client
-
Types of Files in Audit Documentation
- Permanent file
- Current year audit file
- Bulk file
- Correspondence file
- Report file
-
Audit Documentation Custody Issues
- Audit documentation is the auditor's property subject to client confidentiality considerations
- The auditor should safeguard the audit documentation and establish a formal retention policy
-
Bulk File
Where documentation that is too voluminous can be stored
-
Permanent File
Contains documentation of matters having on-going audit significance
-
Receivable Confirmation Alternative Procedures
Verifying subsequent cash receipts
-
-
When to Use Negative Confirmations
- Large number of small accounts
- Control risk is low
- Recipients are expected pay attention to request
-
When to Use Positive Confirmations
When individual accounts are large
-
Positive Confirmations
Where a response is requested whether or not the other party agrees with the client's recorded amount
-
Negative Confirmations
Where a response is only requested in the event of disagreement
-
Payables Confirmations Alternative Procedures
Verify subsequent cash disbursements as payments on the account
-
Basic auditor responsibility for estimates
Evaluate reasonableness of any significant accounting estimates
-
Key factors and assumptions used in evaluating the reasonableness of an estimate
Significant to the accounting estimate, sensitive to variations, deviations from historical patterns, subjective and susceptible to misstatement and bias
-
Factors that affect the risk of material misstatement related to estimates
1) Complexity and subjectivity of process involved; 2) Availability and reliability of data involved; 3) Number, significance, and uncertainty of assumptions involved
-
Audit Procedures for Accounting Estimates
- Inquire of personnel to obtain understanding of how estimate developed
- Review and test management processes
- Develop an independent expectation for corroboration
- Review subsequent events for additional evidence
-
Two approaches to evaluate reasonableness
1) Review and test process used by management to develop estimate; OR 2) Develop an independent expectation
-
Fair value
The amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale
-
Audit process relating to fair value and disclosures
1) Obtain understanding of entity's process for determining fair value measurements and disclosures; 2) Evaluate whether fair value measurements and disclosures conform to GAAP and that methods used are consistently and appropriately applied
-
Auditor's objective regarding fair value and disclosures
To provide reasonable assurance that fair value measurements and disclosures comply with GAAP
-
Best evidence of fair value
Published price quotations in an active market
-
Management responsibility
Responsibility for the financial statements, including the fair value measurements and disclosures, which are inherently imprecise
|
|