AUDITING 3

• 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

• Pre-numbered purchase orders
• Pre-numbered receivers
• Consider perpetual inventory system for high dollar items
• Adequate support for general ledger accounts

• Actual inventory to recorded inventory
• Underlying accounting records to general ledger

• Separate authorization, bookkeeping (recording), and custody of inventory
• Sales returns should be counted by receiving clerk and a receiver prepared

• 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

• 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 to physical inventory and to inventory records and documents limited to authorized personnel

• 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

Payroll checks to payroll register

• 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

• Payroll should be authorized by responsible official
• Computations verified by independent person
• Overtime payments approved by management
• Payroll for management appropriately reviewed and approved

Following activities should be performed by different people:

• Establishing and maintaining employee files
• Timekeeping
• Payroll preparation
• Check distribution
• Reconciling payroll bank account

• Maintain current and accurate payroll information
• Pre-numbered payroll checks
• Separate bank account for payroll transactions

What procedures to perform

Detection Risk

Timing of Procedures

Tests of Details

• a. Tests of Ending Balances
• b. Tests of Transactions

How large the samples should be

• Required in audit planning
• Useful as a form of substantive evidence
• Required as a final review

• Underlying accounting data
• Corroborating information

That the dollar amounts attributed to the elements of the company's financial statements are appropriate and in accordance with GAAP

That the presentation of the financial statements and the footnote disclosures are appropriate and in accordance with GAAP

That the recorded transactions are valid economic events of the period in which they are reported

• 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

• May increase detection risk
• If not testing controls, consider if substantive tests alone sufficient
• Should consider potential for misstatement in remaining period

Evidence is usually persuasive rather than compelling

• Existence/Occurrence
• Completeness
• Rights and Obligations
• Valuation or Allocation
• Presentation and Disclosure

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

• Planning
• Study and evaluation of internal control
• Substantive tests of transactions

That there are no omissions of transactions that should have been reported

• Observe
• Inquire
• Confirm
• Inspect
• Agree (trace or vouch)
• Recalculate and trace
• Read
• Scan
• Perform analytical procedures

• 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

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

• 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

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

• Permanent file
• Current year audit file
• Bulk file
• Correspondence file
• Report file

• 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

Where documentation that is too voluminous can be stored

Contains documentation of matters having on-going audit significance

Verifying subsequent cash receipts

• Positive
• Negative

• Large number of small accounts
• Control risk is low
• Recipients are expected pay attention to request

When individual accounts are large

Where a response is requested whether or not the other party agrees with the client's recorded amount

Where a response is only requested in the event of disagreement

Verify subsequent cash disbursements as payments on the account

Evaluate reasonableness of any significant accounting estimates

Significant to the accounting estimate, sensitive to variations, deviations from historical patterns, subjective and susceptible to misstatement and bias

1) Complexity and subjectivity of process involved; 2) Availability and reliability of data involved; 3) Number, significance, and uncertainty of assumptions involved

• 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

1) Review and test process used by management to develop estimate; OR 2) Develop an independent expectation

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

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

To provide reasonable assurance that fair value measurements and disclosures comply with GAAP

Published price quotations in an active market

Responsibility for the financial statements, including the fair value measurements and disclosures, which are inherently imprecise