Audit Chapter 13

Bank Reconciliation Purpose

Establishes the correct cash-in-bank balance at the balance sheet date and serves as a major control over cash

Auditor’s Bank Reconciliation Tests

1. Compare ending balance with confirmation form

2. Inspect unusual items

3. Verify deposits in transit

4. Check mathematical accuracy

Bank Confirmation Function

Validates reconciling items between bank and accounting records at balance sheet date or an interim date while assisting in audit of loans payable and interest

Cutoff Bank Statement

A statement for the period after balance sheet date, sent directly to auditor to verify transactions, confirm cash balance accuracy, and detect any potential misstatements or irregularities

Proof of Cash Purpose

A detailed examination used in high fraud risk situations to reconcile both receipts and disbursements between records and bank

Lapping

Cash is stolen before recording and shortage is covered using receipts from other customer accounts and eventually writes off discrepancies

Kiting

Stolen cash after recording, with improper transfers between accounts across accounting period

Inventory Price Testing Purpose

Examines supporting documentation for cost and market value, focusing on accuracy and valuation assertions

Inventory Observation Requirements

Mandatory for material inventories, and ensure items are counted once

Segregation of Duties Importance

Prevents errors and fraud by separating authorization, custody, and recording functions in inventory management

Physical Count Procedures

1. Ensure all items are counted and tagged once

2. Perform some test counts and trace quantities to final count

3. Be alert for empty containers and spaces that may exist

4. Watch for damaged and obsolete inventory

5. Inquire about slow moving inventory

Inventory Cutoff Verification

Review last receiving and shipping documents to ensure transactions recorded in correct accounting period

Cutoff Bank Statement Importance

1. Provides independent verification of transactions

2. Helps ensure transactions are recorded in the correct accounting period

3. Supports existence/completeness assertions for cash

3 Components of Inventory Cost

Material, Labor, Overhead

How do you audit material costs?

Test the quantity and type of materials included in the product and the price of the materials

How do you audit labor costs?

Gather evidence about the type and amount of labor needed for production and the labor rate

How do you audit overhead costs?

Review the entity’s method of overhead allocation for reasonableness, compliance with GAAP, and consistency