CPA Audit - A4

Revenue Cycle - Sales IC

1) *Preparation of Sales Order:* Receipt of customer purchase order by sales department

2) *Credit Approval:* Send copy of approved sales order to shipping department, billing department, and accounting

3) *Shipment:* Bill of lading prepared and sent to customer

4) *Billing:* Prepares sales invoice; Match invoices, shipping docs and sales orders

5) *Accounting:* Sale is entered into sales journal and receivable is recorded

Revenue Cycle - Accounts Receivable IC

1) *Sales:* Record receivable in general ledger and subsidiary ledger

2) *Collection of Cash Receipts*

3) *Uncollectible Receivables:* Treasurer approves write offs

4) *Sales Returns:* Credit memos should not be prepared by individuals who collect or receive cash payments on AR; this would be inadequate *segregation of duties*

5) *Sales Discounts*

Revenue Cycle - Cash Receipts IC

*prime area for fraud if proper controls not in place* *(ARC)*

- incoming mail must be opened by person who does not have access to AR ledger

- *three copies* of receipt should be distributed to:

1) *Cashier:* Receives actual receipts and prepares *bank deposit*

2) *AR Department:* Enters *receipts into AR subsidiary ledger*

3) *Accounting Department:* Enters receipts into *AR control account*

Revenue Cycle - Obtaining Evidence

*Existence* is generally a *more relevant* assertion than completeness when auditing the *revenue cycle*

Risk that AR and sales will be overstated (existence) is high

Revenue Cycle - Auditing Sales Transactions

- Completeness: Auditor should trace a sample of shipping documents to sales invoices, and to the sales journal and AR subsidiary ledger; TRACE

(shipping doc --> invoice --> sales journal)

- Cutoff: Compare sample of sales invoices from shortly before and after year-end

- Valuation, Allocation and Accuracy: Compare pricing

- Existence and Occurrence: Vouch a sample of sales transactions from sales journal to sales invoice back ot the customer order and shipping docs

(invoice <-- sales journal)

- Understandability and Classification: Examine invoices for proper classification

segregation of duties = authorization (sales order, treasurer), record keeping (billing/A/R/ accting), custody(wearhouse + shipping)

Revenue Cycle - Auditing AR

- Completeness: Obtain aged trial balance of AR and trace the total to the general ledger

( AR aging --> GL)

- Valuation, Allocaiton, Accuracy: Examine confirmations and allowance for doubtful accounts for accuracy

- Existence and Occurrence: *Confirm* a sample of AR

- Rights and Obligations: Review bank confirms and debt agreements for liens on receivables; Auditor should also inquire management and review debt agreements and board minutes

AR Confirmations

Confirmation of AR is a required GAAP unless:

1) receivables are immaterial

2) confirmation would be ineffective

3) inherent and control risks (RMM) are very low and other procedures can reduce audit risk to a low level

Positive AR Confirmations

Should be used when:

1) there are large individual accounts

2) there are expected errors or items in dispute

3) when internal control is weak

Auditors should consider the types of info respondents will be readily able to confirm:

- single transactions

- individual invoices

- client-prepared statement of account

Confirmations provide evidence regarding:

- *Existence* and

- *Rights and Obligations*

- NOT valuation or completeness

Negative AR Confirmations

May be used when:

1) combined assessed level of inherent risk and control risk is low (RMM low)

2) large number of small account balances are being confirmed

3) there is no reason to expect that the recipients will ignore the requests

Confirmation Exceptions

1) Timing Differences: Occurs when there is a delay int he recording fo the transaction by the client or their customer

2) Misstatements: fictitious sale, goods sent to wrong customer, incorrect price/quantity, etc.

Revenue Cycle - Auditing Presentation and Disclosure

- Completeness: ensure all required disclosures related to AR and sales have been included in the notes to the FS

- Valuation, Allocation and Accuracy: Read over footnotes to ensure accuracy

- Rights and Obligations, and Occurrence: Determine whether any receivables have been discounted, pledged, assigned, etc. and decide if disclosure is necessary

- Understandability and Classification: make sure disclosure are understandable

(Inspecting a sales order is not good enough) m

Expenditure Cycle - Purchases IC

1) Purchase Requisition: Department in need of the asset or services sends a *properly approved,* *serially numbered* requisition to purchasing department

2) Purchase Orders: Purchasing department finds best price from suppliers; Once properly approved, purchase order is created; Copies are sent to - requisitioning department, vendor, receiving department, and accounting department

3) Receipt of Goods or Services: Receiving department receives *blind copy* from purchasing department; receiving report prepared by receiving department and sent to accounting while goods are sent to requisitioning department

• completness

Expenditure Cycle - Accounts Payable IC

1) Recording the Payable: Copy of purchase order indicates to accounting department there will be a cash disbursement; Accounting department records the goods as received in inventory and records a payable

2) Approving Invoice for Payment and Recording Payment: Accounting department matches - receiving report, purchase order, and invoice

Expenditure Cycle - Cash Disbursements IC

- Functions of approving the payment and signing the checks should be *segregated*

- Approved voucher packets *(invoice, PO, receiving report, and requisition)* prepared by accounting department are received by treasurer, who prepares, signs, and mails the checks; Then cancels all documents

Expenditure Cycle - Obtaining Evidence

*Completeness* and *accuracy* are generally a *more relevant* assertion than existence and rights and obligations when auditing the *revenue cycle*

Risk that over understatement is high

Expenditure Cycle - Auditing Accounts Payable (B/S)

*Completeness* and *Accuracy* are more relevant because of possible *understatement*

- Completeness: Auditor should perform following procedures:

1) Agree AP listing to GL

2) Obtain a sample of vendor statements and agree to vendor accounts

3) *Perform a search for unrecorded liabilities*

• Review disbursements made after year end

• Identify disbursements related to expenses incurred before YE

• Examine open vouchers, invoices, etc. for a period after YE; Confirm YE liability

- Valuation, Allocation, and Accuracy: Auditor should perform following procedures:

1) Obtain AP listing, foot the listing, and agree

listing to GL

2) Obtain a sample of vendor statements and

agree amounts to vendor accounts

3) Review results of AP confirmations

- Existence and Occurrence: Vouch selected amounts from AP listing to voucher packages

• AP confirms not required bc strong external evidence is typically available. However, confirms may be sent when IC is weak, when there are disputed amounts, or when monthly vendor statements are not available

• AP confirms are positive and generally "blank"

• Major limitation of AP confirms is they may *only be sent to vendors of record*

- Rights and Obligations: Verify AP are owed to entity

Expenditure Cycle - Auditing Purchase Transactions (I/S)

These substantive tests may also be performed as TOC or dual-purpose

- Completeness: Trace sample of vouchers to purchase journal (Voucher --> Purchase Journal)

- Cutoff: Compare dates on sample of vouchers with dates of the transactions recorded in purchase journal; Also make sure purchases were recorded in proper period

- Valuation, Allocation, and Accuracy: Recompute mathematical accuracy of vendor invoices

- Existence and Occurrence: Test sample of vouchers to confirm proper authorization and presence of the receiving report

- Understandability and Classification: Make sure it's in the right account

Expenditure Cycle - Auditing Presentation and Disclosure

- Completeness: Auditor should ensure all disclosures related to AP and purchases have been included in the notes to FS; Required disclosures include:

1) Payables by type and term

2) Purchase contracts and commitments

3) Related party transactions

4) Expenses by segment

- Valuation, Allocation, and Accuracy

- Rights and Obligations, and Occurrence

- Understandability and Classification

Cash Cycle - Lapping Fraud

- Today's CR cover yesterday's theft (ponzi skem)

- Employee withholds funds received by a customer for personal use and fails to apply these receipts of cash/checks to the customer's receivable balance

- Employee will then use a subsequent receipt from a different customer to cover the previously unrecorded amount

- Reflected by *delayed deposits*

lockbox system , statement sent by bank to auditor instead of company

Cash Cycle - Kiting Fraud

- Cash recorded in two places at once

- Reflected by disbursement of cash being recorded *after receipt date* noted by bank

- Occurs when a check drawn on one bank is deposited in another bank and no record is made of the the disbursement in the balance of the first bank until after year-end

- Intentional overstatement of cash in FS as cash is simultaneously reflected in two different bank accounts

check all deposits in transit outstanding checks listed on the baknk rec at year end cleared the next period

Cash Cycle - Auditing Cash Balance

Completeness, Valuation and Allocation, Existence:

- *Bank Confirmation:* Bank confirms, in addition to verifying year end balances, also provides evidence about actual loans, contingent liabilities, discounted notes, pledged collateral, and guarantee or security agreements; shows account balance, interest rate, and collateral

- *Bank Reconciliation:*Tested by -

1. Footing the bank rec and list of outstanding checks

2. Agreeing balance per books on year-end bank rec to the general ledger

3. Agreeing bank rec to bank confirm

4. Agreeing deposits in transit and outstanding checks to cutoff bank statement

must have segregation of duties (authorization, recording, reconciliation)

Auditing Payroll Accrual

when IC over payroll is effective --> analytical procedures and recalculation of payroll accruals

when IC cannot be relied upon --> tests related to completeness, existence, and rights and obligations

primary source of info regarding contingencies

MANAGEMENT

letter sent to client's attorney is simply a means of *corroborating* information provided by management

collections flowchart

expendature flowchart

auditing cash receipts and disbursements

completness - trace a sample of remittance advices to the cash recipts journal and deposit slips

cutoff

valuation, allocation, accuracy - sample of daily deposits the author should foot the remittance advices and entries on the deposit slip and agree to the cash recipts journal

existence and occurrence - vouch a sample of entries in the cash recpits jpournal to remittance advice

understanding of presentation and classification

inventory cycle controls

purchasing

• prenumbered, purchase orders that are approved are prepared and sent to accouting and reciving

reciving

• receipt of good, verification of quantities, damaged goods prep of receiving report, adn delivery of goods to warehouse

warehouse

• acts as a custodian for the verified quanity of goods recived

shipping

• shipment of goods after authoization (approved sales order from credit department)

auditing inventory cycle

completness - tracing, prenumbered inv tags and trace to physical inv report sheets

valuation, allocation, accuracy - recalculated and reconcile to the GL, inquire about damaged goods, examine, (slow moving inventory inquires)

existence and occurence - vouch

rights + obligations - congined goods

investment cycle controls

authorization - board of directors should authorize the purchase of sale of investments

custody of investments - custodian recommended but at minimum custody should be joint control by 2 company officials with the investments

record keeping - separate party

auditing investment balance / transactions

completness - unrecorded purchases by examining trasnactions, confirm from custodian,

valuation and allocation- recalcuate, detimine impariment, list investments by category, reasonableness of estimates

existence - confirmation of securities, analytical procedures of int earned, inspection, examiniation

rights + obligations- count securities

cutoff (transactions)

understandability and presentation and classification - (afs v trading secutiires in correct accounts)

marketable securities

AFS (oci) + trading (I/s)

auditor should inquire of mgmt and obtain written representation concerning mgmt intnent and baility with respect to holding versus selling goods

measuring fair value

level 1 - same quoted prices

level 2 - simular / diffrent market quoted prices

level 3 - not obserable , ufcf

mgmt responsiblity = making fv measurments + disclosure in accordance w gaap

auditors responsiblity = obtain sufficent evidence to provide rerasonable assurance that fv + disclosures conform w gaap

• understand the process for determining estimates, indentify controls, IR + CR, need for specialist, mgmt bias, relevant mgmt representation, relevant matters to those charged w goverence

pricing from 3ed parties

pricing services - nature + source of evidence

broker dealer- quoted from broker reelvenace and reliabity is based on the brokers market is for simular instruments

impariment indicatiors - decline in fv that needs to be recorded

other transaction cycles (PPE) controls

aquisition - properly authorized

subsidary ledgers - detailed info concerning each asset

physical securities - safegaurd assets, periodic inspection, serial number

written policies - depreciation policies and records

disposition - retirement is documented and authorized

payroll and personal cycle controls

authorization to employ and pay - HR hires new employees( segration between Hr and payroll)

supervision - base pay approved by employees immediate supervisor

timekeeping ad cost accounting - time clocks approved by supervisor and compare to employee clock cards

payroll check preparation - salary based information signed by treasured or cfo, controls over access to blank checks and check signature plates

check distribution - distributed by a person that has no other payroll function, employee shows a form of id, compare personal files with payroll

financing cycle

documentation, authorization, records, controls over pmts, independent reconciliation

management representation letter purpose

mandatory, refusal to provide the letter will generally results in a disclaimer of opion or withdrawal

• to confirm representations explicitly or implicitly given to the auditor

• to indicate and document the continuing appropriateness of such representation

• to reduce the possibility of misunderstanding concerning matters that are subject of the representation

signed by ceo and cfo

same date as audit report

address all f/s and periods covered in the report even if current mgmt was not present during all periods

mgmt letter disclosures

if misstatment is not materially misstated, doesnt involove mgmt and deosnt envolve an employee in a significant internal control position then mgmt doesnt have to disclose that to the auditor

• All events subsequent to the date of the financial statements and for which U.S. GAAP requires adjustment or disclosure have been adjusted or disclosed.

• The effects of uncorrected misstatements are immaterial, both individually and in the aggregate, to the financial statements as a whole. A list of the uncorrected misstatements is attached to the representation letter.

• The effects of all known or possible litigation and claims have been accounted for and disclosed in accordance with U.S. GAAP.

must include a statement that management believes the effects of uncorrected misstatements are immaterial to the financial statements as a whole and a summary of the uncorrected misstatements should be included. 

management acknowledges its responsibility for the design of controls to detect and prevent fraud in its management representation letter.

those charged with governance

board of directors and audit committee

auditor has to establish a 2 way communication with CWG discussing the scope + timing of the audit. info from those charged w governance, timely observations arising form the audit

deficencies

control- does not prevent or detect and correct misstatment on a timley basis(written or oral to mgmt)

significant - not material but still sever and merits attention by CWG ( writting to mgmt)

material weakness - reasonable posisblity that a material misstatment of the entitys f/s will not be prevented or detected and corrected on a timely basis ( writting to mgmt and CWG)

• must evaluate indiviusally and combined

• actual misstatement = actual amount

• potential misstatement = resonably posiblity, magnituede ( $ amt and volume of activity)

• communicated within 60 days of the report release date

control design v operation deficiency

design- control is missing or not properly designed

opperating - properly designed doesn’t operate as designed or is performed by an inappropriate person

material weakness indicators

indeitification of fraud (including immaterial)

restatment of previous issued f/s to correct MM

identification by the auditor of MM that mgmt wouldnt detect

ineffective oversight by those charged w governance

even if corrected durring the audit - it must be communitcated in writting to mgmt and cwg

previosult communicated sig dif + mw that are not corrected should be communicated again

the audit process

1. communicate w predecessor auditor

2. CRIME + RMM= Ir*cr*DR

   1. rmm smae as IR*CR

   2. rmm inverse DR

   3. timing nature and extent

3. substanative procedures required

   1. test of details - gather evidence to support acct bal.

   2. substantive analytical procedures - comparisons of recorded amts

4. nonissuers: may have an egagament quality reviewr, issuers are required

5. opion, cams, pcaob