A4 Performing Further Procedures, Forming Conclusions, and Communications

Which financial statement accounts relate to revenue?

• Sales/Revenue

• Accounts Receivable

• Cash

Which source documents are related to revenue?

• Sales order

• Shipping document

• Cash receipts

• Accounts receivable confirmation

• Remittance advice

What record is related to revenue?

Sales invoice

Describe the proper internal controls for the revenue cycle related to sales

1. Creation of sales order (Prenumbered)

2. Credit department authorizes sales order (Segregation of duties)

3. Shipping department creates shipping document and bill of lading (Segregation of duties)

4. Billing department creates sales invoice and matches it with the shipping document and sales order (Three-way match)

Describe the proper internal controls for the revenue cycle related to accounts receivable

• Eliminate receivable once cash is received

• Prepare aging schedule and send to credit department

Describe the proper internal controls for the revenue cycle related to sales returns

• Serial number on receiving report may be used as a sales return slip

• Separate payments collection and creation of credit memo (Segregation of duties)

Describe the proper internal controls for the revenue cycle related to cash receipts

1. Cash receipt is received by someone without access to the A/R ledger. Copy is sent to cashier, A/R department, and accounting department (Segregation of duties)

2. Cashier receives the receipt and prepares the bank deposit slip

3. A/R enters receipt into A/R subledger and matches the bank deposit slip with the remittance advice

4. Accounting department enters receipt into G/L

Describe the procedure for each assertion relevant to revenue

• Completeness: Trace shipping document to sales invoice and sales journal

• Cutoff: Compare invoices just before and after year-end with the shipment dates and the dates the sales were recorded

• Valuation, allocation, and accuracy: Compare prices on invoices with authorized price lists

• Existence and occurrence: Vouch sales journal to sales invoice and shipping document

• Understandability of presentation and classification: Examine invoices

Describe the procedure for each assertion relevant to accounts receivable

• Completeness: trace total from A/R aging schedule to general ledger

• Valuation, allocation, and accuracy: recalculate and reconcile the allowance for credit losses

• Existence and occurrence: confirm a sample of accounts receivable

• Rights and obligations: review bank confirmations, inspect debt agreements, and read board minutes

A/R confirmation is typically required unless:

• Receivables are immaterial

• Confirmation would be ineffective

• Inherent and control risks are very low and evidence provided by other procedures is sufficient to reduce audit risk to an acceptably low level

A/R confirmations provide evidence for which assertions and not for which assertions?

• For: Existence and Rights and obligations

• Not for: Valuation and Completeness

When A/R confirmation responses are not received, the auditor should:

Perform alternative procedures such as:

• Inspecting shipping documents

• Reviewing subsequent cash receipts

Which financial statement accounts relate to the expenditure cycle?

• Expense

• Accounts payable

• Accrued liabilities

• Cash

Describe the proper internal controls for the expenditure cycle

1. Create purchase requisition (Prenumbered and Authorized)

2. Purchase requisition sent to purchasing department, requests bids from various suppliers, and creates purchase order

3. Copy of blank purchase order is sent to the receiving department who counts the goods upon arrival in receiving report

4. Accounts payable department receives invoice and matches it with purchase requisition, purchase order, and receiving report

5. Treasurer receives approved voucher package and pays the bill

Describe the procedure for each assertion relevant to expenditures

• Completeness: trace the accounts payable listing to general ledger by selecting cash disbursement subsequent to year-end

• Valuation, allocation, and accuracy: foot the accounts payable listing and reconcile to general ledger

• Existence and occurrence: vouch the accounts payable listing to voucher package

• Rights and obligations: inspect voucher packages

Describe the procedure for each assertion relevant to cash

• Completeness: trace remittance advice to cash receipts journal

• Cutoff: cutoff procedures for cash disbursements and receipts just before and after year-end

• Valuation, allocation, and accuracy: foot remittance advice and deposit slip to cash receipts journal and bank statement

• Existence and occurrence: vouch cash receipts journal to remittance advice, deposit slip, and bank statement

• Understandability of presentation and classification: inspect remittance advice and cancelled checks

Describe the procedure for each assertion relevant to inventory

• Completeness: trace from inventory/inventory tag to inventory listing and/or tag listing

• Valuation, allocation, and accuracy: recalculate inventory report and reconcile to general ledger, inquire of obsolete or damaged goods, and inspect for slow-moving items, examine vendor invoices, review direct labor rates, test computation of overhead rates, and examine standard cost variance analyses

• Existence and occurrence: vouch from inventory listing/tag listing to inventory/inventory tag

• Rights and obligations: inspect for exclusion of consigned inventory on hand from inventory count and confirm consigned goods in hands of consignee are included in inventory count

• Understandability of presentation and classification: review inventory-related disclosures and review inventory records for proper classification (raw materials, work in process, and finished goods)

Describe the procedure for each assertion relevant to investment balance

• Completeness: trace transactions after year-end to records if purchase relates to year under audit

• Valuation, allocation, and accuracy: foot listing of investments to general ledger, recalculate ending value of investments not reported at fair value, and determine whether any impairment occurred

• Existence and occurrence: confirmation to custodian for securities or examine securities in safe deposit box

• Rights and obligations: confirmation of securities and count of securities on hand

Describe the procedure for each assertion relevant to investment transactions

• Completeness: analytical procedures for reasonableness of dividend and interest income

• Cutoff: cutoff procedures for purchases, sales, and investment income

• Valuation, allocation, and accuracy: recalculate gains/losses and discount/premium amortization

• Existence and occurrence: analytical procedures for reasonableness of dividend and interest income

• Understandability of presentation and classification: examine if investment transactions are recorded in proper accounts

Describe the procedure for each assertion relevant to PP&E balance

• Completeness: trace from fixed asset schedule to general ledger, schedule of additions and dispositions of fixed assets to fixed asset schedule, and actual fixed assets to fixed asset schedule and subledger

• Valuation, allocation, and accuracy: recalculate accumulated depreciation and evaluate fixed assets for impairment

• Existence and occurrence: vouch additions to fixed asset account to asset requisition form or invoice, inspect the actual asset, and select older fixed assets from subledger to the old asset to test for unrecorded retirements

• Rights and obligations: examine invoices, deeds, and title documents

Describe the procedure for each assertion relevant to PP&E transactions

• Completeness: trace fixed asset purchase requisition to receiving report and fixed asset subledger and review repair and maintenance accounts for uncapitalized items

• Cutoff: review purchases dispositions shortly before and after year-end

• Valuation, allocation, and accuracy: recalculate depreciation expense and gains and losses and removal of accumulated depreciation should be tested for reasonableness

• Existence and occurrence: vouch purchases to receiving report and invoice or dispositions to asset retirement form

• Understandability of presentation and classification: review lease transactions

Describe the procedure for each assertion relevant to payroll accrual

• Completeness: search for unrecorded liabilities

• Valuation, allocation, and accuracy: recalculate year-end payroll accrual

• Existence and occurrence: vouch payroll accrual to time cards and employee files

• Rights and obligations: examine employee file to verify payroll accrual is an obligation

Describe the procedure for each assertion relevant to payroll transaction

• Completeness: trace time cards to payroll register

• Cutoff: examine time cards before and after year-end

• Valuation, allocation, and accuracy: foot payroll, recalculate gross and net pay, compare payroll with budget, and recalculate paychecks

• Existence and occurrence: vouch payroll register to approved time reports

• Understandability of presentation and classification: examine paychecks for proper classification

Describe the procedure for each assertion relevant to debt balance

• Completeness: trace debt contract to financial statements, listing of all debt to general ledger, and bank confirmations to debt agreements and financial statements

• Valuation, allocation, and accuracy: recalculate interest payable and amortization of premiums or discounts

• Existence and occurrence: confirm notes or bonds with creditors or custodian

• Rights and obligations: examine note and bond agreements to verify they are obligations

Describe the procedure for each assertion relevant to debt transactions

• Completeness: examine new debt agreements and board minutes and review interest expense for payments not included in debt listing

• Cutoff: review debt activity before and after year-end

• Valuation, allocation, and accuracy: test a sample of debt receipts and payments and compare interest expense to debt balance

• Existence and occurrence: review board minutes and inspect agreements

• Understandability of presentation and classification: examine due dates of notes and bonds to determine classification as short term or long term

Describe the procedure for each assertion relevant to equity balance and transactions

• Completeness: third-party confirmation or inspect stock certificate book

• Valuation, allocation, and accuracy: recalculate value assigned to stock transactions and analyze retained earnings account

• Existence and occurrence: vouch transactions to board minutes and confirm and inspect stock certificate book

• Understandability of presentation and classification: review whether there are restrictions on retained earnings and inquire of any appropriations of retained earnings that must be disclosed

What are some qualitative considerations that may cause an otherwise immaterial misstatement to be deemed material?

• Misstatement affects compliance with loan covenants, contracts, or regulatory requirements

• Misstatements increase management compensation, indicate management bias, or involve fraud or illegal acts

• Misstatement includes a misclassification between certain account balances

• Misstatement is currently immaterial but will have a material effect in the future

• Misstatements appear “too costly” to correct

What are the four categories that information typically is included in within the management representation letter?

• Financial statements

• Completeness

• Recognition, measurement, and disclosure

• Subsequent events

What are some indicators of material weakness in internal control over financial reporting?

• Any fraud by senior management

• Restatement of previously issued financial statements

• Identification by auditor of material misstatement that would not have been detected by the entity's system of internal control

• Ineffective oversight by those charged with governance

An auditor’s letter on significant deficiencies/material weaknesses should:

• Indicate the purpose of the audit was to report on the financial statements and not to provide an opinion on internal control

• Include the definition of a material weakness and, if applicable, significant deficiency

• Include a restriction on use (i.e. report is intended solely for the information and use of management)