Audit Applications

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Part 3

• Audit Applications

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CHAPTER 4-5-6
Pre-engagement arrangements
Understand the clients business
Obtain the financial statements
Audit planning tools
Preliminary risk assessment
Preliminary analytical procedures
Preliminary materiality decisions
Audit programs
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Internal Control Evaluation and Control Risk
Assessment
Obtain an understanding of the clients internal
control
Preliminary risk assessment



Control environment
Control procedures
Accounting system



Document the environment
Document the procedures
Document the system
Assess control risk (preliminary)

Perform test of control procedures
Not perform
-

Audit programs
Assess control risk below the maximum

Document the control risk assessment
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Audit programs
Nature, time, extent
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Revenue and Collection Cycle
Acquisition and Expenditure Cycle Including Audit
of Accounts Payable and Inventory Existence
Production and Payroll Cycle Including Audit of
Inventory Valuation and Capital Assets
Finance and Investment Cycle
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CHAPTER 9 Revenue and Collection Cycle

• 1. Typical Activities
• 2.Audit Evidence in Management Reports and Data
  Files
• 3.Control Risk Assessment
• 4.Audit Cases Substantive Audit Procedures(4)

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CHAPTER 9 Revenue and Collection Cycle

• 5.Special Note
• The Existence Assertion
• Using Confirmations
• Audit of Bank Reconciliation
• with Attention to Lapping and Kiting

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1. Typical Activities

• (1)?????????,??????
• (2)??????????
• (3)??????????????
• (4)?????????????
• (5)????????
• P350,E9-1

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START HERE
Cash reconciliation
Customer payments (cash receipts)
Customers purchase orders, contracts
Cash receipts recording
Customer Orders
Collections
Deposit cash in bank
Cash custody
Accounts receivable recording
Sales authorization
Physical custody
Monthly statements
Sales invoice
Credit files, reports
Credit Granting
Bill Customers
Warehousing Shipping and Delivery
To customer
To customer
Shipping documents
To customer
Accounts/Records Cash in bank Cash
receipts Accounts receivable Allowance for
doubtful accounts, write-offs Bad debt
expense sales revenue Sales returns,
allowances, discounts Perpetual inventory
records, shipping records
Cash receipts transition file
Accounts receivable master file
Shipping document transaction file
Perpetual inventory records
Cash balances (account) file
Shipping documents(copy)
Shipping documents (copy)
Customer order
Sales invoice (copy)
Bank statements
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Account/Records

• Cash in bank
• Cash receipts
• accounts receivable
• Allowance for doubtful accounts,write-offs
• Bad debt expense
• Sales revenue
• Sales returns, allowances, discounts
• Perpetual inventory records, shipping records

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Segregation of responsibility

• authorization
• Custody
  recording
• reconciliation

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Segregation of responsibility

• A.authorization of sales and accounts receivable
• Custody, recording, reconciliation
• B. Custody of inventory and cash
• .authorization , recording, reconciliation

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Segregation of responsibility

• C.recording(accounting)
• .authorization, Custody, reconciliation
• D. Reconciliation
• .authorization, Custody, recording
• combination of 2 of more

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(1)SALES AND ACCOUNTS RECEIVABLE AUTHORIZATION

• Enter the order entry in the computer terminal
• computer system perform automatic authorization
  procedures(be imbedded in)
• access to the master files (changes) must be
  limited
• pending order, packing slip ,updates the
  inventory master file, should be numbered in a
  numerical sequence.
• The price list master file.

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4
8
Inventory master (subsidiary)
A/R master (subsidiary)
Credit check files
Price list master file
Pending order master
Back order master
Sales detail (journal)
General ledger master
3
5

• On-line sales processing
• Authorized terminal ID
• Sales order screen
• Automatic credit check
• Inventory-on-hand check
• Immediate update all databases
• On-line status query
• Automatic transfer from pending order to A/R and
  G/L master files

Customer purchase order
Packing slip
1
2
Marketing management
Sales order
Stockroom
Order entry
Packing slip
Credit management
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Terminal logs
Shipping
Terminal logs
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Back order report
Invoices
Daily sales report
Sales analysis
A/R listing and aging
Monthly customer statements
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Custody

• Transfer, Packing slip
• Storekeepers or the shipping dep change the
  quantity(combine with a recording function)
• custody of accounts receivable records to
  alter the records(combine with authorization and
  recording responsibility)

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recording

• System
• (1)produce a bill of lading shipping document
• (2)remove the order from the pending order master
  file
• (3)produce a sales invoice
• authorization,custody, reconcilation

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Inventory master (subsidiary)
A/R master (subsidiary)
Credit check files
Price list master file
Pending order master
Back order master
Sales detail (journal)
General ledger master

• On-line sales processing
• Authorized terminal ID
• Sales order screen
• Automatic credit check
• Inventory-on-hand check
• Immediate update all databases
• On-line status query
• Automatic transfer from pending order to A/R and
  G/L master files

Customer purchase order
Packing slip
Marketing management
Sales order
Stockroom
Order entry
Packing slip
Credit management
Terminal logs
Lading Shipping
Terminal logs
1
4
Back order report
Invoices
Daily sales report
Sales analysis
A/R listing and aging
Monthly customer statements
3
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periodic reconciliation

• The sum of customers unpaid balances with
  account receivable control account total.
• Age trial balance
• confirmation

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(2)Cash receipts and cash balances authorization

• Custody
• recording
• periodic reconciliation
• (deposit slip 2 to cash remittance lists 3)

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Accounts receivable
General ledger
2
1
Prepare cash remittance list
Approve discounts Prepare deposit.
Post to customer accounts
Prepare cash receipts journal. Post to
general ledger..
START Cash received
Approval of discounts noted on remittance list.
C.R.L. 3
Cash receipts journal
C.R.L. 2
Cash 1 remittance list
Money
Individual customer accounts subsidiary
Accounts receivable control
Cash accounts
C.R.L. 3
To bank
Deposit sip 2
1
2
Deposit slip 1
Cash 2 remittance list
Cash 1 remittance list
All cash receipts are deposited.
C.R.L. 3
Date
Date
Deposit sip 2
Monthly bank statement
Prepare monthly bank reconciliation.
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2.Audit Evidence in Management Reports and Data
Files

• Pending order master file
• credit check files
• price list master file
• sales detail file(sales journal)
• sale analysis reports(employee ,region)
• accounts receivable aged trail balance
• cash receipts journal

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3.Control Risk Assessment

• It governs the nature,timing, and extent
• of substantive audit procedures
• that will be applied in the audit of account
  balance.

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Account balancep356

• Cash in bank
• Accounts receivable
• Allowance for doubtful accounts
• Bad debt expense
• sales revenue
• Sales returns, allowances,discounts

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3.Control Risk Assessment

• (1)General control considerations
• (2)detail test of controls
• (3)summary Control Risk Assessment

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(1)General control considerations

• control
• Segregation of responsibilities. P356
• fidelity bond (persons handle cash)
• detail control checking procedures(1-8)

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Segregation of responsibility

• authorization
• Custody
  recording
• reconciliation

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detail control checking procedures

• (1)no sales order should be entered without a
  customer order.
• (2)a credit-check code or manual signature should
  be recorded by an authorized means.
• (3)access to inventory and the shipping area
  should be restricted to authorized persons.
• (4)access to billing terminals and blank invoice
  forms should be restricted to authorized persons.

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detail control checking procedures

• (5)accountants should be under orders to record
  sales and accounts receivable.
• (6)customer invoices should be compared with
  bills of lading and customer orders.
• (7)pending order files should be reviewed in a
  timely fashion to avoid failure to bill and
  record shipments.
• (8)bank statements should be reconciled in detail
  monthly.

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THE WAY TO OBTAIN information about the control

• internal control questionnaire
• (appendix 9A, p397)
• walk-through or sample of one
• With enquiry

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(2)detail test of controls audit procedures

• ObjectiveE 9-4, P358
• (1)identification of the data population from
  which a sample of items will be selected for
  audit.
• (2)an expression of the action that will be taken
  to produce relevant evidence.
• Actionvouching, tracing, observing, scanning,
• recalculating.

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two direction(E9-5)
Shipping document file
Sales invoice file
Trace shipping evidence to invoice
sample
A-1-b
Vouch to shipping document evidence
sample
A-3-b

• E9-6

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(3)summary Control Risk Assessment

• Control risk is low be limited in cost-saving
  ways
• Control risk is highbe designed to lower the
  risk of failing to detect material error in the
  account balance.

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4. Substantive Audit Procedures

• The Audit Procedures to gather evidence on
  account balance are called Substantive
  Procedures .
• Its goal is to detect evidence of errors,
  irregularities, and frauds if any exist in the
  accounts as material overstatements or
  understatements of the account balances.

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4. Substantive Audit Procedures

• some amount of Substantive Audit Procedures ought
  to follow the assessment of control risk.
• Auditor should not place total reliance on
  controls to the exclusion of other procedure.

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4. Substantive Audit Procedures

• Substantive Audit Procedures
• differ from
• test of controls audit procedure
• In their basic purpose.
• Dual-purpose procedure.
• Detail substantive procedure, appendix9B

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The structure of casette

• Problem
• method
• paper trail(a set of telltale signs)
• amount
• audit objective
• control
• test of control
• audit of balances

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Casette 9.1 the canny cashier

• D.Bakel, the assistant controller of SEI.
• SEI, Maintained accounts receivable for school
  districts in the region.
• Customers received credit by using their own
  credit cards.

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Method D.Bakel DUTIES

• (1)company cashier--received all the incoming
  mail payments, the credit card account, the cash
  and cheques.
• (2)prepared the bank deposit(deliver)
• (3)prepared a remittance worksheet
• (4)reconciled the bank statement.
• No one else review deposits or the bank statement.

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Sports Equipments (SEI)
Bank Account (SEI)
discounts
3.funds
schools
payments
Add 2 discount
2. Cash,cheques school district payment
1. Bank Account (SEC)
SEI receipts
interests
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Open a bank account (SEC)

• (1)deposit cash,cheques(SEI) in the SEC account.
• Earning the interest.
• (2)wrote SEC cheques to SEI to replace the
  borrowed funds.

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Stole payment

• (1)deposit payment to SEC
• (2) deposit SEC cheques in SEI, giving the credit
• (3)approved an additional 2 discount
• SEC paid in less( 2)

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LAPPING or teeming and lading????,????

• ?????????????,??????????
• ??,??????????,??????????,??????????????,??????????
  (??????)?
• ????????,????????????

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amount

• 6 years
• (1)average balance 150 000
• Interest 67 500
• (2)extra discount 120 000

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Audit approach

• Objective
• Control segregation, supervision
• test of controlvalidity,completeness
• Audit balance
• control risk of incorrect accounting
• Time year-end date
• Nature positive confirmation
• Extent sample, all 72 school district accounts
• p364

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5.Special Note

• (1)The Existence Assertion (2)Using
  Confirmations
• (3)Audit of Bank Reconciliation with Attention
  to Lapping and Kiting

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(1)The Existence Assertion

• Existence and right assertion
• 1.recalculation
• (prepaid expenses, interest, rent, bank
  reconciliation)
• 2.physical observation
• (autos,land,building,petty cash, undeposited
  receipts)
• 3.confirmation

form
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Audit procedures

• 4.Verbal enquiry
• 5.examination of documents(vouching)
• 6.scanning
• 7.analytical procedures

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(2)Using Confirmations

• Bank confirmation,372
• aged trial balance,p373
• Positive confirmation, p374
• negative confirmation, p375
• response rate
• detection rate the number of exceptions reported
  to auditors/the number of account errors
  intentionally reported to customers)

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(3) Audit of Bank Reconciliations with
Attention to Lapping and Kiting

• Accounts receivable lapping
• credit given to customers for whom no payments
  were received on the day in question
• Cheques listed on Customer credits
• A sample of
• Deposit slips

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cheque kiting
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1
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2
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1
Cheque kiting ???????
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Cheque kiting????,????

• 1.using a hot cheque,depositing money from one
  bank to another.
• 2. The depository bank does not know the cheque
  is on insufficient funds.
• 3.the deficiency is covered by another hot cheque
  from another bank account.
• 4.customer uses the time required for cheques to
  clear to obtain an unauthorized loan.

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Auditing assignments(CH9)

• 1.prepare chapter 10.
• 2.????,????,???? ?
• (1)9.1, 9.6, 9.8, 9.9, 9.11, 9.22, 9.27 ,9.28
• (2)9.34--9.49
• (3)9.53, 9.60
• 3.Casette 9.2, 9.3, 9.4, finished by
  team1,2,3,and make a presentation in the class

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