Week 11 Flashcards
Timing of Tests
Q2 Control Testing - Understanding of IC - Walkthroughs - Entity-level controls
Between Q3 and Q4
Control Testing
- Transactional Control Testing
- Some Substantive Testing
After Q4
Sub. Testing
- Complete Substantive Testing
- Complete audit
Substantive Testing: 2 primary types
Test of Details
- Key Item
- Representative
- Other
Analytical Procedures
Test of Details: Vouching vs. Tracing
Vouching: Tests existence and occurrence assertions
Accounting Records to External Supporting Documents
Tracing: Tests completeness assertion
External Supporting Documents to Accounting Records
Test of Details - Types
Key Item
- Select material items for “coverage”
Representative
- Remaining pop individually unimportant but significant in total
- 3 common sampling strategies: representative, variables estimation, attribute
Other
- Test mathematical accuracy of PBC schedules
- Confirmations
- Tie-in of supporting ledgers
- Cut-off & classification
- Inspect the physical existence of items
Typically at or near year-end, exceptions include:
Accounts that accumulate transactions
Control testing confirms a strong control system
General audit procedures:
- Read BOD minutes, Legal Correspondence
- Examine provision methodologies/assumptions
- Evaluate Internal Control Work
Differs from business to business
Small
- Physical cash on hand
- Few internal controls
- Usually one source – no electronic forms of cash
Large
- No physical cash on hand
- Robust internal controls
- Lots of sources
Debit & credit card
Withdrawals (PAP)
Electronic Funds Transfer
- Lockboxes
- Process outsourced
Illustration of Audit Process for Cash
Procedures to Understand Client & Cycles
Cash
Test of Controls
Primarily completed in other cycles
Independent bank reconciliations
Analytical Procedures
Not significant due to the 100% verification
Test of Details
Bank confirmations
Cut-off bank statement
Illustration of Audit Process for AR
Procedures to Understand Client & Cycles
Accounts Receivable
Test of Controls
Usually tested as part of the Sales & Cash Receipts cycles
SOD & Bad debt policies are important
Concerned about lapping
Analytical Procedures
Minimal due to confirmations
Will want explanations of large variations
Test of Details
A/R confirmations
Subsequent cash receipts
3 types of confirmations
Positive
Negative
Blank
Positive
DEFINITION
Requests confirmation that balance is correct and letter be returned.
RELIABILITY
Good – can follow up with alternative procedures
RESPONSE RATE
Reasonable
EXPENSE
Higher
WHEN
Individual large balances
Few debtors
Don’t suspect fraud or error
Negative
DEFINITION
Requests confirmation only when balance is not correct.
RELIABILITY
Questionable
RESPONSE RATE
Not required
EXPENSE
Low
WHEN
RMM is low
Pop is small balances & similar
Expect due care & few exceptions
Blank
DEFINITION
Requests that the balance be filled in and letter be returned.
RELIABILITY
Highest
RESPONSE RATE
Low
EXPENSE
Higher
WHEN
Concern is overstatement such as accounts payable
AR Valuation
Audit Procedures:
Examine changes – volume sales, credit policy (TOC of credit approvals), economy, etc.
Examine client’s method for determining the allowance
Discuss with the credit manager the likelihood of collecting older accounts
Examine subsequent cash receipts on these accounts and evaluate the collectability
Bad Debt Expense is residual value
Illustration of Audit Process
Procedures to Understand Client & Cycles
Inventory
Test of Controls
Vary widely from business to business
Physical and recording of costs
Key control is inventory count
Analytical Procedures
Similar importance to other cycles
Can minimize test of details
Test of Details
#1 Audit objective is: existence
Attend inventory count to reperform & observe
Rank by Risk of Inventory
Cars Diamonds Crude Oil Leather Coats Chemicals for Ink CD/ DVDs Home Appliances Furniture
