AA304 AUDIT PROCEDURES

TYPE OF EVIDENCE DOCUMENTATION AUDIT PROCEDURE Examine a sample of vendors invoices to determine whether the goods or services received are reasonable and of the type normally used by the clients business. Read the minutes of a board of directors meeting and summarize all information that is pertinent to the FS in an audit file. Trace a sample of sales transactions from sales invoices to the sales journal and compare customer name, date and the total dollar value of the sale. Select a sample of sales invoices and compare the unit selling price as stated on the invoice to the list of unit selling prices authorized by management. Vouch a sample of recorded acquisition transactions to vendors invoices and receiving reports. Compute inventory turnover ratios and compare with those of previous years as a test of inventory obsolescence. Scan the sales journal, looking for large and unusual transactions. Re-compute the unit sales price items the number of units for a sample of duplicate sales invoices and compare the totals with calculations. Foot the sales journal for a 1-month period and compare all total s with the general ledger. Trace postings from the sales journal to the general ledger accounts. Count a sample of 100 inventory items and compare quantity and description to clients counts. Observe whether the two inventory count teams independently count and record inventory counts. Inquire of management whether there is any obsolete inventory on hand at the BS date.

ANALYTICAL PROCEDURES RECALCULATION

REPERFORMANCE PHYSICAL EXAMINATION OBSERVATION INQUIRIES OF CLIENT

ILLUSTRATIVE KEY CONTROLS Credit is approved automatically by the computer by comparison to authorized credit limits. Recorded sales are supported by authorized shipping documents and approved customer orders. Separation of duties exists among billing, recording of sales, and handling of cash receipts. Shipping documents are electronically forwarded to billing daily and are billed the subsequent day. Shipping documents are pre-numbered and accounted for weekly. Batch totals of quantities shipped are compared with quantities billed. Unit selling prices are obtained from the price list master file of approved prices.

TYPICAL TESTS OF CONTROLS Examine a sample of sales invoices and compare customer order to authorized credit limit. (Re-performance) Examine a sample of duplicate sales invoices to determine that each one is supported by an authorized shipping document and approved customer order. (Documentation) Observe whether personnel responsible for handling cash have no accounting responsibilities and inquire as to their duties. (Observation and Inquiry) Observe whether shipping documents are forwarded daily to billing and observe when they are billed. (Observation) Account for a sequence of shipping documents and trace each to the sales journal. (Documentation and Reperformance) Examine a sample of daily batches, re-calculate the shipping quantities and trace totals to reconciliation with input reports. (Re-performance) Examine a sample of sales invoices and agree prices to authorized computer price list.

Sales transactions are internally verified. Statements are mailed to customers each month. Computer automatically posts transactions to the AR subsidiary records and to the GL. AR master file is reconciled to the GL on a monthly basis.

Review changes to price file throughout the year for proper approval/ (Re-performance and Documentation) Examine documents for internal verification. (Documentation) Observe whether statements are mailed for 1 month and inquire about who is responsible for mailing the statements. (Observation and Inquiry) Use audit software to trace postings from the batch of sales transactions to the subsidiary records and GL. (Reperformance) Examine evidence of reconciliation for test month and test accuracy of reconciliation. (Documentation and Reperformance)

CLASSIFICATION

COMPLETENESS

DETAIL TIE-IN

EXISTENCE

ACCURACY

CUTOFF

Obtain an aged list of receivables: trace accounts to the master file, foot schedule, and trace to GL. Obtain an analysis of the allowance for doubtful accounts and bad debt expense: test accuracy, examine authorization for write-offs and trace to GL. Obtain direct confirmation of AR and perform alternative procedures for non responses. Review AR control account for the period. Investigate the nature of and review support for any large or unusual entries or any entries not arising from normal journal sources. Also investigate any significant increases or decreases in sales toward year-end. Review receivables for any that have been assigned or discounted. Investigate collectability of account balances. Review lists of balances for amounts due from related parties or employees, credit balances and unusual items as well as notes receivable due after 1 year. Determine that proper cutoff procedures were applied at the BS date to ensure that sales, cash receipts and credit memos have been recorded in the correct period.

FOR SALES CYCLE

TRANSACTIONRELATED AUDIT OBJECTIVES KEY EXISTING CONTROLS TESTS OF CONTROLS SUBSTANTIVE TEST OF TRANSACTIONS

Occurrence

Credit is approved automatically by computer by comparison to authorized credit limits. Sales are supported by authorized shipping documents and approved

Examine customer order for evidence of credit approval.

Account for a sequence of sales invoices.

Examine sales invoice for supporting bill of lading and customer order.

Review sales journal and master file for unusual transactions and amounts.

RIGHTS

TEST OF DETAILS OF BALANCES AUDIT PROCEDURES ACCOUNTS RECEIVABLE

REALIZATION VALUE

customer orders. Batch totals of quantities shipped are compared with quantities billed. Statements are sent to customers each month. Shipping documents are prenumbered and accounted for weekly. Batch totals of quantities shipped are compared with quantities billed. Sales are supported by authorized shipping documents and approved customer orders. Batch totals of quantities shipped are compared with quantities billed. Unit selling prices are obtained from the price list master file of approved prices. Statements are sent to customers each month. Computer automatically posts transactions to the AR master file and GL. AR master file is reconciled to the GL on a monthly basis. Statements are sent to customers each month. Account classifications are internally verified. Shipping documents are prenumbered and accounted for weekly by accountant. Examine file of batch totals for initials of data control clerk. Observe whether monthly statements are sent. Account for a sequence of shipping documents. Trace sales journal entries to supporting documents, including duplicate sales invoice, bill of lading, sales order and customer order. Trace selected shipping documents to the sales journal to be sure that each one is included.

Completeness

Accuracy

Examine file of batch totals for initials of data control clerk. Examine sales invoice for supporting documents.

Trace entries in sales journal to sales invoices.

Examine file of batch totals for initials of data control clerk. Examine the approved price list for accuracy and proper authorization.

Re-compute prices and extensions on sales invoices.

Trace details on sales invoices to shipping documents, sales order, customer order.

Posting and Summarization

Observe whether monthly statements are sent. Examine evidence that AR master file is reconciled to the GL. Observe whether monthly statements are sent.

Trace selected sales invoices from the sales journal to the AR master file and test for amount, date and invoice number. Use audit software to foot and cross-foot the sales journal and trace totals to the GL.

Classification Timing

Examine document package for internal verification. Account for a sequence of shipping documents.

Examine duplicate sales invoice for proper account classification. Compare date of recording of sale in sales journal with duplicate sales invoice and bill of lading.

FOR CASH RECEIPTS

TRANSACTIONRELATED AUDIT OBJECTIVES KEY EXISTING CONTROLS TESTS OF CONTROLS SUBSTANTIVE TEST OF TRANSACTIONS

Occurrence

Accountant independently reconciles bank account. Batch totals of cash receipts are compared with computer summary reports.

Observe whether accountant reconciles bank account. Examine file of batch totals for initials of data control clerk. Observe prelisting of cash receipts. Observe endorsement of incoming checks.

Completeness

Prelisting of cash receipts is prepared. Checks are restrictively endorsed.

Review cash receipts journal and master file for unusual transactions and amounts. Trace cash receipts entries from the cash receipts journal entries to the bank statement. Prepare a proof of cash receipts. Obtain prelisting of cash receipts and trace amounts to the cash receipts journal, testing for names, amounts and dates.

Batch totals of cash receipts are compared with computer summary reports. Statements are sent to customers each month. Accountant independently reconciles bank account. Batch totals of cash receipts are compared with computer summary reports. Statements are sent to customers each month. Statements are sent to customers each month. Computer automatically posts transactions to the AR master file and GL. AR master file is reconciled to the GL on a monthly basis.

Examine a file of batch totals for initials of data control clerk. Observe whether monthly statements are sent. Observe whether accountant reconciles bank accounts. Examine file of batch totals for initials of data control clerk. Observe whether monthly statements are sent. Observe whether monthly statements are sent. Examine evidence that AR master file is reconciled to GL.

Compare the prelisting with the duplicate deposit slip.

Accuracy

Obtain prelisting of cash receipts and trace amounts to the cash receipts journal, testing for names, amount and dates. Prepare proof of cash receipts.

Posting & Summarization

Classification Timing

Cash receipts transactions are internally verified. Procedures require recording of cash on a daily basis.

Examine evidence of internal verification. Observe unrecorded cash at a point in time.

Trace selected entries from the cash receipts journal to the AR master file and test for dates and amounts. Trace selected credits from the AR master file to the cash receipts journal and test for dates and amounts. Use audit software to foot and cross-foot the sales journal and trace totals to the GL. Examine prelisting for proper account classification. Compare date of deposit per bank statement to the dates in the cash receipts journal and prelisting of cash receipts.

FOR ACQUISITIONS
TRANSACTIONRELATED AUDIT OBJECTIVES KEY EXISTING CONTROLS TESTS OF CONTROLS SUBSTANTIVE TEST OF TRANSACTIONS

Occurrence

PR, PO, RR and invoice are attached to the voucher. Acquisitions are approved at the proper level. Computer accepts entry of purchases only from authorized vendors in the vendor master file. Documents are cancelled to prevent their reuse. Vendors invoices, RR, PO and PR are internally verified. PO, RR and vouchers are prenumbered and accounted for.

Examine documents in voucher package for existence. Examine indication of approval. Attempt to input transactions with valid and invalid vendors.

Review the acquisitions journal, GL and AP master file for large or unusual amounts. Examine underlying documents for reasonableness and authenticity. Examine vendor master file for unusual vendors. Trace inventory acquisitions to inventory master file.

Examine indication of cancellation. Examine indication of internal verification. Account for a sequence of PO, RR and vouchers.

Examine fixed assets acquired.

Completeness

Trace from a file of RR to acquisitions journal. Trace from a file of vendors invoices to the acquisitions journal. Compare recorded transactions in the acquisition journal with invoice, RR and other supporting documents.

Accuracy

Calculations and amounts are internally verified. Batch totals are compared

Examine indication of internal verification. Examine file of batch totals

with computer summary reports. Acquisitions are approved for prices and discounts. AP master file contents are internally verified. AP master file or trial balance totals are compared with GL balances. An adequate chart of accounts is used. Accounts classifications are internally verified. Procedures require recording transactions as soon as possible after the goods and services have been received. Dates are internally verified.

Posting & Summarization

for initials of data control clerk; compare totals to summary reports. Examine indication of approval. Examine indication of verification. Examine initials on GL accounts indicating comparison. Examine procedures manual and chart of accounts. Examine indication of verification. Examine procedure manual and observe whether unrecorded vendors invoices exist. Examine indication of verification.

Re-compute the clerical accuracy on invoice including discounts and freight. Test clerical accuracy by footing the journals and tracing postings to GL and AP and inventory master files.

Classification

Compare classification with chart of accounts by referring to invoices.

Timing

Compare dates of receiving reports and vendors invoices with dates in acquisitions journal.

FOR CASH DISBURSEMENTS

TRANSACTIONRELATED AUDIT OBJECTIVES KEY EXISTING CONTROLS TESTS OF CONTROLS SUBSTANTIVE TEST OF TRANSACTIONS

Occurrence

There is adequate segregation of duties between accounts payable and custody of signed checks or authority to disburse funds electronically. Supporting documentation is examined before signing of checks or electronic disbursement of funds by an authorized person. Approval of payment on supporting documents is given at the time checks are signed.

Discuss with personnel and observe activities.

Review the cash disbursements journal, GL, and AP master file for large or unusual amounts. Trace the cancelled check or electronic bank records of disbursements to the related acquisitions journal entry and examine for payee name and amount. Examine cancelled check for authorized signature, proper endorsement and cancellation by the bank or use bank records to verify payee for electronic payment. Examine supporting documents as part of the tests of acquisitions. Reconcile recorded cash disbursements with the cash disbursements on the bank statement.

Discuss with personnel and observe activities.

Examine indication of approval.

Completeness

Checks are pre-numbered and accounted for. The bank reconciliation is prepared monthly by an employee independent of recording cash disbursements or custody of assets. Calculations and amounts are internally verified. The bank reconciliation is prepared monthly by an independent person.

Account for sequence of checks. Examine bank reconciliations and observe their preparation.

Accuracy

Examine indication of internal verification. Examine bank reconciliations and observe their preparation.

Compare cancelled checks and electronic bank records of disbursements with the related acquisitions journal and cash disbursements journal entries. Re-compute cash discounts.

Posting & Summarization

AP master file contents are internally verified. AP master file or trial balance totals are compared with GL balances. An adequate chart of accounts is used. Accounts classifications are internally verified. Procedures require recording of transactions as soon as possible after the check has been signed or electronically submitted for bank processing. Dates are internally verified.

Examine indication of internal verification. Examine initials on GL accounts indicating comparison. Examine procedures manual and chart of accounts. Examine indication of internal verification. Examine procedures manual and observe whether unrecorded checks exist.

Prepare a proof of cash disbursements. Test clerical accuracy by footing journals and tracing postings to GL and AP master file.

Classification

Compare classification with chart of accounts by referring to vendors invoices and acquisitions journal.

Timing

Compare dates in cancelled checks or electronic bank records with the cash disbursements journal. Compare dates on cancelled checks or electronic bank records with the bank cancellation date.

Examine indication of internal verification.

BALANCE-RELATED AUDIT OBJECTIVES AND TESTS OF DETAILS OF BALANCES FOR ACQUISITIONS BALANCERELATED AUDIT OBJECTIVE Detail Tie-In

TESTS OF DETAILS OF BALANCES PROCEDURES Foot the acquisition schedule. Trace the individual acquisitions to the master file for amounts and descriptions. Trace the total to the GL. Examine vendors invoices and receiving reports. Physically examine assets. Examine vendors invoices of closely related accounts such as repairs and maintenance to uncover items that should be recorded as equipment. Review lease and rental agreements. Examine vendors invoices. Examine vendors invoices in various equipment accounts to uncover items that should be classified as manufacturing or office equipment, part of buildings or repairs. Examine vendors invoices of closely related accounts such as repairs to uncover items that should be recorded as equipment. Examine rent and lease expense for capitalizable leases. Review transactions near the BS date for correct period. Examine vendors invoices.

Existence Completeness

Accuracy Classification

Cutoff Rights