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Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Substantive Tests of

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Substantive Tests of Transactions and Balances: CONTINUATION

VI. Production Transactions A. Substantive Tests of Transactions

Assertion

Potential Misstatements

 

Substantive

Audit

 

Procedures

  • A. Existence/

Transaction

that

did

not

For selected transactions,

  • B. Occurence

occur may be recorded

examine signed materials

Recorded

 

requisitions 1 , approved labor tickets 2 , and allocation

production

of overhead.

transactions

occurred

1 A material requisition form lists the items to be picked from inventory and used in the production process or in the provision of a service to a customer, usually for a specific job. The form usually has three purposes:

  • To pick items from stock

  • To relieve the inventory records in the amount of the items picked

  • To charge the targeted job for the cost of the items requisitioned

The form can also be used as the basis for the reordering of any inventory items that are not currently in stock.

The information most commonly found on a material requisition form includes:

  • Header section: Job number to be charged

  • Header section: Date of requisition

  • Header section: Date by which inventory is required

  • Main body: Item number or description to be pulled from stock

  • Main body: Unit quantity to be pulled from stock

  • Footer section: Authorization signature line

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus If the materials

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

If the materials are to be delivered to a specific location, there may also be space in the header in which to identify the delivery location. Unless a service invoice is to be prepared from this document, it usually does not include item costs or prices.

The requesting person retains a copy of the material requisition form, as does the warehouse staff. Another copy accompanies the picked goods to their eventual destination. If items listed on the form are not in stock, another copy may be sent to the purchasing department for ordering purposes. Auditors may trace the flow of material requisition forms through a company, to see if inventory items are being appropriately used and recorded as mandated by company materials handling procedures. If not, the auditors may conclude that they cannot rely upon certain aspects of a company's control systems as part of their audit activities, and so will bolster other audit activities.

The material requisition form is not used in a computerized production planning environment, where this picking information is instead sent to the warehouse as an electronic message.

A material requisition form may also be known as a purchase requisition form, though a purchase requisition can be used for all types of purchases, not just those involved in the production process.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus If the materials
Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus In job orderomeasuring and recording direct materials cost. Direct labor hours worked, direct labor rate per hour, and total amount in dollars for each individual job or task is recorded on a document known as time ticket or employee time ticket . A separate time ticket is prepared by each worker for every working day. Accounting department collects all time tickets at the end of the day. These time tickets are used to enter direct labor cost on the job cost sheet of each individual job order. An example/sample of complete time ticket is given below: Employee Time Ticket In job order costing system, any labor charges that are not directly traceable to a particular job are known as indirect labor cost . In example of time ticket given above “maintenance” is indirect labor. Other examples of indirect labor are cleanup costs and supervision etc. Indirect labor is not included in direct labor cost and, therefore, becomes a part of the manufacturing overhead. These days, many companies have replaced the manual process of recording direct materials cost with the computerized approaches. They use a bar code technology to enter data into a computer. This technology increases the speed and accuracy of the whole process. Page 3 of 35 " id="pdf-obj-2-2" src="pdf-obj-2-2.jpg">

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

2 In job order costing system, the method of measuring and recording direct labor cost is similar tomeasuring and recording direct materials cost.

Direct labor hours worked, direct labor rate per hour, and total amount in dollars for each individual job or task is recorded on a document known as time ticket or employee time ticket. A separate time ticket is prepared by each worker for every working day.

Accounting department collects all time tickets at the end of the day. These time tickets are used to enter direct labor cost on the job cost sheet of each individual job order. An example/sample of complete time ticket is given below:

Employee Time Ticket

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus In job orderomeasuring and recording direct materials cost. Direct labor hours worked, direct labor rate per hour, and total amount in dollars for each individual job or task is recorded on a document known as time ticket or employee time ticket . A separate time ticket is prepared by each worker for every working day. Accounting department collects all time tickets at the end of the day. These time tickets are used to enter direct labor cost on the job cost sheet of each individual job order. An example/sample of complete time ticket is given below: Employee Time Ticket In job order costing system, any labor charges that are not directly traceable to a particular job are known as indirect labor cost . In example of time ticket given above “maintenance” is indirect labor. Other examples of indirect labor are cleanup costs and supervision etc. Indirect labor is not included in direct labor cost and, therefore, becomes a part of the manufacturing overhead. These days, many companies have replaced the manual process of recording direct materials cost with the computerized approaches. They use a bar code technology to enter data into a computer. This technology increases the speed and accuracy of the whole process. Page 3 of 35 " id="pdf-obj-2-26" src="pdf-obj-2-26.jpg">

In job order costing system, any labor charges that are not directly traceable to a particular job are known as indirect labor cost. In example of time ticket given above “maintenance” is indirect labor. Other examples of indirect labor are cleanup costs and supervision etc. Indirect labor is not included in direct labor cost and, therefore, becomes a part of the manufacturing overhead. These days, many companies have replaced the manual process of recording direct materials cost with the computerized approaches. They use a bar code technology to enter data into a computer. This technology increases the speed and accuracy of the whole process.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Potential Misstatements

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Potential Misstatements

Substantive

Audit

Procedures

  • C. Completeness

Completed production may

Account for a sequence

  • D. Rights/Obligations

not be recorded

 

of production reports 1

All

production

 

Account for a sequence

transactions

that

Goods may be issued

but

of material requisitions

ocurred

are

not recorded

recorded

 

Reconcile time cards and labor tickets

Time

may

be

worked

in

production

but

not

recorded

 

1 A departmental cost of production report (CPR) shows all costs chargeable to a department. It is not only the source for summary journal entries at the end of the month but also a most convenient vehicle for presenting and disposing of costs accumulated during the month. A production cost report shows:

  • 1. Total unit costs transferred to it from a preceding department.

  • 2. Materials, labor, and factory overhead added by the department.

  • 3. Unit cost added by the department.

  • 4. Total and unit costs accumulated to the end of operations in the department.

  • 5. The cost of the beginning and ending work in process inventories.

  • 6. Cost transferred to a succeeding department or to a finished goods storeroom.

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Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Potential Misstatements

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Potential Misstatements

Substantive

Audit

Procedures

  • E. Valuation/

Values may not be based

Test

cost

records

by

  • F. Measurement

 

on costs incurred

tracing

to

underlying

 

documents, such as

bill

Production

of

materials 1 ,

labor

transactions

are

tickets,

authorized

labor

recorded

for

the

rates,

and

standard

proper amounts

overhead

rates.

Review

 

variances.

1 A bill of materials or product structure is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, parts and the quantities of each needed to manufacture an end product or to finish a particular job.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Potential Misstatements
Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Potential Misstatements

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Potential Misstatements

Substantive

Audit

Procedures

G. Presentation

and

Costs may be assigned

to

Check

accuracy

of

Disclosure

wrong account

account

coding

by

reference

to

chart

of

Production

accounts.

transactions

are

recorded to result in presentation and

disclosure

in

accordance with

PFRS.

  • B. Analytical Procedures Auditors’ substantive tests of balances relating to production are primarily analytical procedures and variance analyses.

Compare actual costs per unit produced to budgeted costs

Compare actual costs per unit produced to prior year’s costs

Compare actual costs per unit produced to standard costs Significant variations should raise questions about whether costs are misclassified.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus VII. Inventory Warehousing

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

VII. Inventory Warehousing Transactions A. Substantive Tests of Transactions

Assertion

Potential Misstatements

Substantive Audit Procedures

  • A. Existence/

Receipts or

issues

of

For selected transactions

  • B. Occurrence

inventory that

did

not

recorded in the inventory

occur may be recorded

control account, examine

Recorded

inventory

signed receiving report 1 .

warehousing

transactions

occurred

1 A receiving report is an important record of the goods that an entity has actually received from a supplier because it documents what is owed to the supplier in terms of payment for the goods received or the return of the goods, in some cases.

A receiving report is used to document the contents of a delivery to a business. The form is filled out by the receiving staff of the business accepting the delivered goods. The following information is typically included on a receiving report:

Date and time on which the delivery was received

Name of the shipping company that delivered the goods

Name of each item received

Quantity of each item received

The authorizing purchase order number, if noted on the delivery documentation or box

 Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Condition of

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Condition of the items received. This can be a negative entry, where only damaged goods are noted.

The receiving report can be used in several ways, including the following:

Returns. If certain goods are to be returned, the receiving report documents the reason for the return, such as damaged goods.

Payables. The receiving report can be used as evidence of receipt in the three- way matching process. This approach is more commonly used for larger-dollar purchases.

Accruals. The accounting staff may use receiving reports that were completed near month-end to accrue expenses for supplier invoices that have not yet arrived.

A master copy of each receiving report is stored in the receiving department. Copies are sent to other departments as required by company procedures, such as the copy sent to the payables staff to document received goods.

From a control perspective, it can be useful to uniquely number each receiving report. The sequence of numbers can then be examined to see if any receiving reports are missing.

 Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Condition of
Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Potential Misstatements

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Potential Misstatements

Substantive Audit Procedures

C. Completeness

Goods may have

been

Account for a sequence of

received or issued but not

receiving reports and

All

inventory

recorded.

requisitions.

Perform

warehousing

records-to-floor and

transactions

that

floor-to-records 1 tests.

ocurred

are

recorded

1 This is a blog post of “Kellen,” an auditor, in his blog “Accountant by Day” What are inventory counts and why do you need to fly there?

For those who don’t know, inventory counts are what manufacturing companies do

around the end of the year to see exactly how much inventory they have. The inventory count must be done after production for the past year ends, and before production for the new year begins, otherwise it becomes much more difficult to keep track of what to

count as inventory as of 12/31.

As auditors, we participate in inventory counts soon after the client has finished counting the inventory. We only have this small window of opportunity, because in a few days, the inventory levels will be different. We want to make sure that the inventory records are correct as of 12/31.

Inventory Counting Process

The client’s employees will spend a few days counting everything in the warehouse (or warehouses.) When the client’s employees count the inventory, they keep track of what

they count on count sheets. They should also put stickers or tags on each piece of

inventory to make it clear which pieces have already been counted.

Inventory Audit Test: Sheet-to-Floor

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Our first inventory

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Our first inventory count test is called “sheet-to-floor.” For this test, we selected inventory items from the count sheets. Then we traced these sheets to the actual inventory on the floor, and recounted it. For inventory, auditors are most worried about the existence assertion: Does the inventory recorded on the books really exist?

Inventory Audit Test: Floor-to-Sheet

However, as auditors we are also making sure that they count was done well. We perform a second test called “floor-to-sheet” where we select an item of inventory out

on the warehouse floor. We count the items, and then trace them to their count sheet to

make sure that the client’s counters recorded to same number that we did. This tests for completeness: Is all the existing inventory recorded on the books?

In the case of fraud, it is much more likely that a company would overstate inventory, so existence is the most important test. However, counters can also make mistakes, and auditors are also checking for errors - in fact, most of the discrepancies we find as auditors are due to errors, not fraud.

Assertion

Potential Misstatements

Substantive Audit Procedures

D. Rights and

Items held on

Examine invoice 2 for goods

Obligations

consignment 1 may be included in inventory.

received.

Inventory warehousing transactions are for goods that belong to the entity.

1 Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consignee), who undertakes to sell the goods. The consignor continues to own the goods until they are sold, so the goods appear as inventory in the accounting records of the consignor, not the consignee.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus An invoice is

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

2 An invoice is a document sent to a buyer that specifies the amount and cost of products or services that have been provided by a seller

An invoice indicates what must be paid by the buyer according to the payment terms of the seller. Payment terms usually specify the period of time that a buyer has to send payment to the seller for the goods and/or services that they have purchased.

An invoice provides a detailed account of the products or service and a set of other information that can vary a bit depending on the requirements in the country the invoice is issued and the type of product or service being sold.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus An invoice is
Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Potential Misstatements

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Potential Misstatements

Substantive Audit Procedures

  • E. Valuation/

Inventory may be

Trace allocated costs back

  • F. Measurement

misvalued.

to supporting documents.

Allocations are recorded for the proper amounts.

Verify mathematical accuracy and trace postings.

Assertion

Potential Misstatements

Substantive Audit Procedures

  • G. Presentation and

Receipt or issue may be

Check accuracy of accounts

Disclosure

charged or credited to the wrong accounts.

on invoices by referring to chart of accounts 1 .

Inventory warehousing transactions are recorded to result in presentation and disclosure in accordance with PFRS.

1The chart of accounts is a listing of all accounts used in the general ledger of an organization. The chart is usually sorted in order by account number, to ease the task of locating specific accounts.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus B. Substantive Test

Republic of the Philippines

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  • B. Substantive Test of Details of Balances

Assertion

Substantive Audit Procedures

  • A. Existence/

 
  • B. Occurence

Recorded inventory exists.

  • 1. Before the client takes the physical inventory, review and approve the clients’s written plan 1 for it.

  • 2. Observe the client personnel physically counting inventory.

  • 3. Confirm inventories on consignment and held in public warehouses.

1 Example of a companys written plan for taking the physical count of their inventories is presented on the succeeding pages.

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Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Substantive Audit

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Substantive Audit Procedures

C. Completeness

 

All inventories of the entity are recorded.

  • 4. Obtain a copy of prenumbered inventory tags 1 used by the client in taking inventory and reconcile the tags to the listing.

  • 5. For selected items, trace from tags to listing.

  • 6. Perform cutoff procedures. Obtain the receiving report number for the last shipment received prior to year-end and determine that the item is included in inventory. Also, identify the last shipping terms, when the item was properly recorded in sales or inventory.

  • 7. Perform analytical procedures.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Example of an

Republic of the Philippines

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1 Example of an inventory tag

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Example of an

INVENTORY TAG is a tag attached to inventory items that identifies the inventory items to aid in counting the physical inventory.

Assertion

 

Substantive Audit Procedures

D. Rights and obligations

 

Inventory is owned by the entity.

8.

Determine that consigned inventory has been excluded from inventory and that inventory pledged has been appropriately disclosed. Examine confirmations from financial institutions and read minutes of the board of directors’ meetings.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Substantive Audit

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

 

Substantive Audit Procedures

  • E. Valuation/

 
  • F. Measurement

Recorded inventory is valued in accordance with PFRS.

9.

Considering the method the client uses for inventory valuation, examine invoices for inventory on hand or trace to prior year’s inventory listing to verify cost.

  • 10. For selected items, determine replacement cost of the inventory and apply lower of cost or market value.

  • 11. Verify computations in inventory listing.

  • 12. Review the obsolescence of inventory by

 
  • a. Being alert while observing inventory being taken for damaged, slow-moving or scrap inventory.

  • b. Scanning perpetual records for slow moving items and discussing their valuation with the client.

Assertion

Substantive Audit Procedures

  • G. Presentation and disclosure

 

Inventory is classified and disclosed in accordance with PFRS.

  • 13. Determine whether the accountsare classified and disclosed in the financial statements in accordance withe PFRS.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus C. Analytical Proceduresauditors. When the scam was finally detected in 1937, the SEC determined that $19 million in fictitious inventory was on the balance sheet of the company. This is equal to approximately $285 million in current dollars. McKesson & Robbins had a profound impact on the accounting industry and led to the adoption of Generally Accepted Auditing Standards (GAAS), including the concept of an independent audit committee. Another change included having auditors personally inspect inventory to verify its existence . Page 23 of 35 " id="pdf-obj-22-2" src="pdf-obj-22-2.jpg">

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  • C. Analytical Procedures

    • 1. Compare gross profit with historical results and industry averages.

    • 2. Compare inventory with that of budget and prior period.

    • 3. Compare inventory turnover with that of other entities in the same industry and that of prior periods.

    • 4. Scan for unusual and slow-moving items.

INVENTORY FRAUD CASE: McKesson & Robins

McKesson & Robbins was a drug and chemical company in the mid-1920s that attracted the attention of Philip Musica, an individual with an unsavory past that included criminal acts and multiple fake names.

Under the name Frank D. Costa, Musica greeted the advent of U.S. Prohibition in 1919 with the creation of a company that manufactured hair tonic and other products that had high alcohol content. These products were sold to bootleggers, which used the alcohol to produce liquor to sell to customers.

Musica purchased McKesson & Robbins in 1924 using the name F. Donald Coster, and seeded the company with family members to help loot the company. The fraud involved fake purchase orders, inflated inventory and skimming cash from company sales, and occurred despite the presence of Price Waterhouse as the company's auditors. When the scam was finally detected in 1937, the SEC determined that $19 million in fictitious inventory was on the balance sheet of the company. This is equal to approximately $285 million in current dollars.

McKesson & Robbins had a profound impact on the accounting industry and led to the adoption of Generally Accepted Auditing Standards (GAAS), including the concept of an independent audit committee. Another change included having auditors personally inspect inventory to verify its existence.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus VIII. Property, Plant

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VIII. Property, Plant and Equipment

Assertion

Substantive Audit Procedures

  • A. Existence/

 
  • B. Occurence

Recorded property, plant and equipment assets exist.

  • 1. Physically inspect the assets for a sample of property, plant and equipment recorded in the plant ledger 1 .

  • 2. Physically inspect the assets and examine supporting documentations for additions to property, plant and equipment.

  • 3. Verify that existing retirements and disposals are recorded and properly valued.

1 Plant Ledger: A subsidiary ledger that records detailed information on each capital asset, including acquisition date, cost, description, location, depreciation, and disposition.

Assertion

Substantive Audit Procedures

  • C. Completeness

 

All property, plant and equipment are recorded.

  • 4. Perform analytical procedures.

  • 5. Analyze repairs and maintenance for expenditures that should have been capitalized 1 .

  • 6. Examine lease and loan agreements to identify any liabilities that should be recorded.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus General Principle of

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1 General Principle of Capitalization The IRS indicates what constitutes a real property capital improvement as follows:

Fixing a defect or design flaw

Creating an addition, physical enlargement or expansion

Creating an increase in capacity, productivity or efficiency

Rebuilding property after the end of its economic useful life

Replacing a major component or structural part of the property

Adapting property to a new or different use

Assertion

 

Substantive Audit Procedures

D. Rights and Obligations

 

Property, plant and equipment are owned by the entity.

7.

Determine whether any liens 1 or mortgages 2 have been placed on plant and equipment by examining bank confirmations and reading minutes of

the board of directors’ meetings.

1 a right to keep possession of property belonging to another person until a debt owed by that person is discharged.

2 a legal agreement by which a bank or other creditor lends money at interest in

exchange

for

taking

title

of

the

debtor's

property,

with

the

condition

that

the

conveyance of title becomes void upon the payment of the debt.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Substantive Audit

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Substantive Audit Procedures

  • E. Valuation/

 
  • F. Measurement

Recorded property, plant and equipment are valued in

  • 8. Verify the accuracy of recorded property, plant and equipment.

accordance with PFRS.

  • 9. Verify depreciation.

Assertion

Substantive Audit Procedures

  • G. Presentation and Disclosure

 

Property, plant and equipment are classified and disclosed in accordance with PFRS.

10. Review the financial statements and perform analytical procedures to determine whether accounts are classified and disclosed in accordance with PFRS.

IX. Investments

Assertion

Substantive Audit Procedures

  • A. Existence/

 
  • B. Occurence

  • 1. Inspect securities on hand and trace to list.

Recorded investments and investment income exist.

  • 2. Confirm securities held by others.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Substantive Audit

Republic of the Philippines

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Assertion

Substantive Audit Procedures

  • C. Completeness

 

All investments and investment income are recorded.

  • 3. Apply analytical procedures.

Assertion

Substantive Audit Procedures

  • D. Rights and obligations

 

Investments and investment

  • 4. Examine supporting brokers’ advices

income are owned by the entity.

and paid checks for investments aquired during the period.

  • 5. Examine remittance advices for dividends, interest, and disposal of investments.

Assertion

Substantive Audit Procedures

  • E. Valuation/

 
  • F. Measurement

Investments are valued in accordance with PFRS and investments and investment

  • 6. Reconcile the investment list to the subsidiary ledger and general ledger account.

income are matematically accurate.

  • 7. Recalculate interest revenue and verify dividend income by reference to published report of dividends.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Substantive Audit

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Substantive Audit Procedures

  • H. Presentation and Disclosure

 

Investments and investment income are presented in accordance with PFRS.

  • 8. Review the financial statements and perform analytical procedures to determine whether accounts are classified and disclosed in accordance with PFRS.

X. Notes Payable

Assertion

Substantive Audit Procedures

  • A. Existence/

 
  • B. Occurence

Recorded notes payable actually exist.

  • 1. Confirm notes with lenders, including the principal amounts, interest rate, interest payments, due date, collateral and other terms.

  • 2. Determine whether proceeds of notes are recorded and used as the board of directors intended.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Substantive Audit

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Substantive Audit Procedures

  • C. Completeness

 

All notes payable are

  • 3. Perform analytical procedures.

recorded.

  • 4. Reconcile interest expense to notes payable and compare interest expense for the current period with that for the previous period.

  • 5. Review standard bank confirmations to determine that all loans are recorded.

Assertion

Substantive Audit Procedures

  • D. Rights and obligations

 

Recorded notes payable represent obligations of the entity.

  • 6. Read the loan agreement for terms and conditions that should be disclosed and for pledging of assets.

Assertion

Substantive Audit Procedures

  • E. Valuation/

 
  • F. Measurement

Notes payable are valued properly.

  • 7. Recalculate the portion of notes currently due, interest expense, interest payments, and accrued interest; foot the schedule of notes payable.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Substantive Audit

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Substantive Audit Procedures

  • G. Presentation and Disclosure

 

Notes payable are recorded to result in presentation and disclosure in accordance with PFRS.

  • 8. Review the financial statements and perform analytical procedures to determine whether accounts are classified and disclosed in accordance with PFRS.

XI. Shareholders’ Equity

Assertion

Substantive Audit Procedures

  • A. Existence/

 
  • B. Occurence

Share capital recorded as issued actually was issued,

  • 1. Examine the corporate charter for the number of authorized shares and

and recorded dividends actually were declared.

determine that the entity is in compliance.

  • 2. Examine minutes of board of directors’

meetings for authorization to issue shares, pay dividends, pay dividends, split shares, or purchase treasury shares.

  • 3. Perform analytical procedures.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Substantive Audit

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Substantive Audit Procedures

  • C. Completeness

 

All issued share capital and declared dividends are recorded.

  • 4. Based on reading of minutes of board of directors’ meetings, determine that all declared cash or share dividends and approved share splits have been recorded.

  • 5. Confirm with the outside share registrar and ahre transfer agent (a) the number of shares issued and outstanding and (b) the dividends paid. Or foot shareholders’ ledger and reconcile it to the general ledger and the share certificate book. Account for all certficates.

Assertion

Substantive Audit Procedures

  • D. Rights and obligations

 

Share capital transactions represent ownership interests in the entity.

  • 6. Examine remittance advices for cash receipts for shares issued during the period under audit. Examine paid checks and share certificates for shares repurchased. Trace authorization for

dividends to minutes of the board of

directors’ meetings.

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus Assertion Substantive Audit

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

Assertion

Substantive Audit Procedures

  • E. Valuation/

 
  • F. Measurement

Shareholders’ equity

  • 7. Recalculate EPS and dividends. Trace

  • 8. Reconcile SHE Ledger with the general

transactions are recorded for the proper amounts.

postings of dividends to the RE acct.

ledger.

  • 9. Verify amount transferred from RE for share dividends by reference to the published market price of the shares.

Assertion

Substantive Audit Procedures

  • G. Presentation and Disclosure

 

SHE transactions are recorded to result in presentation and disclosure in accordance with PFRS.

10. Review the financial statements to determine that share capital, retained earnings, and earnings per share are properly classified, described, and disclosed.

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

References

Auditing Theory by Ma. Elenita B. Cabrera

Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus End-of Report Questions

Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

Santa Maria, Bulacan Campus

End-of Report Questions

  • 1. Which of the following is the least useful when performing substantive tests on production transactions?

    • A. Materials Requisition Form

    • B. Labor tickets

    • C. Bill of Materials

    • D. Inventory Tag

  • 2. In performing a search for unrecorded retirements of fixed assets, an auditor most likely would:

    • A. tour the client’s

  • facilities, and then analyze the repair and

    maintenance account.

    • B. inspect the property ledger and the insurance and tax records, and then tour the client’s facilities.

    • C. analyze the repair and maintenance account, and then tour the client’s facilities.

    • D. tour the client’s facilities, and then inspect the property ledger and the insurance and tax records.

    In searching for unrecorded retirements of fixed assets, the auditor would select items included in the property ledger and other records and then, by touring the

    client’s facilities, look to see if they are on hand. A fixed asset that is not on hand but

    is included in the records may indicate that a retirement was not recorded.

    Republic of the Philippines POLYTECHNIC UNIVERSITY OF THE PHILIPPINES Santa Maria, Bulacan Campus 3. Auditors try

    Republic of the Philippines

    POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

    Santa Maria, Bulacan Campus

    3. Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following would most likely yield the highest level of evidence?

    • A. Interest expense

    • B. Accounts payable.

    • C. Accounts receivable.

    • D. Travel and entertainment expense.

    When using analytical procedures to identify predictable relationships, higher levels of evidence will be obtained when those relationships are most predictable. Relationships involving income statement accounts, such as interest expense, tend to be more predictable than relationships involving only balance sheet accounts. This is because income statement accounts represent transactions over a period of time, rather than a point in time, as a balance sheet amount represents. Also, interest expense, which can be related to debt, is more predictable than the travel and entertainment expense, which is more unpredictable and subject to management discretion.