ASSERTION TYPICAL AUDIT PROCEDURES
Presentation and Disclosure 1. Inquiry of management.
2. Reviewing contracts, agreements, and minutes of meetings.
Existence or Occurrence 1. Confirmation
2. Inspection
3. Vouching and documentation.
Rights and obligations 1. Review cutoff through examination of documents
2. Inquiry
Completeness 1. Analytical procedures
2. Vouching 3. Confirmation 4. Cutoff tests
Valuation 1. Confirmation
2. Vouching and documentation 3. Recalculation
D. AUDIT PROGRAMS—GENERAL AUDIT PROCEDURES
1. Audit programs are required to be prepared in all audits conducted in accordance with GAAS. The purpose of audit programs is two-fold:
a) To show evidence in the workpapers that the audit was adequately planned, and b) To serve as a step-by-step guide for the audit of a particular account.
2. The following audit programs are typical procedures that are normally performed during an audit:
Planning
1. Obtain a client engagement letter or document understanding in workpapers.
2. Obtain from client any special reporting requirements regarding loan or debenture agreement or S.E.C.
requirements.
3. Review client's internal control structure.
4. Prepare a budget.
Cash
1. Review internal control before year end.
2. Confirm all accounts with bank with which company transacted business during year as of ________ .
3. Arrange to receive cutoff bank statements, and canceled checks and bank advices for the period up to 2 weeks after year end.
4. Verify the propriety of the bank reconciliation and all reconciled items. Trace any unreturned O/S check amounts to supporting documents.
5. For bank cutoff statement:
a. Verify the deposits in transit into the bank reconciliation.
b. Make sure that all the checks dated at year end or prior are listed as O/S on the bank reconciliation.
c. Review source documents for items not clearing in the bank's cutoff statement (i.e., purchase order, invoice or bank deposit receipt).
6. Perform interbank transfer test to determine if transfers between corporate accounts have been properly recorded.
7. Count petty cash, reconcile with vouchers to balance sheet date. (NOTE: This should be done during inventory observation.)
8. If cash disbursement test reveals that internal control over cash is weak, do a proof of cash for an interim month. Month chosen ________
a. For that month, test foot books of original entry (i.e., cash receipts and cash disbursements) and trace to general ledger; and reconcile to bank deposits and withdrawals.
b. Clear all outstanding items.
9. Note for financial statement presentation of any cash restrictions (i.e., 90-day notice accounts, certificate of deposit, etc.).
10. Conclude as to audit objectives.
Accounts Receivable
1. Review internal control before year end.
2. Obtain A/R aging, as of date of interim work or year end as applicable.
a. Select A/R balances for positive confirmation, and confirm a representative sample of total dollar value and number of accounts.
b. Agree the aged listing to the G/L control account.
3. Send second requests two weeks after original request.
4. Obtain explanations for all differences.
5. For nonreplies, perform alternate verification procedures. Trace all entries on customer A/R card to subsequent cash receipts, proof of delivery, or authorized credit issuance.
6. Summarize confirmation results, and conclude as to adequacy.
If interim audit work was performed, do step 7; otherwise omit.
7. Obtain year-end A/R aging:
a. Reconcile the interim to year-end balance by tracing to sales register, C/R register, and any adjustments, and summarize on a work paper.
b. Foot the aged T/B.
c. Agree total to G/L.
d. Compare the individual customer balances for interim versus year end and investigate unusual differences.
e. Review for any large credit balances; consider reclassifying as accounts payable.
8. Obtain an analysis of allowance for bad debts.
a. One showing beginning balance, expense additions, deductions (write-offs) and ending balance.
b. A second schedule showing composition of ending balance (i.e., those accounts deemed uncollectible).
c. Determine reasonableness of allowance for bad debts by reference to aged A/R T/B and discussions with credit department.
9. Review sales cutoff before and after year-end tracing from sales register to shipping documents, and relating the test to documents (bills of lading) obtained at the year-end inventory.
10. Review credit memos for authenticity and proper approval.
11. Conclude on propriety of A/R, bad debt expense, and allowance for uncollectible accounts.
Inventory
1. Review internal control prior to year end.
2. Send confirmations to any locations outside the factory where the client's inventory is held.
3. Physical inventory observation:
a. Prior to inventory date, determine that proper instructions have been issued to client personnel. Review procedures with company controller.
b. If tags are used, obtain tag control of those issued and those used.
c. Tour premises and determine that inventory is not moving and that no shipping or receiving is going on.
d. Determine that slow-moving obsolete inventory and customer inventory are prominently marked and are not being counted. Make a note of these items to insure that they have not been included in the priced inventory listing.
e. Determine that the tags are being filled out in accordance with instructions.
f. Make test counts, recording a few from all areas and all classes (RM, W/P and FG) of inventory for subsequent tie-in to priced inventory.
g. Obtain shipping and receiving cutoff documents.
h. Obtain carbon copy of all tags prior to end of physical inventory and check into tag listing.
i. If perpetual system is in use, select a sample from perpetual records and trace to inventory count to the floor and count some items on the floor and trace to the perpetual records.
j. If inventory tags are not used (i.e., if the inventory is listed on count sheets), test that all items are being counted by reference to audit procedures in (i). In addition, count the number of inventory sheets and note the last item on each sheet in order that we may test to see if we received a complete priced inventory.
4. Inventory Valuation
a. Obtain a complete listing of the priced inventory.
b. Quantities:
1. Trace all test counts obtained at the time of the physical to final inventory.
2. Trace listing of obsolete items to priced inventory in order to verify their exclusion.
c. Prices:
1. Raw Materials
a) Select a representative sample and trace to the vendor invoice or cost card to determine that the correct prices were used.
2. W.I.P. and Finished Goods
a) Select a sample and trace to cost records.
b) Do an overhead cost calculation to determine if overhead application is correct.
c) Select a sample and test if cost buildup procedure for material, labor and overhead is adequate to yield reasonable pricing.
5. Inventory Summarization
a. Test extensions of final inventory.
b. Foot the summarization, and agree the total to the G/L control total.
c. Compare list with prior years and investigate any large differences and compare for obsolete items or item written off in prior year and included this year.
6. Cutoff
a. Review cutoff with reference to shipping and receiving documents from the physical and incorporate the work with that done in A/R and A/P.
7. Lower of Cost or Market Test
a. For a reasonable sample, compare inventory value with recent sales invoices. Examine gross profits by product line if possible.
8. Slow Moving or Obsolete Inventory
a. Review purchase records and/or perpetual records and compare inventory lists and any available activity reports for slow moving or obsolete inventory. Evaluate what reserve should be applied, if any.
9. If applicable, review perpetual cards for large fluctuations of quantity and investigate.
10. Conclude on inventory valuation and cutoff.