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					7.58   Control Assertion Associations

        Error                                        Assertions
               a)    Sales recorded, goods not       Occurrence
                     shipped
               b) Goods shipped, sales not           Completeness
                  recorded
               c)    Goods shipped to a bad          Accuracy
                     credit risk customer
               d) Sales billed at the wrong          Accuracy
                  price or wrong quantity
               e)    Product A sales recorded as     Classification
                     Product line B
               f)    Failure to post charges to      Completeness
                     customers for sales
               g) January sales recorded in          Cutoff
                  December


7.59   Client Control Procedures and Audit Tests of Controls

       For each client control activity numbered 1-15, write an auditor’s test of control procedure that could
       produce evidence on the question of whether the client’s control has been installed and is in operation.

       Sales Invoice Sample: Select a sample of random numbers representing recorded sales invoices, and

       1(a).        Inspect the attached sales order for credit approval signature.

       1(b).        Trace customer to up-to-date credit file/information underlying the credit approval.

       2.           Inspect the attached shipping document for (i) existence, and (ii) prenumbering imprint.

       3.           Compare billed quantity on sales invoice to shipped quantity on shipping document.

       4.           Find the sales invoice associated with the random number (failure to find this means an invoice
                    wasn’t recorded). Alternatively, use computer to add up the recorded sales invoice numbers and
                    compare to a sum of digits check total.

       5.           Compare sales invoice to sales order for quantity, price, and other terms.

       6.           Compare prices on sales invoice to approved price list.

       7.           Check product line code for proper classification compared to products invoices.

       11.          Compare invoice date to shipping document date.
       14.          Note whether credit files are updated for customer payment history.

       Other

       2.           Count the number of shipping documents (subtract beginning number from ending number) and
                    compare to same-period count of sales invoices (to look for different number of documents).
       2.     Select a sample of random numbers representing shipping documents and look for them in the
              shipping document file.

       2.     Computer-scan the shipping document file for missing numbers in sequence.

       2.     Use computer to add the shipping document numbers entered in the files and compare to a
              computed sum of digits check total.

       8.     Find client’s sales dollar batch totals, recalculate the total, and compare to sales journal of the
              relevant period.

       9.     Use the same sales dollar batch totals for comparison to separate total of accounts receivable
              subsidiary postings, if available.

       10.    Study the accounting manual and make inquiry about accountants’ instructions to date sales on
              date of shipment.

       12.    Obtain client’s documentation showing A/R subsidiary total reconciled to A/R control account.
              Alternatively, add up the subsidiary and compare to the control account.

       13.    Obtain client’s documentation showing reconciliation of intercompany receivables and payables
              for sales and purchases. Alternatively, confirm balances with subsidiaries or other auditors.

       14.    Select a sample of credit files and trace to customers’ accounts receivable, noting extent of up-date
              for payment history.

       15.    Study client correspondence on investigation and collection efforts on overdue customer accounts,
              noting any dispute conditions. If no effort is made, follow up overdue accounts with audit
              procedures (confirmation, determine existence of debtor in directories, etc.)


7.60   Confirmation of Trade Accounts Receivable

       a.     Auditing standards presume that auditors will request confirmation of the client’s accounts
              receivable. An auditor can justify omitting these confirmations if:

              1.       The accounts receivable are immaterial to the financial statements.

              2.       The expected response rates to properly designed confirmation requests will be
                       inadequate, or responses are expected to be unreliable, hence the confirmation procedures
                       would be ineffective.

              3.       The evidence expected to be provided by analytical procedures or other substantive
                       procedures is sufficient to reduce audit risk to an acceptably low level for the applicable
                       financial statement assertions.

       b.     These factors will affect the reliability of confirmations:

              1.       The confirmation form. Some positive forms request agreement or disagreement with
                       information stated on the form. Other positive forms, known as blank forms, request the
                       respondent to fill in the balance or furnish other information. Negative forms request a
                       response only if the recipient disagrees with the information stated on the request.
              2.       The auditor’s prior experience with this client or similar clients is also likely to affect
                       reliability because the auditor will have prior knowledge of the expected confirmation
                           response rates, inaccurate information on prior years’ confirmations, and misstatements
                           identified during prior audits.

               3.          The nature of the information being confirmed may affect the competence of the
                           evidence obtained as well as the response rate. For example, this client’s customers’
                           accounting systems may permit confirmation of individual transactions, but not account
                           balances, or vice versa.
               4.          Sending the confirmation requests to the proper respondents will likely provide
                           meaningful and competent evidence. Each request should be sent to a person the auditor
                           believes is knowledgeable about the information to be confirmed.

       c.      The nature of the alternative procedures the auditor can apply when replies to positive
               confirmation requests are not received varies according to the account and assertion in question.
               Possible alternative procedures include:
               1.       Examining subsequent cash receipts and matching such receipts with the actual items
                        being paid.
               2.       The auditor can also consider inspecting the client’s customers’ purchase orders on file
                        and related shipping documents.

               3.          Inspecting correspondence between the client and its customers could provide additional
                           evidence.
               4.          The auditor may also establish the existence of the client’s customers by reference to
                           credit sources such as Dun & Bradstreet or other sources of identification (e.g., telephone
                           book, business directories, state incorporation files).


7.61   Audit Objectives and Procedures for Accounts Receivable
       a.      Accounts receivable represent all amounts owed to the client company at the balance sheet date.

               2.          Perform sales cut-off tests to obtain assurance that sales transactions and corresponding
                           entries for inventories and cost of goods sold are recorded in the same and proper period.

       b.      The client company has legal right to all accounts receivable at the balance sheet date.

               5. (best)            Review loan agreements for indications of whether accounts receivable have
                                    been factored or pledged.

               4. (possible)        Obtain an understanding of the business purpose of transactions that resulted in
                                    accounts receivable balances.

       c.      Accounts receivable are stated at net realizable value.
               3.          Review the aged trial balance for significant past due accounts.

       d.      Accounts receivable are properly described and presented in the financial statements.

               6. (best)            Review the accounts receivable trial balance for amounts due from officers and
                                    employees.

               4. (possible)        Obtain an understanding of the business purpose of transactions that resulted in
                                    accounts receivable balances.

				
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