AUD 4 TRANSACTION CYCLES Flashcards
What is the description or parts of the revenue cycle?
Sales revenue, receivables, and cash receipts
What is part of the expenditure cycles?
Purchases
Payables
Cash disbursements
Whats part of the inventory cycle?
Perpectual inventory
physical counts
manufacturing costs
What part of the investments cycle?
investments in debt and equity and the income received from investments
Whats included in the PP&E cycle?
acquisitions and disposals and related depreciation expense
Whats included in the payroll and personnel cycle?
payroll and personnel functions
Whats included in the financing cycle?
debt and equity financing
repayments to borrowers
interest expense
dividends
How to test the completeness assertion on the A/R balance
Trace aged TB of AR to GL control account
AGED TRIAL BALANCE Definition
AGED TRIAL BALANCE alphabetically lists accounts receivable with outstanding balances. It displays one balance for every account by age and is typically produced only once on demand to check receivable details against other reports.
How to test valuation, allocation, and accuracy assertion for the AR balance
Accuracy = confirmations
adequacy of AFDA = valuation
How to test existence/orccurrence assertions for the AR balance
confirm sample of AR
How to test the rights/obligations assertion for AR balance
Review bank confirms and debt agreements for liens on receivable. Review board minutes for factored/sold AR
How to test completeness assertion for sales transactions
trace shipping docs to invoices, and to the sales journal and AR sub ledger
How to test cutoff assertion for sales transactions
Analyze record of sales returns after YE.
Compare some invoice from shortly before and after YE w/shipment dates and w/the dates the sales were recorded in the sales journal
How to test Val/Alloc/Accuracy assertion for sales transactions
Compare prices/terms on invoices w/authorized price liests and terms to see if sales are recorded at correct amount
How to test Exist/Occur assertion for sales transactions
Vouch sales trans from sales journal to invoices and back to customer order and shipping docs
How to test understandability and classification of sales transactions
examine invoice for proper classification of correct revenue accounts
How to test the completeness assertion of disclosures/presentation assertion. Which disclosures are supposed to be included in the FS?
- Revrec method
- Rev by reportable segment
- Related party revenue and receivables
- Receivables by type and term (short vs long)
- Pledged or discounted receivables
How to test the val/all/acc assertion for disclosures/pres of sales?
Read footnotes and other info related to AR and sales accurate and at correct amounts
How to test for Rights, obligations, occurrence for disclosure/presentation of AR/Sales
Determine if any AR pledged, assigned or discounted.
Compare disclosures to other aud evidence to ensure all disclosed info has actually occurred
What are A/P dept’s 3 functions?
- record payable
- approve invoice for pmt
- record pmt after its paid by treasurer
What are some of the things the treasurer does?
Prepares/signs/mails checks and cancels all supporting docs after pmt.
How to test completeness assertion for balance of A/P:
- agree a/p listing to the GL
- get sample of vendor statements and agree to the vendor accts
- Perform a search of unrecorded liabilities
How to test the val/all/accur assertion for A/P balance
- get A/P listing and foot it and agree to the GL
- get sample of vendor statements and agree the amounts to the vendor accounts
- Review results of A/P confirms
How to test the exist/occur assertion for the A/P bal
vouch selected amt from the A/P listing to the voucher packages.
When would A/P confirms be sent out? Would usually be vendors with small/zero balances selected
When IC is weak
Disputed amounts
monthly vendor statements aren’t available
How does auditor test the rights and obligations assertion of the A/P balance?
review sample of voucher packages for PR, PO, receiving report and invoice to verify payable owed by entity
How to test completeness for purchase trans
trace sample of vouchers to purchase journal
How to test val/all/accur for purchase trans
recompute math of sample of invoices
What are the required disclosures for AP and purchases in the notes to the FS
- payables by type
- purchase contracts and purc. commitments
- Related party purch and payables
- expenses by segment
What is the test for the val/alloc/accur assertion for disclosures of purchases/AP
Read footnoes and info to see if info is accur and presented at approp. amounts
Whats the test for the rights/obs/occur of purch/AP?
Compare discl. to other aud evid to ensure all disclosed info related to AP/Purch has occured
Whats the test for ustandability and classification of AP/Purchases
read all AP and purchase related disc. to see if they are understandable. Aud s/see if mat LT payables or non-trade payable require separate disclosure
NEED TO LOOKUP AND REFRESH HOW TO VALUE AND RECORD FLUCTUATING INVESTMENTS/INTENGIBLE ASSETS
NEED TO LOOKUP AND REFRESH HOW TO VALUE AND RECORD FLUCTUATING INVESTMENTS/INTENGIBLE ASSETS LIKE AFS AND HTM AND FMARKET (rEVALUATION OF PPANDE
What cash fraud scheme is this? : withholding and not recording current receipts of cash or checks and the unrecorded receipts is covered by applying a later cash receipt to the previously unrecorded account
Lapping
Which fraud scheme?
check is drawn on one bank and is deposited in another bank and no record is made of the disbursement in the balance of the first bank
Kiting
Which scheme uses a bank transfer schedule and what is that?
Kiting
BTS = compares the dates checks are drawn at the disbursing bank to the dates the checks are deposited in the receiving bank account
What are the primary audit procedures to test completeness, valuation/allocation, and existence of the ending cash balance?
Bank confirmations and audit of YE bank reconciliation
The steps/procedures in testing the YE bank reconciliation in the audit of cash balance
- footing bank recon and list of outstanding checks
- agree bal per book to the GL
3.agree bal per bank confirm to bal of bank acct on recon
agree deposits in transit and outstanding checks to cutoff bank statement
Whats the cutoff bank statement?
Obtained from bank and covers the first 10 to 15 days of the new period after YE. Any reconciling items s/usually clear during this 10-15 day period so if something hasn’t cleared it s/be investigated
What procedures performed to audit cash receipts and disbursement transactions for completeness
CR: Trace a sample of remit advices to cash receipts journal and deposit slips
CD: trace sample of cancelled checks to CD journal
What are the required disclosures in the FS for cash? (tests completeness of disclosures)
- Policy defining cash/cash equiv.
- Restrictions on cash, including sinking fund requriements
- Compensating balance requirements
What is a sinking fund requirement?
A requirement for certain bond issuers to buy back a portion of its debt at regular intervals
Who reviews and approves writeoffs of A/R?
Treasurer.
Note: the credit department initiates the writeoff request
In the collection of cash receipts cycle, who prepares the listing of checks? and who prepares the check deposit summary
Mailroom does check listing
cashier does the check deposit summary
What are the dual-purpose tests performed at thfor the physical inventory count to audit the ending inventory balance
Inventory observation:
- inspect inventory for existence and condition
- perform test counts
- eval mgt’s instructions/procedures for inventory count
- observe performance of count procedures
How does auditor test completeness of inventory during observation?
Trace test counts to the inventory report and trace sample of prenumbered inventory tags to the physical inventory report
How to test val/alloc/accuracy of inventory?
- test math accuracy of inventory report and recon to GL inventory
- inquire (and look for) ab obsolete or damaged goods, scan perpetual records for slow-moving items
- Examine vendor invoices
- Perform inventory price tests to check valuation of inventory
How does auditor test existence of inventory of items on physical inventory report?
vouching smaple of items in physical inventory report by performing tests counts, and by vouching to inventory tags.
Which are the required disclosures for inventory that s/be included in the notes to the FS? (completeness)
- cost and valuation method (cost = LIFO, valuation = NRV or LCM)
- RM, WIP, FG bals
- consigned inventory
- pledged or assigned inventory
- sig. lossess from w/downs or purchase commits
- warranty obligations
Where/how do you record unrealized gains/lossess on AFS securities?
OCI
Where/how do you record unrealized gains/lossess on trading securities?
Earnings
What are some of the typical categories/classifications of debt/equity investments?
Trading AFS held to maturity securities Derivatives Equity method
Which disclosures s/the auditor ensure have been made in the FS notes related to investments?
Auditor s/determine if all required marketable securities and derivative disclosures have been made
How should maretable securities (AFS, HTM, TS) be recorded
No sig. influence:
Trading and AFS are recorded at fair value
held to maturity are carried at amortized cost
How should the auditor audit the classification of equity method investments?
Examine audited FS of the investee.
And s/inquire of mgt regarding the entity’s ability to exercise significant influence over the investments.
When a client’s investments in a security that’s valuation is based on the investee’s financial results, what are the procedures the auditor s/perform to obtain SAAE in support of the investee’s financial results?
- Obtain and read the FS and audit report of the investee
- if investee hasnt been audited, request the FS be audited
- if carrying amount of investment in client’s FS reflect factors not in the investee’s FS, or FVs are materially different from investee’s carrying amounts, aud s/get SAAE to support the amounts.
- If theres a difference in periods that may have a material affect, see if mgt has considered the lack of comparability and determine the effect if any on the auditor’s report.
What should the auditor do when auditing investments in derivatives and other securities measure or disclosed at fair value?
- Determine if applicable fwork specifies the method that s/be used to detmine fair value
- evaluate if the client’s determined fair value is consistent with the specific valuation method
- if fair value estimate is obtained from broker-dealer or 3rd party, get an understanding of the method used by them to develop their fair value estimate
What does PP&E assets include?
This includes all tangible assets w/service lives greater than one year that are used in operation of the business.
What are the major transactions associated w/the PP&E assets/cycle?
Purchases, repair and maintenance, depreciation, disposal, revaluation, and leasing.
Revaluation of PP&E is only used for IFRS
Why does the auditor review the repairs and maintenance account when auditing PP&E?
To see if they locate any items that s/have been capitalized
What are the required disclosures related to fixed assets that are to be included in the FS?
- Depreciation method and useful lives
- Depreciation expense for the period.
- Balance of each class of capital assets by nature or function
- A/Dep allowance by class or in total.
- Liens and mortgages
- capital/operating lease information
What are the SODs related to the Payroll Cycle?
- Authorization to employ and pay (HR)
- Supervision approves hours
- Timekeeping and cost acctg - accumulated separate
- payroll check prep
- check distribution
What are the required disclosures related to the payroll cycle in the notes to the FS?
- pension and post-retirement benefit disclsoures
- stock-based compensation disc.
- deferred compensation and profit sharing plans
Which of the assertion(s) when auditing disclosures in all cycles seems to include:
“read the footnoes and other information related to …to determine if the information is…
Val/alloc/accuracy
What does the financing cycle include?
– includes an entity’s debt and equity
What should good IC over debt include?
- adeq. documentation of all financing agreements
- new debt financing authorized by BOD/mgt
- detailed records of LT debt, including interest and principal pmts, and amortization of bond premiums/discounts
What is good IC over equity?
-all stock issuance, D/E declarations, and Tstock must be authorized by the BOD.
What are the IC that a company s/implement if a stock transfer agent is not used?
- officer of entity s/be responsible for ensuring that the stock transaction comply with AOI and regs and he s/maintain the stock cert book. This person s/have no acctg responsibilities
- There s/be periodic independent recon of the stock cert boko w/the number of shares outstanding
In auditing debt transactions, which assertion is being tested when the auditor examines lease agreements for proper classification as operating or capital?
Completeness
How is classification assertion tested when auditing the transactions for debt?
By making sure LT and ST debt are properly categorized as such. Done by looking at due dates
How is the valu/alloc/accur assertion tested when auditing the transactions for debt?
Compare interest expense to the debt balance
How is existence and occurrence tested when audited the transactions of debt?
verify existence of new debt by reviewing the BOD mins for evid and inspecting the agreements
What are the required disclosures related to debt transactions
- Details of maturity dates, interest rates, call/conversion privleges, and assets pledged as collateral
- future sinking fund payments and maturities for each of the next five years
- loan covenants
Which assertions is the auditor concerned about when auditing equity?
completeness, valuation, existence/occurrence. Aud s/also focus on evaluating classification/ustandability
What are the required FS notes related to equity?
- Number of shraes authorized/issued/outstanding
- Rights and privileges of securities, including D/E and liquidation preferences, participation rights, call prices/dates, conversion or exercise prices or rates and dates, sinking fund requriements, unusual voting rights and sig. contracts to issue additional shares
- stock option plans
- appropriations or R/E earning and restrictions on D/Es.
How is existence/occurrence assertion tested for auditing of stock trans?
can be tested by vouching trans recorded during period to BOD minutes.
Also stock agent confirmation and inspection of stock cert book
What do the substantive test of details in the inventory cycle primarily focus on?
Ending balance in the investment account and the presentation and disclosure.
When using blank positive confirmations w/be preferrable
Blank confirmations should be used if recipients are likely to sign confirmations without careful investigation. Blank confirmations require the recipient to fill in the balance, so the recipient cannot simply sign off without checking the balance.
When an auditor is searching for unrecorded payables/liabilities, he would:
An auditor most likely would compare cash payments made after the balance sheet date with the accounts payable trial balance in searching for unrecorded payables. The auditor is looking for items that should have been recorded as of the balance sheet date, but were not.
