AUD 4.6 - Other Transaction Cycles Flashcards
The major transactions associated with property plant and equipment cycle are:
Purchases
Repairs and maintenance
Depreciation
Disposal
Leasing
The major internal control processes for property plant and equipment are:
Acquisition
Subsidiary ledgers
Physical security
Written policies
Dispositions
What is generated for acquisitions of PPE?
Requisition forms
Acquisitions of PPE are tied into what? The board of directors approves this and what else?
The capital budget
Approve acquisition of assets over a certain amount
Information including the assets description, ID number, location, acquisition date, cost, depreciation method, and amount of depreciation can be found in what during the PPE internal controls?
The subsidiary ledger
There should be segregation of duties in this internal control for PPE where cash is received and an asset and its accumulated depreciation is removed from the subsidiary ledger:
Segregation of those who authorize a disposal and those who actually dispose of the asset
Retirements of assets are documented on what? This contains evidence o proper authorization and the reason for retirement.
On a sequentially numbered work order
What assertions are covered when auditing the PPE balance?
Completeness
Valuation and allocation
Existence
Rights and obligations
When auditing the completeness assertion of the PPE balance, the auditor should:
Obtain and foot fixed assets schedule and tie to the GL
Obtain and got schedule of additions/disposals and tie to the fixed assets schedule
Sample fixed assets and trace them to the fixed assets subsidiary ledger
When auditing the valuation and allocation assertion of the PPE balance, the auditor should:
Recalculate accumulated depreciation
Evaluate fixed assets for impairment
Reperform the entity’s impairment analysis
When auditing the existence assertion of the PPE balance, the auditor should:
Vouch additions to the fixed assets accounts by examining internal documents, external evidence, and inspecting actual assets
Test for unrecorded requirements
When auditing the rights and obligations assertion of the PPE balance, the auditor should:
Examine invoices, deeds, and title documents to confirm ownership of fixed assets
When auditing the completeness assertion of the PPE transactions, the auditor should:
Trace a sample of purchase requisitions to receiving reposts and the fixed assets subsidiary ledger
Review the related repair and maintenance expense accounts for items that should’ve been capitalized
Review lease and rental agreements
When auditing the cutoff assertion of the PPE transactions, the auditor should:
Review purchases and dispositions from shortly before and after year end
When auditing the valuation, allocation, and accuracy assertion of the PPE transactions, the auditor should:
Recalculate depreciation expense
Gains and losses and the removal of accumulated depreciation for fixed assets sold or retired should be tested for reasonableness
When auditing the existence and occurrence assertion of the PPE transactions, the auditor should:
Vouch a sample of purchases to the receiving report then the vendor invoice and a sample of disposition to the asset retirement form and other supporting documents
When auditing the understandability and classification assertion of the PPE transactions, the auditor should:
Examine a sample of significant charges to repairs and maintenance expense for items that should have been capitalized
Review lease transactions for proper classification as operating or capital lease
What assertions are audited when testing PPE transactions?
Completeness
Cutoff
Valuation, allocation, and accuracy
Existence and occurrence
Understandability and classification
The most significant payroll and personnel cycle risks are:
The creation of fictitious employees and the falsification of hours worked
There should be proper segregation of duties between what steps of the payroll and personnel cycle?
Authorization and employ and pay
Supervision
Timekeeping and cost accounting
Payroll check preparation
Who hires employees and maintains the personnel records, containing hire date, department, salary, and position?
The HR department
Who approves pay base data (hours, absences, time off, etc)
Employees immediate supervisor
Data on which pay is based such as hours worked or jobs completed should be accumulated by who?
Someone independent of any other function of the payroll and personnel cycle
Who computes salary and issues the unsigned payroll checks to the treasurer for signature?
The payroll department or a service organization
The payroll department is a record keeping department, they should not have authority or the ability to do what?
Change hours or rates or sign checks
What is a paymaster?
The person responsible for distributing checks
They have no other payroll function
The auditor should do what to evaluate the internal controls surrounding payroll and personnel cycle?
Observe segregation of duties
Compare personnel records to actual time cards
Observe payroll distribution
Observe the use of time-clocks
Test to ensure only employees existing in the computer data fils are accepted when entered
The auditor generally focuses substantive procedures for the payroll and personnel cycle on:
Analytical procedures and the recalculation of payroll accruals
Tests related to completeness, existence, and rights and obligations are performed in the payroll cycle only when:
Internal controls over payroll cannot be relied upon
When testing the completeness assertion when auditing the payroll accrual, the auditor should:
Perform the search for unrecorded liabilities
When testing the valuation and allocation assertion when auditing the payroll accrual, the auditor should:
Recalculate any year end payroll accrual and compare the calculated amount to the recorded amount
When testing the existence assertion when auditing the payroll accrual, the auditor should:
Vouch amounts from the clients calculation of the payroll accrual to supporting documents
When testing the rights and obligations assertion when auditing the payroll accrual, the auditor should:
Examine supporting documentation to verify that the payroll accrual is an obligation of the entity
When testing the completeness assertion when auditing the payroll transactions, the auditor should:
Trace a sample of time cards to the payroll register
When testing the cutoff assertion when auditing the payroll transactions, the auditor should:
Sample time cards from beginning and prior to year end and compare with the payroll report to ensure proper period recording
When testing the valuation, allocation, and accuracy assertion when auditing the payroll transactions, the auditor should:
Compare recorded payroll with payroll checks issued
Verify pay rates and deductions with employees records
Recalculate gross and net pay
Compare payroll costs with standards or budgets
Recompute mathematical accuracy of a sample of paychecks
When testing the existence and occurrence assertion when auditing the payroll transactions, the auditor should:
Vouch time on payroll summaries by selecting a sample of payroll register entries and comparing with time cards and approved time reports
When testing the understandability and classification assertion when auditing the payroll transactions, the auditor should:
Examine a sample of paychecks for classification into proper expense accounts
The financing cycle includes an entity’s:
Debt and equity
This ensures that stock issuances comply with the articles of incorporation, prepares stock certificates, and maintains records of shares authorized, issued, and outstanding:
Stock transfer agent
When testing the completeness assertion when auditing the debt balance, the auditor should:
Review board minutes, obtain debt agreements, and trace all new debt contracts into the financials
Agree total debt listing to the GL
Debt disclosed in the bank confirmation should be traced to the debt agreements and financials
Confirm notes and bonds with creditors
When testing the valuation and allocation assertion when auditing the debt balance, the auditor should:
Examine new debt agreements to determine if recorded at proper amount
Recompute any interest payable and amortization of premiums and discounts
When testing the existence assertion when auditing the debt balance, the auditor should:
Confirm notes and bonds directly with creditors
When testing the rights and obligations assertion when auditing the debt balance, the auditor should:
Examine notes and bond agreements to verify that they are the obligations of the entity
When testing the completeness assertion when auditing the debt transactions, the auditor should:
Examine new debt agreements and the board minutes for evidence of new debt
Review interest expense for payments to debt holders not included in the debt listing
Examine lease agreements for proper classification as operating or capital lease
When testing the valuation, allocation, and accuracy assertion when auditing the debt transactions, the auditor should:
Sample debt receipts and payments and compare interest expense to the debt balance for reasonableness
When testing the existence and occurrence assertion when auditing the debt transactions, the auditor should:
Review the board minutes for evidence of new debt agreements and inspect those agreements if any
When testing the understandability and classification assertion when auditing the debt transactions, the auditor should:
Examine due dates of notes and bods to determine whether the debt should be classified as short or long term
If the client uses a stock transfer agent, when testing the completeness assertion when auditing the equity balance and transactions, the auditor should:
Send third party confirms to confirm shares authorized, issued, and outstanding as well as to provide evidence of individual transactions
If the client does not use a stock transfer agent, when testing the completeness assertion when auditing the equity balance and transactions, the auditor should:
Examine the stock certificate stubs from the “stock certificate book” for proper recording of any canceled certificates and for existence of remaining unissued certificates
Foot the shares outstanding in the stock certificate book an agree with the GL
Examine all shares of treasury stock and agree to GL
When auditing equity, the auditor is mostly concerned with what assertions?
Completeness, valuation, existence and occurrence. Also classification and understandability
When testing the valuation assertion when auditing the equity balance and transactions, the auditor should:
Recompute the value assigned to stock transactions during the period
Analyze the retained earnings account and review the propriety of any direct entries to retained earnings
When testing the existence and occurrence assertion when auditing the equity balance and transactions, the auditor should:
Vouch transactions recorded during the period to board minutes
Confirming the stock transfer agent or stock certificate book also cover existence
When testing the understandability and classification assertion when auditing the equity balance and transactions, the auditor should:
Determine whether there are restrictions on retained earnings resulting from loans, agreements, or laws.
