Audit Evidence - Specific Audit Areas

Question 1

What is the general presumption for auditing Ending Balances?

Answer 1

If Beginning Balance Additions Subtractions are OK then Ending Balances should also be OK.

Question 2

What are accounts payable procedures related to existence and valuation?

Answer 2

1. Verify the mathematical accuracy of payables - compare the GL balance to the supporting detailed listing of payables.
2. Vouch selected items to the underlying vendor’s invoices.
3. Could “confirm” selected payables, but usually do not –Confirmation primarily establishes the validity (“existence”) of the recorded items, but there is a relatively low risk that the company would overstate its true liabilities; the far bigger risk is that material liabilities may have been omitted (i.e., “completeness”).
4. Usually “valuation” is not a significant audit issue, since there is a presumption that the client will pay 100% of what is owed; the auditor should look to see that the client takes advantage of any available cash discounts for prompt payment.

Question 3

What are inventory procedures related to completeness?

Answer 3

1. Inventory cutoff - review revieving documents and shipping documents surrounding year end (what are the shipping terms)
2. Analytical procedures
   
   1. Gross profit rates
   2. inventory turnover - slow moving inventory?
   3. shrinkage rates
   4. total inventory

Question 4

How is Accounts Payable audited?

Answer 4

Review purchase orders/invoices - Confirm with Vendors

Corresponding Income Statement Account - Various Expenses

Question 4

What are procedures for payroll related to the cutoff assertion?

Answer 4

If occurance and completeness have been addressed, then cutoff should be good

Question 4

What are the procedures for auditing investments (based on cost)?

Answer 4

1. inspect the documentation of purchase price
2. confirm the existence of the security with the appropriate outside parties
3. test the amorization of any premium or discount

Question 5

What are accounts recievable procedures related to rights and obligations?

Answer 5

Inquire of Management - pledged, consignment sales (not actually sales) recievable due from related parties/employees

*Document these

Question 5

What are the procedures for long term libilities reated to the existence/occurance assertion?

Answer 5

1. A. Obtain copies of new loan agreements for the auditor’s review and documentation.
   B. Verify authorization of new debt in minutes of meetings of those charged with governance.
   C. Trace receipts from the accounting records to the bank statement.

* Substantive tests of transactions to audit additions to debt*

Question 6

What are accounts recievable procedures related to valuation?

Answer 6

1. Review client’s aged trial balance - inquire about large deliquents, estimate % uncollectible within each category
2. Review recieving documents after year end for sales returns (is allowance for returns valued correctly?)
3. Review adjusting journal entries for appropriate authorization (write-offs)

Question 7

What are common procedures for cash and their related assertions?

Answer 7

1. Request Cut-off bank statement (approx. 10 days after year end)
   
   1. request must come from management
   2. Vouch bank Rec Deposits in Transit to Cutoff Statement (existence)
   3. Trace Outstanding Checks on cutoff statement to Bank Rec (completeness)
2. Confirm balances directly with Bank statement
   
   1. Cash - existence
   2. Liabilities - completeness
3. Prepare schedule of interbank transfer - verify both sides accounted for correctly, check for kiting
4. Proof of cash - when fraud is suspected
5. Count Petty Cash - if client requests, otherwise analytical procedures are usuually sufficient
6. Inquire of Management - balance restrictions

Question 8

What are the procedures for long term liabilities related to the rights and obligations assertion?

Answer 8

• Inquire of management about:
  
  • debt covenants
  • assets pledged as collateral
  • Current portions of long term debt
    
    • read loan documentation to get principal payemtns to be made within next year
    • examine cash payments for the curent year

Question 9

What are the procedures for auditing investments (based on cost)?

Question 10

What substantive procedures test valuation and allocation of account balances?

Answer 10

1. Recalculate account balances – (verify the client’s calculations)
2. Trace to subsequent cash receipts or disbursements – and to the applicable bank statement.
3. Analytical procedures – review the aged trial balance for accounts receivable to evaluate the allowance for uncollectibles. Test the accuracy of the aged categories by examining underlying invoices; review “receivers” for returns of sales.
4. Examine published price quotations for fair value measurements, when applicable – verify mathematical accuracy. Verify that the supporting ledgers or other accounting records agree to the reported balance per the general ledger before performing other audit procedures on those supporting accounting records for purposes of reaching a conclusion about the fairness of the general ledger account balance involved. “Foot” and “cross-foot” the underlying records to verify that they, in fact, add up.

Question 11

What are inventory procedures related to rights and obligations?

Answer 11

Inquire of management of any inventory held on consignment or pledged as collateral

Review loan agreements to identify collateral

*document*

Question 12

What are fixed asset procedures related to rights and obligations?

Answer 12

Inquire of management for any assets pledged as collateral

*Document*

Question 12

What are procedures for payroll related to the Classification assertion?

Answer 12

1. procedures for accuracy and occurance apply to classification
2. review outside reports - pension, incurance, profit-sharing plans
3. Verify payroll deductions and taxes, trace cash disbursements for withholdings to appropriate agencies
4. Analytical procedures (typical for an income statement account)

Question 13

What are fixed asset procedures related to existence?

Answer 13

A. Consider the adequacy of the accounting records – Verify that the client’s detailed fixed asset listing supports the related general ledger account balance.
B. additions – Vouch to (inspect) the underlying documents (examine the purchase order, vendor’s invoice, and the entity’s canceled check if payment has been made); look for approval in the minutes of meetings of those charged with governance if the addition is a “major” one.
C. disposals – Trace any proceeds received to the cash receipts journal and bank statement; review for appropriate approval.

Question 13

What are the audit procedures for Stockholder’s Equity? (all relevant assertions)

Answer 13

1. existence - confirm outstanding shares with external register, verify issuance was in accordance with law
2. completeness - review board minutes for authorized transactions, account for all certificate numbers (confirming no unauthorized shares issued
3. Rights and obligations - review board minutes for authorizations for stock and dividend transactions, review employee stock option contracts for compliance, inquire of management on restriction of retained earnings
4. Valuation - review cash reciepts and disbursements for changes in stock accounts (and board minutes), compare subsidiary ledger to GL, examine documentation for par or stated value

Question 14

What are the procedures for long term liabilities related to the completeness assertion?

Answer 14

A. Verify due dates for payments in the loan agreements.

B. Trace cash disbursements from the accounting records to the bank statement.

C. Examine canceled notes if paid in full.

D. Could confirm year-end balances, but confirmations are most applicable to establishing the validity of recorded items (that is, existence).

*Substantive test of transactions to audit decreases in debt*

Question 15

How is Cash audited? (with regard to risk)

Answer 15

Assurance Level is High (control risk). Acceptable Detection Risk is Low.

Question 17

How are beginning balances audited?

Answer 17

Should match last year’s ending balance.

Question 17

What are accounts payable procedures related to completeness?

Answer 17

1. Review cash disbursements subsequent to year end and al over some specified dollar amount
   
   1. examine related invoices, recieving documents - check dates
   2. examine unpaid invoices on hand at date of search (if any should have been included at year end
   3. inquire of management of unrecorded liabilities *document*

*Procedures done towards the end of fieldwork*

Question 18

What is lapping?

Answer 18

Cash reciepts are stolen, later reciepts applied to prior customer’s account, continues until a reciavble is written off

Question 19

What are procedures for payroll related to the completeness assertion?

Answer 19

A. Review time reports and time cards to verify support for production records.
B. Apply analytical procedures (and recalculation) to verify that the payroll-related accruals at year-end are reasonable.

Question 21

Under the Indirect Method what must be disclosed on a Statement of Cash Flows?

Answer 21

• Interest Paid
• Income Taxes Paid
• Non-cash Transactions
• Cash and Cash Equivalents Definitions

Question 22

What are the procedures for long term liabilities reated to the valuation assertion?

Answer 22

* Should be based on present value *

A. Trace related cash receipts and disbursements from the accounting records to the bank statements.
B. Examine the underlying loan contracts related to the stated dollar amounts.
C. Recalculate the amortization of any premium or discount using the effective interest method.
D. Apply analytical procedures to the related expense accounts (e.g., interest) – Note that the balance sheet item and the related income statement item are usually addressed on the same audit documentation (working paper).

Question 24

Under the Direct Method what must be disclosed on a Statement of Cash Flows?

Answer 24

• Results as if you had used Indirect Method
• Non-cash Transactions
• Cash and Cash Equivalents Definition

Question 25

What are fixed asset procedures related to valuation?

Answer 25

1. Review depreciation expense calculations - compare useful lives and methods with prior years for consistency
2. Consider if ther have been impairments - inquire of management

Question 26

How is Inventory audited?

Answer 26

Examine purchase agreements

Look at Board Minutes - Is Inventory held as collateral?

Corresponding Income Statement Account - COGS

Question 27

What are other current liabilities procedures?

Answer 27

Wages and Salaries Payable - compute estimated accrual

Dividends Payable - compute declared dividends per share

Interest payable (and interest expense) - compute accrued interest

Question 29

What substantive procedures test** rights and obligations** of account balances?

Answer 29

1. Inquire of applicable client personnel – the management representation letter should document these inquiries regarding important matters.
2. Examine authorization of transactions – to ascertain whether any unusual conditions apply.

Question 31

What are Subsequent Events and what do they require?

Answer 31

Subsequent events occur after the Balance Sheet Date but before the audit report is issued.

Auditor needs to make inquiries and assess if they affect the audit report.

Question 32

How is a Statement of Cash Flows audited?

Answer 32

Foot all balances - Check the Math

Trace Cash Flow items to other Financial Statements

Check classifications - Operating Activities, Investing Activities, Financing Activities

Question 34

What are accounts recievable procedures related to existence/occurance?

Answer 34

1. Verify that Subsidiary A/R agrees to General ledger balance
2. Confirm accounts
   
   1. Positive confirmations - need a response
      
      1. If no response - alternative procedures
         
         1. look for subsequent cash recepits of balance (preferred method)
         2. Vouch balance to underlying documents (occurance)
   2. negative confirmation - need a response only if incorrect (use when control risk is low, or balances are small)
3. Investigate exceptions to reponses recieved

Question 35

What are procedures for payroll related to the accuracy and occurance assertion?

Answer 35

A. Examine personnel records on a test basis, to determine that the levels of compensation and support for all deductions exist for all employees. Officers’ compensation should be documented in the minutes of meetings of those charged with governance.
B. Trace selected transactions from the payroll register to the general ledger and to the payroll bank account.
C. Recalculate selected entries on the payroll register.

Question 36

How is Accounts Receivable audited? (with regard to risk)

Answer 36

If Acceptable DR is High - Negative Confirmation is used - Customer only responds if balance is materially wrong.

If Acceptable DR is Low - Positive Confirmation is used - Customer asked to confirm by telling auditor the balance.

Corresponding Income Statement Account - Revenue

Question 37

What are fixed asset procedures related to completeness?

Answer 37

1. Review repairs and maintenance expense - expense underlying documents for proper expensing/capitalization
2. Review lease agreements

Question 38

What are accounts recievable procedures related to completeness?

Answer 38

1. Perform cutoff test - review shipping documents surrounding cutoff date, compare to related sales invoices, are they in the appropriate period?

*Cutoff also indirectly address existence/occurance

Question 39

What are inventory procedures related to valuation?

Answer 39

1. Price test the unit costs - consider inventory methods and cost flow assumptions
   
   1. Merchandising - examine underlying invoices
   2. Manufacturing - examine job order cost rescords, test to underlying documents
2. Test extensions - Price*Quantity
   
   1. foot extensions, tie to GL and TB
   2. Scan for unusual items
   3. Review client reconciliation
3. Inquire of management of obsolete or damaged good - write off or lower of cost or market considerations

Question 40

What substantive procedures test Existence?

Answer 40

1. Confirmation – (especially when concerned about overstatements.)
2. Observation – especially for inventory or investment securities held by the entity
3. Agree (vouch) to underlying documents – Agree items from the accounting record to the supporting source documents to evaluate the appropriateness of recorded items: for example, as an alternate procedure for accounts receivable; to verify additions to property, plant, and equipment accounts; and for various liabilities, such as notes payable.

Question 41

What are inventory procedures related to existence?

Answer 41

Observation - client counts, auditor observes while taking test counts (tracing to count sheets and final inventory listing)

• study client’s counting procedures (internal control-observe compliance)
• look for damaged or obsolete items
• *need to do bi directional testing!!!*

Question 42

What substantive procedures test for completeness of account balances?

Answer 42

1. Cutoff tests – trace from supporting source documents back to the accounting records looking for omissions. For example, trace from shipping documents to cost of goods sold or to the sales journal, or perform a “search for unrecorded liabilities.”
2. Analytical procedures – these are applicable to every audit area, but be specific: calculate a particular ratio or compare something specific to another specific thing!

Question 43

What procedures usually are performed in every individual audit area?

Answer 43

1. Agree the financial statement elements to the underlying records (TB to GL
2. Scan journal’s and ledger’s for”Unusual” items
3. Inquire of management (and document)
4. Perform analytic procedures - consider historical trends and events within industry