Engagement Procedures

Question 1

Sales and receivables were all accounted for

Answer 1

Trace shipping documents with sales invoice and JEs

Account for the numerical sequence of sale orders, shipping documents, invoice, etc.

Question 2

Sales occurred

Answer 2

Vouch sample of recorded sales to customer orders and shipping documents

Question 3

Accounts Receivables are valid assets

Answer 3

Confirm accounts receivable

Question 4

Accounts Receivable are measured appropriately

Answer 4

Classify receivables by age and compare collection rates within classifications with those of prior years (also called aging the accounts receivable)
Trace cash receipts to specific accounts
Review delinquent customers’ credit ratings

Question 5

Cash transactions occurred

Answer 5

Vouch a sample of recorded cash receipts to accounts receivable and customer orders
Vouch a sample of recorded cash disbursements to approved vouchers

Question 6

Cash reported actually exists

Answer 6

Count cash on hand
Send bank confirmations
Prepare bank reconciliations

Question 7

Inventory transactions occurred

Answer 7

Vouch a sample of recorded purchases to documentation.

Vouch a sample of recorded cost of sales to documentation

Question 8

Inventory actually exists

Answer 8

Observe inventory and make test counts

Question 9

Inventory amounts are measured appropriately

Answer 9

Determine whether some inventory is obsolete

Ensure manufactured goods are tested for reasonableness

Question 10

Inventory balance contains all inventory owned at year end

Answer 10

Analytical procedures should be used. A commonly used ratio is the inventory turnover ratio

Question 11

Purchases occurred

Answer 11

Vouch a sample of recorded payables to documentation, e.g., requisitions, purchase orders, receiving reports, and approved invoices

Question 12

Accounts Payable are all accounted for

Answer 12

Analytical procedures should be used to form expectations with which to compare management’s representations.
Trace subsequent payments to recorded payables.
Collect supporting documentation and search for unmatched documents to determine whether relevant documents have been lost, misplaced, or misfiled

Question 13

Transactions affecting property, plant, and equipment are accounted for.

Answer 13

Analytical procedures should be used. Typical ratios include rate of return on plant assets and plant assets to total assets

Question 14

Transactions were recorded in the proper period

Answer 14

Cutoff test. Documents are traced to the accounting records for several days prior to and after year end to determine proper recognition in the appropriate period

Question 15

Transactions and events were recorded appropriately

Answer 15

Obtain management representation letter that includes assertions that transactions and events were recorded appropriately

Question 16

Amount are appropriately described and disclosures are fairly and clearly expressed

Answer 16

Inspect financial statements
Evaluate note disclosures
Inspect any other relevant documentation