Review Flashcards
What duties should be segregated in the payroll cycle?
Each role is responsible for the following:
1) Human resources – This can be performed by the human resources department hiring new employees and maintaining records of the employees hire date and salary information.
2) Payroll (accounting) – Supervision can be assured by proper approval of an employees work data (e.g. hours worked, vacation time, sick days etc.). Payment data should be based on hours worked on completed jobs (timekeeping).
3) Treasurer (payroll check preparation) – The payroll department should separate those who distribute payment to staff.
One control that every company should have in place is called the “voucher package” or “3-way match”,
The “voucher package” or “3-way match”, which reconciles the purchase order, the receiving report and the invoice. The voucher packageensures that the company only receives and pays for goods that they actually ordered.
How to test whether proper segregation of duties exist?
Inquiry and observation
The audit team should perform inquiry with employees of the department to understand what they are responsible for. Additionally, the audit team should observe how the employee performs their job and what type of system access they each have.
Existing control activities
Authorization of transactions is part of the control activities of an organization.
Control environment
Participation of those charged with governance is part of the control environment of an organization.
Monitoring
The internal audit function is part of the monitoring component of an organization’s internal control.
Risk assessment
Adoption of new accounting principles creates a risk that needs to be identified and evaluated as part of an organization’s risk assessment.
Information and communication systems
Information and communication systems are used to present transactions and related disclosures properly.
Control environment
Risk assessment
Information and communication systems
Existing control activities
Monitoring
Consideration of Financial Statement Assertions
(COVERUP)
Further audit procedures are performed at the relevant assertion level. The main financial statement
assertions (COVERUP) are:
* Completeness (tracing)
@Account balances (unrecorded) B/S @transactions and events I/S
@presentation and disclosures (GAAP footnote)
* CutOff
* Valuation, allocation, and accuracy
* Existence (Balance Sheet inspecting items) Vouching and occurrence (I/S items) vouching
* Rights and obligations
* Understandability of Presentation and classification
As the acceptable level of detection risk increases, the assurance (effectiveness) that must be provided from substantive tests can decrease. Thus, the auditor may change the timing of substantive tests from year-end to an interim date.
If there is a low detection risk, there is a minor probability that the auditor will not be able to detect a material error; therefore, the auditor must complete additional substantive testing.
.Tolerable misstatement is the maximum error in a population that the auditor is willing to accept
and is the application of performance materiality to sampling procedures
Professional judgment is necessary when determining materiality for the financial statements as a whole. Both qualitative and quantitative factors should be assessed when determining materiality for the financial statements as a whole. Preliminary assessment and revised throughout the audit
The auditor has an active responsibility to investigate subsequent events between the date of the financial statements and the date of the auditor’s report The auditor would also be responsible for investigating the effects of any omitted audit procedures discovered after the submission of the audit report.
The auditor has no active responsibility to make inquiries or perform any further auditing procedures after the date of the auditor’s report (2/12/Y3), but should consider the implications of any information coming to his or her attention.
