SU 7: Internal Control -- Purchases, Payroll, and Other Cycles Flashcards
Responsible Party, M or A - Obtain Understanding of internal control over payroll transactions
A, Auditor. The auditor is responsible for obtaining an understanding of internal control over payroll transaction
Responsible Party, M or A -Authorize the payroll
M, Management. Management is responsible for authorizing transactions
Responsible Party, M or A -Calculate proper amount of payroll
M, Management. Management is responsible for calculating the proper amount for the payroll
Responsible Party, M or A - Safeguard Assets associated with payment of payroll
M, Management. Management is responsible for safeguarding assets
Responsible Party, M or A - Determine that the controls described in the payroll procedures manual have been implemented
A, Auditor. The auditor is responsible for determining that the controls described in the payroll procedures manual have been implemented
Responsible Party, M or A - Assess risk of material misstatement related to payroll
A, Auditor. The auditor is responsible for assessing RMM of payroll.
Responsible Party, M or A - Distribute the payroll
M, Management. Management is responsible for distributing payroll
Responsible Party, M or A - Account for payroll transactions
M, Management. Management is responsible for accounting for payroll transactions.
Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Human Resources
A, Authorization. The human resource subunit is responsible for authorization
Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Payroll
B, Recording. The payroll subunit is responsible for recording.
Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Shop Supervisor
A, Authorization. The shops subunit is responsible for approving time tickets
Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Cost Accounting
B, Recording. The cost accounting subunit is responsible for recording
Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Accounts Payable
B, Recording. A/R is responsible for recording
Payroll Duties: Authorization A, Recording R, Asset Custody AC. 1. Appropriate Responsibility - Cash Disbursements
C, Asset Custody. The cash disbursements subunit is responsible for cash disbursement
An EDI system is often used to support the production system of_____
I, just-in-time. Just-in-time is a delivery concept where goods or services are delivered only as needed. It is often supported by an EDI system
An advantage of EDI included_____
A, reduction of errors. EDI reduces data entry and typically results in reduction of errors
One piece of evidence that the auditor should inspect to assure proper agreements with trading partners is_____
G, written contract. The written contract provides the auditor with an understanding of the duties and responsibilities of the parties
EDI often uses______ as a third party service provider
D, Value-added-network. An entity using EDI often uses a VAN as a third-party service provider, and controls are provided by the VAN may be critical
Auditing an EDI application requires the consideration of ______
F, an audit trail. The audit trail allows the auditor to trace a transaction from initiation to disposition
______ provides information about users who have accessed the EDI system
J, Activity log. An activity log provides information about a) users who have accessed the system b) the files accessed c) the processes accomplished d) the time of access e) the amount of time the processing required
EDI eliminates _______ both internal and external.
H, paper documents. The use of EDI eliminates the need for paper documents, as transactions are digitally processed.
EDI messages should be_____ to insure privacy
E, encrypted. To ensure privacy, messages should be encrypted before they are transmitted
Rules on how each “package of information” is structured is referred to as
C, transmission protocols. Transmission protocols are rules on how each envelope or package of information is structured and processed by the communications devices so that messages are kept seperate.
An open environment would be created when EDI is conducted on_____
B, the Internet. EDI can use private networks or be conducted on the Internet.
Personnel Responsibility - Inventory Control
Provides authorization for the purchase of goods and performs an accountability function
Personnel Responsibility - Purchasing Agent
issues purchase orders for required goods and negotiate terms
Personnel Responsibility - Receiving
accepts goods for approved purchases, counts and inspects goods, and prepares receiving reports
Personnel Responsibility - AP
(vouchers payable) assembles the proper documentation to support payment voucher (and disbursement) and records AP
Personnel Responsibility - Cash Disbursements
evaluates the documentation to support a payment voucher and signs and mails the check. Department cancels the documentation to prevent duplicate payment
Personnel Responsibility - GL
maintains AP control account and other related GL accounts.
AP - R&O
Management asserts that the company is obligated to pay accounts payable
AP R&O - Testing
• Compare amounts showing as payable to vendors’ invoices, receiving reports, and purchase
orders to verify that payables are for goods ordered and received
• Examine vendors’ invoices, receiving reports, and purchase orders
AP A&V - Testing
• Confirm amounts reported as payables with vendors
• Compare amounts reported as payables to vendors’ invoices, receiving reports, and
purchase orders
• Compare amount on schedule of accounts payable to amount reported on financial
statements
• Recalculate totals of accounts payable schedule
• Apply analytical procedures to determine if relationships between accounts payable and
purchases, inventory, cost of goods sold, and other items are reasonable
AP - A&V
Management asserts that accounts payable is reported at the amount that the company
is obligated to pay
AP - Cutoff and Completeness
Management asserts that all amounts owed to vendors for purchases on account are included
in accounts payable and that all transactions related to accounts payable and purchases are
reported in the appropriate period
AP C&C - Testing
• Confirm with vendors that balances are complete
• Confirm with vendors with zero balances to determine if amounts are owed
• Compare receiving reports to vendors’ invoices and amounts recorded in accounts payable
• Examine payments made shortly after year-end to determine if goods or services were
received before year-end
AP - E or O
Management asserts that the obligation to pay accounts payable exists and that all purchase
transactions did occur
AP E or O - Testing
• Confirm accounts payable with vendors
• Compare amounts reported in accounts payable to vendors’ invoices, receiving reports,
and purchase orders
• Examine payments after year-end to verify obligation existing at year-end
AP - P&D
Management asserts that amounts reported as accounts payable are properly classified
on the financial statements and any pertinent information is adequately disclosed
AP P&D - Testing
• Examine financial statements and disclosures to make certain that accounts receivable is
properly presented and disclosed
• Ascertain whether payables to related parties are identified for disclosure purposes
Auditing Investments and Investment Income
1) Verify account’s beginning balance from prior-year information
2) Test transactions occurring during the current period through the use of substantive
procedures
3) Verify resulting ending balance in account
4) Determine if ending balance is in need of adjustment due to impairment, change in market
value, or other factor
5) Perform other procedures for management assertions not already addressed
1) Verify account’s beginning balance from prior-year information - Testing Invest
• Compare beginning balance in property, plant, and equipment accounts to amounts
reported on previous period’s balance sheet (V)
2) Test transactions occurring during the current period through the use of substantive
procedures - Testing Invest
• Inquire of management about acquisitions and disposals of property, plant, and equipment
during period (R & O, C, E or O)
• Inquire of management about methods, lives, and salvage values used to calculate
depreciation (V)
• Confirm purchases or sales where documents are not in evidence (R & O, C, E or O)
• Compare amount recorded as cost of property, plant, and equipment to purchase documents
and cancelled checks (V)
• Recalculate costs to be capitalized for delivery, installation, or preparation of property,
plant, and equipment for use (V, C)
3) Verify resulting ending balance in account - Testing Invest
• Recalculate ending balance based on beginning balance and transactions during the
period (V)
4) Determine if ending balance is in need of adjustment due to impairment, change in market
value, or other factor - Testing Invest
• Inquire of management if any long-term investments or investments in marketable
securities classified as available for sale have experienced a nontemporary decline in
value (V, P & D)
• Confirm investments held by brokers or other outside parties to verify they are still in
existence and owned by the company (R & O, C, E or O)
• Compare carrying value of investments to market values to verify that investments are
carried at lower of cost or market when appropriate (V, P & D)
• Examine stock certificates, bonds, partnership agreements, or joint venture agreements
to verify that investments exist (E or O)
5) Perform other procedures for management assertions not already addressed
• Inquire of management as to its intention for holding investments to verify classification
(P & D)
• Examine financial statements and disclosures to make certain that investments are
properly presented and disclosed (P & D)
Auditing - PP&E
1) Verify account’s beginning balance from prior-year information
2) Test transactions occurring during the current period through the use of substantive
procedures
3) Verify resulting ending balance in account
4) Determine if ending balance is in need of adjustment due to impairment, change in market
value, or other factor
5) Perform other procedures for management assertions not already addressed
1) Verify account’s beginning balance from prior-year information - Testing PPE
• Compare beginning balance in property, plant, and equipment accounts to amounts
reported on previous period’s balance sheet (V)
2) Test transactions occurring during the current period through the use of substantive
procedures - Testing PPE
• Inquire of management about acquisitions and disposals of property, plant, and equipment
during period (R & O, C, E or O)
• Inquire of management about methods, lives, and salvage values used to calculate
depreciation (V)
• Confirm purchases or sales where documents are not in evidence (R & O, C, E or O)
• Compare amount recorded as cost of property, plant, and equipment to purchase documents
and cancelled checks (V)
• Recalculate costs to be capitalized for delivery, installation, or preparation of property,
plant, and equipment for use (V, C)
3) Verify resulting ending balance in account - Testing PPE
• Recalculate ending balance based on beginning balance and transactions during the
period (V)
4) Determine if ending balance is in need of adjustment due to impairment, change in market
value, or other factor - Testing PPE
• Inquire of management if any impairments have occurred affecting property, plant, and
equipment (V, P & D)
• Examine property, plant, and equipment to verify that they exist (E or O)
5) Perform other procedures for management assertions not already addressed - Testing PPE
• Examine financial statements and disclosures to make certain that property, plant, and
equipment is properly presented and disclosed, that methods used for determining
depreciation are disclosed, and that amount of depreciation recognized for the period
is disclosed (P & D)
Auditing LT Debt & Int Exp
1) Verify account’s beginning balance from prior-year information
2) Test transactions occurring during the current period through the use of substantive
procedures
3) Verify resulting ending balance in account
4) Determine if ending balance is in need of adjustment due to impairment, change in market
value, or other factor
5) Perform other procedures for management assertions not already addressed
1) Verify account’s beginning balance from prior-year information - Test LT debt and int exp
• Compare beginning balance in long-term debt accounts to amounts reported on previous
period’s balance sheet (V)
2) Test transactions occurring during the current period through the use of substantive
procedures - Test LT debt and int exp
• Inquire of management about issuance and retirements of long-term debt during period
(R & O, C, E or O)
• Compare amounts reported as interest expense to amounts disbursed (V, E or O)
• Compare amount recorded as proceeds from issuance to confirmations from underwriters
and amounts deposited (V, E or O)
• Compare amounts reported in cash receipts journal to amounts recorded as initial carrying
value of long-term debt (V, C)
• Recalculate amortization of discount or premium and verify proper recording (V)
• Recalculate gains and losses on early retirements (A & V)
• Apply analytical procedures to verify reasonableness of amount reported as interest
expense (V, C)
3) Verify resulting ending balance in account - Test LT debt and int exp
• Recalculate ending balance based on beginning balance and transactions during the
period (V)
4) Determine if ending balance is in need of adjustment due to impairment, change in market
value, or other factor - Test LT debt and int exp
• Confirm obligations with trustees or other outside parties to verify there are no unrecorded
liabilities (R & O, C, E or O)
• Examine bond agreements and long-term notes to verify that long-term liabilities exist
(E or O)
• Examine documents relating to renewal or refinancing of debt after balance date to
support classification as long-term (P & D)
5) Perform other procedures for management assertions not already addressed - Test LT debt and int exp
• Inquire of management as to its intention for retiring debt prior to maturity (P & D)
• Examine financial statements and disclosures to make certain that long-term debt is
properly presented and disclosed and that gains and losses on early retirement are
reported as extraordinary items (P & D)
• Examine documents to verify that company is complying with debt covenants (P & D)
Auditing Equity
1) Verify account’s beginning balance from prior-year information
2) Test transactions occurring during the current period through the use of substantive
procedures
3) Verify resulting ending balance in account
4) Determine if ending balance is in need of adjustment due to impairment, change in market
value, or other factor
5) Perform other procedures for management assertions not already addressed
1) Verify account’s beginning balance from prior-year information - Equity Testing
• Compare beginning balance in long-term debt accounts to amounts reported on previous
period’s balance sheet (V)
2) Test transactions occurring during the current period through the use of substantive
procedures - Equity Testing
• Inquire of management about issuance and retirements of equity securities during
period (R & O, C, E or O)
• Compare amounts reported as dividends to amounts disbursed (V, E or O)
• Compare amount recorded as proceeds from issuance to confirmations from underwriters
and deposits (V, E or O)
• Compare amounts reported in cash receipts journal to amounts recorded as proceeds
from issuance of debt securities (V, C)
• Verify changes in Accumulated Other Comprehensive Income amounts (V, P & D)
• Examine minutes of directors meetings for indications of authorization of dividends and
issuances and retirements of equity securities (C)
3) Verify resulting ending balance in account - Equity Testing
• Recalculate ending balance based on beginning balance and transactions during the
period (V)
5) Perform other procedures for management assertions not already addressed - Equity Testing
• Inquire of management as to its intention for retiring debt prior to maturity (P & D)
• Examine financial statements and disclosures to make certain that long-term debt is
properly presented and disclosed and that gains and losses on early retirement are
reported as extraordinary items (P & D)
• Examine employee stock purchase plans to analyze terms (P & D)
• Examine appropriate laws to determine if there are restrictions on retained earnings
(P & D)
• Examine documents to verify that company is complying with debt covenants
Purchase Controls - Frequently Missing
(1) Prenumbered purchase orders used
(2) Separate purchasing department makes purchases
(3) Purchasing personnel independent of receiving and recordkeeping
(4) Suppliers’ monthly statements compared with recorded payables
Accounts Payable - Controls Frequently Missing
(1) Accounts payable personnel independent of purchasing, receiving, and disbursements
(2) Clerical accuracy of vendors’ invoices tested
(3) Purchase order, receiving report, and vendor’s invoice matched
Cash Disbursements - Controls Frequently Missing
(1) Prenumbered checks with a mechanical check protector used
(2) Two signatures on large check amounts
(3) Checks signed only with appropriate support (purchase order, receiving report, vendor’s
invoice). Treasurer signs checks and mails them
(4) Support for checks canceled after payment
(5) Voided checks mutilated, retained, and accounted for
(6) Bank reconciliations prepared by individual independent of cash disbursements
recordkeeping
(7) Physical control of unused checks
Prior to sending or receiving EDI messages a company should? Trading partner Agreement
Enter into a EDI Trading partner Agreement
Parties should understand:
1.) their responsibilities
2.) Messages each will initiate
3.) How they will interpret messages
4.) means of verification of complete messages
5.) moment when the contract for parties is effective
6.) level of security required.
