1 part 3 audit applications. 2 chapter 4-5-6 pre-engagement arrangements understand the client`s...

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Part 3

Audit Applications

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CHAPTER 4-5-6

Pre-engagement

arrangements

Understand the

client`s business

Obtain the

financial statements

Preliminary analytical procedures

Preliminary materiality decisions

Preliminary risk

assessment

Audit

programs

Audit planning tools

3

Obtain an understanding of the client’s internal control

Control environment

Accounting system

Control procedures

Document the environment

Document the system

Document the procedures

Assess control risk (preliminary)

Assess control risk below the maximumPerform test of

control procedures Audit programs

Document the control risk assessment

Not perform

- +

Preliminary risk assessment

Internal Control Evaluation and Control Risk Assessment

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Nature, time, extent

Audit programs

5Slide B6

消费者供应商

产成品

（ 销 售 和 应 收 账 款 循环）

( 存 货 循环 )

( 生 产 循环 )

( 工资循环 )

（ 采 购 和 应付账款循环 )

工厂、车间 原材料劳动力

常见的业务循环

融资与投资循环

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划分业务循环

货币资金 投 资 筹 资

固定资产 采 购 工 资

存 货

生 产

销 售

Revenue and Collection Cycle

Acquisition and Expenditure Cycle Including Audit of

Accounts Payable and Inventory Existence

Production and Payroll Cycle

Including Audit of Inventory Valuation and Capital Assets

Finance and Investment Cycle

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CHAPTER 9 Revenue and Collection Cycle

• 1. Typical Activities

• 2.Audit Evidence in Management Reports and Data Files

• 3.Control Risk Assessment • 4.Audit Cases: Substantive Audit Procedures(4)

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CHAPTER 9 Revenue and Collection Cycle

• 5.Special Note:

• The Existence Assertion

• Using Confirmations

• Audit of Bank Reconciliation with Attention to Lapping and Kiting

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1. Typical Activities（ 1 ）接受和处理顾客订单，包括批准信

用；（ 2 ）向顾客提供货物和劳务；（ 3 ）开具账单给顾客并登记应收账款；（ 4 ）收集并存放向顾客收取的现金；（ 5 ）调整银行对账单。

• P350 ， E9-1

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CreditGranting

STARTHERE

Cash reconciliation

Cash receiptsrecording

Accountsreceivablerecording

Physicalcustody

Sales authorization

CustomerOrders

WarehousingShipping and

Delivery

Bill Customers

Collections

Customerpayments

(cash receipts)

Deposit cashin bank

Cashcustody

Monthlystatements

Salesinvoice

Tocustomer

Tocustomer

Shippingdocuments

Cash receipts

transitionfile

Accountsreceivable

masterfile

Shipping document

transactionfile

Tocustomer

Perpetualinventoryrecords

Cashbalances(account)

file

Shippingdocuments(copy)

Customerorder

Sales invoice(copy)

Bankstatements

Shippingdocuments

(copy)

Customer’spurchase orders,

contracts

Credit files,reports

Accounts/Records

Cash in bank

Cash receipts

Accounts receivable

Allowance for doubtful

accounts, write-offs

Bad debt expense

sales revenue

Sales returns, allowances,

discounts

Perpetual inventory records,

shipping records

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Account/Records

• Cash in bank

• Cash receipts

• accounts receivable

• Allowance for doubtful accounts,write-offs

• Bad debt expense

• Sales revenue

• Sales returns, allowances, discounts

• Perpetual inventory records, shipping records

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Segregation of responsibility

• authorization

• Custody recording

• reconciliation

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Segregation of responsibility

• A.authorization of sales and accounts receivable

• Custody, recording, reconciliation

• B. Custody of inventory and cash

• .authorization , recording, reconciliation

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Segregation of responsibility

• C.recording(accounting)• .authorization, Custody, reconciliation

• D. Reconciliation• .authorization, Custody, recording

• combination of 2 of more

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（ 1 ） SALES AND ACCOUNTS RECEIVABLE AUTHORIZATION

• Enter the order entry in the computer terminal

• computer system perform automatic authorization procedures(be imbedded in)

• access to the master files (changes) must be limited

• pending order, packing slip ,updates the inventory master file, should be numbered in a numerical sequence.

• The price list master file.

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Inventorymaster

(subsidiary)

A/Rmaster

(subsidiary)

Creditcheckfiles

Price listmaster

file

Pendingorder

master

Backorder

master

Salesdetail

(journal)

Generalledgermaster

On-line sales processing

•Authorized terminal ID•Sales order screen•Automatic credit check•Inventory-on-hand check•Immediate update all databases•On-line status query

•Automatic transfer from pending order to A/R and G/L master files

Terminallogs

Order entry

Customerpurchase order

Sales order

Packingslip

Stockroom

Packingslip

ShippingTerminal

logs

Creditmanagement

Marketingmanagement

Back orderreportInvoices Daily sales

report Sales analysis A/R listingand aging

Monthlycustomer

statements

1 2

3

4

5

6

7

8

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Custody

• Transfer, Packing slip• Storekeepers or the shipping dep change th

e quantity(combine with a recording function)

• “custody” of accounts receivable records to alter the records(combine with authorization and recording responsibility)

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recording

• System:(1)produce a bill of lading shipping documen

t

(2)remove the order from the pending order master file

(3)produce a sales invoice

• authorization,custody, reconcilation

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Inventorymaster

(subsidiary)

A/Rmaster

(subsidiary)

Creditcheckfiles

Price listmaster

file

Pendingorder

master

Backorder

master

Salesdetail

(journal)

Generalledgermaster

On-line sales processing

•Authorized terminal ID•Sales order screen•Automatic credit check•Inventory-on-hand check•Immediate update all databases•On-line status query

•Automatic transfer from pending order to A/R and G/L master files

Terminallogs

Order entry

Customerpurchase order

Sales order

Packingslip

Stockroom

Packingslip

Lading Shipping

Terminallogs

Creditmanagement

Marketingmanagement

Back orderreportInvoices Daily sales

report Sales analysis A/R listingand aging

Monthlycustomer

statements

1

2

3 4

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periodic reconciliation

• The sum of customers` unpaid balances with account receivable control account total.

• Age trial balance

• confirmation

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(2)Cash receipts and cash balances authorization

• Custody

• recording

• periodic reconciliation

• (deposit slip 2 to cash remittance lists 3)

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STARTCash received

Prepare cashremittance

list

ApprovediscountsPreparedeposit.

Postto customer

accounts

Prepare cashreceipts journal.Post to general

ledger..

C.R.L. 3

C.R.L. 2Cash 1remittancelist

Money

C.R.L. 3

Deposit sip 2

Deposit slip 1

Approvalof discounts notedon remittance list.

1 2

All cash receipts are deposited.

C.R.L. 3

Deposit sip 2

Monthly bankstatement

Cash receiptsjournal

Individualcustomeraccounts

subsidiary

Accountsreceivable

control

Cashaccounts

Cash 2remittancelist

Cash 1remittancelist

Date Date

Tobank

Preparemonthly bankreconciliation.

2 1

Accounts receivable General ledger

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2.Audit Evidence in Management Reports and Data Files

• Pending order master file

• credit check files

• price list master file

• sales detail file(sales journal)

• sale analysis reports(employee ,region)

• accounts receivable aged trail balance

• cash receipts journal

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3.Control Risk Assessment

It governs the nature,timing, and extent

of substantive audit procedures

that will be applied in the audit of account balance.

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Account balancep356

Cash in bank

Accounts receivable

Allowance for doubtful accounts

Bad debt expense

sales revenue

Sales returns, allowances,discounts

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3.Control Risk Assessment

• (1)General control considerations

• (2)detail test of controls

• (3)summary: Control Risk Assessment

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(1)General control considerations

• control

• Segregation of responsibilities. P356

• fidelity bond (persons handle cash)

• detail control checking procedures(1-8)

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Segregation of responsibility

• authorization

• Custody recording

• reconciliation

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detail control checking procedures

(1)no sales order should be entered without a customer order.

(2)a credit-check code or manual signature should be recorded by an authorized means.

(3)access to inventory and the shipping area should be restricted to authorized persons.

(4)access to billing terminals and blank invoice forms should be restricted to authorized persons.

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detail control checking procedures

(5)accountants should be under orders to record sales and accounts receivable.

(6)customer invoices should be compared with bills of lading and customer orders.

(7)pending order files should be reviewed in a timely fashion to avoid failure to bill and record shipments.

(8)bank statements should be reconciled in detail monthly.

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THE WAY TO OBTAIN information about the control

• internal control questionnaire

(appendix 9A, p397)

• walk-through or sample of one

With enquiry

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(2)detail test of controls audit procedures

• Objective:E 9-4, P358(1)identification of the data population from

which a sample of items will be selected for audit.

(2)an expression of the action that will be taken to produce relevant evidence.

Action:vouching, tracing, observing, scanning, recalculating.

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two direction(E9-5)

sample

sampleA-3-b

A-1-b

Vouch to shipping document evidence

Trace shipping evidence to invoice

Shipping document file

Sales invoice file

•E9-6

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(3)summary: Control Risk Assessment

Control risk is low: be limited in cost-saving ways

Control risk is high:be designed to lower the risk of failing to detect

material error in the account balance.

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4. Substantive Audit Procedures

• The Audit Procedures to gather evidence on account balance are called “Substantive Procedures ”.

• Its goal is to detect evidence of errors, irregularities, and frauds if any exist in the accounts as material overstatements or understatements of the account balances.

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4. Substantive Audit Procedures

• some amount of Substantive Audit Procedures ought to follow the assessment of control risk.

• Auditor should not place total reliance on controls to the exclusion of other procedure.

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4. Substantive Audit Procedures

• Substantive Audit Procedures

differ from

test of controls audit procedure

In their basic purpose.

• Dual-purpose procedure.

• Detail substantive procedure, appendix9B

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The structure of casette

• Problem

• method

• paper trail(a set of telltale signs)

• amount

• audit objective

• control

• test of control

• audit of balances

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Casette 9.1 the canny cashier

D.Bakel, the assistant controller of SEI.

SEI, Maintained accounts receivable for school districts in the region.

Customers received credit by using their own credit cards.

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Method: D.Bakel` DUTIES

• (1)company cashier--received all the incoming mail payments, the credit card account, t

he cash and cheques.• (2)prepared the bank deposit(deliver)• (3)prepared a remittance worksheet• (4)reconciled the bank statement.

• No one else review deposits or the bank statement.

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1. Bank Account (SEC)

Bank Account

(SEI)

Sports Equipments

(SEI)

schools

2. Cash,chequesschool district payment

SEIreceipts

interests

3.fun

ds

paymentsAdd 2% discount

discounts

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Open a bank account (SEC)

(1)deposit cash,cheques(SEI) in the SEC account.

• Earning the interest.

(2)wrote SEC cheques to SEI to replace the “borrowed” funds.

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Stole payment

• (1)deposit payment to SEC

• (2) deposit SEC cheques in SEI, giving the credit

• (3)approved an additional 2% discount

• SEC paid in less( 2%)

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LAPPING or teeming and lading截留挪用，早收晚解

• 采用递延记录现金收入的方法，掩盖库存现金的短缺。

• 例如，将一个客户交来的现金，记录为客户的应付账款，然后再将第二个客户交来的现金，记入第一个客户账户内（冲减应付账款）。

• 依次循环碾转挪用，直到他归还这笔现金为止。

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amount

• 6 years

(1)average balance: $150 000

Interest: $67 500

(2)extra discount: $120 000

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Audit approach

• Objective• Control: segregation, supervision

• test of control:validity,completeness

Audit balance:

control risk of incorrect accounting

Time: year-end date

Nature: positive confirmation

Extent: sample, all 72 school district accounts• p364

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• • (1)The Existence Assertion (2)Using Confirmations

• (3)Audit of Bank Reconciliation with Attention to Lapping and Kiting

5.Special Note

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(1)The Existence Assertion • Existence and right assertion

1.recalculation

(prepaid expenses, interest, rent, bank reconciliation)

2.physical observation

(autos,land,building,petty cash, undeposited receipts)

3.confirmation

form

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4.Verbal enquiry

5.examination of documents(vouching)

6.scanning

7.analytical procedures

Audit procedures

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(2)Using Confirmations • Bank confirmation,372;

• aged trial balance,p373

• Positive confirmation, p374

• negative confirmation, p375

• response rate

detection rate= the number of exceptions reported to auditors/the number of account errors intentionally reported to customers)

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(3) Audit of Bank Reconciliations with Attention to Lapping and Kit

ing• Accounts receivable lapping:

credit given to customers for whom no payments were received on the day in question

Cheques listed on Customer creditsA sample of Deposit slips

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收款人B

收款人开户银行 X

付款人A

付款人开户银行 Y

支票

支票存款单2

结算单3

结算单 2

支票1

2

cheque kiting

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1

收款人银行基于支票有效的假定，立即将收入支票金额，加入收款人银行账户的余额。

Cheque kiting

成立的结算方式

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Cheque kiting空头支票，移挪补空

• 1.using a hot cheque,depositing money from one bank to another.

• 2. The depository bank does not know the cheque is on insufficient funds.

• 3.the deficiency is covered by another hot cheque from another bank account.

• 4.customer uses the time required for cheques to clear to obtain an unauthorized loan.

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Auditing assignments(CH9)

• 1.prepare chapter 10.• 2. 下列各题，每人均做，书面完成 。• (1)9.1, 9.6, 9.8, 9.9, 9.11, 9.22, 9.27 ,9.28• (2)9.34--9.49• (3)9.53, 9.60• 3.Casette 9.2, 9.3, 9.4, finished by team1 ， 2 ，

3 ， and make a presentation in the class

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