auditing principles3
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Auditing Principles
Jose Cintron, MBA-CPC jose@mba4help.com
Http://josecintron.comhttp://mba4help.com
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Analytical Procedures
Auditors can evaluate financial statement accounts by studying and comparing relationships among financial and nonfinancial data. The methods of study and comparison are known as analytical procedures.
Auditors are required to use them when planning the audit and when performing the final review of the financial statements before the audit report is issued.
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Analytical Procedures
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Audit Documentation
Audit documentation provides the auditors' record of compliance with generally accepted auditing standards. The documentation (usually in the form of either electronic files or hard copy workpapers) should contain support for the decisions regarding planning and performing the audit, procedures performed, evidence obtained, and conclusions reached.
Even though the auditors legally own the audit documentation, professional ethics require that the files not be transferred without consent of the client because of the confidential information recorded in them.
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Substantive procedures during the audit of cash.
THE AUDIT OF CASH
Describe the types of substantive procedures that are conducted during the audit of cash.The first procedure in an audit of cash is to obtain the entity-prepared bank reconciliations and audit them, focusing on some of the reconciling items discussed in the preceding section. In a well-functioning control environment, auditors should never have to perform the company's internal control activity of preparing the bank reconciliation.
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AUDIT EVIDENCE USED TO TEST CASH
Cash Receipts Journal
The cash receipts journal contains all of the detailed entries for all receipts of cash by the entity (debits to the cash account), including cash deposits. It contains the population of credit entries that should be reflected in the credits to accounts receivable for customer payments. It also contains the adjusting and correcting entries that can result from the bank account reconciliation.
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AUDIT EVIDENCE USED TO TEST CASH
Cash Disbursements Journal
The cash disbursements journal is the company's checkbook. It contains all detailed entries for checks written during the period being audited (cash disbursements). Because all cash disbursements (other than those from a petty cash account) should be made via check or electronic transfer, the cash disbursements journal contains the cash credit entries that provide a population for testing cash disbursements.
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AUDIT EVIDENCE USED TO TEST CASH
Bank Reconciliations
The company's bank reconciliation is the primary document used to test the cash balance in the financial statements. The amount of cash in the bank is almost always different from the amount in the general ledger (financial statements), and the reconciliation is designed to explain the difference between these two amounts. In addition, a bank account reconciliation that compares the book cash balance to the bank cash balance provides management with an opportunity to monitor the separation of duties for cash receipts and cash disbursements as well.
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Bank Reconciliation
When auditing the bank reconciliation, the auditor should begin by confirming the account balance listed as the “balance per bank” on the top of the bank reconciliation for each bank account from each bank that the client utilizes in the business. A confirmation letter is required to be sent by the auditor and received in the mail directly back from each bank at the offices of the public accounting firm.
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Balance in the bank
Once the “balance in the bank” has been confirmed and cross-referenced to the balance in the bank reconciliation, the following additional procedures are typically used in auditing the bank reconciliation:
Verify the mathematical accuracy of the reconciliation, including the listing of outstanding checks and deposits in transit.
Examine reconciling items to ensure they are appropriately classified (e.g., that they were legitimate outstanding checks that were written but not paid by the bank at the statement date).
Agree the book balance to the trial balance, which has been traced to the general ledger.
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Characteristic signs of check-kiting schemes
Frequent deposits and checks in rounded and the same amounts.Frequent deposits with checks written on the same (other) banks.Short time lags between deposits and withdrawals.Frequent ATM account balance inquiries.Large periodic balances in individual accounts with no apparent business explanation.Low average balance compared to high level of deposits.Many checks made payable to other banks.Banks' willingness to pay against uncollected funds.“Cash” withdrawals with deposit checks drawn on another bank.Checks drawn on foreign banks with lax banking laws and regulations
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AUDIT EVIDENCE USED TO TEST CASH
Canceled Checks
Describes the information found on a typical check. Whether the auditor examines the actual check or a scanned image obtained from the bank, knowledge of the codes for Federal Reserve districts, offices, states, and bank identification numbers could enable an auditor to spot a crude check forgery. A forger's mistakes with the optional identification printing or the magnetic check number might provide a tip-off. If the amount of a check is altered after it has cleared the bank, the alteration would be noted by comparing the magnetic imprint of the amount paid to the amount written on the check face.
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The reverse side of a check carries the endorsement(s) of the payees and holders in due course; the date and the name and routing number of the bank where the check was deposited; and the date clearing.
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AUDIT EVIDENCE USED TO TEST CASH
Individuals engaging in fraudulent schemes involving cash often try to conceal their crimes by removing canceled checks they made payable to themselves or endorsed on the back with their own names. Missing canceled checks are a red flag. However, many banks no longer return the canceled checks to their customers. Instead, they send photocopies of the front of the checks. While this information is sufficient for reconciling an account, it does not provide the information that may assist a company or auditor in detecting or investigating possible frauds.
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AUDIT EVIDENCE USED TO TEST CASH
Bank Statements
Most of the information shown on the bank statement is self-explanatory. However, auditors should not overlook the usefulness of some of the information: the number and dollar amount of deposits and checks can be compared to the detail data on the bank statement; the account holder's federal business identification number is on the statement, and this can be used in other databases; and the statement itself can be studied for alterations.
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Test of control cash disbursement
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AUDIT APPROACH-REVENUE AND COLLECTION CYCLE
Approach for using the audit risk model to plan an engagement:Set audit risk at desired levels (normally, low).
1.Assess risk of material misstatement, which incorporates inherent risk based on the nature of the account balance or class of transactions and control risk based on gaining an understanding of internal control.
2.Remember that audit standard 240 requires consideration of revenue as a fraud risk and documentation if the auditors conclude that revenue is not a fraud risk.
3.Determine detection risk based on the level of audit risk and risk of material misstatement.
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Assertions for sales and receivables with their relative risks.
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Relative Assertion Risks for Revenue and Receivables
After considering the inherent risk associated with each assertion, the auditors identify important control activities implemented by the client for each relevant assertion. Once the control activities have been determined to be in place through inquiry, observation, and walkthrough, auditors estimate the control risk. Based on the combined inherent and control risk assessments (referred to as the risk of material misstatement), auditors calculate detection risk and determine the nature, timing, and extent of evidence to gather by substantive procedures.
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Relative Assertion Risks for Revenue and Receivables
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Revenue Recognition
An entity's revenue-earning activities involve delivering or producing goods, rendering services, or performing other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues
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Revenue Recognition
Similarly, the SEC believes that revenue generally is realized or realizable and earned when all of the following criteria are met:
Persuasive evidence of an arrangement exists.Delivery has occurred or services have been rendered.The seller's price to the buyer is fixed or determinable.Collectability is reasonably ensured.
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Collectability of Accounts Receivable
Collectability of Accounts Receivable
In most companies, a portion of accounts receivable will not be paid. GAAP requires the client to provide an estimate of the amount that will likely be uncollectable and provide an allowance for this amount. Estimation of the allowance for doubtful accounts can be subjective and difficult for the client and the auditor. This is particularly true when the client has changed products or its customer base, so there is little experience on which to base estimates. Changing economic conditions also make it difficult to estimate collectability.
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REVENUE AND COLLECTION CYCLE
The basic activities in the revenue and collection cycle are
(1) receiving and processing customer orders, including credit approval; (2) delivering goods and services to customers;
(3) billing customers and accounting for accounts receivable; (4) collecting and depositing cash received from customers.
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Delivering Goods and Services to Customers
Physical custody of inventory goods starts in the storeroom or warehouse where inventory is kept. Custody is transferred to the shipping department upon the authorization of the shipping order that permits the inventory clerk to release goods to the shipping department. Proper authorization is important: Employees performing each of these steps should sign transfer documents so they are held accountable. This control procedure prevents employees from misappropriating the goods or shipping product to friends without billing them. A bill of lading is a form that the carrier signs to verify the goods are shipped. A packing slip, which describes the goods being shipped, is often included with the shipment.
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Billing Customers Accounts Receivable
When a delivery or shipment is complete, the system finishes the transaction by filing a shipment record and preparing a final invoice for the customer (which is recorded as sales revenue and accounts receivable). A sales invoice is the bill sent to the customer that indicates the amount due. Any person who has the power to enter or alter these transactions or to change the invoice before it is mailed to the customer should not have any authorization, custody, or recording responsibilities.
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Plan de Auditoria – Ciclo de Ventas
Costo de Ventas
Otorgamiento de Crédito
Orden de Compra - Cliente
Facturación
Descuentos
Despacho de mercancía
Cuentas por Cobrar
Cobranzas
Ingreso del dinero
Ajustes a Facturas
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Asientos Contables Involucrados
Ventas
Costo de Ventas
Caja
Devoluciones o Descuentos
Provisión / Ctas.
Incobrables
Comisiones en Ventas
Pasivo / Impuestos
sobre Ventas
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Documentos
Orden de Compra
Orden de Venta
Guía de Embarque Factura Notas de
CréditoAvisos de
CobroRecibos de Caja
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Bases de Datos
Data
Lista de Clientes
Lista de Precios
Ordenes Pendientes
Estadísticas de Ventas
Diario de Ventas
E/C Bancarios
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Enlace con otros Ciclos
Ventas
Compras
Inventario
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