Download - AOP(annual opreating Planning)
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Auditing Operations and Completing the Audit
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Outline Auditing operations
» Miscellaneous revenue» Miscellaneous SG&A expenses
Auditing payroll Completing the audit Evaluating audit findings Post-audit responsibilities
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Relationships Between Balance Sheet and Revenue Accounts
Relationship of Revenue to Balance Sheet Accounts
Balance Sheet Item Revenue
Accounts receivable Sales
Notes receivable Interest
Securities and other investments Interest, dividends, gains on sales, share of investee’s income
Property, plant and equipment Rent, gains on sale
Intangible assets Royalties
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Miscellaneous Revenue
Mixture of minor or non-recurring revenue transactions.
Items that may be misclassified as miscellaneous revenue.» Collection on previously written-off receivables» Write-offs of old outstanding checks» Proceeds from sale of scrap» Refunds or rebates of insurance premiums» Proceeds from sales of plant assets
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Relationships Between Balance Sheet and Income Statement
AccountsRelationship of Expenses to Balance Sheet Accounts
Balance Sheet Item Expenses
Accounts and notes receivable Uncollectible accounts and notes expense
Inventories Purchases, cost of goods and payroll
Property, plant and equipment Depreciation and repairs and maintenance
Intangible assets Amortization
Accrued liabilities Commissions, fees, bonuses, product warranty expenses, etc.
Interest-bearing debt Interest
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Substantive Tests for Selling, General and Administrative
Expenses Perform analytical procedures
» Develop an expectation of the account balance» Determine the amount of difference from the expectation that
can be accepted without investigation» Compare the company’s account balance with the expected
account balance» Investigate significant deviations from the expected account
balance Obtain or prepare analyses of selected expense
accounts Obtain or prepare analyses of critical expenses in the
income tax return
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The Audit of Payroll
Payroll is often a company’s largest operating cost.
Potential payroll frauds» Fictitious employees» Overpaying employees» Continuing to pay employees after
termination
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Payroll Functions Human resources
» Authorized pay rate» Employment papers / payroll deductions
Timekeeping» Electronic clocks» Supervisor oversight of timekeeping
Payroll preparation and recordkeeping» Time cards» Payroll journals» Labor distributions» Employee earnings records
Distribution of paychecks» Paymaster» Imprest account / regular reconciliation» Proof of identity / employee signature
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Audit Program for Payroll Obtain an understanding of internal control
over payrolls Perform tests of controls as necessary
» Compare name, wage rates, and payroll deductions to HR records.
» Compare time on payroll to time reports approved by supervisors.
» Test extensions and footing of payroll.» Compare payroll total to total of checks issued.» Observe the use of time clocks.» Observe the distribution of paychecks.
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Audit Program for Payroll
Perform substantive tests of payrollSubstantive Tests Audit Objectives
Perform analytical proceduresInvestigate fluctuations in payrollObtain a summary of amounts of officers’ compensation and trace to authorization.
Existence/occurrenceCompletenessValuation
Test compensation from profit-sharing or bonus plans.Test commission earningsTest pension obligations
Valuation
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Audit Procedures Completed Near the End of Field Work
Search for unrecorded liabilities Review the minutes of meetings Perform final analytical procedures Perform procedures to identify loss
contingencies Perform the review for subsequent events Obtain the representation letter
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Loss ContingenciesDef.: A possible loss stemming from past events that will be
resolved as to existence and amount by some future event. Loss contingencies should be reflected in the financial
statement amounts when:» It is probable that a loss had been sustained before the balance
sheet date» The amount of the loss can be reasonably estimated
Loss contingencies should be disclosed in the notes to the financial statements when it is at least reasonably possible that a loss has been sustained
Loss contingencies need not be disclosed when the possibility of loss is remote
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Loss Contingencies
Types of loss contingencies» Litigation» Income tax disputes» Guarantees of indebtedness» Accounts receivable sold or assigned with recourse» Environmental issues» Commitments» General risk contingencies
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Loss Contingencies
Procedures for loss contingencies» Review minutes of BOD meetings.» Send letter of inquiry to client’s attorneys.» Send confirmation letters to financial institutions requesting
information on contingent liabilities.» Review correspondence with financial institutions for
evidence of guarantees of indebtedness, or sales or assignments of accounts receivable.
» Review reports and correspondence with regulatory agencies to identify potential fines or assessments.
» Obtain a representation letter from management indicating that all liabilities known to officers are recorded or disclosed.
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Subsequent Events
Covers period between balance sheet date to date of auditor’s report (last day of fieldwork).
Type I subsequent event» Involves conditions that existed on or before
balance sheet date– Must adjust financial statement amounts to reflect event
Type II subsequent event» Involves conditions coming into existence after the
balance sheet date.– Must disclose in footnotes if omission would cause
financial statements to be misleading.
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Subsequent Events
Examples of Type I subsequent events» Large receivable at balance sheet date
proves to be uncollectible due to subsequent bankruptcy of debtor.
» Customer check included in ending cash subsequently proves to be uncollectible.
» Settlement of pending litigation.
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Subsequent Events
» Business combination– Pro forma results often disclosed
» Substantial casualty losses» Significant changes in financial
position or financial structure
» Major personnel changes» Product line changes» Labor strikes
Examples of Type II subsequent events
Disclosure generally required
Disclosure generally not required
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Subsequent Events
Audit procedures relating to subsequent events» Review latest interim financial statements
and minutes of BOD meetings.» Inquiries to appropriate client officials.» Letter of inquiry to client’s attorneys.» Representation from management in
representation letter.
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Evaluating Audit Findings
Overall review of the audit» Evaluate sufficiency and competency of evidence in
the workpapers.» Evaluate total likely misstatement
– Known misstatements– Projected misstatements– Other estimated misstatements
» Review the sufficiency of disclosures– Disclosure checklists
» Client approval of adjusting entries and disclosures
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Required Communication With the Audit Committee
Significant deficiencies in internal control The auditors’ responsibilities for the audit and other
information included with the financial statements Significant audit adjustments made Proposed audit adjustments evaluated by management as
immaterial Disagreements with management or other difficulties The auditors’ viewpoint on an accounting or auditing matter
if management contacted other auditors about the matter A discussion of the quality of accounting principles and
estimates
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Post-Audit Considerations
Subsequent discovery of facts existing at the date of the audit report» Auditor must immediately investigate» If material, auditor should advise client to make
appropriate disclosures to anyone relying on the financial statements.
» If management refuses, auditor should contact BOD members, any regulatory agencies, and if practicable any persons relying on the statements.
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Post-Audit Considerations
Subsequent discovery of omitted procedures» Auditor should assess importance of omitted
procedures to audit opinion.» If opinion is impaired, the auditor should attempt to
perform the omitted procedures or appropriate alternative procedures.
» Auditor should consult legal counsel.