Auditor’s Process in Considering Tests of Controls and Substantive Tests of Details of Tx

Obtain an understanding of internal controls over processing of transactions Identify key controls and deficiencies and link to audit assertions and objectives Assess control risk (preliminary) for each assertion/objective Design tests of controls and substantive tests of details of tx to be performed as dual-purpose tests Assess control risk (“final”)

Obtaining an Understanding Understand the transactions, accounts, journals and ledgers involved in the cycle Transactions Sales Cash receipts Returns and Allowances Write-offs Accounts Sales A/r Cash AFDA Sales Returns and Allowances Bad Debts Expense Journals Sales Journal Cash receipts Journal Other specialized journals Ledger/Master File Accounts Receivable

Sales Transaction Timeline Activity goes here Document created goes here

Cash Receipt Transaction Payment arrives in mail with remittance advice Restrictive __________________ Compare to check to ________________ Prepare _________________ Send checks to _______________ Send ___________________to A/R Depositing cash Prepare _______________ __________ daily Send duplicate deposit slip to ________________ Recording A/R Based on _________________ Prepare voucher for total amount of ________ to A/R to send to ________________. G/L accounting reconciles daily ____________to daily ____________

Other Transactions Sales Returns the key is that any reduction to accounts receivable needs to be supported by a ________________(indicating the receipt of goods) and a _________________(indicating appropriate authorization). Bad Debts again, the key is that it should be supported by _________________________ (e.g., notice of bankruptcy or delinquency past a certain company established date) and a _______________(indicating appropriate authorization).

Assertions about Classes of Transactions and Events Occurrence Completeness Accuracy Posting and summarization Classification Cutoff timing

Testing the Occurrence Assertion (Transactions and Events) Objective Occurrence Type of evidence Audit Program Step This panel describes, in general, types of evidence that can be used to test occurrence. This panel describes, in general terms, the audit program step that an auditor might use to test occurrence This panel describes the specific type(s) of evidence that might help test occurrence related to sales transactions This panel describes the specific audit step that would be used to test the occurrence assertion for sales transactions

Testing the Occurrence Assertion (Transactions and Events) Objective Occurrence Type of evidence Audit Program Step

Testing the Occurrence Assertion (Transactions and Events) Objective Occurrence Type of evidence Audit Program Step Inspection of records or documents

Testing the Occurrence Assertion (Transactions and Events) Objective Occurrence Type of evidence Audit Program Step Inspection of records or documents Vouching—Sample from journal entries and look for documents capturing the economic event Inspection of documents to test validity of sales transactions

Testing the Occurrence Assertion (Transactions and Events) Objective Occurrence Type of evidence Audit Program Step Inspection of records or documents Vouching—Sample from journal entries and look for documents capturing the economic event Inspection of documents to test validity of sales transactions Sample from sales journal entry and look for bills of lading.

Testing the Completeness Assertion (Transactions and Events) Objective: Completeness Type of evidence Audit Program Step Inspection of records or documents Tracing—Sample from documents capturing the economic event and look for journal entries Inspection of documents to test completeness of recording of sales transactions

Testing the Accuracy Assertion (Transactions and Events) Objective: Accuracy Type of evidence Audit Program Step Inspection of records or docs, Recalculation, Reperformance Determine agreement of amounts on documents and recalculate Inspection of sales invoices and supporting documents to test accuracy

Testing the Accuracy Assertion (Transactions and Events) Objective: Posting and Summarization Type of evidence Audit Program Step Recalculation, and Reperformance Foot (total) a column of numbers and trace through system for accurate posting Recalculation and Reperformance of sales tx for accurate posting and summ.

Testing the Classification Assertion (Transactions and Events) Objective: Classification Type of evidence Audit Program Step Inspection of records or documents Review significant contracts for application of revenue recognition policy, review terms. Inspection of records or documents for proper classification of sales transactions

Testing the Cutoff Assertion (Transactions and Events) Objective: Timing Type of evidence Audit program step Inspection of records or documents Determine the last document processed during the accounting period. Sample docs before and after and trace to journals for proper timing and special arrangements Inspection of records or documents for testing cutoff