1. Auditing Operations and Completing the Audit1

2. Outline Auditing operations Auditing payroll Completing the audit
Miscellaneous revenue
Miscellaneous SG&A expenses
Auditing payroll
Completing the audit
Evaluating audit findings
Post-audit responsibilities

3. 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 2 2

4. 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

5. Relationships Between Balance Sheet and Income Statement Accounts
Relationship 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

6. 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 3 3

7. 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

8. Payroll Functions Human resources Timekeeping
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

9. 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.

10. Audit Program for Payroll
Perform substantive tests of payroll
Substantive Tests
Audit Objectives
Perform analytical procedures
Investigate fluctuations in payroll
Obtain a summary of amounts of officers’ compensation and trace to authorization.
Existence/occurrence
Completeness
Valuation
Test compensation from profit-sharing or bonus plans.
Test commission earnings
Test pension obligations

11. 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 4 4

12. Loss Contingencies
Def.: 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 5 5

13. 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

14. 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.

15. 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.

16. 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.

17. Subsequent Events Examples of Type II 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
Disclosure generally required
Disclosure generally not required

18. 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.

19. 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

20. 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 6 6

21. 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.

22. 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.