1. Dr. Raymond N. Johnson, CPA MODERN AUDITING 7th Edition Developed by: Raymond N. Johnson Portland Sate University John Wiley & Sons, Inc. William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Walter G. Kell University of Michigan

2. Dr. Raymond N. Johnson, CPA Understanding Assertions Transaction class Account balances Disclosures

3. Dr. Raymond N. Johnson, CPA Understanding the Business and Industry Key Questions –How material is the transaction class to the audit client? –What business risks exist within the transaction class? –What expectations do you have regarding industry norms? Business practices Expected controls Expected ratios

4. Dr. Raymond N. Johnson, CPA Understanding the Business and Industry Example Industries Retail grocery Household appliance manufacturer Computer manufacturer Hotel / Resort School district Key Issues Significance of transaction class Business risks Expectations –Business practices –Controls –Ratios

5. Dr. Raymond N. Johnson, CPA Audit Risk Model AR = IR x CR x AP x TD 1.Assess IR 2.Consider preliminary audit strategy 3.Perform analytical procedures 4.Evaluate internal controls 5.Assess TD and perform remaining substantive tests

6. Dr. Raymond N. Johnson, CPA Inherent Risk Purchases and accounts payable –“Short-term” completeness problems Inventory –Net realizable value of inventory –Obsolete inventory –Overstatement of inventory to overstate profits Payroll –Employee fraud and payroll overstatements

7. Dr. Raymond N. Johnson, CPA Analytical Procedures Accounts payable –AP Turns –Evidence of understated payables Inventory –Inventory turns –Inventory growth relative to CGS –Manufacturing inputs to finished goods output –Quality control Payroll –Average payroll in key employee classes –Payroll costs per units of output (accomplishment) –Benefits and taxes to gross payroll

8. Dr. Raymond N. Johnson, CPA 5 Elements of Internal Control Control Environment Risk Assessment Information and Communication Control Activities Monitoring

9. Dr. Raymond N. Johnson, CPA Control Environment Establishes the tone that ensures a high level of control consciousness Establishes a tone of accountability for use of resources You must assume a strong control environment to place reliance on specific control activities

10. Dr. Raymond N. Johnson, CPA Control Activities Authorization Segregation of duties Safeguarding of assets Information processing controls –Computer general controls –Computer application controls Performance reviews

11. Dr. Raymond N. Johnson, CPA Direct Tests of User Controls Figure 10-2

12. Dr. Raymond N. Johnson, CPA Low CR Assessment based on Application Controls Figure 10-2

13. Dr. Raymond N. Johnson, CPA High CR Assessment based on Application Controls Figure 10-2 Inference

14. Dr. Raymond N. Johnson, CPA Designing or Evaluating Computer Application Controls Understand key functions –Initiating transactions –Delivery or receipt of good or services –Recording transactions –Consideration

15. Dr. Raymond N. Johnson, CPA Purchasing Understand key functions –Initiating transactions Purchase requisition Purchase order –Delivery or receipt of good or services Receiving report –Recording transactions Vendor’s invoice Voucher –Consideration Check

16. Dr. Raymond N. Johnson, CPA Inventory Understand key functions –Initiating transactions Production order Material requirements report –Delivery or receipt of good or services Materials issue slip Time ticket Move ticket –Recording transactions Daily production activity report Completed production activity report

17. Dr. Raymond N. Johnson, CPA Payroll Understand key functions –Initiating transactions Personnel authorization –Delivery or receipt of good or services Clock card Time ticket –Recording transactions & consideration Payroll register (journal) Payroll Check (from imprest bank account)

18. Dr. Raymond N. Johnson, CPA Substantive Tests Initial procedures –Understand the business and industry –Test accuracy of data provided for audit Analytical procedures Tests of details of transactions Tests of details of balances Tests of details of balances – accounting estimates Procedures required by GAAS Tests of presentation and disclosure

19. Dr. Raymond N. Johnson, CPA CHAPTER 15 AUDITING THE EXPENDITURE CYCLE

20. Dr. Raymond N. Johnson, CPA CopyrightCopyright Copyright 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.