ATC F8 materials FF8 AA (Int)Session37 j08

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  OVERVIEW Objective ¾ To illustrate the contents of work programs for the audit of transactions and balances.
  SALES PURCHASES WAGES & SALARIES
  ¾ Cash balances
  
PAYABLES &
ACCRUED
EXPENSES
  ¾ Completeness
  ¾ Accrued expenses
  ¾ Reservation of title
  ¾ Setting-off
  ¾ Tests of detail
  ¾ Window-dressing
  ¾ Tests of detail
  ¾ Existence and ownership
  ¾ Valuation
  ¾ NRV
  ¾ Interim count
  ¾ GIT
  ¾ Setting-off
  ¾ Bank balances
  TRANSACTIONS – Statement of comprehensive income BALANCES – Statement of financial position
  ¾ Tests of detail
  ¾ Transactions
  ¾ Existence and ownership
  ¾ Book value
  ¾ Property valuation
  ¾ Capital commitments
  
INVENTORY
RECEIVABLES &
PREPAYMENTS
  ¾ Existence
  
BANK& CASH
  ¾ Valuation
  ¾ Interim confirmation
  ¾ Cutoff
  ¾ Loans
  ¾ Prepayments
  ¾ Confirmation summary
  
PROPERTY,
PLANT &
EQUIPMENT
  ¾ Physical count 1 SALES
  HASTINGS & WARWICK Sch. Ref.
  CLIENT . . . . . . . . . . . . . . . . . . . . . . . . PREPARED BY . . . . . . . . . . . . DATE . . . . . . . PERIOD . . . . . . . . . . . . . . . . . . . . . . . . REVIEWED BY . . . . . . . . . . . . DATE . . . . . . .
  (Audit senior in charge) AUDIT AREA – CREDIT PURCHASES REVIEWED BY . . . . . . . . . . . . DATE . . . . . . .
  (Manager)
The purpose of the auditing procedures set out in this section of the program is to obtain Work Ref. to
reasonable assurance that credit sales are not materially understated. performed supporting
  by working paperRELIANCE ON INTERNAL CONTROL PROCEDURES
  1. Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers.TESTS OF DETAIL
  Note: Where the maximum values of items in an account can be determined from independent information or by calculation, use analytical procedures to reduce tests of detail as far as possible.
  2. Test for omission and other understatement in the accounting records of sales charged to
  1
  accounts receivable, by selecting from appropriate records of potential sales transactions and tracing the selected items through to the relevant income account in the general ledger, as follows:
  (A) Select from the most appropriate records the items to be examined (see note below). Test for completeness of these records by examining the system for preparing and controlling such records, by testing the numerical sequence (if any) of the records, and/or by any other procedures which are appropriate.
  Note: The records from which the sample is selected should as far as possible satisfy the following requirements:
  (1) The records should if practicable be independent of the sales recording system.
  (2) The records should be complete in the sense that for each sale that has been made, there is a related item in the independent records. (3) The records should if practicable be such that the probability of selecting a particular item is proportionate to the value of the potential sale. (4) The records should enable the potential sales to be identified at the earliest possible stage in the recording process.
  (B) Compare the records selected in procedure (A) above with the initial sales records, for correct quantities. (C) Check the selling price of these initial sales records with the relevant independent records (such as official catalogues, price lists, etc.), and check the extensions and casts. (D) Check the VAT on sales selected for testing, and test the proper recording of these items in the VAT account in the general ledger. (E) Compare these initial sales records with the intermediate and final records, testing these records for understatement of the casts, and for under-summarisation of the sales income.1 E.g. customers’ orders
  (F) Compare the credits in the final records examined in procedure (E) above with the relevant income account(s) in the general ledger. (G) Test the casts of these income accounts and prove the final balances arithmetically.
  3. Test the transactions in the last few days of the year to ensure that sales have not been understated as follows: Compare major despatches as shown in the despatch records in the last few days of the year with the copy sales invoices. Trace these copy invoices, via the sales accounting records, to the credit of the sales account. In doing this, ensure that these despatches have been included as sales in the year under review.
  Note: This test should be carried out in conjunction with the cutoff procedures relating
  2 to the overstatement of receivables – see paragraph 10 of the AP for receivables and prepayments.2 AP = Audit Program2 PURCHASES
  HASTINGS & WARWICK Sch. Ref.
  CLIENT . . . . . . . . . . . . . . . . . . . . . . . . PREPARED BY . . . . . . . . . . . . DATE . . . . . . . PERIOD . . . . . . . . . . . . . . . . . . . . . . . . REVIEWED BY . . . . . . . . . . . . DATE . . . . . . .
  (Audit senior in charge) AUDIT AREA – CREDIT PURCHASES REVIEWED BY . . . . . . . . . . . . DATE . . . . . . .
  (Manager)
  The purpose of the auditing procedures set out in this section of the program is to obtain reasonable assurance that purchases are not materially overstated.
  Work performed by
  Ref. to supporting working paperRELIANCE ON INTERNAL CONTROL PROCEDURES
  (A) Examine the initial purchase records and supporting documents (such as purchase orders and goods received records) for: (1) Approval, (2) Other independent evidence of validity, and (3) Correctness of the allocations to the general ledger accounts. (B) Cast the initial purchase record (usually the purchase invoice). (C) Examine the terms of sale of suppliers selected for the above tests, and identify those suppliers that have included reservation of title in their terms of trade. The end of the reporting period liability to these suppliers should be tested for understatement (see paragraph 21 (A) of the AP for payables, accrued expenses and provisions).
  Note: Where credit entries (e.g. purchase credits and cash discounts) have been identified in taking out our debit sample, ensure that these credit entries are being tested for understatement using the relevant AP.
  (D) Examine also the relevant paid cheques for the correctness of the relevant details (such as the date, the payee, the amount and the signatures), and investigate any alterations or unusual endorsements.
  (E) Where any selected debit entries have not been paid by the end of the reporting period, ensure that these are included in payables at that date. (F) List on a working paper the names of the suppliers whose transactions have been tested. These suppliers will form part of the payables confirmation sample (see paragraph 3(B) of the AP for payables and accrued expenses).
  3. Test the transactions in the last few days of the year to ensure that purchases have not been overstated, as follows: Compare major purchases as shown in the purchases account in the last few days of the year with the receiving records, to ensure that the goods or services were received or performed before the end of the reporting period.
  Note: This test should be carried out in conjunction with the cutoff procedures relating to the understatement of liabilities – see paragraphs 16 and 17 of the AP for payables, accrued expenses and provisions.
  1. Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers.
  TESTS OF DETAIL 2. Select from the general ledger accounts items to be tested for overstatement.3 WAGES AND SALARIES
  HASTINGS & WARWICK Sch. Ref.
  (Audit senior in charge) AUDIT AREA – WAGES AND SALARIES REVIEWED BY . . . . . . . . . . . . DATE . . . . . . .
  (Manager)
  The purpose of the auditing procedures set out in this section of the program is to obtain reasonable assurance that wages and salaries are not materially overstated. This section can be duplicated to support any number of separate payrolls.
  Work performed by
  Ref. to supporting working paperRELIANCE ON INTERNAL CONTROL PROCEDURES
  1. Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers.
  CLIENT . . . . . . . . . . . . . . . . . . . . . . . . PREPARED BY . . . . . . . . . . . . DATE . . . . . . . PERIOD . . . . . . . . . . . . . . . . . . . . . . . . REVIEWED BY . . . . . . . . . . . . DATE . . . . . . .TESTS OF DETAIL
  Note: If a costing system is used it may be necessary to select directly from payroll records and prove the postings to the general ledger in total.
  (ii) From each payroll account selected under procedure (i) above select individual payrolls to be examined, testing the casts of the debit entries in these accounts for overstatement. (iii) From each payroll selected under procedure (ii) above select individual employees’ pay to be examined, testing the casts of the payroll for overstatement. (B) Where we can use the payroll reconciliation method, select three payrolls for testing as follows:
  (i) At the interim audit visit select two payrolls for testing – one a current payroll and the other selected at random. (ii) At the final audit visit select a further payroll at random. (iii) Where we only carry out one audit visit select three payrolls from the year at random.
  For each payroll selected under (i) to (iii) above select individual employees’ pay to be examined using a reduced sampling interval. (C) In addition, we should select all individuals who prepare, handle or approve employee status change documents, payroll master files or payrolls.
  (A) (i) From the general ledger payroll accounts select (on the basis of the total debit entries in these accounts) the accounts to be sampled.
  2. Select individual items for examination using either procedure (A) or procedure (B) below:
  Note: Procedure (B), the payroll selection reconciliation method, can be used in the following circumstances: (i) Where we have evaluated the internal control over wages and salaries as good. (ii) Where we have obtained satisfactory results from our analytical review for credibility. (iii) Where we have reviewed the week by week/month by month payroll data, which is reconciled by management or is closely controlled by management budgets, and have received satisfactory explanations for all significant discrepancies revealed by our review.
  3. Carry out the following procedures in respect of each employee selected for examination: (A) Obtain evidence of employment by examining independent employee records, by personal contact, or by enquiry of other independent employees.
  (B) Examine the relevant supporting documents (such as employee status change documents, payroll master files, and employees’ time, piece and bonus records) for: (1) Approval.
  (2) Other independent evidence of validity and, (3) Correctness of the gross pay calculations. (C) Obtain the payroll for the pay period from which the employee was selected, and scrutinise it for possible duplicate payments to that employee.
  (D) Test that deductions from pay have been properly accounted for, as follows:
  Note: Where the maximum rates of deductions from pay can be determined from independent information or by calculation, use analytical procedures to reduce as far as possible the tests of detail in 3(D)(i) below.
  (i) Test for understatement of credit entries in the deduction accounts in the general ledger. Use the sample of the employees checked under procedures (A) to (C) above. For each employee selected check that the various deductions from gross pay have been correctly recorded in the initial, intermediate and final records and in the general ledger deduction accounts. Test for undercasting of deductions in each of these records.
  (ii) In respect of the payrolls dealt with in 2, check that the total deductions plus the total net pay equals the total gross pay. (E) For employees paid in cash, observe the making up of pay packets and the distribution of pay to employees, paying special attention to unclaimed pay.
  When we, use the payroll selection reconciliation method we should attend the payout of the current payroll week selected at the interim audit. (F) For employees paid by cheque, examine the paid cheque for the correctness of the relevant details (such as the date, the payee, the amount and the signatures), and investigate any alterations or unusual endorsements.
  4. Check the total net pay recorded on all the payrolls selected in 2 above to the paid cheque or other payment details.
  5. Where we have used the payroll selection reconciliation method of selecting individuals for testing, carry out the following additional procedures: (A) For each employee selected review the cumulative pay for the year for amounts over basic pay. (B) Cast the selected payrolls and compare the totals of gross pay and deductions of the selected weeks or months with the equivalent totals of all other payrolls in the year. (C) Cast all the weekly or monthly payroll summaries and agree the postings to the general ledger. (D) Scan the general ledger payroll accounts to ensure that there are no payroll postings which have not been checked under (C) above.4 PROPERTY, PLANT AND EQUIPMENT
  HASTINGS & WARWICK Sch. Ref.
  CLIENT . . . . . . . . . . . . . . . . . . . . . . . . PREPARED BY . . . . . . . . . . . . DATE . . . . . . . PERIOD . . . . . . . . . . . . . . . . . . . . . . . . REVIEWED BY . . . . . . . . . . . . DATE . . . . . . .
  (Audit senior in charge) AUDIT AREA – NON-CURRENT ASSETS REVIEWED BY . . . . . . . . . . . . DATE . . . . . . .
  (Manager)
  The purpose of the auditing procedures set out in this section of the program is to obtain
  Work Ref. to
  
reasonable assurance that property, plant and equipment are not materially overstated. performed supporting
  by working paperRELIANCE ON INTERNAL CONTROL PROCEDURES
  1. Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers.TESTS OF DETAIL EXAMINING THE TRANSACTIONS DURING THE YEAR
  2. Obtain or prepare working papers of non-current asset balances and a summary of the related general ledger transactions (including depreciation) and test that these have been properly prepared, as follows: (A) Agree the totals with the general ledger accounts.
  (B) Test the casts for overstatement. (C) Agree the totals with the subsidiary records of property, plant and equipment (e.g. tangible fixed asset registers).
  3. (A) Select the property, plant and equipment to be examined, as follows: (1) Select from the list of non-current assets at cost at the beginning of the financial year; and (2) Select additions to non-current assets in the financial year by selecting from the debit entries in the non-current asset control account in the general ledger. Test the casts of the debit entries in this account for overstatement. (B) Test the additions selected in procedure (A) (2) above with the relevant supporting records and documents for:
  (1) Approval by the board of directors or by other designated officials. (2) Other independent evidence of validity. (3) Correctness of the allocations to the general ledger accounts.
  (C) For the items selected in procedure (A) (2) above, examine the paid cheque for the correctness of the relevant details. (D) For each item selected under procedures (A) (1) and (2) above:
  (1) Where the asset has not been disposed of, check that it is correctly included in the non-current asset control account at the end of the reporting period. (2) Where the non-current asset has been sold or otherwise disposed of during the financial year, check with the supporting evidence (e.g. correspondence, scrapping note, etc.) and ensure that the profit or loss on disposal has been properly computed and has been correctly recorded in the general ledger accounts. Determine that the client has made a reasonable scrap recovery in the case of assets which have been scrapped.CONFIRMING THE EXISTENCE AND OWNERSHIP OF FIXED ASSETS
  4. Confirm the existence and ownership of all property, plant and equipment which have been examined under procedure 3(D) (1) above, as follows: (A) In respect of freehold property, inspect the title deeds or obtain confirmation from independent third-party custodians. (B) In respect of leasehold property, inspect the leases or obtain confirmation from independent third-party custodians. (C) In respect of plant and equipment, review the evidence of physical counts, or inspect the assets, or use other appropriate procedures. If the asset is permanently idle or obsolete, review the value of this asset in the accounts.CONFIRMING THE BOOK VALUE OF PROPERTY, PLANT AND EQUIPMENT
  5. Test that depreciation has been correctly calculated, by applying either procedure (A) or procedure (B) below: (A) Prove the amount of depreciation in total. (B) Test the amounts of depreciation on individual items selected in procedure 3(A) above, by checking with the authorised depreciation rates and by checking the calculations in order to ensure that such items are not already fully depreciated. Also, test the casts of the depreciation records and the postings to the general ledger accounts.
  6. Investigate and test the client’s procedure which ensures that all amounts expended by the client on the acquisition of property, plant and equipment are correctly recorded as non- current assets.
  
Note: This procedure ensures that the test for understatement of the accumulated provision for depreciation (in paragraph 5 above) is based on a population of property, plant and equipment that is not materially understated.
  7. Ensure that depreciation: (A) Has been provided on a basis which is consistent with that of the previous year.
  (B) Is adequate but not excessive, by reviewing gains and losses on disposals or by other appropriate methods.PROPERTY VALUATION
  8. (A) Review the details of any valuation of assets made in the year, whether or not such valuations have been reflected in the accounts.
  (B) Where there is reason to believe that the current market value of a property could be significantly different from the amount at which it is included in the accounts, and no valuation has been made in the current year, discuss with the manager the need to request the client to make such a valuation.
  (C) Assess whether or not a true and fair view is shown by the statement of financial position if the current market value is materially below the book value and, if appropriate, consult the manager or partner.
  REVIEWING AND TESTING CAPITAL COMMITMENTS 9. Obtain or prepare a working paper of capital commitments.
  10. Test that they are correctly stated.
  11. Consider possible additional commitments. Discuss these with responsible client officials and include in the working papers the date and outcome of the discussions and the names and status of the officials concerned.5 INVENTORY
  HASTINGS & WARWICK Sch. Ref.
  CLIENT . . . . . . . . . . . . . . . . . . . . . . . . PREPARED BY . . . . . . . . . . . . DATE . . . . . . . PERIOD . . . . . . . . . . . . . . . . . . . . . . . . REVIEWED BY . . . . . . . . . . . . DATE . . . . . . .
  (Audit senior in charge) AUDIT AREA – INVENTORY REVIEWED BY . . . . . . . . . . . . DATE . . . . . . .
  (Manager)
  The purpose of the auditing procedures set out in this section of the program is to obtain reasonable assurance that inventories are not materially misstated.
  Work performed by
  Ref. to supporting working paperRELIANCE ON INTERNAL CONTROL PROCEDURES
  2. Where the date selected for the count is an interim date we must be able to rely on the year-end book inventory records. Assess the past reliability of the book records by examining the materiality of differences disclosed by previous physical counts. If there are any doubts as to the reliability of the book records, discuss immediately with the manager whether we should request the client to conduct a year-end count.
  TESTS OF DETAIL – EXISTENCE AND OWNERSHIP Planning attendance at physical inventory counting
  4. Select for test counting (by reference to perpetual records or prior period inventory summaries and purchases selected under the AP for income and expenses) those inventory items expected to have the largest monetary value at the count date.
  5. Where the client maintains inventory of a technical nature which is not readily identifiable, or whose conditions we are not competent to ascertain, consider using independent experts.
  6. Obtain a list of all inventory held by third party custodians. Ensure that the list is complete. In respect of these inventories: (A) Establish the suitability of the custodian. (B) Confirm the existence and title of such inventory directly with the custodians. (C) Review the controls exercised by the client over these inventories (including cutoff) and consider whether there is any need for us to inspect them.
  7. Arrange for the necessary audit staff to attend physical inventory counting at the various locations. Brief the audit staff and ensure that they have a copy of the client's instructions together with a list of the inventory items pre-selected in 4 above and the audit program for procedures during counting which they will need to complete.
  Make arrangements for the audit staff to be present at the end of the count.
  See end of this program
  8. On completion of the count obtain and review the audit working papers prepared during our attendance at the various locations, and summarise the adequacy and effectiveness of the counts.
  1. Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers.
  3. Review the adequacy of the client’s instructions. Any serious shortcomings must be discussed immediately with responsible client officials so that they can be rectified before the inventory count.
  Procedures subsequent to physical inventory counting
  9. Obtain the client’s count records and test that they are complete and accurate, as follows: (A) Test for completeness, by comparing the numerical sequence of count records with the details recorded in our working papers at the time of the physical count.
  (B) Scrutinise the count records to ensure that they have not been altered subsequent to our attendance at the physical count by comparing the records with details recorded in our working papers at the time of the physical count (e.g. photocopies).
  Testing continuous stockchecking procedures
  10. Review the instructions issued and the procedures adopted by the client, in order to determine whether such instructions and procedures are adequate. Pay particular attention to controls revealed on the ICQ for the inventory system where inventory is not physically counted at the end of the reporting period.
  11. Arrange to attend at least one of the continuous stockchecks during the year. Review reports of inventory counting or the inventory records to ascertain the extent to which inventories have been counted during the year, and also to determine (by reviewing any differences disclosed) the accuracy of the inventory records. In the light of this review, determine the extent of the counting to be performed under 12 (A) and (B) below. Test that the differences disclosed by counting have been adjusted in the inventory records.
  12. Carry out audit tests as follows: (A) Select from the inventory account at the end of the reporting period a sample of inventory items, and check the quantities with the underlying inventory records and the valuation of the items with supporting documents. (B) Count a number of items that are in inventory, and check these by comparing them with the inventory account.
  13. Summarise on a working paper our findings on the adequacy and effectiveness of the continuous counting procedures and on the reliability of the inventory records. Also indicate the approximate amount of the differences found during the year.
  Checking quantities on stocksheets
  14. Test the casts of the stocksheets by: (A) Casting the pages to which counted items have been traced and follow the totals through to the inventory summary.
  (B) Casting the final inventory summary, selecting individual page totals and casting them at the same time selecting items for examination in procedure 15(A).
  
Where inventories are subject to continuous counting, test that the list of inventory has been
properly extracted (by selecting from the list and comparing with the inventory records and vice versa).
  15. Test that the physical quantities shown on the final stocksheets are neither overstated nor understated by performing the following procedures: (A) Overstatement: Agree the details of those items selected in procedures 14 (B) above with the client’s count records, to ensure that the stocksheets only incorporate count records from physical inventory counting. (B) Understatement: Agree items which were counted by us, or in our presence, with the final stocksheets.
  Testing the cutoff of inventory (Note: The cutoff tests detailed below should be co-ordinated with the cutoff tests on receivables, payables, sales and purchases.)
  16. Test that there was a proper cutoff at the physical count date, as follows: (A) Select from the goods received reports for a few days either side of the inventory- taking date, and compare with the relevant inventory records (and vice versa) to ensure that goods received were recorded in the inventory records in the correct accounting period.
  (B) Select from despatch records for a few days either side of the count date, and compare with the relevant inventory records (and vice versa) to ensure goods despatched were recorded in inventory records in the correct accounting period. (C) Where necessary, test the cutoff on the internal movement of inventory.
  17. Where certain sections only of the inventory have been physically counted (other sections being represented by book figures) check that a clean cutoff has been achieved between the several sections (raw materials, supplies, work in progress, finished goods, etc). Determine in this way that all movements of inventory into or out of the sections physically counted have been properly recorded. Where appropriate, test that the cutoff at the end of the reporting period between the various sections of inventory was adequate.
  18. Where the client’s count did not take place at the end of the reporting period, test that the inventory records at that date reflected a correct cutoff regarding receipts and issues of inventory. In doing this, use the cutoff samples tested in the following: AP for income and expenses – credit sales (paragraph 3)
– purchases on credit (paragraph 3) AP for payables, accrued expenses and provisions (paragraph 8) AP for receivables and prepayments (paragraph 9)
  VALUATION Checking valuations and calculations on stocksheets_

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