PLANNING AN AUDIT OF FINANCIAL STATEMENT

Planning an audit involves:

Establishing the overall audit strategy for the engagement; and
Developing an audit plan
The auditor shall perform the following activities at the beginning of the current audit engagement:
Perform procedures regarding the continuance if the client relationship and the specific audit
engagement.
Evaluate compliance with ethical requirements, including independence
Establish an understanding of the terms of the engagement.
The auditor shall establish an overall audit strategy for the audit. The overall audit strategy sets the scope, timing and
direction of the audit, and guides the development of the more detailed audit plan.
ESTABLISHMENT OF THE OVERALL AUDIT STRATEGY
a) Determining the characteristics of the engagement that define its scope;
b) Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the nature of the
communications required;
c) Considering the important factors that will determine the focus of the engagement teams effort;
d) Considering the results of preliminary engagement activities and, where applicable, whether knowledge
gained on other engagements performed by the engagement partner for the entity is relevant; and
e) Ascertaining the nature, timing and extent of resources necessary to perform the engagement.
BENEFITS OF ADEQUATE PLANNING
Helping the auditor to devote appropriate attention to important areas of the audit
Helping the auditor identify and resolve potential problems on timely basis
Helping the auditor properly organize and manage the audit engagement so that it is performed in an
effective and efficient manner
Assisting in the selection of engagement team members with appropriate levels of capabilities and
competence to respond to anticipated risks, and the proper assignment of work to them
Facilitating the direction and supervision of engagement team members and the review of their work
Assisting, where applicable, in coordination of work done by auditors of components and experts
ADDITIONAL CONSIDERATIONS IN INITIAL AUDIT ENGAGEMENTS
The auditor shall perform the following activities prior to starting an initial audit:
Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement.
Communicate with the previous auditor, where there has been change of auditors, in compliance
with relevant ethical requirements.
ACCEPTANCE/CONTINUANCE OF CLIENT RELATIONSHIP
Preconditions for an audit
a) The use of an acceptable financial reporting framework in the preparation of the financial statements; and
b) The agreement of management, and where appropriate those charged with governance to the premise on
which an audit is conducted
The auditor establishes whether the preconditions for an audit are present by:
1) Determining whether the financial reporting framework to be applied in the preparation of the financial
statements is acceptable; and
2) Obtaining managements agreement that it acknowledges and understands its responsibilities that are
fundamental to the conduct of an audit in accordance with PSAs.
ENGAGEMENT LETTER
The standard states that it is in the interests of both the entity and the auditor that the auditor sends an audit
engagement letter before the commencement of the audit to help avoid misunderstandings with respect to the audit.
The engagement letter shall include:
a. Objective and scope of the audit of the financial statements;
b. The responsibilities of the auditor;
c. The responsibilities of management;
d. Identification of the applicable financial reporting framework for the preparation of the financial statements;
and
e. Reference to the expected form and content of any reports to be issued by the auditor and a statement that
there may be circumstances in which a report may differ from its expected from and content
If the auditor is also the auditor of the companys component. The following factors may influence the auditors
decision whether to send a separate audit engagement letter to the component:
1) Who appoints the component auditor;
2) Whether a separate auditors report is to be issued on the component;
3) Legal requirements in relation to audit appointments;
4) Degree of the ownership by parent; and
5) Degree of independence of the component management from the parent entity.

During recurring audits, the auditor may decide not to send a new engagement letter each period. According to the
standard, the following factors may make it appropriate to revise the terms of the audit engagement or to remind the
entity of existing terms:
Any indication that the entity misunderstands the objective and scope of the audit
Any revised or special terms of the audit engagement
A recent change of senior management
A significant change in ownership
A significant change in nature or size of the entitys business
A change in legal or regulatory requirements
A change in the financial reporting framework adopted in the preparation of the financial statements
Materiality
The auditor is required to determine three different level of materiality. These are
1. Materiality for the financial statements as a whole (overall materiality) the materiality determined at the
overall financial statement level. This materiality level helps auditor determine whether the proposed audit
adjustments are significant or not. If the audit adjustments exceed this level, the auditor may need to adjust
the financial statements
2. Performance Materiality (scoping materiality) calculated as a certain percentage of overall materiality, is
used in scoping of financial statement line items to be tested by the auditor. This will ensure that significant
accounts in the financial statements are covered by audit testing
3. Specific Materiality is the amount set by the auditor for particular classes of transactions, account balances
or disclosures for which misstatements, well though lower than overall materiality could reasonably be
expected to influence the economic decisions of users of the financial statements
The following factors are normally considered by the auditor in determining the appropriate benchmark for the
purpose of calculating overall materiality:
Components of the entitys financial statements
Focus of the users of the financial statements
Nature of the entity
Ownership structure of the entity
Volatility of the benchmark identified
Laws and regulations
Risks Assessment Procedures
Performed to obtain an understanding of the entity and its environment, including the entitys internal control, to
identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and
assertion level
Includes:
1. Inquiries of management and of others within the entity who in the auditors judgement may have
information that is likely to assist in identifying risks of material misstatement due to fraud or error
2. Analytical procedures
3. Observation and inspection
Steps in an Auditors Consideration of Internal Control
1. Perform a preliminary review of the internal control system***
2. Document the internal control system
3. Perform a walk through test
4. Identify cycle control objectives and control procedures
5. Perform tests of controls
6. Assess control risk

Internal Control Questionnaire (Revenue/Receipt Cycle)

QUESTIONNAIRE
YES
1. Before accepting customers sales orders, are they approved by:
a. Sales order department for terms and availability of goods?
b. Credit department for credit standing?
2. Is the credit department independent of the sales department?
3. Are sales orders prenumbered and accounted for?
4. Are sales prices and terms based on approved standards?
5. Are deviation from No. 4 authorized by a responsible officer?
6. Are prenumbered bills of lading or other shipping documents prepared by the
shipping department and accounted for?
7. Are sales invoices prenumbered and accounted for?
8. Are sales invoices checked as to compliance with sales orders, prices, terms,
and arithmetical accuracy?
9. Are quantities, shipped independently checked against invoice quantities?
10. Are credit memos for goods returned based on receiving reports of goods
return by customers?
11. Are adjustments to customers accounts properly authorized and
documented?
12. Are debit or credit memos independently checked against sales invoice data?
13. Are invoices debit memos, and credit memos accounted for, summarized, and
the totals recorded in the control accounts?
14. Is the accounting for invoices, debit memos, and credit memos made by a
person other than those previously connected in the preparation/processing of
the documents and not related to cash receipts functions?
15. Are invoices, debit memos, credit memos, and cash receipts documents
controlled before being submitted for posting to accounts receivable subsidiary
ledger?
16. Are accounts receivable control and subsidiary accounts reconciled:
a. Periodically?
b. Independently?
17. Are accounts receivable subsidiary ledgers maintained by persons not
connected with:
a. Preparing/processing of invoices, debit memos, and credit memos?
b. Recording in the control accounts?
c. Cash receipts functions?
18. Are customers monthly statements prepared and mailed by persons not
connected with:
a. Sales documentation?
b. Recording in the control accounts?
c. Cash receipts functions?
19. Are accounts receivable periodically reviewed and aged?
20. Are there adequate procedure to determine:
a. Amounts to be provided for doubtful accounts?
b. Propriety and authorization of accounts written off?
21. Are collections from customers recorded in detail as to:
a. Currencies?
b. Checks?
c. Invoices not being settled?
d. Collectors temporary receipt number?
22. Are official and collectors temporary receipts prenumbered and accounted
for?
23. Are collections:
a. Promptly issued official receipts for office collections?
b. Covered by collectors temporary receipts promptly validated by
issuing official receipts?
c. Deposited intact and without delay?
24. Are the records of receipt summarized and totals established for posting to
accounts receivable control accounts?
25. Does a person not connected with handling of cash receipts and maintaining
the accounts receivable, compare records of receipts with:
a. Validated deposit slips?
b. Bank statements?
26. Are collections with adequate physical control?
27. Are check collections restrictively endorsed in favour of the company?
28. Are bank reconciliations done by persons not connected with cash and
accounts receivable processing?

NO

N/A

Internal Control Questionnaire (Purchasing/Disbursement Cycle)

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QUESTIONNAIRE
Are purchases of goods or services executed based on appropriate written
authorization?
Are prenumbered purchase orders used to account for all orders?
Do the written authorizations such as purchase orders indicate the quantities,
description, prices and other terms of the orders?
Does the company account for the sequence of prenumbered purchase orders?
Are copies of purchase orders forwarded to the requisitioning, receiving, and
accounts payable departments for subsequent control?
Are lists of approved vendors, current prices, specifications, and terms made
available to purchasing department personnel?
Are goods received physically inspected and counted at the time of their receipt?
Are prenumbered receiving documents prepared in recording all goods and
services accepted?
Does the company account for the sequence of prenumbered receiving
documents?
Are prenumbered purchase orders periodically matched with receiving documents
to identify unmatched (undelivered) orders?
Are receiving department personnel independent of purchasing, accounts
payable, and cash disbursements?
Are all vendors invoices received accounted for by logging, numbering, or other
means to ensure that all goods and services received are recognized as liabilities?
Are all vendors invoices matched with purchase orders and receiving documents
by persons other than those who prepare purchase orders and receiving
documents?
Are control totals established for posting to control accounts before vendors
invoices are forwarded to subsidiary ledger clerks?
Does the company require verification of footings and cross footings of invoices by
persons other than those who prepare purchase orders and receiving documents?
Are adjustments to accounts payable properly documented?
Are the persons who maintain the subsidiary records other than those who check
or approve accounts payable documents or maintain the control account?
Are accounts payable subsidiary ledger records periodically reconciled with
control account in the general ledger by persons other than those who:
a. Maintain the subsidiary records?
b. Maintain the control account?
c. Prepare checks?
d. Have custody of signed checks?
Are vendors statements of accounts periodically reconciled with subsidiary
records by persons other than those who:
a. Maintain the subsidiary records?
b. Maintain the control account?
c. Prepare checks?
d. Have custody of signed checks?
Are checks prepared only on the basis of an approved voucher package?
Are the persons who prepare checks other than those who prepared checks other
than those who initiate or approve documents which give rise to cash
disbursements?
Are the check signers other than those who approve accounts payable or invoices
for payment?
Do the check signers review supporting documentation prior to signing checks?
Are supporting documentation perforated, voided, or otherwise cancelled
immediately after checks are signed? (Or are they placed under the control of
signatories to prevent re use?)
Are signed checks forwarded or mailed directly to payees without returning to
them those who processed the disbursement?
Are unissued and spoiled checks properly safeguarded?
Are the adequate controls over the custody and use of mechanical check signer
and signature plates?
Are the payees, amounts, and dates of recorded disbursements compared with
entries in the bank statement and with paid checks and other documents
supporting the bank statement?
Is the coding used to post cash disbursements to the general ledger adequately
checked?
Are summaries of cash disbursements prepared for posting to the general ledger?

YES

NO

N/A

REVENUE/ RECEIPT CYCLE: CONTROL OBJECTIVES AND PROCEDURES

FUNCTION: ORDER ENTRY
CONTROL OBJECTIVES:
Customers credit limits and terms and sales prices should be approved and stock availability should
be checked before orders are processed and goods/services are delivered.
All customers orders should be accurately recorded as to customer, price, quantity, terms, etc. for
use in subsequent processing
All customers orders should be reported on a timely basis
POTENTIAL ERRORS OR IRREGULARITIES:
Shipments could be made to customers who would eventually not pay their accounts.
Unauthorized adjustments could be made
Shipments not based on approved customers orders could be made
Goods to be shipped may not meet customers specifications and may result to dissatisfaction and
significant returns or uncollectible accounts
FINANCIAL STATEMENT COMPONENTS AFFECTED:
Misstatement of accounts receivable and income
SPECIFIC CONTROL PROCEDURES:
Approval of customers, credit limits and terms, and prices. Such approval should be made by
persons not involved in order entry function. Updated lists of customers, credit limits and terms, and
prices should be made available to sales department personnel
Use of prenumbered sales or work orders and accounting for its completeness
Follow up of missing documents. Results of follow up procedures done should be reviewed and
approved by a designated official
Adequate written procedures for order entry function
FUNCTIONS: SHIPPING
CONTROL OBJECTIVES:
All shipments should be based on approved customers orders. Shipments should be adequately
recorded as to customer, quantity, and description of goods shipped.
All shipments should be reported on a timely basis
POTENTIAL ERRORS OR IRREGULARITIES:
Unauthorized shipments could be made
Customers could be billed for goods that were not received
Unbilled shipments
FINANCIAL STATEMENT COMPONENT AFFECTED:
Misstatement of accounts receivable, sales, inventories, and cost of sales
SPECIFIC CONTROL PROCEDURES:
Shipments should not be made without approved customer orders
Physical count and inspection of goods at the time of shipment
Use of prenumbered shipping documents and accounting for its completeness
Maintaining records of unmatched (undelivered) orders
Follow up procedures on missing shipping documents and unmatched orders
Review and approval of follow up procedures done
Adequate written procedures for shipping function
FUNCTIONS: ACCOUNTING
CONTROL OBJECTIVES:
The should be periodic verification of the completeness, accuracy, and validity of sales and accounts
receivable balances per records
Receivables should be stated at their net realizable value
POTENTIAL ERRORS OR IRREGULARITIES:
Invalid transactions could be taken up to conceal errors or irregularities
General and subsidiary ledgers could be forced balance
Cash receipts could be misappropriated and covered up by taking up invalid adjustments to
accounts receivable balance such as unauthorized write offs
FINANCIAL STATEMENT COMPONENTS AFFECTED:
Misstatement of accounts receivable and sales
SPECIFIC CONTROL PROCEDURES:
Sales and accounts receivable balances should be periodically compared to balances of prior
periods, budgeted amounts, or averages published by the industry in which the company operates
The subsidiary ledgers should be maintained by persons other than those who maintain the control
account, prepare, check, or approve accounts receivable documents, or those involved in the cash
receipts function
The subsidiary ledgers should be periodically reconciled with the control account balance in the
general ledger. Differences disclosed by the reconciliation should be promptly investigated. The

periodic reconciliation should be performed by persons other those who maintain the accounts
receivable records (general and subsidiary ledgers), account for billing documents and debit/credit
memos, or those involved in the cash receipts function
Periodic (e.g., monthly) statements of accounts should be sent to customers. Exceptions noted by
customers should be promptly investigated
Periodic review of customers accounts with credit balances
Preparation of accounts receivable aging schedule
Identification of worthless accounts for write offs
Periodic review of the adequacy of valuation allowances such as bad debts, returns, and discounts
Adequate written procedures for accounting function
FUNCTION: CASH RECEIPTS
CONTROL OBJECTIVES:
All cash receipts should be immediately recorded upon receipt and deposited intact in bank
All cash receipts should be accurately entered in the accounting records
POTENTIAL ERRORS OR IRREGULARITIES:
Cash receipts could be misappropriated
Delays in recording cash receipts
FINANCIAL STATEMENT COMPONENTS AFFECTED:
Misstatement of cash, accounts receivable, and receivables from employees
SPECIFIC CONTROL PROCEDURES:
Use of prenumbered official receipts and accounting for its completeness
Preparation of a list of cash receipts at the time of receipt
Restrictive endorsement of checks received
Establishment of control totals for posting to control accounts before cash receipts documents are
routed to accounts receivable subsidiary ledgers clerk
Comparison of actual amount received with the initial cash receipts record
Comparison of cash receipts record with bank validated deposit slips, cash receipts book, and bank
statements
Adequate written procedures for cash receipts function
SALES RETURNS AND ALLOWANCES
CONTROL OBJECTIVES:
Goods being returned are properly inspected before acceptance
Goods returned are recorded at the time of receipt
POTENTIAL ERRORS OR IRREGULARITIES:
Customers may be given credit for goods returned but were not received
Damaged merchandised may be included in inventories at its original cost
Unrecorded returns
Goods returned in the current period may not be included in the inventory count
FINANCIAL STATEMENT COMPONENT AFFECTED:
Misstatement of accounts receivable, sales returns and allowances, and inventories
SPECIFIC CONTROL PROCEDURES:
The description, condition, and quantity of goods returned should be checked at the time of receipt
Use of prenumbered receiving reports and credit/debit memos
Accounting for the numerical sequence of receiving reports and debit/ credit memos follow up of
missing documents. A designated official should review and approve the results of follow up
procedures done.
Receiving reports should be matched with debit/credit memos

PURCHASING/DISBURSEMENT CYCLE: CONTROL OBJECTIVES AND PROCEDURES

FUNCTION: PURCHASING
CONTROL OBJECTIVES:
All acquisitions of goods and services should be authorized
Written authorizations should contain sufficient details for subsequent comparison with receiving
reports and vendor invoices
All approved purchases should be reported
POTENTIAL ERRORS OR IRREGULARITIES:
Goods not needed such as those for personal use or in excess of the required quantity may be
purchased
Fictitious invoices for goods and services that were not actually received may be processed and paid
Excessive payments may be made because the company does not have the basis in verifying the
quantity ordered and property of the prices shown on the vendors invoices
Written purchase orders may be lost and the company may make invalid payments as there is no
means of verifying the terms
FINANCIAL STATEMENT COMPONENTS AFFECTED:
Misstatement of inventories and income
Misstatement of expenses
Misstatement of losses from fraud
SPECIFIC CONTROL PROCEDURES:
Require written authorizations for all purchases such as approved purchase orders and requisitions
Vendors, prices, quality of goods and terms should be approved by management
Approved purchase orders, purchase requisitions, and other written authorizations should clearly
indicate quantities, description of goods, prices and other terms such as freight and discounts
Use of prenumbered purchase orders; accounting for its numerical sequence and follow up missing
orders
Adequate written procedures for the purchasing function
FUNCTION: RECEIVING
CONTROL OBJECTIVES:
The description, quantity and quality of goods and services received should be conform with the
specifications of the order
All goods and services received should be promptly and accurately received
POTENTIAL ERRORS OR IRREGULARITIES:
Vendors invoices may include items which were not actually received
Defective or damaged goods may be priced at full cost
FINANCIAL STATEMENT COMPONENTS AFFECTED:
Misstatement of inventories and income
SPECIFIC CONTROL PROCEDURES:
Check the description, quantities, and condition of goods received at the time of their receipt
Use of prenumbered receiving reports in recording goods and services received and accepted
Accounting for the numerical sequence of receiving reports, follow up of missing reports
Prenumbered purchase orders should be matched with receiving reports to identify unmatched
orders; there should be follow up procedures for long outstanding unmatched orders
Adequate written procedures for receiving function
FUNCTION: ACCOUNTS PAYABLE
CONTROL OBJECTIVES:
Liabilities for all goods and services received and accepted should be recognized and recorded in
general and subsidiary ledgers
All recorded purchases should be based on the quantity, description, and condition of goods received
There should be periodic verification of recorded purchases and liabilities
POTENTIAL ERRORS OR IRREGULARITIES:
The company may not be able to determine of all transactions have been recorded since purchase
invoices are not accounted for
Payments may be made for goods that were not actually received
Non detection of unrecorded liabilities
FINANCIAL STATEMENT COMPONENTS AFFECTED:
Misstatements of assets, expenses, and accounts payable
SPECIFIC CONTROL PROCEDURES:
Vendors invoices should be logged, numbered, or controlled by other means as they are received
Receiving reports should be matched with vendors invoices to identify unmatched receipts; follow up
procedures should be performed on long unmatched items
Control totals should be established and posted to control account before invoices are forwarded to
the subsidiary ledger clerk
Accruals for services received such as rent, utilities, audit and legal fees, etc., should be made on a
regular and rational basis

Check the validity of vendors invoices; quantities and prices billed should be compared with
receiving reports and purchase orders
Verify the accuracy of vendors invoices
A designated official should review and approved vendors invoices before they are recorded as
accounts payable
There should be periodic comparison of recorded balances with budgeted amounts and with those of
prior periods
The subsidiary records should be maintained by a person who neither approves disbursement
documents nor maintains the control account
There should be periodic reconciliation of subsidiary records with control account balance and with
suppliers statements of accounts
The validity of amounts and quantities shown on vendors credit memos should be checked by
comparing them with records of goods returned and original purchase invoices; extensions and
footings of credit and debit memos should be adequately checked
There should be adequate written documentation of procedures for processing and recording
vendors invoices
FUNCTION: CASH DISBURSEMENT
CONTROL OBJECTIVES:
All cash disbursement should be promptly and accurately recorded
All cash disbursement should be authorized, based on recorded liabilities
Access to cash should be limited to authorized company personnel
POTENTIAL ERRORS OR IRREGULARITIES:
Cash may be misappropriated by making fraudulent payments
FINANCIAL STATEMENT COMPONENTS AFFECTED:
Misstatement of assets, liabilities, expenses, losses from fraud, and income
SPECIFIC CONTROL PROCEDURES:
Use of and accounting for prenumbered checks and vouchers
Details of recorded cash disbursements such as payees, dates, check numbers, and amounts should
be compared with paid checks and bank statement
Follow up of missing checks and vouchers
Establish control totals for posting to control account prior to posting to subsidiary records.
Checks should be prepared based on approved voucher package
Company officials designated as check signers should review disbursement documents before
signing checks. Dual signatures should be required for disbursements involving unusually large
amounts
Disbursement documents should be stamped PAID, perforated, or voided to prevent re use
Adequate control over access to blank, used and spoiled checks
There should be adequate control over access to check signing equipment and signature plates
There should be adequate documentation of procedures for processing cash disbursements
The following procedures may help an auditor determine if the control policy or procedure is suitably designed to
prevent or detect misstatements and if it is functioning effectively:
1. Inquiries of appropriate personnel
2. Inspection of documents and records
3. Observation of the application of a specific internal control policy or procedure
In addition to the foregoing, an auditor may reperform a specific control procedure. These tests of controls should
provide evidence that will enable an auditor to answer the following questions:
1. Were the control procedures performed?
2. How were they performed?
3. Who performed the procedure?

TYPICAL TESTS OF CONTROLS FOR THE REVENUE/RECEIPT CYCLE ARE LISTED BELOW:
SALES
1. Obtain specimen signatures of officers who approve transactions, like:
a. Credit manager
b. Sales manager
c. Storekeeper
d. Shipping or delivery department manager
2. Obtain specimen initials of persons who double check the:
a. Sales invoices
b. Delivery receipts or bills of lading
3. Check the file copies for completeness of the numerical sequence of:
a. Sales orders
b. Charge sales invoices
c. Cash sales invoices
d. Delivery receipts
e. Credit memos
4. Select a sample of recorded sales invoices, and:
a. Check arithmetical accuracy
b. Trace to corresponding shipping documents
c. Test pricing by reference to official price list
d. Check approval for:
i. Credit
ii. Terms
e. Compare details with approved customer orders like merchandise specifications, price,
quantity, credit period, discounts, etc.
f. Trace postings to customers subsidiary ledgers
g. Check entries for promptness and accuracy
5. Select a sample of sales invoices, and:
a. Trace to sales register
b. Trace postings to customers subsidiary ledgers
c. Look for the initials of the person who double checked the accuracy of sales invoices
6. Select a sample of delivery receipts or bills of lading, and;
a. Trace to corresponding sales invoices
b. Compare with customers orders
c. Trace postings to stock cards and inventory records
d. Look for the initials of the person who double checked the accuracy of delivery receipts
7. Select a sample entries in the subsidiary ledger and trace to:
a. Corresponding sales invoices
b. Entries in the sales register
8. Check footings and cross footings of sales register and trace postings to the general ledger
9. Observe proper segregation of duties
ACCOUNTS RECEIVABLE
1. Select a sample of postings in the subsidiary ledger, and:
a. Trace to cash receipts register
b. Trace to debit/credit memo register
2. Reverse the procedures in no. 1
3. Check for evidence showing monthly reconciliation of the subsidiary ledger balances with the control
account in the general ledger
4. Scan and investigate any unusual items
5. Determine if write offs and other adjustments are properly documented and authorized
6. Observe proper segregation of duties
SALES RETURNS AND ALLOWANCES
1. Select sample of credit memos and trace to:
a. Entries in the debit/credit memo register
b. Corresponding receiving report
2. Reverse the procedures in no. 1
3. Select sample of credit memos and;
a. Review for proper approval
b. Check pricing and arithmetical accuracy
4. Check footings and cross footings of debit/credit memos register and trace postings to the general
ledger
5. Observe proper segregation of duties
CASH RECEIPTS
1. Select a sample of postings in the subsidiary ledger, and:

2.
3.
4.
5.
6.
7.
8.
9.

a. Trace to cash receipts register

b. Postings in the subsidiary ledger
c. Provisional collectors receipts
Reverse the procedures in no. 1
Check footings and cross footings of cash receipts register and trace postings to the general ledger
Trace cash receipts register entries to bank statement deposits and vice versa
Obtain or prepare a bank reconciliation
Compare details of collections per of official receipts with details on the deposits slips
Reconcile cash receipts record with total deposits per bank statement
Investigate debit entries to cash not originating from cash receipts register
Observe proper segregation of duties

TYPICAL TESTS OF CONTROLS FOR THE PURCHASING/DISBURSEMENT CYCLE ARE LISTED BELOW:
PURCHASES
1. Obtain specimen signatures of officers who approve transactions, like:
a. Sales manager
b. Purchasing manager
c. Storekeeper
d. Check signatories
2. Obtain specimen initials of persons who double check the:
a. Purchase requisitions
b. Purchase orders
c. Price canvassing
d. Suppliers sales invoices
e. Suppliers delivery receipts
f. Items at minimum balances
3. Check the file copies for completeness of the numerical sequence of:
a. Purchase requisitions
b. Purchase orders
c. Receiving reports
d. Debit memos
e. Notice of defective goods
4. Select a sample of recorded purchases, and:
a. Check arithmetical accuracy
b. Trace to corresponding receiving reports
c. Trace details to corresponding purchase orders
d. Check entries for promptness and accuracy
e. Trace postings to suppliers subsidiary ledger
5. Select a sample of suppliers sales invoices, and:
a. Trace to purchase register
b. Look for the initials of the person who double checked the accuracy of invoices
c. Trace postings to suppliers subsidiary ledger
6. Select a sample of receiving reports, and;
a. Trace to corresponding suppliers sales invoices
b. Compare with purchase orders
c. Trace postings to stock cards and inventory records
d. Look for the initials of the person who double checked the accuracy of receiving reports
7. Check footings and cross footings of purchases register
8. Check postings to the general ledger
9. Observe proper segregation of duties
ACCOUNTS PAYABLE
1. Select a sample of postings in the subsidiary ledger, and:
a. Trace to Suppliers sales invoices
a. Trace to check register
b. Trace to debit/credit memo register
c. Trace to purchase register
2. Reverse the procedures in no. 1
3. Check for evidence showing monthly reconciliation of the subsidiary ledger balances with the control
account in the general ledger
4. Scan and investigate any unusual items
5. Determine if adjustments are properly documented and authorized
6. Observe proper segregation of duties
PURCHASE RETURNS AND ALLOWANCES
1. Select sample of debit memos and trace to:

a. Entries in the debit/credit memo register

b. Corresponding delivery receipts duly signed by suppliers or their representatives
2. Using the same sample selected in no 1:
a. Review for proper approval
b. Check pricing and arithmetical accuracy
3. Observe proper segregation of duties
CASH RECEIPTS
1. Select a sample of checks, and:
a. Trace to check register
b. Postings in the subsidiary ledger
c. Check voucher
2. Reverse the procedures in no. 1
3. Check footings and cross footings of check register and trace postings to the general ledger
4. Trace check register entries to bank statement deposits and vice versa
5. Reconcile check register total credits to cash with total bank debits for checks
6. Investigate credit entries to cash not originating from check register
7. Compare canceled check details with check register information

OTHER CONSIDERATIONS IN PLANNING/CONDUCTING AUDIT OF FINANCIAL STATEMENTS

RELATED PARTIES
The auditor shall inquire of management regarding:
The identity of the entitys related parties, including changes from prior period;
The nature of the relationships between the entity and these related parties; and
Whether the entity entered into any transactions with these related parties during the period and, if
so, the type and purpose of the transactions
The auditor shall inquire of management and others within the entity, and perform other risk assessment procedures
considered appropriate, to obtain an understanding of the controls, if any, that management has established to:
Identify, account for, and disclose related party relationships and transactions in accordance with
the applicable financial reporting framework
Authorize and approve significant transactions and arrangements with related parties; and
Authorize and approve significant transactions and arrangements outside the normal course of
business
During the audit, the auditor shall remain alert, when inspecting records or documents, for arrangements or other
information that may indicate the existence of related party relationships or transactions that management has not
previously identified or disclosed to the auditor
The auditor shall share relevant information obtained about the entitys related parties with the other members of the
engagement team
The auditor shall treat identified significant related party transactions outside the entity s normal course of business
as giving rise to significant risks.
Unless all of those charged with governance are involved in managing the entity, the auditor shall communicate with
those charged with governance significant matters arising during the audit in connection with the entitys related
parties.
The auditor shall include in the audit documentation the names of the identified related parties and the nature of the
related party relationships
USING THE WORK OF INTERNAL AUDITORS
THE EXTERNAL AUDITOR SHALL DETERMINE:
a) Whether the work of the internal auditors is likely to be adequate for purposes of audit; and
b) If so, the planned effect of the work of the internal auditors on the nature, timing or extent of the external
auditors procedures.
c) In determining whether the work of the internal auditors is likely to be adequate for purposes of the audit, the
external auditor shall evaluate:
The objectivity of the internal audit function;
The technical competence of the internal auditors;
Whether the work of the internal auditors is likely to be carried out with due professional care; and
Whether there is likely to be effective communication between the internal auditors and the
external auditor
d) In determining the planned effect of the work of the internal auditors on the nature, timing or extent of the
external auditors procedures, the external auditor shall consider:
The nature and scope of specific work performed, or to be performed, the internal auditors
The assessed risks of material misstatement at the assertion level for particular classes of
transactions, account balances, and disclosures; and

The degree of subjectivity involved in the evaluation of the audit evidence gathered by the internal
auditors in support of the relevant assertions
e) To determine the adequacy of specific work performed by the internal auditors for the external auditors
purposes, the external auditor shall evaluate whether:
The work was performed by internal auditors having adequate technical training and proficiency
The work was properly supervised, reviewed and documented;
Adequate audit evidence has been obtained to enable the internal auditors to draw reasonable
conclusions;
Conclusions reached are appropriate in the circumstances and any reports prepared by the internal
auditors are consistent with the results of the work performed; and
Any exceptions or unusual matters disclosed by the internal auditors are properly resolved.
USING THE WORK OF AN AUDITORS EXPERT
AUDITORS EXPERT
An individual or organization possessing expertise in a field other than accounting or auditing, whose work
in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence
An auditors expert may assist the auditor in:
Obtaining an understanding of the entity and its environment, including its internal control
Identifying and assessing the risks of material misstatement
Determining and implementing overall responses to assessed risks at the financial statements level
Designing and performing further audit procedures
Evaluating the sufficiency and appropriateness of audit evidence
When planning to use the work of an auditors expert, the auditor shall evaluate the competence, capability
and objectivity of the auditors expert
The auditor shall obtain sufficient understanding of the field of the expertise of the auditors expert to enable
the auditor to:
Determine the nature, scope and objectives of that experts work for the auditors purposes
Evaluate the adequacy of that work for the auditors purposes
The auditor shall agree, in writing when appropriate, on the following matters with the auditors expert :
The nature, scope and objectives of that experts work
The respective roles and responsibilities of the auditor and that expert
The nature, timing and extent of communication between the auditor and that expert, including the
form of any report to be provided by that expert
The need for the auditors expert to observe confidentiality requirements
The auditor shall evaluate the adequacy of the auditors expert work for the auditors purposes, including:
The relevance and reasonableness of that experts findings or conclusions, and their consistency
with other audit evidence
If that experts work involve used of significant assumptions and methods in the circumstances
If that experts work involves the use of source data that is significant to that experts work, the
relevance, completeness, and accuracy of that source data.
If the auditor determines that the work of the auditors expert is not adequate for the auditors purposes, the
auditor shall:
Agree with that expert on the nature and extent of further work to be performed that expert
Perform additional audit procedures appropriate to the circumastances