ACAUD 3149

Topic 1: Pre-Engagement Activities Content not provided yet.

Topic 2: Audit Planning

Objectives
 To plan the audit so that the audit will be Planning as a Phase of the Audit Process
performed:  Not discrete—no certain or absolute beginning
o Effectively—fulfillment of objectives or end
o Efficiently—managed the time well  Continual and iterative (encompasses the whole
process)
Role and Timing of Planning  Possibility of changes will ensue changes in
 Overall audit strategy—the narrative, the drama planning
behind the audit, basically a statement stating  Completed at the end of the current engagement
deadline, etc.  New information or changes will affect audit
 Audit plan—the formal documentation of the documentation and should update such
strategy, scheduling, scoping, staffing
Major Audit Planning Activities
Benefits of Audit Planning  To establish an overall strategy:
 Appropriate attention to important areas o setting the:
o Since there is no complete assurance;  scope;
only reasonable assurance  timing; and
 Timely identification and resolution of potential  direction of the audit
problems o and guides the development of the audit
 Proper organization and management of the plan
audit engagement (leading to an effective and  Major audit planning activities
efficient performance)
 Proper assignment of work to appropriate Understanding of the client and its
Obtaining
engagement team members environment
 Assistance in coordinating work done by other Determinin
auditors and experts Need for experts
g
 Assistance in facilitating direction, supervision, Establishin
review Materiality and assessing risks
g
Assessing Possibility of non-compliance
Nature and Extent of Planning Activities Identifying Related parties
Will vary according to the following: Performing Preliminary analytical procedures
 Entity size and complexity Overall audit strategy and detailed audit
Developing
 Previous experience with the entity of key plan
engagement team members Preparing Preliminary audit programs
o Partner
o Manager
o Staff-in-charge
 Changes in circumstances during audit
 Timing of the appointment of the independent
auditor
 Completion of Overall Strategy and Audit Plan
Overall Audit Strategy  Establishment of both are not necessarily
In establishing the overall audit strategy, the auditor discrete nor sequential
shall:  Establishment of both are closely interrelated
 Identify engagement characteristics that define  Changes in one may result in changes to the
its scope other
 Ascertain reporting objectives to plan timing of  Preferably, audit plan should be initially
the audit and nature of communications required completed prior to consideration of IC of
 Consider factors judged to be significant in performance of specific procedures
directing the efforts of the engagement team
 Consider results of pre-engagement activities Planning Documentation
and whether knowledge gained by the partner on Documents:
previous other engagements are relevant  Overall audit strategy
 Ascertain the NTE of resources necessary  Audit plan
 Significant changes and reasons for such
Audit Plan o Reasons should be justifiable
 Developed after establishing the audit strategy
 Developed to address the various matters Additional Considerations in Initial Audit
identified in the overall audit strategy Engagements
 More detailed than the overall audit strategy  After performing pre-engagement activities
 Includes NTE of the audit procedures to be  Planning activities may be expanded due to:
performed by engagement team members which o the auditor possibly not having previous
will be documented in the audit program experience with the entity that is
 Audit program—shows the more detailed and considered in planning recurring
specifies the procedures; a list of things to do engagements

Audit Program For initial audits, additional matters that may be

 Serves as: considered in developing the overall audit strategy:
o Set of instructions to assistants  Arrangements with previous auditor to review
o Means to control and record proper prior years’ working papers
execution of the work  In connection with the initial selection of
 Contains auditors discussed with management:
o Audit objectives for each area o Major issues
o Time budget which budgets hours for o The communication of said matters to
each audit area or audit procedure those charged with governance
 Planned audit procedures to obtain sufficient,
Changes to Planning Decisions during the appropriate evidence regarding open balances
Course of the Audit o Since you weren’t the auditor last audit
 Overall audit plan & audit program—revised as  Other procedures required by the firm’s system
necessary during the audit course of quality control for initial audit engagements
 Planning—continuous throughout engagement
because of constant of unexpected changes or
results of audit procedures

Direction, Supervision, and Review

  The auditor should:  (Understanding internal control) Identify
o Plan the nature, timing, and extent of throughout the understanding process:
direction and supervision of engagement o Risks
team members o Relevant controls related to said risks
 The NTE of direction and supervision depends  (Understanding significant classes of
on the following factors: transactions) Consider:
o Assessed risk of material misstatement o Classes of transactions
 Most important factor o Account balances
o Size and complexity of the entity o Disclosures in the financial statements
o Area of audit  Relate identified risks to what can go wrong at
o Capabilities and competence of the assertion level
personnel performing the audit work  Consider whether the risks are of a magnitude
that could result in a material misstatement of
Considerations Specific to Smaller Entities the financial statements
 Audit is carried out by a small audit firm (may o Are risks high or low
be a sole practitioner)  Consider the likelihood that the risks could
 It is desirable to consult: result in a material misstatement of the FS
o Other suitably-experienced auditors o How likely will the risks result in MM
o Auditor’s professional body (BOA)
 But usually one-man team audits are for audits Risk Assessment Procedures
of smaller entities as well  Inquiries (asking, asking, asking)
o Management
Risk Assessment Procedures o Others within the entity who may have
information in identifying risks of MM
Identifying and Assessing the Risks of Material due to fraud and error
Misstatement through Understanding the Entity and  Analytical procedures
its Environment  Observation and inspection
 Auditor’s another objective: to identify and
assess risks of material misstatements RAP by themselves do not provide SAE on which to
 Whether due to: base the audit opinion
o Fraud
o Error Analytical Procedures during the Planning Stage
 At the following levels:  Consist of evaluations of financial information
o Financial statement level—per line  Through a study of plausible relationships
items of the balance sheet and income among both financial and non-financial data
statement  Encompass the investigation of identified
o Assertion level—information composing fluctuations and relationships that are:
those line items o consistent with other information; or
 Through understanding the: o differ from expected values significantly
o Entity  Required to be performed during planning stage
o Its environment  Designed to assist the auditor in planning the
o Entity’s internal control NTE of other audit procedures
 Thereby providing a basis for designing and
implementing responses to the assessed risks of
material misstatements
The auditor shall:
Required Understanding of the Entity  Using professional judgment, the auditor shall
and its Environment (information obtained here will be define materiality at:
used in the design of substantive procedures) o FS level—the smallest aggregate
The auditor should obtain an understanding of the amount of misstatement applicable to all
following: FS
 Applicable financial reporting framework and o Assertion level for classes of
the following: transaction, account balances, and
o Industry disclosures—largest tolerable
o Regulatory misstatement
o Other external factors
 The entity’s: Audit Risk
o Nature and operations  The risk that the auditor gives an inappropriate
o Ownership and governance structure audit opinion when the financial statements are
o Types of investments made and planned materially misstated
to be made
o Way of structure and how it is finance Components of Audit Risk
 Risk of material misstatement
 Selection and application of accounting policies,
including reasons for changes o Control risk—risk that a misstatement
 Objectives and strategies, and related business will not be prevented, detected, and
risks that may result in risk of MM corrected by the accounting and internal
control
 Measurement and review of the entity’s
o Inherent risk—susceptibility of an
financial performance
account balance or class of transactions
 Internal control
to misstatements, assuming that there
were no controls
Assessment of Audit Risk and Materiality
 Individually; or
 Materiality and audit risk:
 In aggregation with
o affect the application of PSA; and
misstatements in other balances
o are reflected in the auditor’s report
or classes
 The auditor must make judgments about  Risk of not detecting the misstatement
materiality and audit risk in determining the o Detection risk—risk that the substantive
NTE of procedures to apply and in evaluating
procedures will not detect a
the results
misstatement that exists in an account
balance or class of transactions
Materiality
 Information is material if its omission or To reduce detection risk
misstatement could influence the economic Nature More effective procedures
decisions of users taken on the basis of the Timing Closer or nearer to year-end
financial statements Extent Larger sample size
 Depends on the size of the item of the error
judged
 Recognizes that some matters, but not all, are
important for fair presentation of the FS
 Its relationship with audit risk should be
considered
 Considered, to determine scope of audit
procedures
 Assessment of Control Risk  Audit planning is the continuation of the pre-
Interrelationship of engagement because after acceptance of terms,
the Components of Mediu you must plan the audit well because you need
High Low
Audit Risk m to earn a profit, also.
 Doing the audit efficiently and not sacrificing
Mediu quality of audit
High Lowest Lower
m  Efficiency and effectivity!
Assessment
Mediu Mediu
of inherent Lower Higher  Inherent and control risk cannot be managed, but
m m
risk can only be assessed
Mediu
Low Higher Highest  Detection risk can be managed and can be set by
m
adjusting nature, timing, and extent of audit
procedures
Interpretation of the Extremes
 If the control risk and the inherent risk are Standard Procedures
assessed high, detection risk should be set at the 1. Obtain an understanding of the entity’s
lowest level to maintain the set audit risk, environment
meaning, maximum audit procedures. 2. Consider materiality and assess risk of material
misstatements
 If the control risk and the inherent risk are
3. Determine the acceptable level of audit risk
assessed low, detection risk should be set at the
4. Identify detection risk to determine the nature,
highest level to maintain the set audit risk,
timing, and extent of further audit procedures
meaning, loose audit procedures.

Relationships of Risk and Materiality to Substantive

Procedures
Substantive
Relationshi
Procedures
p
required
Assessed
High High
risk of MM
Direct
(inherent &
Low Low
control)
Acceptable
High Low
risk of not
detecting Inverse
the MM Low High
(detection)
High Low
Acceptable
Inverse
Materiality
Low High

If the assessment of audit risk is high, materiality should

be set at a low level. By assessing materiality at the
lowest, you are accepting a lower tolerable error.

Recap of Audit Planning

SAMPLE AUDIT STRATEGY DOCUMENT
SAMPLE AUDIT PLAN DOCUMENT
All the way down the last account of the financial statements. Each account is in the audit plan with the same columns.

SAMPLE AUDIT PROGRAM

(This example is for cash audit)

 Based on the audit plan

 Step by step instructions for assertions
Topic 3: Consideration of Internal Control o Plan the audit
o Develop an effective audit approach
 The understanding of IC will be used to identify:
Internal Control Consideration o Types of potential misstatements
 Part of audit planning o Consider factors that affect risk of MM
 For the auditor to obtain understanding of o Design the NTE of further audit
client’s accounting and internal control systems procedures
 To:
  After this, it is assumed that we are done with  Entity’s objectives ∞ controls
the bulk of audit planning  No matter how well designed, internal controls
can only provide REASONABLE
Accounting and Internal Control Systems ASSURANCE because of inherent limitations
 Accounting system—tasks and records which
processes transactions to maintain financial Inherent Limitations of Internal Control
records; the whole process of accounting; can be  Such limitations include:
computerized or manual o Cost-benefit consideration—
o Identifying management usual requirement that a
o Assembling control be cost-effective
o Analyzing o Management overriding control—
o Calculating possibility that a person exercising
o Classifying control could abuse such responsibility
o Recording o Possibility of circumvention through
o Summarizing collusion
o Reporting o Possibility of procedures becoming
 Internal control system—not specific to the inadequate due to changes in condition
accounting process; all the policies and and compliance with procedures may
procedures (P&P—internal control) adopted by deteriorate
management to ensure; extends beyond the o Human error—carelessness, distraction,
accounting system error in judgments, misunderstanding of
o Orderly and efficient business conduct instructions
o Safeguarding of assets o The fact that most controls tend to be
o Prevention and detection of fraud and directed at anticipated/routine
transactions and not at unusual/non-
error
routine transactions
o Accuracy and completeness of
Areas of Internal Control
accounting records
 Administrative control
o Timely preparation of reliable
o Plan of organization and the procedures
information
and records
o Concerned with:
 the decision processes leading to
Entity’s Internal Control management’s authorization of
 A process, P&P, designed to provide reasonable transactions
assurance o Promote:
 Effected by:  Operational efficiency
o Those charged with governance (Board)  Adherence to managerial
o Management policies
o Other personnel  Accounting control
o Plan of organization and the procedures
 Objectives (EERC)
o Effectiveness and efficiency of and records
o Concerned with:
operations
o Reliability of financial reporting  the safeguarding of assets
o Compliance with applicable laws and  the reliability of financial
regulations records
o Involves systems of authorization and
Assurance Provided by Internal Control approval controls over:
  Assets o HR policies and procedures
 Internal audit o Organizational structure
 All other financial matters
Entity’s Risk Assessment Process
Controls Relevant to the Audit  The process of identifying and responding to
 Controls pertaining to: business risks and the results thereof
o The “R” objective (reliability of  For financial reporting purposes, includes:
financial reporting) o How mgmt. identifies risks relevant to
o Management risk that may give rise to preparation of FS that are:
MM in the financial statements  Presented fairly in all
 A matter of PJ (professional judgment) subject material respects
to PSA requirements—whether a control  In accordance with the
(individually or with others) is relevant in: entity’s applicable FR
o Assessing risks of MM framework
o Designing and performing further  Estimating significance
procedures in response to assessed risks  Assessing likelihood of
 Factors in exercising judgment occurrence of risks
o Auditor’s judgment about materiality  Deciding upon actions
o Size to manage risks
o Nature (including organization and  Risks can arise or change due to:
ownership characteristics) o Changes in operating environment
o Diversity and complexity operations o New personnel
o Applicable legal and regulatory o New or revamped information systems
requirements o Rapid growth
o Nature and complexity of IC systems o New technology
Components of Internal Control o New business models, products, or
 Control environment activities
 Entity’s risk assessment process o Corporate restructurings
 Information and communication systems o Expanded foreign operations
 Control activities o New accounting pronouncements
 Monitoring of controls  Auditor shall obtain an understanding whether
the entity has a process for
Control Environment o Identifying business risks relevant to FR
 Governance and management functions objectives
 The attitudes, awareness, and actions of those o Assessing the significance of risks and
charged with governance and management their likelihood of occurrence
 TONE FROM THE TOP o Deciding how to manage those risks
 Elements
o Integrity and ethical values Information and Communication Systems
o Management’s philosophy and operating  Consists of:
style o Infrastructure (physical and hardware
o Competence—outlined or implied components)
o Participation by those charged with o Software (P&P)
governance o People
o Assignment of authority and o Input or data
responsibility o Output or meaningful information
 In manual systems, infrastructure and software o Segregation of duties—the ff. should be
components are absent or less significant performed by different employees:
 Consists of procedures and records established:  Independent checks
o For entity transactions to be:  Asset custody
 Initiated  Authorization of transactions
 Recorded  Recording of transactions
 Processed  Execution of transactions
 Reported
o To maintain accountability for: Monitoring of Controls
 Related assets  Assessing the quality of internal control
 Liabilities performance over time
 equity  On a timely basis, involves assessment of:
 Communications related to financial reporting: o Design of controls
o Internal—between management and o Operations of controls
TCWG  Done to ensure that controls continue to operate
o External—e.g. with regulatory effectively
authorities  Can be accomplished through
 BIR o Ongoing monitoring activities
 SEC o Separate evaluations—performed by
 IC internal auditors, audit committee,
 Etc. and/or external auditors
o Combination of the two

Responses to Assessed Risks

Control Activities  The stage after understanding the internal and
 The meat of the discussion on internal control accounting control system
 P&P to help ensure management directives are  At the financial statement level:
carried out o Auditor shall design and implement
 Control activities overall responses
o Authorization  At the assertion level:
 Specific authorization—for o Auditor shall design and perform further
unusual, material, infrequent audit procedures
projects  In designing further audit procedures, the auditor
 General authorization—for shall:
regular transactions o Consider the reasons for the assessment
o Performance reviews—usually done by given to the risk of MM AT THE
accounting or internal audit functions, ASSERTION LEVEL for each:
controllership department  Class of transactions
 Actual vs. budget, forecasts,  Account balance
prior period performance  Disclosure
o Information processing—from initiation o Obtain more persuasive audit evidence
up to eventual inclusion of transaction in —when assessed risk is higher
financial reports
o Physical controls—for assets and Test of Controls
documents
  Auditor should give adequate consideration to o Account balance
controls relevant to the audit o Disclosure
 Quality of IC can have a significant impact in
determining the NTE of the audit procedures in Recap
gathering audit evidence related to class of
transactions, account balances, and disclosures
(substantive procedures)
 Basically, the quality of IC is tested to determine
the NTE of subsequent substantive procedures
 Designed and perform to obtain SAE as to the
operating effectiveness of controls when:
o Assessment of risks of MM at the
assertion level relies on controls
assumed to be operating effectively
o Substantive procedures cannot provide
SAE at the assertion level
 Test of controls include (IOIRW)
o Inquiry
o Observation
o Inspection
o Reperformance
o Walk-through tests

Substantive Procedures
 Irrespective of assessed risks of MM—hindi
dapat mawala
 For each material:
o Class of transactions

Topic 5: Substantive Tests of Cash (Empleo Chapter o Misappropriation

3) o Misapplication
o Other forms of frauds
Cash  Most financial statement items flow through the
 Refers only to cash items that are: cash account, such that a misstatement in cash
o unrestricted and balance means misstatement of some other
o immediately available for use in current accounts
operations
 First item in the current assets section of the Objectives in the Audit of Cash
balance sheet whose items are sorted based on 1. Obtain an understanding of internal control
liquidity procedures adopted by the company to safeguard
 Does not represent a significant amount cash
compared to total assets but more audit time is 2. Establish the existence of the recorded amount
devoted to its balances’ examination because of of cash
a high degree of inherent risk 3. Establish the completeness of recorded cash
 Highly prone to:
 4. Determine that the client has rights to recorded f) Cash register totals and credit card machines
cash should be balanced daily. Any resulting cash
5. Establish that the presentation and disclosure of shortage/overage should be monitored
cash is appropriate
6. (not in Empleo’s book) Establish the accurate Controls over Cash Disbursements
conversion and valuation of cash denominated in  Cash disbursement controls should provide
foreign currency assurance that cash disbursements are:
o Made only for authorized business
Internal Control over Cash purposes
 The auditor should consider control over cash o Properly recorded
transactions to determine the extent of audit
procedures to be performed
 Segregation of the custodian function from the Cash Disbursement Controls
record keeping function a) All disbursements must be properly authorized
o An important aspect of cash control and adequately documented (voucher system is
 Minimizes fraud highly recommended since it requires review of
 Help detect unintentional errors supporting documents)—check and review
 Individuals involved in cash transactions must b) Payments must be made by
be controlled  Checks—thru the voucher system;
o The more people involved, the bigger  Electronic fund transfer—thru the
the risk voucher system; or
 Individual responsibilities for cash handling  Petty cash fund—immaterial and
must be fixed and individual duties must be insignificant disbursements;
limited to replenishment is thru the voucher
o Minimize (if not eliminate) fraudulent system
activities involving cash c) Issued checks must be sequentially numbered
d) Checks should be signed by at least two persons
Controls over Cash Receipts to prevent fictitious disbursements
 Cash receipt controls should provide assurance e) Check signatories shall be persons in appropriate
that cash that should have been received was: high levels in the organization
o In fact received  Ex. president and treasurer
o Recorded correctly f) Checks issued must be payable to specific
o Deposited promptly entities (company or person) and must not be
 Basic principle: no one person should be made payable to “Cash”
allowed to collect, handle, and deposit cash  Payee written on check should be
specified
Cash Receipt Controls g) Periodic bank reconciliations must be made by a
a) Cash handling and record keeping should not be person independent of the following functions:
assigned to one person  Authorization
b) Pre-numbered and sequentially used official  Check signing function
receipts  Cash receipts function
c) Intact deposit of each day’s cash receipts Reconciliation must be made at least once a
d) Deposits should match with official receipts month to ensure that all deposits and
The person reconciling ORs with deposits disbursements are properly made and recorded
should not be the one making the deposits both by the entity and the bank
e) Cash sales should be recorded at the point of
sale Audit Procedures
 Auditing cash and cash equivalent involves
 o Identifying the risks of material
misstatements for cash; and
o Gathering audit evidence to reduce these
risks to an acceptable level
 Common risks of material misstatements
associated with cash
o Non-recording of transactions
o Non-existence of cash balances
o Recording cash transactions in I. AUDITING CASH ON HAND (Petty
Cash Fund)
inappropriate reporting period
 The auditor has to trace
 The auditor shall conduct a cash count as
o Opening balance of cash  prior year’s
follows:
financial statements
o In the presence of a custodian
o Opening balance of cash  prior year’s
o Custodian should be present throughout
working papers (for repeat engagement)
the count
 Reconciliation should be made between
o Signature of the custodian must be
o Composition of cash items
obtained to certify that the fund was
o Opening balance in the year under audit
returned intact
o The count of cash on hand balances and
the count of other highly liquid
instruments must be made
simultaneously
 This is to avoid any fund
transfer to temporarily conceal
cash shortage
 Cash count
o to validate the existence of cash on hand

Items Counted and Cashier’s Accountability

 Items counted—items inside the petty cash box;
receipts and disbursements
 Cashier’s accountability—all items entrusted to
the cashier for which he or she is accountable to
the entity or another party; receipts and unused
 Comparison of “items counted” vs. “cashier’s
accountability”
o Total items counted must = cashier’s
total accountability
o Any discrepancy = cash
shortage/overage
 Cash shortage
o Cashier accountability > items counted
o Reclassified as either (depends on
company policy)
 Receivable from the cashier (if
clearly cashier’s fault)
  Miscellaneous expense by custodian xxx Unconsumed items
Total per count xxx Other collections xx
(immaterial) handled by the x
 Cash overage custodian xx
o Items counted > cashier’s accountability Unreleased salaries x
Cashier’s
o Reclassified as accountability
 Miscellaneous income
xx
o Must be taken out of the cash fund and x
deposited to the general cash in bank xx
x
account of the company
Audit Adjusting Entries
Petty Cash Fund 1. From counted items
 The auditor should a. IOUs
o Bring the cash fund balance to = actual b. Petty cash vouchers (expenses)
cash items (currency and coins) that are i. Excluding PCFs made after the
appropriately composing the period. At present, those are still
undisbursed cash fund cash items.
o Reclassify noncash items c. Cash shortage/overage
o Cash items belonging to the entity but
not part of the cash fund, such as misc.
collections handled by the cashier, shall Miscellaneous Receivables—Employees xxx
be properly recorded and deposited Office Supplies Expense xxx
 The auditor should seek an explanation from an Transportation Expense xxx
official as to the existence of IOUs as part of the Freight Out xxx
Cash shortage xxx
items counted
Cash overage xxx
o Borrowing by the employees from the Petty cash fund xxx
PCF may be against the entity’s policy
and defeats the purpose for which the 2.
PCF is held by the entity From cashier’s accountability
o Usually, this practice is informal and a. Unused supplies
should not be practiced b. Collections
o c. Unpaid checks
 The Petty Cash Fund balance after adjustment
should represent only actual cash items counted
properly forming part of the undisbursed cash in
the PCF
Items counted (basically, all
Cashier’s total accountability
except sales unremitted)
Currency and coins xxx Imprest balance of the xx
Checks cash fund x
Checks representing xxx Checks or money
collections (dated and items for payment xx
post-dated) to another x
Checks for xxx (Meralco, PLDT,
disbursements etc.) Correct Petty Cash Fund, per audit Balance
(entrusted to the Collections  (+) Bills and coins
custodian) temporarily
Properly approved petty xxx handled by the xx  (+) Checks dated December of the current period
cash vouchers custodian for x o Still cash items since not yet considered
evidencing payments remittance to the
IOUs with no supporting xxx general cashier cashed at period’s year-end
vouchers (does not include  (+) Petty cash vouchers dated January of the
Unconsumed items xxx check for
Other collections handled PCashier)
next period
 o Still cash items since still undisbursed at  Help the auditor determine that all cash
period’s year-end disbursements are
 (-) Collections from customers o Properly authorized
o Not anymore a PCF item, should be in o Made only for goods and services that
CIB are actually received
 (-) Unreleased salaries  Include
o Returned to payroll envelope (part of o Proving the footings of the cash
CIB) disbursements journal or check register;
o Tracing the totals to the general ledger;
II. AUDITING CASH IN BANK o Comparing checks returned with the
entries in the cash disbursements journal
Tests of Controls Related to Cash Receipts or check register; and
 Help the auditor determine that cash payment o Reconciling recorded disbursements
intended for the company are with bank statements.
o Received  Ledger postings of cash receipts and
o Properly and promptly recorded disbursements must be reviewed to spot unusual
o Properly and promptly deposited in the entries that require special investigation
company’s bank account
 Includes Confirmation of Bank Balance
o Footing cash receipts records—checking  Must be requested by the auditor for each bank
totals; account maintained by the client
o Testing the postings of cash receipts to  This provides evidence in respect of the ff.:
ledgers; o Existence;
o Comparing recorded receipts with bank o Ownership; and
statements; o Accuracy of cash balances
o Comparing deposit slips recorded  The bank confirmation request must be on the
receipts; and auditor’s letterhead and must be sent to all banks
o Comparing recorded receipts with the where the client has dealings
details in the official receipts o Letter should not come from the client
 Details in the official receipts for cash  The request should be clear and concise
collections from customers must be matched  The request must include
with credit postings to customers’ subsidiary o Confirmation of demand deposits;
ledgers o Savings deposits;
o may uncover lapping o Certificates of deposits; and
 Lapping—a fraud referring to: o Information on compensating balances
o misappropriation of collections from  The ff. types of information may also be sought
customers from confirmation (basically, bank
o delaying its recording confirmation):
o posting the subsequent collections to the o Bank balances with corresponding
account of the customer who previously account numbers;
made the payment o Currency description;
o most likely to occur when has access to o Bank loans; and
both:  Collateral provided
 receipt of collections  Maturity and interest rate
 AR records  Terms and repayment
conditions
Tests of Controls Related to Cash Disbursements o Contingent liabilities
  Guarantees o Deposits in transit (DIT) and
 Endorsements outstanding checks (OC)—must be
 Copies for this should be retained in the working traced in the cutoff bank statement
papers noting reasonableness of the time period
between book recording and bank
recording (the lapse should be short,
preferably under 3months)
o Canceled checks—returned with the
Bank Reconciliation cutoff bank statement which must be
 Prepared when the confirmation returned by the traced to the list of outstanding checks
bank does not agree with the ledger balance (but o Large/unusual checks—should be
after a second confirmation) investigated
 Must be obtained by the auditor from the client o Significant or unusual reconciling items
when —for which appropriate evidence should
o the amount in the confirmation request be obtained
does not agree with the ledger balance
o repeated non-responses are obtained Proof of Cash
from the financing institution (but if  The auditor shall consider preparing such when
information is really material, effort there is reason to believe that a client’s
should be exerted to obtain that employee or officer perpetrates misappropriation
confirmation)  A reconciliation of the beginning and ending
 An audit evidence to support the ff. FS balances of cash, cash receipts, and cash
assertions relating to Cash in Bank disbursements during a specific period
o Existence or occurrence  To obtain an understanding of how the client
o Cut-off and the bank recorded the transactions affecting
o Accuracy cash balance during the period
o Completeness  Prepared by the auditor when there is reason to
 Reconciling items listed should be traced to believe that a client’s employee or officer
bank statements for the subsequent months perpetrates misappropriation
 Timing  Necessary to reconcile time differences in the
o At the close of the prior year—for first recording of the bank and the books
time audits
 The auditor has to test the clerical accuracy of Bank Transfer Schedule
the reconciliation and the details of the  Prepared if the client maintains cash accounts
supporting schedules with at least two separate banks
 Extent and nature—of the reconciling items  Shall be prepared to show transfers of cash
must be reviewed for reasonableness balances from one bank to another
 Cutoff bank statements—obtained to verify  Prepared specially towards the end of the
reconciling items listed in the bank reporting period
reconciliation
 Items Kiting
 An attempt to temporarily conceal a cash
shortage at month end by issuing a check from
one bank and depositing it to another
 Manipulation causing an amount of cash to be
included simultaneously in the balance of two or
more bank accounts
Important Notes from PCF Problem
 Cash count must be conducted with the presence
of the cash custodian all throughout the process
 Auditor has to obtain certification from the
custodian that the funds were counted in his/her
presence and they were returned to him/her
intact
Tips:

Items listed as Cashier’s Method 1:

counted accountability PCF fund xxx
Bills and coins Petty cash fund (at the Receivable from employees (xxx)
(undisbursed funds) imprest balance) PCF voucher expenses (xxx)
Other funds for which Cash overage xxx
Other funds and
the cashier is
collections received Cash shortage (xxx)
accountable
Unconsumed items Correct PCF balance xxx
(evidenced by PCF
Checks representing Method 2:
vouchers)
disbursements from
Bills and coins xxx
petty cash (no approved
Included to offset its Checks dated before year-end
vouchers)
double inclusion in the (formally cash already,
count
exclude stale, PDC, etc.) xxx
Checks representing
PC vouchers dated after year-end
other funds handled by
cashier (e.g. collections (undisbursed as of Dec. 31) xxx
from customers) Total cash items xxx
Paid petty cash Collections from customers*
vouchers (with (for deposit) (xxx)
appropriate invoices Unremitted cash sales as of Dec. 31 (xxx)
that payment is out of Unreleased salaries without money**
the PCF)
(must be in payroll envelope) (xxx)
IOUS (no approved
PCF vouchers) Petty cash fund, per audit xxx***
Unconsumed items
(evidenced by PCF * deducted since these are included in the “checks
vouchers) dated before year-end”
** deducted since could have been included as bills and
Used as the basis for coins
the adjustment for
*** amount which will be reflected in the FS; will be
prepaid expenses
Excess = PCF cash Excess = PCF cash reversed at the beginning of the next period
overage shortage

> miscellaneous > miscellaneous Solving tips

expense income  Unused stamps that has no disbursements, will
> receivable from be added to unreplenished vouchers since it isn’t
cashier
documented and considered as expense.
 Solving sequence
o Items counted and cashier’s
accountability to solve for cash
short/over
 o Method 1: PCF funds reduced by non-
PCFs
o Method 2: Adding all PCF items
Deposit in Transit
Deposit in transit, Jan. 31 xxx
 If salary in an envelope is intact, Add: Deposits made—February xxx
o Counted in the “items counted” Total xxx
o Added to “cashier’s accountability” Less: Deposits ack. by the bank—February (xxx)
o Not deducted from cash items in the Deposit in transit, Feb. 28 xxx
computation of adjusted PCF
 If salary in an envelope is not intact Unadjusted book receipts
o Not counted in the “items counted”
Deposits made—February xxx
Add:
o Still added to “cashier’s accountability”
Credit memo—January xxx
o Deducted from cash items in the
Errors in Jan. corrected in February book receipts:
computation of adjusted PCF
Understatement of Jan. cash
receipts for customer’s check xxx
Cash and Cash Equivalent Composition
Overstatement of cash disbursements
Item Classification in January for customer’s check xxx
Bank drafts ✓ Cash
Cash in bank, with overdraft in a
Total unadjusted book receipts xxx
Current liability
different bank
Cash in bank, with overdraft in a second
account
✓ Cash (-) Basically,
Cash in bank, with restricted
✓ Cash (less CB)
deposits for the current month
compensating balance
Cash in bank, with unrestricted +
✓ Cash (in full)
compensating balance all book errors of the previous month and CMs of the
Contingent fund Non-current investment
Customer’s NSF checks Accounts receivable previous month
Customer’s postdated checks Accounts receivable (that cause a debit to the CIB book account in February
Demand deposit ✓ Cash
Escrow deposit Other CA/NCA that are not book receipts)
Fund for acquisition of PPE, regardless
Non-current investment
when to disburse
Insurance fund Non-current investment
Interest fund ✓ Cash Unadjusted bank receipts (credits)
IOU from officers Advances to officers
Manager’s check ✓ Cash
Deposits ack. by the bank—February xxx
Money market instrument, due in 2
✓ Cash equivalent Add:
months
Money market instrument, due in 5 Credit memo—February
Short-term investment
months xxx
Payroll fund ✓ Cash
Petty cash fund ✓ Cash Errors in Jan. corrected in February bank receipts:
Postal money orders ✓ Cash Overstatement of cash disbursements
Preferred redemption fund Non-current investment
Redeemable preferred shares, acquired 3 in January (e.g. bank charge) xxx
✓ Cash equivalent
months before maturity Errors in February affecting bank receipts:
Revolving fund ✓ Cash
Sinking fund Non-current investment Overstatement of cash receipts
Tax fund ✓ Cash in February (e.g. erroneous
Time deposit, 120 days Short-term investment
Time deposit, 90 days ✓ Cash equivalent bank credit) xxx
Time deposit, one year, due in 3 months Short-term investment Total unadjusted bank receipts xxx
Travel fund ✓ Cash
Traveler’s check ✓ Cash
Treasury bill, 160-day Short-term investment Basically,
Treasury bills, due in 3 months ✓ Cash equivalent
Treasury note C/NC Investment deposits acknowledged by bank for the current month
Treasury shares Deduction to SHE +
Unused credit line Notes to FS
Visa credit-card limit Notes to FS all bank errors and CMs of the current month
(that cause a credit to the bank account in February that
are not acknowledged deposits) Tutorial Session: Substantive Tests of Cash
Outstanding Checks
Outstanding checks, Jan. 31 xxx
Add: Checks issued—February xxx Bank Confirmation
Total xxx  Main objective is to obtain information about
Less: Checks paid by the bank—February (xxx) deposit and loan balances
Outstanding checks, Feb. 28 xxx  Consider the volume of transactions passing thru
such bank account, and not the materiality of the
Unadjusted bank disbursements cash balance
Checks issued—February xxx  Also provides information about contingent
Add: liabilities and security agreements for disclosure
Debit memo—January xxx purposes
Errors in Jan. corrected in February book disbursements:
Overstatement of Jan. cash Cash count
receipts for customer’s check xxx  Main objective is to determine the existence of
Understatement of cash disbursements cash fund and to account for cash shortage
in January for customer’s check xxx  Count undeposited cash receipts, petty cash fund
Total unadjusted book disbursements xxx and other funds on hand
 Surprise basis
Basically,
 Count in the presence of the custodian
checks issued for the current month
+
Bank Reconciliation
all book errors of the previous month and DMs of the
 Main objective is to ensure that bank balance =
previous month
book balance, and all possible differences can be
(that cause a credit to the CIB book account in February
explained
that are not book disbursements)
 Obtain bank reconciliation prepared by the client
 Prepare POC if client has not prepared bank
reconciliation for two (or more) months
Unadjusted book disbursements (debits)
Checks paid by the bank—February xxx  Obtain bank statement—contains book
Add: reconciling items
Debit memo—February xxx  Obtain cash receipts and cash disbursements
Errors in Jan. corrected in February bank disbursements: journals of the company—contains bank
Overstatement of cash receipts reconciling items
in January (e.g. err. bank credit) xxx
Errors in February affecting bank disbursements: Cash and Cash Equivalent Notes
Overstatement of cash disbursements  Jun 1 acquired
in February (e.g. err. bank charge) xxx Aug 31 maturity
Total unadjusted bank receipts xxx In months, 3 months
In days, 91 days
Basically, CE or not? CE sya!!!!!! Since in the standard, “3
checks paid by bank for the current month months” is explicitly stated. “90 days” is just
+ used for formality or in necessary situations.
all bank errors and DMs of the current month  Jun 15 acquired
(that cause a debit to the bank account in February that Sep 12 maturity
are not check payments) In cases like this, use days!!!
 Accounted for:
 o Cash items + evidence of cash o Not added in accounted for
disbursement o Included in accountability (which is
o Basically, TANAN nakita sa pcf box deducted from the accounted for stuff)
 Envelope with cash  Accountability
o Cash item o Means accountability to the company,
o Added in accounted for and to other persons by the PCF
o Not included in accountability custodian
 Envelope with cash o Fund sa company—ang pcf balance
o Should not be accounted for o Fund sa employees—ang employee
contributions

Topic 6: Substantive Tests of Receivables

Revenue Cycle
 Set of activities that brings about delivery of goods or
services to customers who ultimately pay in cash
 Two phases
o Physical phase—goods or services are Revenue Cycle
Documents and Departments
delivered to the buyer Document C/O Description
o Financial phase—the buyer makes payment o Specifies the terms of the
for goods and services delivered customer’s order for guidance
by stores or warehouse
 Sequence of activities in the revenue cycle 1 Sales order department and the shipping
o Receiving of customer P.O. department
o Subject to the approval of the
o Checking of inventory status credit department
o Obtaining credit approval o Forwarded to the stores
Approved department for the issuance of
o Preparing shipping and packing documents 2
sales order the goods to the sipping
o Shipping the goods and verification of department
o To forward the goods to the
shipments common carrier
o Preparing the sales invoice 3
Shipping Shipping o Transmitted to the common
document department carrier and the billing
o Sending statements to customers—usually department for the preparation
sent out every month since credit terms are of invoice by the latter
Common
usually 30 days 4 Bill of lading
carrier
o Receipt of payment o Prepared after the billing
departments receives evidence
of shipping (shipping
Internal Controls Specific to the Revenue Cycle Billing document)
5 Invoice
 Segregation of the following duties (best way) department o Prices, quantity, and payment
terms are reviewed before the
o Transaction authorization—should be by the sales invoice Is sent to the
credit department, or by the warehouse customer
where the credit department approves the
Amounts and Company Records
credit and the warehouse approves by Amounts
acknowledging whether the orders can be Transmitted to Description
(Subject)
provided by the warehouse in the quantity For proper:
o Journal entries—in the sales
and items that the customers want 1
Daily total of Accounting
journal
sales department
o Record keeping—should be by the o Postings—to the general ledger
and subsidiary ledger of AR
accounting department Adjustment to
o Custody of the asset—should be by the sales such as:
o Sales o Must be properly approved
warehouse department
2 discounts before they are recorded in the
 Increased supervision (alternative) o Sales books
o For companies where it is not practical to returns and
allowances
separate such duties 3 Daily totals of Accounting For proper:
cash receipts department o Postings—to the subsidiary
 from
ledger accounts  The presence of any of the following increases
customers
o At least once a month inherent risk and the probability of material
Total of the o Should be reconciled with the misstatement
subsidiary controlling account in the o Unusual credit terms
4
ledger general ledger by an employee
balances form the internal audit group or o Unusually large amounts of revenues
operations control group recorded towards the end of the reporting
o At least once a month
o Dormant accounts should be period
Statements of
reviewed and tested for o Sales made with recourse or that have
5 Customers impairment
accounts
o Approval shall be made for significant returns
writing off of receivables o Unusual concentration of sales made to
assessed to be uncollectible
particular customers
Impairment
Dormant o Shipments to customers without
6 test and
accounts
review corresponding sales orders
Written off
receivables
7 Approval
assessed to be Tests
uncollectible
o For proper control  Substantive tests of revenue for existence,
Separate o Otherwise, subsequent occurrence, and valuation include:
Accounts ledger and collections may be abstracted
8
written off control
o Vouching of recorded sales transaction back
without the necessity of
account manipulating the accounting to customer order and shipping document
records
 Comparison of quantities on customer’s order with
quantities shipped and billed
Audit Procedures
 Cutoff tests for (provides evidence whether
The auditor has to:
transactions are recorded in the proper reporting
 Update information on client business risk and
period):
analyze potential motivations to or circumstances that
o Sales
misstate revenues
o Sales returns
 Understand client operations and identify the proper
o Cash receipts
revenue recognition principle applicable to business
operations
The extent of cutoff tests depend on the strength or
o IFRS 15—Receivables
effectiveness of client controls over the revenue
o IFRS 9—Financial Instruments (the
cycle.
resulting receivables are financial assets)
 Understand the entity’s operations and its
Cutoff Tests
environment to assist the auditor in developing:
Sales cutoff test
o An expectation of total revenues by
 In this test, the auditor:
understanding the company’s products,
o Selects sample of sales recorded during the
markets, and its maximum sales volume
last few days of the year and first few days
o An understanding of gross margins by
subsequent to the year under audit
understanding products, market share, and
o The selected recorded sales in the sales
competitive advantage
journal are vouched back to sales invoice
o An expectation of receivable levels based on
and shipping documents
average collection periods for the client and
 To determine whether sales are
the industry as a whole
recorded in the proper period
o Also examines the terms of the sales
Normal cutoff errors or misapplication of the
contract
appropriate revenue recognition principle contribute
to the rebuttable presumption that the amount of
Sales return cutoff test
revenue recorded by the enterprise contains some
 In this test, the auditor:
misstatements.
o Selects sample of receiving reports issued
during the last few days of the year (or the
last month of the year and during the first
 few days, or first month, of the subsequent Accounts Receivable Balance
year) The auditor should:
o To determine whether the credit  Obtain a list of the accounts receivable from the
memorandum is recorded during the correct subsidiary ledgers and reconcile the total to the
reporting period balance in the general ledger
 Accounts receivable must be confirmed
Cash receipts cutoff test
 In this test, the auditor:
o Selects sample of credits to the accounts
receivable in the CRJ and vouch them to: Confirmation
 the copies of official receipts  Confirmation with debtors provides assurance that no
issued during the cutoff period, and lapping or any other form of manipulation has been
 the copies of the sales invoices resorted to by any employee of the entity
issued to the customer  It is the auditing firm who should directly mail the
o The purpose is to determine whether confirmation request to the client’s customers
collection is recorded on time and whether o With attached business reply envelope
any adjustment in the original invoice price,  Customers are requested to send back the reply to the
if any is properly accounted for auditing firm to eliminate any opportunity for client
employee to alter such reply
Cash and Credit Sales  Confirmations provide reliable external evidence
Examination of cash sales about:
 Linked to examination of cash receipts from such o Existence
sales  Recorded AR
 Random samples of cash sales, based on sales invoice o Completeness and correctness
o Can be traced to the cash receipts records,  Recorded cash collections
and  Sales discounts
o Reconciled with bank deposits  Sales returns and allowances
 Pricing must be checked to inventory records
 To test reasonableness of the recorded cash sales, Positive Confirmation
expectations are set for change in sales figures in  Requests the customer to reply whether or not the
comparison with previous years’ sales customer agrees with the amount indicated in the
o An amount beyond the expectations may confirmation reply
require further analysis and investigation  Provides more competent evidence since customers
may not give due considerations to negative
Examination of credit sales corporations because it requires a response and a
 A sample of sales invoices second request may be mailed if the customer does
o Must be traced to the order slips (or similar not respond
documents)  Alternative procedures to verify the existence and
o Reconciled to: correctness of the balance of the customer’s AR:
 Pricing information o When no reply to a positive confirmation is
 Warehouse requisitions received
 Delivery receipts o Tracing subsequent cash receipts to
 Auditor has to obtain reasonable assurance that the determine that payments relate to the year-
credit sale was recorded in the proper reporting end accounts receivable balances relate to
period goods ordered by customers which have
o When the sale was actually made been shipped
 Auditor has to obtain assurance that all shipments are o Matching these collections with the year-end
billed receivables, while reviewing shipping
o By obtaining a sample of shipping documents address the assertions of:
documents issued during the year and  Completeness
comparing them to sales invoices  Existence
 Validity
 o Difficulty by the client in making collections
on time
o Repeated defaults by client’s customers
o Subsequent declaration of customers’
bankruptcy
 For all other receivables with no indicators of lifetime
credit risk, an allowance for credit losses is measured
Negative Confirmation at an amount equal to 12-month expected credit risk
 Requests the debtor to reply only when the balance  The measurement of expected credit risk normally
shown is incorrect involves classification of receivables by age
 Less expensive because non-response is assumed to o The client normally prepares an aging
mean agreement with the balance in the confirmation schedule, manually or from a computerized
request system, of AR at the reporting date
 May only be used when all of the following
conditions are present: Aging of Accounts Receivable
o The account consists of a large number of  Used by the auditor to group receivables according to
small balances age to evaluate the adequacy of the client’s allowance
o The inherent and control risk for AR is low for uncollectible accounts
o The auditors have no reason to believe that  If generated by client,
the customer will not disregard the o the auditor has to test it for mathematical
confirmation request and age classification accuracy
 Mainly used for estimating the uncollectible accounts
Exceptions  Other uses
 Non-agreement by the customer on amount indicated o To validate the control account balance
 May be due to timing differences in the execution o Select customer accounts for confirmation
and recording of transaction, disputed item of goods, o Identify amounts due from related parties
customer errors or client errors
(for disclosure purposes)
 The auditor must determine the reason for such
o Otherwise, unexplained differences noted by Other Procedures
the customers on the AR confirmations and  In addition to the aging of AR, the auditor may also:
significant time lag between the record of o Examine credit files for large accounts
the customer (on the date the customer states
o Review subsequent collections of accounts
a payment was made) and the record of the
o Perform analytical procedures useful in
client for cash remittances (on the date the
evaluating the appropriateness of the balance
client recorded the payment) may lead to a
of allowance for uncollectible accts.
conclusion that fraud exists in the collection
process
Substantive Tests on Note Receivables and
Related Interest Revenue
Notes Receivable
Collectability of Receivables
 Include inspection of:
The auditor has to:
o Notes
 Review credit collection policies and procedures and
 As to date of maturity
measure expected credit losses
 Interest rate
 Under IFRS 9, expected credit losses are recognized
 Payee
by setting up an allowance account at an amount
o Independent computation of interest earned;
equal to 12-month expected credit losses and lifetime
and
expected credit losses
o Analytical review procedures
 Lifetime credit losses and related loss allowance
o Recognized for receivables whose credit risk
Interest Revenue
increased significantly from the date of
 Test of reasonableness of interest earned during the
initial recognition
year on notes receivable
 Indicators of lifetime credit losses on the receivables
o Most effective verification of interest
  Ratios and trends o Interest revenue is based on the gross
o Used as indicators of reasonableness of carrying amount (present value of future
amounts cash inflows without deducting the
Receivables from Related Parties allowance)
 Should be separately disclosed
 Audit procedures that identify related party Stage 3:
transactions include:  If the credit risk increases to the point that the
o Reviewing the AR subsidiary ledger and financial asset is considered credit-impaired
trial balance o Lifetime expected credit losses are
o Inquiries from management recognized
 Names of related parties must be communicated to all o Interest revenue is calculated based on the
the members of the audit team so that they are alerted gross carrying amount (adjusted for loss
for related party transactions allowance)

Receivables Sold with Recourse, Discounted, or Pledged as Important Notes to Remember for Solving
Collateral Sales, AR, and Inventory Cutoff Problems
 Can be identified through:  FOB shipping point sales
o Management inquiry o Should be recognized as sales at date of
o Scanning cash receipts journal for large shipment
inflows from unusual sources o Ownership of inventory is transferred at date
o Bank confirmations of shipment
o Information on obligations and terms  FOB destination sales
o Reviewing the minutes of the meetings of o Should be recognized as sales upon reaching
the board of directors destination
o Ownership of inventory is transferred only
Measurement, Presentation, and Disclosure in the FS upon reaching destination
 Receivables are assets that are generally held by the  “All merchandise received up to Dec. 30, 2018 have
enterprise under the business model “held for been included in the count. All merchandise shipped
collection consisting solely of principal plus interest to customers up to Dec. 30, 2018 have been
(SPPI)” eliminated from the count.”
 Following the classification of financial assets under o Merchandise that are still in the warehouse
IFRS 9, receivables are generally measured at in Dec. 30 are included in the physical count
amortized cost o Merchandise shipped before Dec. 30 are not
o Amortized cost—present value of future counted
cash inflows reduced by any allowance  If FOB destination and still hasn’t
provided for impairment reached destination yet
 Still inventory
Three Stages of the Impairment Measurement and Recognition o Stuffed shipped out in Dec. 30 are not
Stage 1: included in the count since it is stated that
 As soon as a financial asset is originated the count was done at the close of business
o A 12-month expected credit losses are hours
recognized in profit or loss; and  “Dec. 2018 recorded sales”
o A loss allowance is established o Recorded as sales in Dec. 30
o Interest revenue is calculated on the gross  If FOB destination and still hasn’t
carrying amount (PV of future cash inflows reached destination yet
without deducting the allowance)  Not yet sales
 Goods made to customer’s specifications are already
Stage 2: considered sold at completion, not at shipment.
 If the credit risk increases significantly from the date
of initial recognition
o A full lifetime expected credit losses are Aging of Accounts Receivable
recognized
  The normal balance of Allowance for Doubtful
Accounts is credit.
 The acquisition of goods and services and
Topic 7: Substantive Tests of Inventories issuance of inventories
 Warehousing—usually called inventory
Inventories (IAS 2) management process
 Assets that are:  Conversion—for entities who convert raw
o held for sales in the normal course of materials to manufactured goods
business; or  Includes the following sequential steps:
o are in the process of production for such Warehousing and Conversion Cycles
Document C/O Sent to Description
sale; or Any
Requisitio Purchasing
o are in the form of materials or supplies to be 1
n form
employee or
department
department
used in the production process or in o Prior to that, the
rendering services purchasing
 For service providers, inventories include: department
Supplier (1)
Purchase Purchasing locates an
o The cost of the service for which the 2 Puch. Dept. (1)
order (3) department appropriate
Acc. Dept. (1)
enterprise has not yet recognized the related supplier and
considers quality
revenue and price.
 Recognized as expense o Done to inspect
Storeroom (1) the goods
o When the revenue is recognized 3
Receiving Receiving
Puch. Dept. (1) received,
report (3) department
o That is, at the point of sale (POS) Acc. Dept. (1) verifying quality
and quantity
 Presentation of expense Receiving
4 Warehouse o Transfer of goods
o Cost of goods sold department
o Transfer of goods
 Following the function of expense Production o Upon request of
5 Warehouse
method in the statement of department the production
comprehensive income department

o Operating expenses
 Separate departments shall undertake
 Following the nature of expense
foregoing activities separately
method in presenting purchases
o For effective internal control
adjusted by the increase or decrease
in inventory amounts  Merchandising companies
 Decline in NRV of inventory o Deliver goods from the warehouse
o Another expense relating to inventories that directly to the customers or to the
may warrant separate presentation (& company’s authorized sales agents
disclosure) or distributors
 Recovery in NRC of inventory  The following must be authorized by
o The gain arising from the adjustment in the management:
o Shipment of goods to customers,
valuation allowance of inventory
o Shown as other operating income or sales agents, or the company’s own
store (or retail outlet)
deduction from the amount of inventory that
is shown as expense in profit or loss
 Misstatement of Inventories
o Results in misstatement of expenses and
profit—in the statement of comprehensive
income
o Results in misstatement of assets—in the
statement of financial position
Conversion Cycles
 Starts when the warehouse, upon requisition of the
production department, issues the materials to
Introduction: The Relevant Accounting Cycles
production.
1) Warehousing and Conversion Cycles
  Where the production department converts materials o Monitoring inventory quantities
into finished goods by additionally incurring costs of  To minimize losses due to stock
DL and MOH outs and losses from obsolescence
 Involves one or two or more production departments, o Conducting a periodic obsolete inventory
depending on the nature of the manufacturing process review
 The following must be accounted for using an o Periodic reconciliation of stock cards
appropriate cost accounting system inventory and physical inventory
o Transfer of goods from one production o Auditing of bill of materials, which is a
department to another, or to the FG record of parts used to construct a product
warehouse o Creating a procedure to track scrap
o Shipment of goods to customers transactions
 Job order system or a process system
o To monitor the costs incurred in the Audit Objectives
production department The auditor examines inventories principally to achieve the
o Depends on the nature of its products and following objectives:
production process  Determine the existence of inventories, and that the
 Information developed by an appropriate cost client has rights to these assets
accounting system  Establish the completeness of inventories
o Provides reliable basis for formulation of  Establish the clerical accuracy of records and
management policies for purchasing, supporting schedules for inventories and related
production, and sales expenses
 Determine that the measurement of inventories and
Internal Controls related expenses is appropriate; and
 Internal control procedures must be adopted by an  Determine that the presentation and disclosure of
entity inventories and related expenses are adequate
o To safeguard inventories and to ensure that
there is reliable information on inventories AUDIT PROCEDURES
o This is because inventories are assets that  Physical count
become the major source of the company’s o Observed by auditors, conducted by client
revenue personnel
 Short-term income o To establish existence of inventories and to
 The auditor considers the internal control adopted by satisfy themselves about the condition of
the client to safeguard inventories inventories at reporting date
o To determine the extent of audit procedures o The auditors are NOT the ones required to
necessary to achieve the foregoing activities take inventory. The auditors merely observe.
 Internal control procedures o If the client has a physical inventory system,
o Physical inspection and counting of all items the physical inventory count determines the
of inventories received from suppliers balance in inventory accounts at year-end
 To remedy any discrepancy  As such, the count is conducted at
between delivery and purchase the reporting date
order o If the client has a perpetual inventory
o Keeping inventories in a warehouse that system, the physical inventory count may be
restricts access to unauthorized persons conducted at any convenient time during the
o Monitoring movements of inventories reporting period
 From receiving to stockroom, to  If the count is conducted at the end
production department, to FG of the reporting period, the auditor
warehouse, to shipping department, has to reconcile the inventory
etc. amount determined through
o Appropriate storage of inventories by physical count and the ledger
classification, using inventory tags balance in the stock cards, and
 So that inventory requirements are appropriate adjustments must be
served without undue delay
 made to update the inventory o If the amounts of inventory are significant
records. (best procedure)  Auditors should consider
 If the count is conducted earlier performing supplementary
than the end of the reporting period, procedures including
roll forward procedures must be  Review of the client’s
undertaken to ensure that the procedures for
inventory balance at year-end investigating prospective
equals the physical goods. warehouses
o Auditors normally participate in the client’s  Evaluating their
advanced planning of the physical inventory performance
and review the written instructions prepared  Obtaining reports on
by management for the employees who will internal control from the
make the counts (at Nov., or early Dec.) auditors of the warehouses
o During the physical inventory:  Observing the inventories
 Auditors will note that all goods are at the warehouse
being counted and that controls o The auditors’ tests of the cost accounting
exist to prevent double counting of system are designed to determine that
items and omission of items from appropriate costs have been assigned to
the count WIP, FGI, and COGS
 Auditors will make test counts of o Auditors must determine that the methods of
numerous items and compare these measuring the cost of inventory are in
counts with the quantities reported conformity with the cost formula applicable
by the client’s counting teams to the enterprise, in accordance with IAS 2
o If the auditors cannot observe the taking of inventories
the inventory because it is impossible to do o Auditors also perform tests of prices (NRV
so: Testing) applied to inventories to determine
 Some audit procedures must be whether the inventory costing procedure
undertaken to validate the existence used by the client has been properly applied
of and the amount reported as o To establish completeness and correctness of
inventory inventory balances
 For the auditors to be satisfied in  The auditor conducts a purchase
such situations, the client generally cutoff test by reviewing purchase
must have effective internal control invoices and receiving report
over inventories, and at some point several days before and after the
the auditors must observe or make end of the reporting period
physical counts of inventory  The date when the enterprise
o The auditors should take exception for obtains economic control (or the
indications of goods that are damaged or date that ownership passed) should
otherwise obsolete or non-salable be noted and compared with the
o The auditor should test the NRV of goods by date the transaction was recorded in
reference to sale transactions during the the accounting records
subsequent reporting period
o If evidence exists that the price less cost to For audits of a manufacturing entity
sell of goods will be less than cost, the  The auditor has to review the bill of materials (BOM)
prospective loss should be recognized in the for a sample of finished goods to test whether the cost
current period, as inventories in the of materials has been properly included in the cost of
statement of financial position are measured WIP of FGI
at the lower of cost and net realizable value  Auditors shall also trace the labor charged to
o The following should be confirmed by direct production based on time cards and labor routings to
communication with the custodian of the ensure that the client charges labor that is supported
warehouse or the consignee by payroll records
 Goods stored in public warehouses  Overhead costs charged to production
 Goods held by consignees
 o Shall be validated to determine whether the  This evidence may be obtained by:
company uses appropriate and consistent o review of the audit working papers of the
method of allocating overhead to product predecessor auditor (if the client’s financial
manufactured statements were audited in the prior year)
o tests of the perpetual inventory records
Analytical review procedures may be conducted to disclose o tests of the documents used in the physical
the presence of obsolete inventory items, material errors in inventory
counting and pricing. Such analytical review procedures o tests of the overall reasonableness of the
include, but are not limited to: inventory figures
 Comparisons of inventories classified by major types o tests of transactions affecting inventory
to prior years’ amounts balances
 Comparisons of gross profit percentages by product o other analytical review procedures
line to prior years’ and industry statistics; and
 Comparison of this year’s inventory turnover to prior Final step of the audit process
years  Presentation and disclosure
Such review may disclose material errors in counting, pricing,  The auditor determines whether inventories are
and obsolete inventory items properly presented and measured in the FS
 The FS should disclose the inventory costing formula
In the audit of a new client
in use, any amount of inventories pledged for
 Auditors must obtain evidence that the client’s liabilities, and significant sales or purchase
beginning inventories are fairly stated, as errors in commitments
beginning inventory balances will misstate current
year profit
Topic 8: Biological Assets and Agri-Produce nutrient levels, moisture, temperature,
fertility, and light). Such management
Introduction distinguishes agricultural activity from other
 Agriculture—the cultivation and breeding of animals, activities. Ex:
plants, and fungi for food, fiber, biofuel, medicinal  Harvesting from unmanaged
plants and other products used to sustain and enhance sources (ocean fishing,
life deforestation) is not agricultural
 PAS 41—prescribes the accounting and disclosure activity
requirement when it is related to agricultural activity o Measurement of change—the change in
 Agricultural activity—the management by an entity quality (ex. genetic merit, density, ripeness,
of the biological transformation of biological assets fat cover, protein content, and fiber strength)
for sale into agricultural produce, or additional or quantity (for example, progeny, weight,
biological assets. It covers a diverse range of cubic meters, fiber length or diameter, and
activities such as: number of buds) brought about by biological
o Raising livestock transformation or harvest is measured and
o Cultivating orchards and plantations monitored as a routine management function
o Forestry
o Agriculture
o Annual or perennial cropping
o Aquaculture (including fish farming)
 Biological transformation results in the following
 Common features which exist within this diversity
types of outcomes:
include the following:
o Asset changes through
o Capability to change—organisms (animals
 Growth
and plants) are capable of biological
 Increase in quantity or
transformation
 Improvement in quality
o Management of change—mgmt. facilitates
 Degeneration; or
biological transformation by enhancing, or
 Decrease in quantity or
at least stabilizing, conditions necessary for
the process to take place (for example,  Deterioration in quality
  Procreation o BBA—matured biological assets held for
 Creation of additional more than one financial period capable for
living animals or plants bearing CBA to be harvested as agricultural
o Production of agricultural produce (ex. latex, produce. Held for generation of income from
tea leaf, wool, and milk) sale of produce; for example:
 PAS 41 (Agriculture)  Livestock intended for production
o The standard applicable to agriculture is of milk
PAS 41 which prescribes the accounting  Grape vines
treatment, financial statement presentation,  Oil palm and rubber trees
and disclosures related to most agricultural  Fruit trees
activity  Trees from which firewood is
o Applicable to: harvested while the tree remains
 Biological assets  Bearer biological assets are not agricultural produce
 Agricultural produce at the point of but, rather, are self-generating
harvest o Bearer plant asset are accounted as PPE (Pas
 Government grants related to 16) provided it will meet the criteria in the
biological assets measured at said standard, while bearer animals are
FVLCD accounted as biological asset (PAS 41)
o Not applicable to: o Produce growing on bearer plants is a
 Agricultural produce after the point biological asset
of harvest (PAS 2 Inventories  Initial recognition
already) o An entity recognizes a bioasset or
 Land related to agricultural activity agricultural produce when:
(PAS 16 PPE or PFRS 16 Leases or  The entity controls the asset as a
PAS 40 Investment Property) result of past events
 Intangible assets related to  It is probable that future economic
agricultural activity (PAS 38 benefits will flow to the entity
Intangible Assets)  The asset can be measured reliably
 Agricultural activity that is not  Measurement
managed, ex. ocean fishing or o Biological assets within the scope of PAS 41
deforestation are measured on initial recognition and at
 Biological asset subsequent reporting dates at FVLCD unless
o A living animal or plant. Ex. FV cannot be measured reliably
 Mango tree o Agricultural produce is measured at FVLCD
 Apple tree at the point of harvest. Because harvested
 Mother pig for breeding produce is a marketable commodity, there is
 Coconut tree, etc no “measurement reliability” exception for
 Agricultural produce produce
o The harvested product of the entity’s assets  Included in profit or loss:
o Harvest—the detachment of produce from a o Gain on initial recognition of biological
bioasset or the cessation of the bioasset’s life assets at FVLCD and changes in FVLCD of
processes bioassets during a period
 Ex. harvested fruit o Gain on initial recognition of agricultural
 Consumable vs. Bearer Biological Assets produce (as a result of harvesting) at
o CBA—those to be harvested as agricultural FVLCD for the period in which it arises
produce or sold as biological assets o All costs related to bioassets that are
 Livestock intended for production measured at FV, other than costs to purchase
of meat such bioassets
 Livestock held for sale  IAS 41 presumes that FV can be reliably measured
 Fish in farms for most biological assets
 Crops such as corn, cabbage, o However, such can be rebutted for a bioasset
carrots, and trees grown for lumber that does not have a quoted market price in
 an active market (at the time of initial  If the FV of biological assets previously measured at
recognition) and for which alternative FV cost subsequently becomes available, certain
measurements are determined to be clearly additional disclosures are required
unreliable  Disclosures relating to government grants include the
o If FV cannot be determined, the asset is nature and extent of grants, unfulfilled conditions,
measured at cost less AD and impairment and significant decreases expected in the level of
losses. But the entity must still measure all grants
of its other biological assets at FVLCD
o If circumstances change and FV becomes
reliably measurable, a switch to FVLCD is
required
 Disclosure requirements in IAS 41 include:
o Aggregate gain or loss from the initial
recognition of bioassets and agricultural
produce and the change in FVLCD
 Separate and/or additional
disclosures are required where
bioassets are measured at cost less
accumulated depreciation
o Description of entity’s bioassets, by broad
group
o Description of the nature of an entity’s
activities with each group of bioassets and
non-financial measures or estimates of
physical quantities of output during the
period and assets on hand at the end of the
period
o Info about bioassets whose title is restricted
or that are pledged as security
o Commitments for development or
acquisition of biological assets
o Financial risk management strategies
o Reconciliation of changes in the CA of
Banana Industry Audit Overview
bioassets, showing separately changes in
 Biological assets—standing crops consist of banana
value, purchases, sales, harvesting, business
trees
combinations, and foreign exchange
 Banana trees—perennial cops wherein:
differences
o First, the mother plant is grown
 Disclosure of a quantified description of each group
o The bunch of the mother plan is harvested
of bioasset, distinguishing between consumable and
bearer assets or between mature and immature assets, o The stalk is chopped and at this stage, a
is encouraged but not required follower (daughter) of about 3months old is
 If FV cannot be measured reliably, additional already growing right beside the mother
required disclosures include plant and this follower will also bear a next
o Description of the assets round of bunch to be harvested
o An explanation of why FV cannot be o This cycle continues for as long as the
reliably measured plantation is cultivated
o If possible, a range within which FV is  A newly grown follower (0-week old) will be
harvested after:
highly likely to lie
o For highland plantation—50 weeks
o Depreciation method
o For midland plantation—38 weeks
o Useful lives or depreciation rates
o For lowland plantation—36 weeks
o Gross carrying amount and the accumulated
depreciation, beginning and ending
  At year end, the biological assets-standing crops in for bunches to be harvested, which is less
the SFP pertain to all the standing banana plants from than 12 months after year end
0 weeks old up to the harvestable bunch
Cash Outflow
Fair Value Measurements  Computed based on the projected reimbursable
 Biological assets-standing crops are usually measured production costs to be incurred on the standing
using valuation techniques for which the lowest level banana trees at various ages as at year-end up to the
input that is significant to the FV measurement is time these will be harvested
unobservable (Level 3)  Production costs for the year are subjected to
 FV is determined based on the expected future cash liquidations and are being reimbursed
flows computed over the fruiting cycle of the banana  Only direct production costs to be incurred up to the
trees date of harvest are included in the determination of
future cash outflows such as plant care costs, fruit
Gathering of Sufficient Appropriate Audit Evidence care costs, irrigation, farm overheads, and other direct
 The future cash flows are based on costs that will costs
have to be incurred on the standing banana trees at  Other overhead costs like general and administrative
various ages as at year-end up to the time these will costs are excluded in the computation
be harvested plus a certain mark up  Future cash outflows are not discounted since there
 Since common business invoicing arrangement with a will be only a maximum of 50 weeks for bunches to
foreign buyer is under a cost plus markup formula be harvested, which is less than 12 months after year
 Production costs for the year are subjected to end
liquidations and are being reimbursed regularly plus
the markup Physical Inspection of Biological Assets
 Only the direct production costs to be incurred up to  The engagement team usually visits the plantation
the date of harvest are included in the determination every year, simultaneous with the observation of
of future cash flows such as physical year-end inventory count
o Plant care costs  This is to inspect if bioassets physically exist and
o Fruit care costs have no signs of impairment as at year-end
o Irrigation
o Farm overheads, other direct costs
 Other overhead costs are excluded such as Test of Management’s Assumptions
o General costs  The Company’s Biological Assets has two primary
o Administrative costs and critical assumptions that need to be tested, name:
o Projected boxes
 Future cash flows are not discounted since there will
o Projected reimbursable production costs
be only a maximum of 50 weeks for bunches to be
harvested, which is less than 12 months after year end  The rest of the assumptions are dependent on the two
abovementioned assumptions
Cash Inflow  If the abovementioned assumptions are reasonable,
 Computed based on projected boxes multiplied by the the engagement team may conclude that the rest of
projected invoice price the assumptions are reasonable and in order as well
 Projected boxes categories—forecasted by the
company’s production department Procedures in Testing the Management’s Assumptions
o Class A  Projected boxes
o Class B o Reasonableness of projected boxes is
o Etc. determined by comparing the forecasted
boxes for the current year with prior years’
 Projected invoice price
actual boxes using the trend analysis
o Based on the Company’s business invoicing
 Reimbursable production costs
arrangement with a foreign buyer under a
o Determined by comparing the projected
cost+markup formula
reimbursable costs for the current year with
o Future cash inflows are not discounted since
prior years’ actual reimbursable costs using
there will be only a maximum of 50 weeks
the trend analysis
  To determine how accurate the assumptions of the  Late 60s—banana production of the Cavendish
management has been, prior years’ projected boxes variety gained prominence as an organized export
and reimbursable costs are compared against the industry
actual boxes and reimbursable costs for those years  1966—PH government granted Dole Philippines, Inc.
STANFILCO Division a license to engage in
Review of Compliance with the Accounting Standards commercial production of bananas
 Accounting, Recognition, and Measurement required  November 1968—STANFILCO made its first
by Philippine Accounting Standards (PAS) shipment of fresh giant Cavendish bananas
 Tagum Agricultural Development Company, Inc.
(TADECO)—a local company which converted its
150hectares abaca plantation into banana seedbeds to
export to Japan
 1973—PH replaced Ecuador and Taiwan as Japan’s
top banana supplier

OPERATIONAL SET-UP
Corporate Management
 The company takes full control in all aspects of its
banana operations
 It hires and trains its own people and undertakes the
operations of the banana plantations on either
company-owned land and/or leased land
 Ensures that targeted production volumes and product
quality are continuously met
 Normally incurs high labor costs since the banana
industry as a whole is labor intensive

Banana Industry Growership

 PH is the second largest exporter of bananas after  The company enters into a growership agreement
Ecuador with several banana growers (who normally owns the
 PH exports make up 98% of the Asian banana trade land) whereby the growers commit to carry out,
o 2/3 shipped to Japan, China, South Korea under the close supervision of the company, the
o Usually Cavendish cultivar development of banana farms
 The major export agricultural commodities were  Other variations of this setup include leaseback
coconut oil and fresh banana with their respective agreement and farm management
contributions of 23% and 13% to the total value of
agricultural exports Joint Venture Agreement
 Under this setup, a local company takes in a capitalist
Impact of Weather Conditions partner (usually a foreign company) in the
 The banana industry is significantly affected by the development of its banana plantation
weather conditions  The foreign partner grants the necessary funds to the
 Weather is not controllable and its variations can local company, normally, free of interest, to finance
spell the difference between a good and a bad harvest the development of its banana plantation (as equity
 Severe weather conditions include: and/or advances)
o El Niño—prolonged drought  The local company directly manages the operations
o La Niña—severe and continuous rains of the plantation
 All of the harvested bananas are sold to the foreign
History in the Philippines partner at a rate agreed by both parties
 1960—bananas were first exported principally to
Japan MARKET AND ENVIRONMENTAL FACTORS
Competitive Environment
  Global competition  Digging holes one or two months before planting
 Threat of other country entrants permits the soil to mellow and frees the hole of
 Local new entrants serious diseases that may later infect the young plant
 Organic bananas
 Changing consumer preference Planting
 Usually done May or June, at the beginning of the
Customer Concerns rainy season
 Quality and timely delivery of business  However, bananas can be planted any time in area
where rainfall is fairly evenly distributed throughout
Supplier Information the year
 Human resources  The plants are planted at the rate of one sucker per
 Materials hill in a square arrangement with a distance from 3m
 Capital by 3m
 Banana plants are propagated through the use of
Technological Advances suckers
 Relay cropping o Suckers are 50 to 60cm tall or of rhizome
 Organic bananas pieces, which are cut from old stocks
o Plants propagated by this method usually
Social and Political Factor have long, narrow leaves
 Comprehensive Agrarian Reform Law
Plant Growth
 Fertilizers and Chemical Control
 Banana plants are the largest herb in the world
 When the leaves unfold, they cover one on top of the
other and form the pseudostem, which looks like a
tree trunk but has no wood
 Because the plant is perennial
BUSINESS PROCESS o It replaces itself through new shoots coming
 It normally takes a banana plant 10 to 11 months out from the underground part of the stem
from seedling to harvest maturity (called rhizome) which can become a fully-
 Throughout this period, technical expertise is needed fledged banana plant, either as successor to
to ensure a healthy and disease-free plant and export the mother or planted elsewhere
quality fruit o In the 6 to 8 months after planting, a
flowering stem emerges with a large bud
Site Selection o Within the bud are tiny flowers that develop
 An important consideration in banana production into bananas
 Bananas can grow anywhere but they grow best in
alluvial, well-drained soil whose subsoil hold Weeding and Deleafing
sufficient moisture to tide the crop over dry periods  Weeding—required to ensure that the plant has no
 Southern Mindanao is the preferred site for competition for nutrients and water, and to rid of any
Cavendish production host disease-carrying organism
 The region has steady rainfall, rich should, excellent  The area around the plant is periodically cleansed to
harbor facilities, and is relatively typhoon free rid of weeds using mechanical weeders
 Almost all banana plantations are in Southern  Deleafing—dried leaves are cleared so that the area is
Mindanao not congested
 The soil around the base of the plants is shifted and
Land/Site Preparation used to cover and control weeds
 Land is prepared by plowing and harrowing which is  Diseased and unwanted leaves are pruned with the
usually done three times so that the field will be rid use of disinfected knives
of weeds
 Followed by digging holes ranging from 50 to 60cm Fertilization
in diameter and 60-80cm deep  Used to bolster the natural soil nutrients and is
required for producing good-quality bananas
  The size of the individual bunches of fruit is largely
determined by the amount of nitrogen applied to the
plants several months before they loom
 For acid soils, application of phosphorus and potash,
particularly the latter, is essential

Irrigation
 Bananas
 ACAUD 3149

Topic 9: Investments

INTRODUCTION
 Investments in financial instruments (IFRS 9, IAS 28)
 Consist primarily of:
o Government bonds
o Commercial papers
o Stock certificates
o Treasury bills
 Readily negotiable

Classifications of Financial Instruments

EQUITY INVESTMENTS
 Equity investments at FVPL
o Held for trading
o Also not held for trading
 not elected to be designated as at FVOCI; or
 not enough significant influence
o Current asset
o Initially measured at purchase price (directly attributable costs are outright expensed)
o Subsequently measured at fair value
o Change in FV is recognized in P/L
 Equity investments at FVOCI
o Not held for trading
 Elected to be designated as at FVOCI
 Not enough significant influence
o Noncurrent asset
o Initially measured at purchase price + directly attributable costs
o Subsequently measured at FV
o Change in FV is recognized in OCI (for the current year)
 Accumulated balance of the holding gains and losses is a component of equity (SOCHIE)
 Investment in associate (joint venture)
o Gives holders significant influence over the operating and financial policies of the investee
o Accounted for in the investor’s consolidated FS using equity method
o Initially measured at purchase price + directly attributable costs
o Subsequently measured at carrying value, without regard to FV, but with regard to impairment
o Affected by the associate’s transactions that affect its SHE
o Investment balance:
 + share in profit
 - share in losses
 - amortization of difference of cost and underlying equity
 - dividends

DEBT INVESTMENTS—classified on the basis of (a) business model and (b) contractual cash flows characteristics
  Amortized cost
o To hold assets to collect contractual cash flows (CCF)
o Solely payment for principal and interest (SPPI)
 FVOCI
o To hold assets to collect (CCF)
o SPPI
 FVPL
o To hold assets for trading
o Neither 1 nor 2

Impairment Loss on Debt Instruments (no FVPL)

 Amortized cost
 FVOCI

Three Stages of Impairment

1. Stage 1
o Set up allowance on initial recognition
o Base allowance on 12-month expected credit losses
2. Stage 2
o Set up an allowance (or recognize additional amount of impairment
o Base allowance on lifetime expected credit losses
i. If there is significant deterioration in credit quality of the issuer since initial recognition
o Interest revenue is based on CA before allowance deduction
3. Stage 3
o Recognize appropriate amount of allowance and impairment loss
o Base allowance on lifetime expected credit losses
i. If there is objective evidence of impairment
o Interest revenue is based on net CA after allowance deduction

INTERNAL CONTROLS
 Separation of duties between
o Custody of instruments
o Maintenance of accounting records
o Authorization of purchases and disposals
 Joint control (at least two officials)
 Complete detailed records
 Registration
 Periodic physical inspection
 Budget
 Investment policies

Concepts
 All purchases and sale
o Should be authorized by the BOD, an investment committee, or a designated company official
 Acquisitions and disposals
o Should be in accordance with established policies of the enterprise
 Internal reports
o Should be prepared for the investment revenue, gains, and losses
 Investment revenue
o Interest income—debt securities
 o Dividend income
 Sale of investment
o Result in gains and losses
 Year-end
o There must be an assurance that the investments are measured properly by comparing the ledger balances with
published price quotations
o Detailed or subsidiary records must be accurately maintained based on established processing and recording
procedures
o JEs that adjust investment balance must be authorized
 Safeguards
o There should be barriers over investment securities by:
 Keeping them in a safe deposit box under the joint control of two or more company officials; or
 Placing them in the custody of an independent safekeeping agent
 Records
o Must be maintained by custodian
o Separate record-keeping of transactions handled by another official or a designated responsible employee
 Physical count of securities
o Must be conducted concurrently with the verification of
 Other liquid assets such as cash
o Listing of investments must be periodically reconciled with investment accounting records
 Investment income
o Must be monitored and periodically recalculated and verified

AUDIT OBJECTIVES
 Consider IC over FIs held by client
 Determine the existence of investment and that the client has rights to the instruments
 All FIs held by entity are reported
o And transactions affecting the investments are properly accounted for completeness
 Establish proper measurement of investments in FIs
 Establish accuracy of amounts recognized in profit or loss and OCI relating to investments
 Determine that the presentation and disclosure of the investments is adequate

AUDIT PROCEDURES
Establish Existence and Occurrence of Transactions
 Confirm balances with trustee
o Or broker if FIs are in custody of an independent outside entity
 Confirmations
o Should be as of the same date so as to obtain a reasonable assurance that there is no switching of securities to
conceal a shortage
o Should include:
 Description of each financial instrument held for the client
 Par or principal amount
 Number of shares
 Total amount of investment
o Should be done during the period with the broker including:
 Sales
 Purchases
 Dividend
 Interest collections
  Who is authorized to make investment transaction
 How investment income proceeds are remitted to the company
 Physical inspection and count
o If company officials keep custody of the instruments
o Should be done simultaneously with the count of cash items held by the concerned company officials
o Should be done in the presence of a client’s officer or a trusted employee
o Inspected instruments shall be returned intact and the return must be properly documented
 Substitution or “borrowing” of securities
o Can be done by comparison of the serial numbers of securities with those recorded in the prior year’s audit working
papers
 Securities held as collateral for loans
o Should be confirmed by sending a request
o Signed by: CLIENT
o Mailed by: AUDITORS
o Reply should be directed to the auditor’s office

Establish Completeness of Account Balances and Recorded Related Transactions

 Cutoff test
o Conducted to obtain assurance that all investment transactions are recorded in the proper reporting period
 Analytical review procedures (and other substantive tests)
o Applied to help determine whether recorded balances are reasonable
o Procedures such as:
 Recomputations of gains and losses
 Dividend and interest revenue
o Usually verified by independent computations by the auditors, or by test of reasonableness of the amount of revenue
earned
o Dividend record books
 Published by investment advisory services
 Show the:
 Amounts of dividends
 Dates of declaration
 Date of record
 Date of payment
o Bond interest
 Can be recomputed from the interest rates and payment dates shown on the bonds.
 Proper measurement of investments
o Validated by referring to published price quotations for securities that are measured at FV
o Estimated FV from security dealers/brokers—if there is no published price quotations
 Debt securities
o Confirmed with debtors at loan balances
 Equity method securities
o Auditors should obtain recent audited FS of the investee to verify the client’s share of net assets and income from
the investment
o If such FS are not available, auditors may find it necessary to perform audit procedures to verify the unaudited
financial statements of the investee
 Investments in debt securities should not be designated as at Amortized Cost if the security is sold in response to market
interest rates and prepayment risk, liquidity demands, availability of alternative investments and foreign currency risk
 Impairment indicators
o Adverse conditions specifically related to security or to specific industry or geographic conditions
o Deterioration of the investee’s financial condition
 o Continuous decline in the fair value of securities
 An impairment loss has to be recognized in profit or loss for investments not classified at FVPL

If purchasing shares dividend on, decrease purchase price by amount of dividend to get its cost.