Auditing Lecture Notes 04172022

AUDITING
LECTURE
A.Y. 2021-2022
Second Semester
NOTES
Audit of Cash & Cash
Equivalents
 Audit Program for CASH
Audit Objectives:
1. To determine that cash balance at the end of the
reporting period represent cash and cash items on hand,
in transit to, or in depository banks.
2. Cash transactions have been properly recorded.
3. Cash balances are properly described and classified, and
adequate disclosures with respect to amounts restricted
as to withdrawal are made in the financial statements.
 Audit Procedures:
1. Conduct a cash count of undeposited collections, petty cash, and other funds.
 Obtain custodian’s signature to acknowledge return of items counted.
 Reconcile items counted with general ledger balances
 Trace undeposited collections counted to bank reconciliation.
 Follow up dispositions of items in cash counted:
o Undeposited collections should be traced to bank deposits.
o Checks accommodated in petty cash should be deposited after the cunt to
establish their validity.
o IOUs is the petty cash should be confirmed and traced to collections in the next
payroll period.
o Expense vouchers should be traced to the succeeding replenishment voucher.
Coordinate cash count with count of marketable securities and other negotiable
assets of the client.
Obtain confirmation of year-end fund balances of cash not counted in branches or
other offices.
2. Confirm bank balance by direct correspondence with all banks in which the client
has had deposits and loans during the year.
3. Obtain bank reconciliation
Check arithmetical accuracy of reconciliation.
Trace balance per book to the general ledger balance of cash count.
Trace balance per bank-to-bank statement and compare with amount confirmed
by bank.
Establish authenticity of reconciling items by reference to their respective
sources, like:
Bank debit or credit advices.
Duly approved journal vouchers.
Investigate checks outstanding for a long period of time.
Consider adjustment, especially if the check is already stale.
Consider the possibility of an erroneous preparation of the check.
Investigate any unusual reconciling items.
Where internal control over cash is weak, consider preparing a proof of cash
reconciliation.
Obtain cutoff bank statement showing the client’s transactions with the bank at
least one week after the reporting date, and:
Trace year-end reconciling items, like:
Deposit of the year-end undeposited collections.
Completeness of year-end outstanding checks.
Corrections of bank errors
Examine supporting documents of year-end outstanding checks that did not
clear in the cutoff bank statement.
 Obtain a list of interbank transfers of fund a few days before
and after the reporting date.
 Vouch supporting documents
 Ascertain that the related receipts and disbursements were
booked by the client within the same day or at least within the
same month.
 Test reasonableness of cutoff by:
 Comparing dates of checks returned with cutoff bank statement
to dates of recording in the cash disbursements register.
 Tracing receipts recorded a few days before the reporting date
to bank deposits.
 Inspect savings account passbook and certificates of deposits.
 Reconcile with book balances.
 Update interest earned posting on passbooks, if necessary.
 Compare balances with bank confirmation reply.
 Determine any restrictions on availability of cash.
 Determine propriety of financial statement presentation and
adequacy of disclosures.
Audit of Receivables
 Audit Program for RECEIVABLES

Audit Objectives:
1. Receivables represent valid claims against customers
and other parties and have been properly recorded.
2. The related allowance for doubtful accounts, returns
and allowances, and discounts are reasonably adequate.
3. Receivables are properly described.
4. Disclosures with respect to the account are adequate.
Audit Procedures:
1. Obtain a list of aged accounts receivable balances from
the subsidiary ledger, and:
Foot and cross-foot the list.
Check if the list reconciles with the general ledger
control account.
Trace individual balance to the subsidiary ledger.
Test the accuracy of the aging.
Adjust non-trade accounts erroneously included in
customer’s accounts.
Investigate and reclassify significant credit balances.
2. Test accuracy of balances appearing in the subsidiary
ledger.
3. Confirm accuracy of individual balances by direct
communication with customers.
Investigate exceptions reported by customers and
discuss with appropriate officer for proper disposal.
Send a second request for positive confirmation requests
without any replies from customers.
If the second request does not produce a reply from the
customer, perform extended procedures, like:
Reviewing collections after year-end.
Checking supporting documents
Discussing the account with appropriate officer.
Discussing with appropriate officer, confirmation requests
returned by the post office and perform extended
procedures.
Prepare a summary of confirmation results.
4. Review correspondence with customers for possible
adjustments
5. Test propriety of cutoff:
Examine sales recorded and shipments made a week before
and after the end of the reporting period and ascertain whether
the sales were recorded in the proper period.
Investigate large amounts of sales returned shortly after
the end of the reporting period.
6. Perform analytical procedures, like:
Gross profit ratio
Accounts receivable turnover
Ratio of accounts written off to sales or balance of
accounts receivable
Compare with prior year and industry average
7. Review individual balances and age of accounts with
appropriate officer and:
Determine accounts that should be written off.
Determine adequacy of allowance for doubtful
accounts.
8. Obtain analyses of significant other receivables.
9. Ascertain whether some receivables are pledged,
factored, discounted, or assigned.
10. Determine propriety of financial statement presentation
and adequacy of disclosures.
11. Obtain receivable representation letter from client.
Audit of Inventories
 Audit Program for INVENTORIES

Audit Objectives to determine that:
1. Inventories included in the statement of financial
position physically exist.
2. Inventories represent items held for sale in the ordinary
course of business, in the process of production for such
sale, or in the form of materials or supplies to be used in
the production process or in the rendering of services.
3. Inventory quantities include products, materials, and
supplies owned by the company (on hand, in transit, or
stored at outside locations)
4. The entity has legal title or similar rights of ownership to
the inventories.
5. Inventories are properly stated at the lower of cost and net
realizable value.
6. Inventories are properly described and classified in the
financial statements and disclosures are adequate.
Audit Procedures:
1. Observe physical inventory counts.
Test shipping and receiving cutoff procedures
Account for all inventory tags and count sheets used in
recording the physical inventory counts.
Test the clerical accuracy of inventory listings.
Trace test counts recorded during the physical inventory
observation to the inventory listing.
Reconcile physical counts to perpetual records and
general ledger balances and investigate significant
variations.
Test inventory and the end of the reporting period.
2. Obtain confirmation of inventories at locations outside the entity.
3. Review perpetual inventory records, production records, and purchasing
records for indications of current activities.
4. Analytically review the relationship of inventory balances to recent
purchasing, production, and sales activities, and to anticipated sales
volume.
5. Examine paid vendors’ invoices, consignment agreements, and
contracts.
6. Review direct labor rates.
7. Test the computation of standard overhead rates.
8. Examine analysis of purchasing and manufacturing standard cost
variances.
9. Examine inventory turnover analysis.
10. Review industry experience and trends.
11. Tour the plant. Inquire of production and sales personnel concerning
possible excess or obsolete inventory items.
12. Examine sales after year-end and open purchase order commitments.
13. Obtain confirmation of inventories pledged under loan agreements.
14. Review draft of the financial statements.
15. Compare the disclosures made in the financial statements to the
requirements of PFRS.
Audit of Investments
 Audit Program for INVESTMENTS

Audit Objectives to determine that:
1. Investments exist (held by the entity or the entity’s
fund manager) and are owned by the entity.
2. All recorded income from investments has accrued to
the entity at the end of the reporting period.
3. All investments owned by the entity at the end of the
reporting period are included in the statement of
financial position.
4. All income accruing from investments at the end of the
reporting period has been recorded.
5. Investments are included in the statement of financial
position at appropriate amounts. The related investment
income included in the income statement at the appropriate
amount.
6. All investments are free of liens, pledges, or other security
interest, or if not, ate adequately disclosed.
7. Investments and related investment income accounts are
properly classified, described, and disclosed in the financial
statements in conformity with PFRS.
Audit Procedures:
1. Prepare or obtain an analysis of the investment account
and:
Trace to applicable general ledger balances.
Vouch changes during the year by reference to board
minutes and brokers’ advices.
Verify completeness of dividend and interest revenues,
and where necessary, by reference to outside published
sources.
Check footings and cross-footings.
2. Conduct securities count and:
Inspect securities as to registered owner.
Reconcile and compare details with investment
analysis.
3. For securities held by an outside custodian:
Arrange for a visit to the custodian and conduct a
count; or
Confirm from the custodian the details of securities
held for the account of the entity.
4. Review minutes, agreements, and confirmation replies
for evidence of liens, pledges, or other security interest in
the entity’s investments and of commitments to acquire or
dispose of investments.
5. Inspect market quotations, financial statements of
investee(s), and other evidence to determine the current
value of investments.
6. Discuss with the entity the process used by management
in classifying investments.
7. Determine whether the client’s investment activities are
consistent with its business model for managing financial
assets.
8. Determine whether the decline in the fair value of held-
for-collection financial assets below amortized cost is other
than temporary and is properly recognized.
9. Verify computations of gains and losses from disposal of
investments.
10. Verify calculations of amortization of premium or
discount on held-for-collection financial assets.
11. Determine propriety of financial statement presentation
and adequacy of disclosures.

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AUDITING

 Audit Program for RECEIVABLES

 Audit Program for INVENTORIES

 Audit Program for INVESTMENTS

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