CHAPTER 3 AUDIT ON FINANCIAL STATEMENT
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Muhammad Faris Bin Mohammad Fauzee (10DAT17F2028)
Nurul Huwaini Binti Rejab (10DAT17F2024)
Premilah A/P Ganapathy (10DAT17F2048)
OUR BLOG IS ABOUT AUDIT ON FINANCIAL STATEMENT
AUDIT ON FINANCIAL STATEMENT
- Definition
- Substantive procedures. Involves a broad array of procedures, of which a small sampling are:
- > Analysis. Conduct a ratio comparison with historical, forecasted, and industry results to spot anomalies.
- > Cash. Review bank reconciliations, count on-hand cash, confirm restrictions on bank balances, issue bank confirmations.
- > Accounts receivable. Confirm account balances, investigate subsequent collections, test year-end sales and cutoff procedures.
- > Inventory. Observe the physical inventory count, obtain confirmation of inventories held at other locations, test shipping and receiving cutoff procedures, examine paid supplier invoices, test the computation of allocated overhead, review current production costs, trace compiled inventory costs to the general ledger.
- > Fixed assets. Observe assets, review purchase and disposal authorizations, review lease documents, examine appraisal reports, recalculate depreciation and amortization.
- > Accounts payable. Confirm accounts, test year-end cutoff.
- > Accrued expenses. Examine subsequent payments, compare balances to prior years, recompute accruals.
- > Debt. Confirm with lenders, review lease agreements, review references in board of directors minutes.
- > Revenue. Examine documents supporting a selection of sales, review subsequent transactions, recalculate percentage of completion computations, review the history of sales returns and allowances.
- > Expenses. Examine documents supporting a selection of expenses, review subsequent transactions, confirm unusual items with suppliers.
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- Conclusion
Such analyses help the auditor to draw conclusions regarding various aspects of the line items of the financial statements. These conclusions should be independent and factual, and not based on assumptions. A set of such conclusions leads to forming an opinion.
- PopQuiz
1) Explain the purpose of auditing the revenue and expenditure components.(OneSoulz)
2) Choose the suitable audit objectives and assertions on cash and balances(Hobii)
3) Select the evidence of auditing the investment.(Four Point 0)
4) Choose the suitable audit test to be used when auditing trade receivables and trade payables.(Group 4)
5) State the definition of audit on financial statements.(Group 5)
6) Explain the purpose of auditing the investment.(Group 6)
7) Apply suitable audit test to be used when auditing the revenue and expenditure components.(Group 7)
answer for Four Point 0
Eloborate the collection transaction assertion using test of control and substantive test.
Comments
1)authorisation-all are pre-approved by responsible personnel
2) completeness-all valid transaction are included in the accounting records
3)Accuracy
4)Validity
5)Physical safeguards an security
6)Error handling
7)Segregation of duties
1. Measured at their fair value of the consideration received or receivable.
2. Ensure voluntary compliance between all documentations, control, policies and guidelines.
3. Test control for detection significant weaknesses and check financial statements.
2. Minority interest also known as non controlling interest. It is a fractional share of company amounting to less than 50% of the voting shares.
3. Profit and loss account.
Please answer this questions
Eloborate the collection transaction assertion using test of control and substantive test ?
Acc. Receivable - confirm account balance, imvestigate subsequent collections, test year - end sales and cut-off procedures.
Account payable - confirm accounts, test year - end cut-off
2) Monthly statement
3) Internal verification statements
function:
Order entry
Credit authorization
Shipping
Billing
Cash receipt
Account receivable
General ledger
document& records
Customer sales order credit approval form
Open order
Shipping document
Sales invoice
Sales journal
Customer statement of account
Account receivable subsidiary ledger
Aged trial balance of account receivable
Remittance advice
Cash receipt journal
Credit memorandum
Write-off authorization
transaction & Financial Statement
Sales
Receipt of cash
Return of good
1. Transaction & FS
> General cash account
-Major source of cash receipt-revenue
-Major source of disbursement purchasing and HR
> Imprest cash account
-used of payment of payroll & dividend cheques
> Branch account
-company that operate branches in multiple locations
-in some case can be impress account or general cash account(summit periodic cash report to head office)
2. document and record
-cash receipts
-journal
3.function
-cash receipts
4.segregation of duties
-cash receipts vs other function
2. Adequete segretion of duties
3. Adequete documents and records
4. Pre-numbered the document
5. Monthly statements
6. Internal verifications procedures
✏️Test inventory in transit
There is a risk that you have inventory transit from one storage location to another at the time of the physical count.
Auditor test for this by reviewing you transfer documentation.
Account payable
#Type of transactions
-vendor credit memo
-vendor debit memo
-prepaid
-cancellation
-temporary
#Document involved
-Company purchase order
-Company receiving report
-Vendor invoice
#Segregation of duty
-The person responsible for bank reconciliation should not:
=Handle unclaimed property reporting
=Be a signer on a bank account.
-The person who is a check signer should not:
=Authorize an invoice for payment on an account on which he/she is also a signer.
=Have ready access to the check stock.
-A person who is responsible for the check stock should not:
=Be an authorized signer.
=Handle the bank reconciliations.
-The person who is responsible for the master vendor file should not:
=Be an authorized signer.
=Be able to approve invoices for payment.
=Handle unclaimed property.
-The person responsible for unclaimed property should not:
=Have responsibility for bank reconciliation.
=Have access to the master vendor file.
#Audit test or audit procedure for account payable
A thorough payable audit is one that ensures accounts payable is fully compliant with generally accepted accounting principles (GAAP)... Auditors use cutoff tests procedures that determine whether a transaction was recorded in the proper recording period—to confirm AP ledger transactions are accurate and complete.
► In the Inventory Management system, when a goods movement is posted, a material document is generated that serves as proof of the movement and as a source of information for any applications that follow. A material document consists of a header and at least one item. The header contains general data about the movement (for example, its date, time and user who posted the transaction). Each item describes one movement.
Accounting document
► If the movement is relevant for Financial Accounting (that is, if it leads to an update of the G/L accounts), an accounting document is created parallel to the material document.
-Purchase are properly accounted for and recorded in the correct accounting period.
Key control features - Requisition
- Purchase order
- Payments
- Petty cash
- Cash collection
Purchase Transaction* Cash/Credit
Audit test used > Test of control
> Substantive Test
Document used *credit note, debit note, 8nvoice, memo and check.
Segregation of duties
*= If someone discharges their duties or responsibilities, they do everything that needs to be done in order to complete them. If someone discharges a debt, they pay it. If something is discharged from inside a place, it comes out. When there is a discharge of a substance, the substance comes out from inside somewhere.
1) Internal Expense Controls
- Companies have many types of internal controls related to expenses. Some invoices may require certain levels of signatures, and others may require a written contract. One of the first steps in an audit is to evaluate paid expenses against how closely they follow the internal controls.
2) Reasonableness of Expenses Check
A reasonableness check involves checking expenses to see if they are in line with what is considered ordinary. For example, an invoice of RM 100 for a small box of pencils would not be reasonable and should raise a red flag. An additional reasonableness step is to make sure that only expenses that are necessary are incurred.
3) Timely Expense Processing
Expenses must be being received in a timely manner.
4) Accuracy and Documentation
Auditors will often randomly select invoices and ask to see all the original paperwork, including contracts if they exist, invoices and signatures. They compare all the original documentation against the amounts paid to find mistakes. Sometimes, this is a simple keying error that may require employee retraining, and in other cases, this could be a payment prior to work being completed.
Transaction
1) A spending or consuming
- Account payables
- Cash payments
Documents involved
1) Payment voucher
2) Bills
3) Receipt
4) Invoice
5) General ledger
2. Adequete segretion of duties
3. Adequete documents and records
4. Pre-numbered the document
5. Monthly statements
6. Internal verifications procedures
✏️Test inventory in transit
There is a risk that you have inventory transit from one storage location to another at the time of the physical count.
Auditor test for this by reviewing you transfer documentation.
Types of Inventory Transactions
Inventory Management is any transaction resulting in a change in stock. ► Goods receipt
► A goods receipt (GR) is a goods movement with which the receipt of goods from a vendor or from production is posted. A goods receipt leads to an increase in warehouse stock. This type of transaction will affect Accounting.
► Goods issue
► A goods issue (GI) is a goods movement with which a material withdrawal, a material consumption, or a shipment of goods to a customer is posted. A goods issue leads to a reduction in warehouse stock. The type of transaction will affect Accounting.
► Stock transfer
► A stock transfer is the removal of material from one storage location and its transfer to another storage location. Stock transfers can occur either within the same plant or between two plants. This transaction may or may not affect Accounting.
► Transfer posting
► A transfer posting is a general term for stock transfers and changes in stock type or stock category of a material. It is irrelevant whether the posting occurs in conjunction with a physical movement or not. This transaction may or may not affect Accounting.
Examples of transfer postings are:
► Transfer postings from material to material
► Release from quality inspection stock
► Transfer of consignment material into company's own stock
Inventory Transaction Detail
When posting a goods movement in the SAP System, the following documents are created: Material document
► In the Inventory Management system, when a goods movement is posted, a material document is generated that serves as proof of the movement and as a source of information for any applications that follow. A material document consists of a header and at least one item. The header contains general data about the movement (for example, its date, time and user who posted the transaction). Each item describes one movement.
Accounting document
► If the movement is relevant for Financial Accounting (that is, if it leads to an update of the G/L accounts), an accounting document is created parallel to the material document.
>Movement Types for Inventory Transactions
When you enter a goods movement in the system, you must enter a movement type to differentiate between the various goods movements. A movement type is a three-digit identification key for a goods movement. The following table contains examples of common movement types.
source document
-revenue
-sale of property
-long term debt
-BOD minutes
-loan agreement
-the share certificates
-executed joint
-confirmation with issuer
Transaction :
-shares, debt securities, loan stock/bond, notes, tranferrable subscription right and warranties,convertible bonds.
Segretion of duties :
-the initiation function should be segregated from the final approved.
-the valuation-monitoring function should be segregated from the acquisition function
-responsibility for maintaining the securities ledger should be separate from that of making entries in the GL
-Responsibility for custody of the securities should be separate from that of accounting for securities.
Audit procedures:
-Physical examination of
the share certificates
- Reading executed joint
venture or similar
agreement
- Confirmation with issuer
- Confirmation with
custodian
- Confirmation of
unsettled transactions
with broker dealer
Valuation & allocation
- Decline in market value
- Increase in market
interest
- Downgraded by a rating
agency
- The issue has
deteriorated
- Dividend has been
reduced or eliminated
Disclosure
-properly disclosure
-subsidiaries
-investment in associates
-BOD minutes
-loan agreement
-the share certificates
-executed joint
-confirmation with issuer
Transaction :
-shares, debt securities, loan stock/bond, notes, tranferrable subscription right and warranties,convertible bonds.
Segretion of duties :
-the initiation function should be segregated from the final approved.
-the valuation-monitoring function should be segregated from the acquisition function
-responsibility for maintaining the securities ledger should be separate from that of making entries in the GL
-Responsibility for custody of the securities should be separate from that of accounting for securities.
Audit procedures:
-Physical examination of
the share certificates
- Reading executed joint
venture or similar
agreement
- Confirmation with issuer
- Confirmation with
custodian
- Confirmation of
unsettled transactions
with broker dealer
Valuation & allocation
- Decline in market value
- Increase in market
interest
- Downgraded by a rating
agency
- The issue has
deteriorated
- Dividend has been
reduced or eliminated
Disclosure
-properly disclosure
-subsidiaries
-investment in associates