ACCT 304 AUDITING
Audit Documentation
Audit Documentation (ISA 230)
• Often called working papers
• Are the record of audit procedures performed, relevant audit evidence obtained and conclusions reached by
the auditor.
• Principal record that the audit conforms to ISA
• Aids the auditor in the conduct and supervision of the audit
– Planning – Review
WORKING PAPERS
NATURE PURPOSE TYPES
RECORDS OF
1. Procedures applied 2. Tests performed 3. Information
obtained 4. Conclusions
reached
1. Principle support for auditor’s report 2. Evidence that
examination was made in
accordance with GAAS
3. Means for
coordinating and supervising the examination
1. Working trial balance
2. Schedules and analyses
3. Audit memoranda and corroborating info
4. Adjusting and reclassifying entries
Functions of Working Papers
• Provide a means of assigning and coordinating audit work
• Aid in supervising and reviewing the audit work
• Provide the support for the auditors’ report
• Document the auditors’ compliance with the
generally accepted auditing standards, especially the standards of field work
• Aid in planning and conducting future audits
Purposes of Audit Documentation
• Integral part of audit quality
• Nature, timing and extent of work performed
• Professional judgments
• Basis for conclusion
• Facilitates planning, performance and supervision
• Provides basis for review
Types of Working Papers
• Permanent audit files
– Document items of concern over multiple years
– Provide summary of policies and organization of client
– To preserve working papers that have little change over time.
– To give audit staff new to the audit information regarding the client’s affairs and the nature of the audit
• Current audit files
– Typically arranged and indexed around accounts in clients’ financial statement – Support current year’s audit report
– Provides a record of work planned
– Details the work performed ie the procedures followed, test performed, information obtained and conclusions reached
– Enables any person to satisfy themselves that an adequate examination for audit purposes has been made of the client’s affairs
Examples of Types of Working Papers
• Audit Administrative Working Papers
• Working Trial Balance
• Lead Schedules (Grouping Sheets)
• Adjusting and Reclassification Journal Entries
• Supporting Schedules
• Account Analysis
• Reconciliations
• Computational Working Papers
• Corroborating Documents
Content of Files
• Permanent Files -
information with continuing relevance
– Information on client – Chart of accounts – Organization charts – Contracts, agreements – Pension plans
– Deferred tax and other schedules
• Current Files -
information specific to current year audit
– Audit program – Time budget
– Working trial balance – Lead schedules
– Detailed schedules
Types of Files
• Detailed schedules
– Analyses – Listings
– Reconciliations
– Reasonableness tests – Memos
– Third-party documentation
Working paper Format
• Headings
– Client name
– Title of work-paper
– Date of financial statements
• Identification of preparer and reviewer
• Indexing - a predetermined code for organizing work-papers
Working paper Considerations
• Work-papers must be clear and understandable
• Work-papers should identify:
– the source of the information presented – the nature and extent of the work done
– appropriate cross references to related work- papers
Working paper Considerations
• Before completion of the audit, all questions or exceptions must be resolved
• Information and comments represent:
– Statements of fact
– Professional conclusions
• Conclusions must be supported by documented facts
Working paper Considerations
• To meet requirements of Sarbanes-Oxley Act, SEC now requires a 7-year retention period for
– workpapers and other documents that form the basis of the audit or review, and
– memoranda, correspondence, communications, other documents, and records (including electronic records),
which are created, sent or received in connection with the audit or review, and contain conclusions, opinions,
analyses, or financial data related to the audit or review.
• Deliberate destruction of the audit documentation within the seven year period constitutes a criminal offense.
Working paper Considerations
• Ownership
– Workpapers belong to the auditor
– Copies may be given to client, but client should never have access to originals
– Workpapers may be required (no
auditor/client privilege)
Dr. Bedi Mrs. Welbeck and Mr. Donkor Slide 17
Auditing the revenue cycle & related accounts
Auditing the revenue cycle & related accounts
The auditor obtains an understanding of internal control for several reasons:
• To identify the types of potential misstatement that could occur & the factors that contribute to the risk that they will occur
• To understand the accounting system sufficiently to identify the client’s documents, reports & other
information that may be available & ascertain what data will be used in audit tests
• To determine an efficient & effective approach to the continuation of the audit
REVENUE RECOGNITION
• Before revenue is recognized (recorded), it must be realized and earned.
• Revenue is realized when a product or service is exchanged for cash, a promise to pay cash, or other assets that can be converted into cash.
• Revenue is earned when a product has
been delivered or a service has been
provided.
OVERVIEW OF THE REVENUE CYCLE
• The revenue cycle begins with an order from a customer, proceeding to the exchange of goods or services for a
promise to pay, and ending with the receipt of cash.
• Transactions types;
– The sale of goods or rendering a service for cash or credit.
– The receipt of cash from the customer in payment for the goods or services.
– The return of goods by the customer for credit or cash.
FINANCIAL STATEMENT ACCOUNTS
• Sales transactions:
– Trade accounts receivable – Sales
– Allowance for uncollectible accounts – Bad debt expense
• Cash receipts transactions:
– Cash
– Trade accounts receivable – Cash discounts
• Sales return and allowance transactions:
– Sales returns
– Sales allowances
– Trade accounts receivable
FUNCTIONS IN THE REVENUE CYCLE
• Order entry
• Credit authorization
• Shipping
• Billing
• Cash receipts
• Accounts receivable
• General ledger
DOCUMENTS AND RECORDS
• Customer sales order
• Credit approval form
• Open-order report
• Shipping document
• Sales invoice
• Sales journal
• Customer statement
• Accounts receivable subsidiary ledger
• Aged trial balance of accounts receivable
• Remittance advice
• Cash receipts journal
• Credit memorandum
• Write-off authorization
EDEM WELBECK
KEY SEGREGATION OF DUTIES
• The credit function should be segregated from the billing function.
• The shipping function should be segregated from the billing function.
• The accounts receivable function should be segregated from the general ledger function.
• The cash receipts function should be segregated from the accounts receivable function.
EDEM WELBECK
INHERENT RISK ASSESSMENT
• Industry-related factors.
• The complexity and contentiousness of revenue recognition issues
• The difficulty of auditing transactions and account balances.
• Misstatements detected in prior audits.
EDEM WELBECK
CONTROL RISK ASSESSMENT
Planning and performing tests of controls on revenue cycle transactions
Understanding and documenting
the revenue internal control system based on the planned level of control risk using ICQ
Assessing and documenting the control risk for the revenue cycle
Example of internal control questionnaire used by auditor to understand the IC system
Sales
1. Are sales orders approved by the credit department before they are accepted?
2. Are shipping documents – used?; pre-numbered?.
3. Is the credit function separated from other functions, particularly cash, sales & accounting functions?
4. Are invoices- prepared on all sales?; pre-numbered?
5. Are shipping documents checked to customers’ orders for quantity & description to determine that items shipped are those ordered?
6. Are invoices checked for – prices, payment terms?
Internal control questionnaire cont’d
Sales
7. Is a check made to determine that all invoices are recorded and all invoice numbers accounted for?
8. Are sales summaries prepared, independent of the
accounting department, which may be used as a check on recorded sales?
9. Do miscellaneous sales follow the same peoceedures as regular sales, eg., sale of equipment, sales of scrap & sales to employees
10. Are invoices checked to notices of shipment for quantity &
descriptions to determine that items shipped are being billed?
CONTROL PROCEDURES AND TESTS OF CONTROLS - SALES RETURNS AND ALLOWANCES TRANSACTIONS
• Each credit memorandum should be approved by someone other than the individual who initiated it.
• A credit for returned goods should be supported by a receiving document indicating that the goods have been returned.
RELATING THE ASSESSED LEVEL OF
CONTROL RISK TO SUBSTANTIVE TESTING
• The results of the auditor’s testing of internal control for the revenue cycle directly impacts on detection risk and
the level of substantive testing that will be required for the accounts affected by the cycle.
• When the results of the testing controls support the
planned assessed level of CR, the auditor can conduct the substantive tests at the planned level.
• If the results of the tests of controls do not support the planned level of CR, DR will have to be set lower.
EDEM WELBECK
Audit of E-commerce Business
Dr. Bedi Mrs. Welbeck and Mr. Donkor Slide 31
Audit of E-commerce Business
• IAPS 1013
• The purpose of this International Auditing Practice Statement (IAPS) is to provide guidance to assist auditors of financial statements where an entity engages in commercial activity that takes place by means of connected computers over a public network, such as the Internet (e-commerce).
Audit Implications
• Skills and knowledge (Competence and due care)
• Use of experts
• Knowledge of the business
• Risk identification
• Internal control considerations
– Security
– Transaction integrity
– Process alignment (each subsystem must properly interpret the data from each other)
Effect of E-commerce on Audit Evidence
• There may not be any paper records for e-commerce transactions, and electronic records may be more easily destroyed or altered than paper records without leaving evidence of such destruction or alteration.
• The auditor may test automated controls, such as
record integrity checks, electronic date stamps, digital signatures, and version controls when considering the integrity of electronic evidence.
Assertions to Address
• All the financial statements assertions.
• Hence, the COVERMP