Question

Question :

As a senior auditor on the E&U accounting firm you are assigned the following tasks:

1) Auditing sales and accounts receivable cycle accounts

2) Auditing expenditures & accounts payable cycle accounts

3) Auditing payroll cycle accounts

for each of audited cycle mentioned above, prepare a plan that describe the following:

-- audit procedure/evidence to be optained

note: as you answer give example

Answer 1

1.a)Audit Procedure/Evidence to be obtained in Sales:
Review the sales occurrence: This is performing by obtaining the sales transactions that recorded in the financial statements during the period as well as sales report that link to the financial statements. Then perform an audit sampling to total population of those sales transactions to review against quotation, sales orders, invoices, contracts and goods delivery noted. Ensure that the sampling items are represent the total population, otherwise the conclusion might go wrong.
Perform Sales Revenues Analysis could help auditor to identify the unusual event or transactions related to sales. For example, comparing the sales trend again the goods of goods sold or inventories. This analysis could help auditors to perform additional review if they found that the trend go in different direction. There are many different method to perform an analysis over the revenues that auditors could use such as seasonal sales revenues, trend analysis of revenues compare with related non-financial data.
Review the sales price authorization. The fraud over this area is likely to happen. Of cause management is the one who handle to manage and make sure that fraud risk is protected and minimize. But, auditor should also review the control over this area. Focus on unauthorized sales, and unauthorized sales commission that link to performance inventive of sales team and sales manager.
Review the collectability: Sales increase is good but collectability of those sales amount is importance. Account receivable analysis should be performed, and credit policy should be review. Review the written off amount of account receivable during the year and then assess its reasonableness.
Review the sales recognition whether the recognition of sales during the period are respecting the IAS 18 or not. It is importance to assess that the future economic related to sales will be inflow into the company and the sales amount is measurable.
b)Audit Procedure/Evidence to be obtained in Account Receivables:
Matching opening balances of accounts receivables to last year’s closing balances.
Applying analytical procedures to find any unusual differences and reasons behind them.
Obtaining receivables ageing report from the client and matching the figures to accounts receivables general ledger.
Recalculating the figures of accounts receivables general ledger to confirm the accuracy.
Verification of invoices against the supporting documentation to verify that correct postings are carried out in the general ledger.
Verifying the sales period by inspecting the shipment documents of those sales.
Verifying completeness and existence by sending direct confirmations to debtors.
Reviewing the company’s policy for allowance for doubtful debts and applying it to the receivables balances.
Comparing general ledger balances to actual receivables listings and checking their accuracy.
Analyze that the necessary disclosures for bad debts and other significant events are correctly presented in the notes to the financial statements.
2.a)Audit Procedure/Evidence to be obtained in Expenditure Accounts:
An auditor must verify the following Four Potential Errors as to:
Completeness – that transaction is not recorded
Recording – that transaction is recorded inaccurately
Cut off – that transaction is recorded in accounts in the wrong period
Validity – that the recorded transaction is not valid
He shall follow below procedures for carrying out audit of major expenses covered by the business unit:
Check the nature of agreement and obtain assurance as to the reasonableness of the amount charged.
Verify whether the necessary documents or supporting vouchers are attached with the expenses.
Whether company is having documented list of Authorized personnel who sanction expenses & their individual amount of sanctioning the limits.
Check whether the expense incurred is of revenue nature which should be properly accounted for & ensure that no capital expenditure has been made.
Verify whether the TDS has been properly deducted wherever applicable.
Verify the Cut off entries to ensure that all the expenses are properly recorded in the current financial period.
2.b)
Applying analytical procedures on payables balances against other periods to check any unusual increase or decrease.
The auditor should observe the payables balance posting procedure. This will demonstrate to the auditor about the efficiency of the controls over this area.
Compare current year’s opening balances to the previous year’s audited accounts closing balances to verify that the current year’s accounts are initiated with correct figures.
Recalculate the figures from the general ledger and for the individual vendor’s balances to verify the accuracy.
Obtain samples for vendors and inspect documentation to check that the correct figures are posted in the system. This procedure leads to knowing the process of client’s payables posting process
Obtain the ledgers sample total balances for vendors and compare them with total balances from the listing to check that factual balances are recorded in the ledger.
Recalculate the breakup balances of individual vendors to verify the total figures are correctly calculated.
3 a)
Verify Active Employees
For each person that received a paycheck during the quarter, verify that the person was employed during the time period for which the check was issued. Pay particular attention to recent changes in job status
Verify Pay Rate
Verify the pay rate entered into the payroll processing system for each employee. Payroll rates should always be in writing, approved by an owner or manager, and filed with other employee paperwork.
Review Hours Paid
Compare the hours paid to employees for each pay period to the time clock reports or other tracking device used to record employee hours worked. Pay special attention to overtime hours as the cost of overtime can add up quickly and push a small business over budget in salaries and wages expense.
Compare Payroll Reports to General Ledger
Compare the totals, such as gross payroll expense, taxes withheld and net check amount, to the general ledger to ensure each payroll processing is correctly recorded on the general ledger
Review Payroll Tax Submissions
Business payroll taxes include Social Security taxes, Medicare/Medicaid taxes, state unemployment taxes and federal unemployment taxes, as well as the remission of federal withholdings for the employee.
Bank Reconciliation Review
Review the bank reconciliation for the payroll account to ensure that all checks cleared for the issued amount and make a note of any stale-dated payroll checks to research. Make sure you receive the hard copy of all payroll checks.