AUE2602 STUDY SUMMARY NOTES

AUE2602 STUDY SUMMARY NOTES. THE AUDIT OF TRANSACTIONS AND BALANCES Financial statements assertions and the revenue & receipts cycle Sales transactions : • actually occurred (not fictitious) and they pertain to the entity (occurrence) • recorded at correct amount (accuracy) and are allocated in proper accounting period (cut-off) • have all been recorded (completeness) in the proper accounts (classification) Receipts (transactions) : • payment from debtor actually occurred and pertains to entity (occurrence) • receipts are recorded at correct amount (accuracy) and are allocated to the proper accounting period (cut-off) • all receipts have been recorded (completeness) in the proper accounts (classification) Debtors and bank / cash balances (account balances) : • debtors and bank balances actually existed at Statement of Financial Position date (existence) • company has rights to the debtors and bank balances i.e. not encumbered in any way – and if they are encumbered then the disclosure has been made (rights) • all debtors and bank balances are including at Statement of Financial Position date (completeness) • debtors have been reflected at appropriate carrying value i.e. suitable allowance has been made for recovery of nonrecoverable debts (valuation) and bank balances are carried at their correct value (valuation) Presentation and disclosure : • In addition to above also that presentation and disclosure of all matters pertaining to balances and transactions in this cycle are complete and that the financial reporting standards have been correctly classified and accurately presented and disclosed in an understandable way. Cos audit objective is something that has to be achieved important start answer with “ to obtain satisfaction that …” when discussing formulation of an audit objective. e.g. if listing audit objectives for audit of accounts receivables that are disclosed as part of current assets in BS of entity would say : • to obtain satisfaction that the accounts receivable balances have been fully accounted for in the account records and financial statements (completeness) • to obtain satisfaction that the accounts receivable balances have been accounted for at an appropriate carrying value (valuation) • to obtain satisfaction that accounts receivable actually existed at year-end (existence) • to obtain satisfaction that accounts receivables pertain to the orgaisation at year-end (rights and obligations) • to obtain satisfaction that have been correctly disclosed, classified and described in the financials (presentation and disclosure) Characteristics of good internal control with relevance to the revenue and receipts cycle : • control environment – receipts, banking and debtors controls must be very strong. Debtors cannot be just written off or deleted instead of paying • competent trustworthy personnel – anyone who has access to cash or cheques • segregation of duties – division of duties between person receiving payment from customers, person banking the cash and person writing up the records and reconciling the bank account. Should also be someone independent of all these who handles the debtor’s queries. Person who maintains debtor’s records should be independent of person who authorises adjustments to debtors accounts (e.g. credit notes) • isolation of responsibilities – all documents in the cycle should be initialed to indicate a control has taken place, especially : when credit worthiness checks have been carried out on orders before they are processed as goods move from one function to another and are checked as being received by signing document when cheque payments move from the mailroom to the cashier, and even more so when there is cash • access / custody control – physical control over payments (cashier should be protected and chqs should be protected by being crossed). Access to debtor’s ledger should also be restricted cos if debtor’s records are destroyed doubtful company will be able to collect. Also to prevent false credit notes being passed and the money stolen • source document design – e.g. numbering, control over blank forms and limited information that can be keyed in etc • comparison and reconciliation – must frequently and timeously check : orders placed by customers to orders processed / invoiced invoices to payments received (debtor’s maintenance) debtor’s ledger to general ledger cash records to bank statement Important account aspects of the revenue and receipts cycle ISA18 provides guidance on the recognition of revenue. Especially if assessed risk that sales are overstated, then the auditor must confirm that the following conditions have been met for the sale to be correctly recognised : sale of goods : • significant risks and rewards of ownership have been transferred from seller to buyer (e.g. signed delivery note or contract with legal title transfer • seller doesn’t retain continuing managerial involvement or effective control over the goods that have been sold (e.g. consignment stock sent to an agent is not a sale until the agent has sold the goods) • amount of revenue can be measured reliably (i.e. sales values reflected on the invoice) • probable that economic benefits associated with the transaction will flow to the entity (not fictitious sales) rendering of services • amount of revenue can be measured reliably (e.g. contract rates and payment terms are specified in a contract between two entities • probably that economic benefits associated with the transaction will flow to the entity • stage of completion of the transaction can be measured reliably at the Statement of Financial Position date (e.g. by stage of completion can be measured by percentage of costs incurred to date in fulfillment of the contract against the total estimated costs of the contract) allowance for doubtful debts • if any uncertainly arises about the collectability of an amount already included as revenue then it must be expensed and NOT revenue adjusted and reduced. Tests of control • observation • enquiry • inspection • reperformance To prepare a program of tests of controls in any cycle, first need to identify the controls and then select a suitable procedure. e.g. : • enquire if all orders are directed to order clerk and if he makes out internal sales orders for all orders not just phone orders • inspect filled copies of internal sales orders to see if credit approval was obtained • observe despatch clerk counting and checking goods on transfer from warehouse to despatch • reperform a bank reconciliation DETECTION RISK AND SUBSTANTIVE PROCEDURES • match them to details on supporting documentation (i.e. sales orders, delivery notes etc) • reperform pricing and confirm validity of discounts given • reperform casts, extensions and discounts and vat calculations • trace to entry in the sales journal • reperform postings to debtors ledger • inspect documentation for signatures to indicate that control procedures have taken place. Internal controls for CREDIT SALES transactions based on the control activities : Segregation of duties - including the division of duties and the authorisation of various transactions. If no segregation of duties is possible then management supervision of critical functions MUST be used. Internal control measures for credit control function and initiating credit sales. Appropriate approvals for manual override of credit limits. Physical controls – regular stock-takes must be carried out and any deviations from the theoretical inventory records must be followed up Information processing controls – programmed controls over pricing, calculations, product codes and description and customer account codes. Programme code is password protected and all programme changes are reviewed and approved by senior staff. Operating reviews – management continually monitors and studies the internal control measures which have been laid down to ensure that they are applied in the appropriate manner so if errors or weakness occur they can be corrected. Management reviews are continually carried out (i.e. comparing actual performance with key performance indicators) Reporting – printouts of GL balances etc as well as exception reports available at least monthly, and the reconciliation to be verified and signed by a senior staff member (i.e. department head). Reports must include comparisons of actual current financial year results to budgets and forecasts and prior periods, with explanations for variances and differences