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13-26
a.
TRANSACTION-RELATED
AUDIT OBJECTIVE
b.
TEST OF
CONTROL PROCEDURE
c.
SUBSTANTIVE
TEST
1. Recorded transactions
exist, recorded
transactions are stated
at the correct amounts,
and transactions are
properly classified.
(Occurrence, Accuracy,
and Classification)
Examine invoice
packages for initials
indicating that review
has been performed.
Examine supporting
invoices and
recheck items
checked by the
clerk.
2. Existing acquisition
transactions are
recorded.
(Completeness)
Account for numerical
sequence of receiving
reports and trace to
acquisitions journal entry.
Reconcile vendor
statements to
accounts payable
listing.
3. Existing cash
disbursement
transactions are
recorded, recorded
transactions exist, and
recorded transactions
are stated at the correct
amounts.
(Completeness,
Occurrence, and
Accuracy).
Observe cash handling
procedures and examine
bank reconciliation to
determine if was
prepared by an
independent person.
Perform tests of bank
reconciliation as of
the balance sheet
date.
4. Recorded transactions
exist. (Occurrence)*
Examine invoices for the
controller’s initials.
Examine supporting
invoices for same
information examined
by the controller.
5. Recorded transactions
exist. (Occurrence)
Examine invoices for
indication of check
number and date.
Examine supporting
invoices, purchase
orders, and
receiving reports
containing the
proper check
number and date for
each cash
disbursement.
* The objectives satisfied depend upon what she examines. She might, for
13-27
(a)
CONTROL
ACTIVITY
(b)
TRANSACTION-
RELATED AUDIT
OBJECTIVE(S)
(c)
TEST OF
CONTROL
(d)
POSSIBLE
MISSTATEMENT
(e)
SUBSTANTIVE
AUDIT PROCEDURE
1. Proper authorization
Occurrence
Examine approved purchase
orders for a sample of
acquisitions
Unauthorized
acquisitions of goods
Examine supporting documents for
appropriateness of expenditures
2. Adequate
documents or
records
Occurrence
Completeness
Account for a numerical
sequence of receiving
reports
Unrecorded acquisitions
exist
Confirm accounts payable,
especially vendors with small
or zero balances
3. Independent checks
on performance
Timing
Examine vendors’ invoices
for indication of comparison
Cutoff misstatements
Perform search for unrecorded
liabilities
4. Independent checks
on performance
Classification
Examine vendors’ invoices
for indication of internal
verification
Account classification
misstatements
Compare vendors’ invoices to
acquisitions journal for
reasonableness of account
classification
5. Adequate
documents or
records
Occurrence
Examine supporting
documents for indication of
cancellation
Duplicate payment for an
acquisition
Examine supporting documents for
every payment to selected
vendors
6. Independent checks
on performance
Occurrence
Accuracy
Examine vendors’ invoices
for indication of comparison
Invalid or unauthorized
payment
Examine supporting documents for
appropriateness of expenditures
7. Independent checks
on performance
Accuracy
Examine vendors’ invoices
for indication of
recalculation
A misstatement in
calculation of a
vendor’s invoice
Recalculation of vendors’ invoices
8. Proper authorization
Occurrence
Examine cancelled checks
for signature
Invalid or unauthorized
payment
Examine supporting documents for
appropriateness of expenditures
9. Separation of duties
Occurrence
Observe check mailing
procedures and inquire
about normal procedures
Bookkeeper takes
signed check and
changes payee name
Compare payee name on
cancelled check to supporting
documents
10. Independent checks
on performance
Posting and
summarization
Examine indication of
reconciliation of the master
file and control account
Misstatements in master
file or control account
Foot subsidiary records and
compare to control account
13-12
Copyright © 2017 Pearson Education, Inc.
13-13
Copyright © 2017 Pearson Education, Inc.
13-28 a. Although a client may have very effective internal controls, the
auditor cannot place complete reliance on them in evaluating
whether the financial statements are fairly stated. This reflects the
inherent limitations of internal control, and the need under auditing
standards to perform certain tests of balances such as confirmation
of receivables and observation of inventory.
b. The auditor may decide not to place the maximum reliance on
internal control if it is not cost-beneficial. The auditor may decide
that it is more cost-effective to reduce reliance on controls and
perform more substantive tests.
c. 1. B, C
2. C
3. A
3. Assess control risk.
controls.
4. Perform tests of controls.
2. Perform substantive tests of details of balances.
Any other sequence is not cost effective or is incorrect. For example:
E
F
A B D
G H D
C D
13-14
13-29 (continued)
needed.
c. The sequence is E, B, G, C. The auditor concluded the internal
controls may be effective, but it was not cost effective to reduce
assessed control risk. The auditor should not have performed tests
d. The sequence is F, A, G, C. The logic is not reasonable. When the
auditor concluded the controls were not effective he or she should
have gone immediately to D and performed expanded substantive
tests of details of balances.
performed expanded tests.
13-30
AUDIT
PROCEDURES
TO OBTAIN AN
UNDERSTANDING
OF INTERNAL
CONTROL
TESTS OF
CONTROLS
SUBSTANTIVE
TESTS OF
TRANSACTIONS
ANALYTICAL
PROCEDURES
TESTS OF
DETAILS
OF
BALANCES
1
E
E
S
E
S
2
M
N
S
M
E
3
E
E
M
E
S, E*
E = Extensive amount of testing.
M = Medium amount of testing.
S = Small amount of testing.
N = No testing.
13-15
13-30 (continued)
locations have a larger portion of the ending inventory balance
than other locations, the auditor can likely completely eliminate tests
probably through accounts payable confirmation and other end of
year procedures. No tests of controls are recommended because
of the impracticality of reduced assessed control risk. Some
substantive tests of transactions and substantive analytical
of the balances.
c. The most serious concern in this audit is the evaluation of the
allowance for uncollectible accounts. Given the adverse economic
conditions and significant increase of loans receivable, the auditor
receivable there will be a greatly reduced assessed control risk
and relatively minor confirmation of accounts receivable. In
evaluating the allowance for uncollectible accounts, the auditor
should test the controls over granting loans and following up on
the tests of net realizable value.
13-16
13-31 a. 1. Audit 2
2. Audit 1
3. Audit 3
accounts payable balance include:
1. Materiality of the account balance
2. Size of the populations
3. Makeup of populations
4. Initial vs. repeat engagement
the third audit, the partner apparently has a high expectation of
misstatements, and therefore believes it is necessary to do extensive
of balances.
c. The audit partners could have spent time discussing the audit
13-32 a. Phase I – Procedures 7, 9, 1
Phase II – Procedure 4
Phase III – Procedures 2, 3, 5
Phase IV – Procedures 6, 8
July Audit Report
31 Date
7, 9, 1, 4 2 3 5 6 8
