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Test for omission and other understatement in the accounting records of sales charged to accounts receivable, by selecting from appropriate records of potential sales transactions1and tr
SESSION 37 – APPENDIX AUDIT PROGRAMS OVERVIEW Objective ¾ To illustrate the contents of work programs for the audit of transactions and balances TRANSACTIONS – Statement of comprehensive income BALANCES – Statement of financial position PROPERTY, PLANT & EQUIPMENT SALES ¾ INVENTORY Tests of detail RECEIVABLES & PREPAYMENTS PURCHASES ¾ Transactions Existence and ownership Book value Property valuation Capital commitments ¾ ¾ ¾ ¾ ¾ ¾ Existence and ownership Valuation NRV Interim count GIT Physical count ¾ ¾ ¾ ¾ ¾ ¾ ¾ Existence Valuation Interim confirmation Cutoff Loans Prepayments Confirmation summary ¾ ¾ ¾ ¾ Bank balances Window-dressing Setting-off Cash balances ¾ ¾ ¾ ¾ Completeness Accrued expenses Reservation of title Setting-off Tests of detail BANK& CASH WAGES & SALARIES ¾ ¾ ¾ ¾ ¾ ¾ Tests of detail PAYABLES & ACCRUED EXPENSES 3701 SESSION 37 – APPENDIX AUDIT PROGRAMS SALES HASTINGS & WARWICK Sch Ref CLIENT PREPARED BY DATE PERIOD REVIEWED BY DATE (Audit senior in charge) AUDIT AREA – CREDIT PURCHASES REVIEWED BY DATE (Manager) The purpose of the auditing procedures set out in this section of the program is to obtain reasonable assurance that credit sales are not materially understated RELIANCE ON INTERNAL CONTROL PROCEDURES Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers TESTS OF DETAIL Note: Where the maximum values of items in an account can be determined from independent information or by calculation, use analytical procedures to reduce tests of detail as far as possible Test for omission and other understatement in the accounting records of sales charged to accounts receivable, by selecting from appropriate records of potential sales transactions1 and tracing the selected items through to the relevant income account in the general ledger, as follows: (A) Select from the most appropriate records the items to be examined (see note below) Test for completeness of these records by examining the system for preparing and controlling such records, by testing the numerical sequence (if any) of the records, and/or by any other procedures which are appropriate Note: The records from which the sample is selected should as far as possible satisfy the following requirements: (1) The records should if practicable be independent of the sales recording system (2) The records should be complete in the sense that for each sale that has been made, there is a related item in the independent records (3) The records should if practicable be such that the probability of selecting a particular item is proportionate to the value of the potential sale (4) The records should enable the potential sales to be identified at the earliest possible stage in the recording process (B) Compare the records selected in procedure (A) above with the initial sales records, for correct quantities (C) Check the selling price of these initial sales records with the relevant independent records (such as official catalogues, price lists, etc.), and check the extensions and casts (D) Check the VAT on sales selected for testing, and test the proper recording of these items in the VAT account in the general ledger (E) Compare these initial sales records with the intermediate and final records, testing these records for understatement of the casts, and for under-summarisation of the sales income 3702 E.g customers’ orders Work performed by Ref to supporting working paper SESSION 37 – APPENDIX AUDIT PROGRAMS (F) Compare the credits in the final records examined in procedure (E) above with the relevant income account(s) in the general ledger (G) Test the casts of these income accounts and prove the final balances arithmetically Test the transactions in the last few days of the year to ensure that sales have not been understated as follows: Compare major despatches as shown in the despatch records in the last few days of the year with the copy sales invoices Trace these copy invoices, via the sales accounting records, to the credit of the sales account In doing this, ensure that these despatches have been included as sales in the year under review Note: This test should be carried out in conjunction with the cutoff procedures relating to the overstatement of receivables – see paragraph 10 of the AP2 for receivables and prepayments AP = Audit Program 3703 SESSION 37 – APPENDIX AUDIT PROGRAMS PURCHASES HASTINGS & WARWICK Sch Ref CLIENT PREPARED BY DATE PERIOD REVIEWED BY DATE (Audit senior in charge) AUDIT AREA – CREDIT PURCHASES REVIEWED BY DATE (Manager) The purpose of the auditing procedures set out in this section of the program is to obtain reasonable assurance that purchases are not materially overstated RELIANCE ON INTERNAL CONTROL PROCEDURES Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers TESTS OF DETAIL Select from the general ledger accounts items to be tested for overstatement (A) Examine the initial purchase records and supporting documents (such as purchase orders and goods received records) for: (1) Approval, (2) Other independent evidence of validity, and (3) Correctness of the allocations to the general ledger accounts (B) Cast the initial purchase record (usually the purchase invoice) (C) Examine the terms of sale of suppliers selected for the above tests, and identify those suppliers that have included reservation of title in their terms of trade The end of the reporting period liability to these suppliers should be tested for understatement (see paragraph 21 (A) of the AP for payables, accrued expenses and provisions) Note: Where credit entries (e.g purchase credits and cash discounts) have been identified in taking out our debit sample, ensure that these credit entries are being tested for understatement using the relevant AP (D) Examine also the relevant paid cheques for the correctness of the relevant details (such as the date, the payee, the amount and the signatures), and investigate any alterations or unusual endorsements (E) Where any selected debit entries have not been paid by the end of the reporting period, ensure that these are included in payables at that date (F) List on a working paper the names of the suppliers whose transactions have been tested These suppliers will form part of the payables confirmation sample (see paragraph 3(B) of the AP for payables and accrued expenses) Test the transactions in the last few days of the year to ensure that purchases have not been overstated, as follows: Compare major purchases as shown in the purchases account in the last few days of the year with the receiving records, to ensure that the goods or services were received or performed before the end of the reporting period Note: This test should be carried out in conjunction with the cutoff procedures relating to the understatement of liabilities – see paragraphs 16 and 17 of the AP for payables, accrued expenses and provisions 3704 Work performed by Ref to supporting working paper SESSION 37 – APPENDIX AUDIT PROGRAMS WAGES AND SALARIES HASTINGS & WARWICK Sch Ref CLIENT PREPARED BY DATE PERIOD REVIEWED BY DATE (Audit senior in charge) AUDIT AREA – WAGES AND SALARIES REVIEWED BY DATE (Manager) The purpose of the auditing procedures set out in this section of the program is to obtain reasonable assurance that wages and salaries are not materially overstated This section can be duplicated to support any number of separate payrolls Work performed by Ref to supporting working paper RELIANCE ON INTERNAL CONTROL PROCEDURES Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers TESTS OF DETAIL Select individual items for examination using either procedure (A) or procedure (B) below: Note: Procedure (B), the payroll selection reconciliation method, can be used in the following circumstances: (i) Where we have evaluated the internal control over wages and salaries as good (ii) Where we have obtained satisfactory results from our analytical review for credibility (iii) Where we have reviewed the week by week/month by month payroll data, which is reconciled by management or is closely controlled by management budgets, and have received satisfactory explanations for all significant discrepancies revealed by our review (A) (i) From the general ledger payroll accounts select (on the basis of the total debit entries in these accounts) the accounts to be sampled Note: If a costing system is used it may be necessary to select directly from payroll records and prove the postings to the general ledger in total (ii) From each payroll account selected under procedure (i) above select individual payrolls to be examined, testing the casts of the debit entries in these accounts for overstatement (iii) From each payroll selected under procedure (ii) above select individual employees’ pay to be examined, testing the casts of the payroll for overstatement (B) Where we can use the payroll reconciliation method, select three payrolls for testing as follows: (i) At the interim audit visit select two payrolls for testing – one a current payroll and the other selected at random (ii) At the final audit visit select a further payroll at random (iii) Where we only carry out one audit visit select three payrolls from the year at random For each payroll selected under (i) to (iii) above select individual employees’ pay to be examined using a reduced sampling interval (C) In addition, we should select all individuals who prepare, handle or approve employee status change documents, payroll master files or payrolls 3705 SESSION 37 – APPENDIX AUDIT PROGRAMS Carry out the following procedures in respect of each employee selected for examination: (A) Obtain evidence of employment by examining independent employee records, by personal contact, or by enquiry of other independent employees (B) Examine the relevant supporting documents (such as employee status change documents, payroll master files, and employees’ time, piece and bonus records) for: (1) Approval (2) Other independent evidence of validity and, (3) Correctness of the gross pay calculations (C) Obtain the payroll for the pay period from which the employee was selected, and scrutinise it for possible duplicate payments to that employee (D) Test that deductions from pay have been properly accounted for, as follows: Note: Where the maximum rates of deductions from pay can be determined from independent information or by calculation, use analytical procedures to reduce as far as possible the tests of detail in 3(D)(i) below (i) Test for understatement of credit entries in the deduction accounts in the general ledger Use the sample of the employees checked under procedures (A) to (C) above For each employee selected check that the various deductions from gross pay have been correctly recorded in the initial, intermediate and final records and in the general ledger deduction accounts Test for undercasting of deductions in each of these records (ii) In respect of the payrolls dealt with in 2, check that the total deductions plus the total net pay equals the total gross pay (E) For employees paid in cash, observe the making up of pay packets and the distribution of pay to employees, paying special attention to unclaimed pay When we, use the payroll selection reconciliation method we should attend the payout of the current payroll week selected at the interim audit (F) For employees paid by cheque, examine the paid cheque for the correctness of the relevant details (such as the date, the payee, the amount and the signatures), and investigate any alterations or unusual endorsements Check the total net pay recorded on all the payrolls selected in above to the paid cheque or other payment details Where we have used the payroll selection reconciliation method of selecting individuals for testing, carry out the following additional procedures: (A) For each employee selected review the cumulative pay for the year for amounts over basic pay (B) Cast the selected payrolls and compare the totals of gross pay and deductions of the selected weeks or months with the equivalent totals of all other payrolls in the year (C) Cast all the weekly or monthly payroll summaries and agree the postings to the general ledger (D) Scan the general ledger payroll accounts to ensure that there are no payroll postings which have not been checked under (C) above 3706 SESSION 37 – APPENDIX AUDIT PROGRAMS PROPERTY, PLANT AND EQUIPMENT HASTINGS & WARWICK Sch Ref CLIENT PREPARED BY DATE PERIOD REVIEWED BY DATE (Audit senior in charge) AUDIT AREA – NON-CURRENT ASSETS REVIEWED BY DATE (Manager) The purpose of the auditing procedures set out in this section of the program is to obtain reasonable assurance that property, plant and equipment are not materially overstated Work performed by Ref to supporting working paper RELIANCE ON INTERNAL CONTROL PROCEDURES Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers TESTS OF DETAIL EXAMINING THE TRANSACTIONS DURING THE YEAR Obtain or prepare working papers of non-current asset balances and a summary of the related general ledger transactions (including depreciation) and test that these have been properly prepared, as follows: (A) Agree the totals with the general ledger accounts (B) Test the casts for overstatement (C) Agree the totals with the subsidiary records of property, plant and equipment (e.g tangible fixed asset registers) (A) Select the property, plant and equipment to be examined, as follows: (1) Select from the list of non-current assets at cost at the beginning of the financial year; and (2) Select additions to non-current assets in the financial year by selecting from the debit entries in the non-current asset control account in the general ledger Test the casts of the debit entries in this account for overstatement (B) Test the additions selected in procedure (A) (2) above with the relevant supporting records and documents for: (1) Approval by the board of directors or by other designated officials (2) Other independent evidence of validity (3) Correctness of the allocations to the general ledger accounts (C) For the items selected in procedure (A) (2) above, examine the paid cheque for the correctness of the relevant details (D) For each item selected under procedures (A) (1) and (2) above: (1) Where the asset has not been disposed of, check that it is correctly included in the non-current asset control account at the end of the reporting period (2) Where the non-current asset has been sold or otherwise disposed of during the financial year, check with the supporting evidence (e.g correspondence, scrapping note, etc.) and ensure that the profit or loss on disposal has been properly computed and has been correctly recorded in the general ledger accounts Determine that the client has made a reasonable scrap recovery in the case of assets which have been scrapped 3707 SESSION 37 – APPENDIX AUDIT PROGRAMS CONFIRMING THE EXISTENCE AND OWNERSHIP OF FIXED ASSETS Confirm the existence and ownership of all property, plant and equipment which have been examined under procedure 3(D) (1) above, as follows: (A) In respect of freehold property, inspect the title deeds or obtain confirmation from independent third-party custodians (B) In respect of leasehold property, inspect the leases or obtain confirmation from independent third-party custodians (C) In respect of plant and equipment, review the evidence of physical counts, or inspect the assets, or use other appropriate procedures If the asset is permanently idle or obsolete, review the value of this asset in the accounts CONFIRMING THE BOOK VALUE OF PROPERTY, PLANT AND EQUIPMENT Test that depreciation has been correctly calculated, by applying either procedure (A) or procedure (B) below: (A) Prove the amount of depreciation in total (B) Test the amounts of depreciation on individual items selected in procedure 3(A) above, by checking with the authorised depreciation rates and by checking the calculations in order to ensure that such items are not already fully depreciated Also, test the casts of the depreciation records and the postings to the general ledger accounts Investigate and test the client’s procedure which ensures that all amounts expended by the client on the acquisition of property, plant and equipment are correctly recorded as noncurrent assets Note: This procedure ensures that the test for understatement of the accumulated provision for depreciation (in paragraph above) is based on a population of property, plant and equipment that is not materially understated Ensure that depreciation: (A) Has been provided on a basis which is consistent with that of the previous year (B) Is adequate but not excessive, by reviewing gains and losses on disposals or by other appropriate methods PROPERTY VALUATION (A) Review the details of any valuation of assets made in the year, whether or not such valuations have been reflected in the accounts (B) Where there is reason to believe that the current market value of a property could be significantly different from the amount at which it is included in the accounts, and no valuation has been made in the current year, discuss with the manager the need to request the client to make such a valuation (C) Assess whether or not a true and fair view is shown by the statement of financial position if the current market value is materially below the book value and, if appropriate, consult the manager or partner REVIEWING AND TESTING CAPITAL COMMITMENTS Obtain or prepare a working paper of capital commitments 10 Test that they are correctly stated 11 Consider possible additional commitments Discuss these with responsible client officials and include in the working papers the date and outcome of the discussions and the names and status of the officials concerned 3708 SESSION 37 – APPENDIX AUDIT PROGRAMS INVENTORY HASTINGS & WARWICK Sch Ref CLIENT PREPARED BY DATE PERIOD REVIEWED BY DATE (Audit senior in charge) AUDIT AREA – INVENTORY REVIEWED BY DATE (Manager) The purpose of the auditing procedures set out in this section of the program is to obtain reasonable assurance that inventories are not materially misstated Work performed by Ref to supporting working paper RELIANCE ON INTERNAL CONTROL PROCEDURES Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers TESTS OF DETAIL – EXISTENCE AND OWNERSHIP Planning attendance at physical inventory counting Where the date selected for the count is an interim date we must be able to rely on the year-end book inventory records Assess the past reliability of the book records by examining the materiality of differences disclosed by previous physical counts If there are any doubts as to the reliability of the book records, discuss immediately with the manager whether we should request the client to conduct a year-end count Review the adequacy of the client’s instructions Any serious shortcomings must be discussed immediately with responsible client officials so that they can be rectified before the inventory count Select for test counting (by reference to perpetual records or prior period inventory summaries and purchases selected under the AP for income and expenses) those inventory items expected to have the largest monetary value at the count date Where the client maintains inventory of a technical nature which is not readily identifiable, or whose conditions we are not competent to ascertain, consider using independent experts Obtain a list of all inventory held by third party custodians Ensure that the list is complete In respect of these inventories: (A) Establish the suitability of the custodian (B) Confirm the existence and title of such inventory directly with the custodians (C) Review the controls exercised by the client over these inventories (including cutoff) and consider whether there is any need for us to inspect them Arrange for the necessary audit staff to attend physical inventory counting at the various locations Brief the audit staff and ensure that they have a copy of the client's instructions together with a list of the inventory items pre-selected in above and the audit program for procedures during counting which they will need to complete See end of this program Make arrangements for the audit staff to be present at the end of the count On completion of the count obtain and review the audit working papers prepared during our attendance at the various locations, and summarise the adequacy and effectiveness of the counts 3709 SESSION 37 – APPENDIX AUDIT PROGRAMS Procedures subsequent to physical inventory counting Obtain the client’s count records and test that they are complete and accurate, as follows: (A) Test for completeness, by comparing the numerical sequence of count records with the details recorded in our working papers at the time of the physical count (B) Scrutinise the count records to ensure that they have not been altered subsequent to our attendance at the physical count by comparing the records with details recorded in our working papers at the time of the physical count (e.g photocopies) Testing continuous stockchecking procedures 10 Review the instructions issued and the procedures adopted by the client, in order to determine whether such instructions and procedures are adequate Pay particular attention to controls revealed on the ICQ for the inventory system where inventory is not physically counted at the end of the reporting period 11 Arrange to attend at least one of the continuous stockchecks during the year Review reports of inventory counting or the inventory records to ascertain the extent to which inventories have been counted during the year, and also to determine (by reviewing any differences disclosed) the accuracy of the inventory records In the light of this review, determine the extent of the counting to be performed under 12 (A) and (B) below Test that the differences disclosed by counting have been adjusted in the inventory records 12 Carry out audit tests as follows: (A) Select from the inventory account at the end of the reporting period a sample of inventory items, and check the quantities with the underlying inventory records and the valuation of the items with supporting documents (B) Count a number of items that are in inventory, and check these by comparing them with the inventory account 13 Summarise on a working paper our findings on the adequacy and effectiveness of the continuous counting procedures and on the reliability of the inventory records Also indicate the approximate amount of the differences found during the year Checking quantities on stocksheets 14 Test the casts of the stocksheets by: (A) Casting the pages to which counted items have been traced and follow the totals through to the inventory summary (B) Casting the final inventory summary, selecting individual page totals and casting them at the same time selecting items for examination in procedure 15(A) Where inventories are subject to continuous counting, test that the list of inventory has been properly extracted (by selecting from the list and comparing with the inventory records and vice versa) 15 Test that the physical quantities shown on the final stocksheets are neither overstated nor understated by performing the following procedures: (A) Overstatement: Agree the details of those items selected in procedures 14 (B) above with the client’s count records, to ensure that the stocksheets only incorporate count records from physical inventory counting (B) Understatement: Agree items which were counted by us, or in our presence, with the final stocksheets 3710 SESSION 37 – APPENDIX AUDIT PROGRAMS TESTING THE NET REALISABLE VALUE OF INVENTORY 25 Apply the procedures set out in (A) to (E) below to ascertain whether or not inventory write-downs and provisions are adequate (but not excessive) so that inventories are stated at the lower of cost and net realisable value In doing this, consider the following factors where applicable: the condition of the inventory, its saleability, the possibility of obsolescence, the levels of inventory in relation to current and expected sales or usage, the estimated costs of completing work in progress, and current and expected selling prices less reasonable costs of disposal (A) Test the amount at which inventory of finished products and of other items held for sale to customers is stated does not exceed the selling price less reasonable costs of disposal Also test that the quantities held are not excessive Compare inventory levels (where appropriate) with sales for the current year, with orders, and with sales forecasts (B) Test that work in progress is current and saleable Also test that (where appropriate) it has been written down by the amount of any losses expected to arise on realisation – taking into account reasonable costs of completion and disposal (C) Test that inventories of raw material and supplies which are defective, obsolete or surplus to production requirements have been adequately written down (D) Test that adequate provision has been made for any major purchase commitments which are surplus to requirements or which are at prices in excess of current replacement prices FOLLOWING UP AN INTERIM COUNT 26 Where the physical inventory count date differs from the end of the reporting period examine all significant entries in the general ledger inventory control account, as follows: (A) Test debits for overstatement by selecting from debits to general ledger inventory accounts and agree with the underlying records (B) Test credits to the inventory account for understatement by comparing with the appropriate debits to cost of sales (C) Test credits to the inventory account for misstatement by reviewing analytically the expected cost of sales (e.g by reference to sales and gross profit margins) and comparing this amount with the inventory credits 27 Test cost of sales for overstatement by completing the AP for Income and Expenses 28 Confirm that there has been no material change in the relationship of inventory cost to net realisable value between the count date and the end of the reporting period TESTING GOODS IN TRANSIT 29 In respect of goods in transit: (A) Examine the basis for recording any inventory that is in transit (B) Check that the goods have been subsequently received and were validly in transit Goods in transit will be tested for understatement in conjunction with the cutoff tests under steps 16 to 18 in this program and cutoff tests in the AP for Payables, accrued expenses and provisions OVERALL REVIEW 30 Compare the inventories at the end of the reporting period with those of the previous year, and obtain explanations for any significant differences Compare inventory turnover rates with those of previous years Generally consider whether inventories are stated on appropriate bases consistent with those stated in the preceding year 3712 These steps should be coordinated with related procedures for payables, cost of sales and receivables SESSION 37 – APPENDIX AUDIT PROGRAMS PROCEDURES DURING PHYSICAL INVENTORY COUNT Before carrying out the procedures set out below, ensure that you are familiar with and understand, the client’s procedures and instructions At the outset, tour the areas for which you are responsible to ascertain the nature, location and size of the inventory to be counted By observing the procedures being carried out, obtain reasonable assurance that the instructions are being complied with and that the procedures followed are adequate to ensure an accurate count Bring any significant breakdown in procedures to the attention of the senior auditor in charge and the client official in charge of physical inventory counting Make the following test counts, and record sufficient details in the working papers so that the selected items can be traced to the final inventory summary (Indicate on the working papers that all test counts have been agreed to final client counts): ISA 501 (A) All items pre-selected in step of the main program (To test inventory for overstatement and understatement.) (B) A sample of items selected from the physical inventory items (To test inventory for understatement.) (C) A sample of items selected from the client’s count records, or in the case of continuous inventory checking, from the inventory records (To test inventory for overstatement.) For (B) and (C) pay particular attention to high value items Ensure against subsequent alteration of the client’s count figures by, for example, taking photocopies of the stocksheets and recording the numbers of sheets utilised During the course of the count make and record such tests as are necessary to ensure that: (A) All differences disclosed by double counts are investigated and resolved (B) All inventory is included in the physical count and all areas are systematically cleared (C) Any goods that are sub-standard, defective, obsolete, or slow-moving are identified and recorded as such on the stocksheets Check that all goods which not belong to the client are properly identified and segregated, and that they are not included in count records (A) Observe the procedures for dealing with goods received or despatched during the count Record on an audit working paper the details of a number of such items to enable subsequent checking of purchases-inventory and inventory-sales cutoff (e.g the serial numbers of the last goods despatched note(s) for each location, checking previous and subsequent sequences) (B) Observe the control over the movement of goods between areas whilst counting is in progress Examine the serial numbering or count records and record details of all records used 10 Where work in progress is being inspected during the count, ensure that adequate information is available relating to the degree of completion 11 Where inventory is stored in bulk and cannot be measured accurately, attend with suitably experienced client personnel Record and assess the effectiveness of the methods used for inspecting and estimating such inventory 12 Prepare a summary of the adequacy and effectiveness of the count procedures 3713 SESSION 37 – APPENDIX AUDIT PROGRAMS RECEIVABLES AND PREPAYMENTS HASTINGS & WARWICK Sch Ref CLIENT PREPARED BY DATE PERIOD REVIEWED BY DATE (Audit senior in charge) AUDIT AREA – RECEIVABLES AND PREPAYMENTS REVIEWED BY The purpose of the auditing procedures set out in this section of the program is to obtain reasonable assurance that receivables and prepayments are not materially overstated RELIANCE ON INTERNAL CONTROL PROCEDURES Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers TESTS OF DETAIL CONFIRMING THE EXISTENCE OF TRADE RECEIVABLES Note: Receivables may be confirmed at the end of the reporting period or at an interim date If an interim date is chosen the follow-up procedures set out in paragraph of this AP must also be applied Obtain a list of trade receivables at the confirmation date and test these receivables for overstatement by carrying out the audit procedures set out in paragraphs 3, and below Wherever possible, use as the list the client’s analysis of customer accounts Test the list as follows: (A) Agree or reconcile the total of the list with the receivables control account in the general ledger (B) Test the casts of the list for overstatement (C) Test the individual items on the list for overstatement, by applying the procedures set out below: (1) Select either debit balances from the list of receivables of invoices outstanding by use of sub-sampling techniques Note: Test for understatement of credit balances, using the tests required to verify payables – see AP for payables, accrued expenses and provisions (2) In respect of the selected balances, send out positive confirmation requests Note: (a) Where the client prepares the confirmation requests, check that they have all been properly prepared Retain a copy of the working paper that lists all accounts selected (b) Obtain the signature of the client’s official on each request (c) Mail the request direct, and not use the client's staff or facilities for this purpose (d) After a reasonable period of time, send out second request to those customers who have not responded (3) Where the customer will not confirm the balance in writing, try (with the client’s permission) to obtain confirmation by fax or telephone 3714 DATE (Manager) Work performed by Ref to supporting working paper SESSION 37 – APPENDIX AUDIT PROGRAMS (4) Review each reply received In cases where the customer disputes the balance, request the client to investigate the reasons for all differences Establish the validity of the differences and prepare a schedule of the differences and their subsequent disposition Note: It is important to investigate thoroughly any instances where the customer disputes the amount paid by him or the date on which the client’s records indicate payment was received Factors such as these may indicate “teeming and lading” Where we are unable to obtain confirmation of a customer’s balance obtain evidence (by applying appropriate procedures) that the balance was a bona fide receivable of the client at the confirmation date The appropriate alternative procedures consist of: (A) Checking the opening balance of the account with the list of balances at the end of the subsequent reporting period, testing the casts of the account during the year and agreeing the balance; and (B) Testing the outstanding items with independent evidence of validity – including customers’ orders, despatch records and subsequent payments (where these can be substantiated by remittance advices or other independent means); and (C) Testing for the understatement of payments etc by discussing the outstanding items with a responsible official who is independent of the cash receiving function Where confirmation procedures are not applied, select individual balances from the list of receivables and carry out the procedures listed in paragraph above Prepare a summary of the confirmation procedures applied and of our conclusions TESTING THE VALUATION OF TRADE RECEIVABLES Test trade receivables for collectability and for understatement of the doubtful debts provision as follows: (A) Obtain reasonable assurance that the client’s listing of overdue accounts has been correctly prepared by checking it with the sample selected in procedure 3(C) (l).Check the casts of each column and agree the total with the receivable’s control account (B) Select overdue items from the client’s listing of overdue accounts and check and investigate the extent to which they are collectable by reviewing credit reports, correspondence and other independent evidence (C) Establish the reasonableness of formulae used to calculate general provisions Review generally the client’s bad debt experience for the current and recent financial years and establish the reasons for significant differences Check the calculations on which the provision is based Test the bad debts written off against the provision during the year for overstatement by selecting debts written off and checking them with such independent evidence of validity as correspondence with solicitors, debt collection agencies etc FOLLOWING UP AN INTERIM CONFIRMATION OF TRADE RECEIVABLES Where the procedures in paragraphs to above were applied to a date other than the end of the reporting period, apply the following additional procedures: (A) Test for overstatement of trade receivables at the end of the reporting period by examining the transactions in the intervening period from the confirmation date to the end of the reporting period, as set out below: 3715 SESSION 37 – APPENDIX AUDIT PROGRAMS (1) Test the credit sales in the intervening period for overstatement, as follows Select debit entries from the receivables control account and compare these with the final sales records Select individual transactions by sub-sampling these final records and the related intermediate and initial sales records Check these transactions with independent evidence of validity (e.g customer orders, delivery notes signed by the customers, despatch records, etc) (2) Test the sales returns and allowances in the intervening period for understatement, as follows Examine the evidence of sales returns and allowances (e.g goods returned records, correspondence with customers, and the relevant sales invoices) Trace major items in these records to the credit notes and (via the accounting records) to the credit of the receivables control account In doing this ensure that these sales returns were recorded in the correct financial year (3) Test the receipts from customers in the intervening period for understatement, as follows Examine customers’ remittance advices, and any other available independent evidence Trace major items in these records (via the accounting records) to the credit of the receivables control account In doing this, ensure that these receipts were recorded in the correct financial year (B) Review and summarise the movements on the receivables control account from the confirmation date to the end of the reporting period and establish the reasons for all unusual fluctuations Compare the individual balances which were selected for confirmation at the interim date with the corresponding balances at the end of the reporting period, and investigate major differences TESTING THE CUTOFF OF RECEIVABLES 10 Test for any overstatement of receivables as at the end of the reporting period that has arisen from recording transactions in the wrong financial year Do this by testing for overstatement of sales and for understatement of sales returns and receipts, in the following manner: (A) Test for overstatement of credit sales in the period immediately preceding the end of the reporting period, as follows Compare major billings as recorded in the receivables control account (or other appropriate accounting record of billings) in the last few days of the year, with evidence of the date on which goods were despatched or services were rendered In doing this, ensure that the billings are for sales made during the financial year under review (The evidence of despatch should preferably comprise the customer’s acknowledgement of delivery or service (e.g signed delivery notes) or, failing that, the client’s despatch records.) (B) Test for understatement of sales returns and allowances in the period immediately preceding the end of the reporting period, as follows: (1) Examine the evidence of sales returns and allowances (e.g goods returned records, correspondence with customers, and the relevant sales invoices) for the last few days of the year and the first few weeks after the end of the reporting period Trace major items in these records to the relevant credit notes and (via the accounting records) to the credit of the receivables control account In doing this, ensure that the sales returns and allowances have been recorded in the correct financial year or, alternatively, that adequate provision for sales returns and allowances has been made as at the end of the reporting period (2) Compare major sales credit notes in the first few weeks after the end of the reporting period with the relevant supporting evidence (e.g goods returned records, correspondence with customers, and the relevant sales invoices) In doing this, ensure that these credit notes have been recorded in the correct financial year or, alternatively, that adequate provision for sales returns and allowances has been made as at the end of the reporting period 3716 SESSION 37 – APPENDIX AUDIT PROGRAMS (C) Test for understatement of receipts from customers in the last few weeks of the year, as follows Examine customers’ remittance advices, listings of remittances, and any other independent evidence Trace major items in these records (via the accounting records) to the credit of the receivables control account In doing this, ensure that these receipts were recorded in the correct financial year Note: The cutoff tests set out above should be carried out in conjunction with the cutoff procedures relating to the understatement of sales (and the overstatement of sales returns and allowances) – See the AP for income and expenses – credit sales (paragraph 3) REVIEWING TRADE RECEIVABLES 11 Review generally the list of balances as at the end of the reporting period Compute trade receivables as a percentage of sales and as the number of days’ sales outstanding Compare these ratios with those of preceding years and obtain satisfactory explanations for any significant differences Determine that the balances have been correctly classified for statement of financial position purposes and in particular that: (A) Material credit balances have not been deducted from receivables (except where there is a right to set-off) (B) Inter-group balances have been classified correctly (C) Balances due from any person or company which is in any way “connected” with the client arise from bona fide transactions on an “arm’s length” basis TESTING OF LOANS 12 Obtain a list of loans at the end of the reporting period or, where appropriate, as at an interim date Test this for overstatement, as follows: (A) Agree the total with the balance of the control account in the general ledger (B) Test the casts of the list for overstatement (C) Select loans from the list, or where the loans bear interest, from the sources specified in the note below Test the selected items for overstatement as follows: (1) Obtain written confirmation direct from the individual borrowers (2) Compare the selected loans with adequate evidence of ultimate collectability Do this by checking that the interest and principal are being paid on time and that the loan is not in default of the loan agreement Also, determine that the loan is adequately secured, by confirming that the client has a charge on the security and by examining evidence of the existence and value of the security (e.g correspondence, the borrower’s accounts, etc) Where necessary, review the loans with responsible client officials (3) In the case of those selected loans which were made during the financial year, compare with the relevant supporting documents for: (i) Approval by the board of directors or by other designated officials or committees; and (ii) Other independent evidence of validity (e.g loan agreements and evidence of receipt) Note: Where the loans bear interest, the selection should be made instead from the list of loans at the beginning of the year and from the loans made during the year The items selected should then be used for: (A) Testing the loans for overstatement – as in procedure (C) above, and (B) Testing for understatement of loan interest, by checking that the interest relating to the selected loans has been included in the relevant income account in the general ledger Loans to directors or employees 13 Identify loans made to, or debts due by either directors, or employees, and consider the disclosure of such loans in the accounts 3717 SESSION 37 – APPENDIX AUDIT PROGRAMS TESTING OTHER RECEIVABLES AND PREPAYMENTS 14 Obtain a list of other receivables as at the end of the reporting period or, where appropriate, as at an interim date Test this for overstatement, as follows: (A) Agree the list with the balances on the relevant accounts in the general ledger (B) Test the casts of the list for overstatement (C) Select receivables from the list and test them for overstatement by applying procedures similar to those set out in paragraph 12(C) above (D) Determine the nature and bona fides of all significant receivables, paying particular attention to amounts due from any person or company which is in any way connected with the client 15 Obtain a list of prepayments as at the end of the reporting period or, where appropriate, as at an interim date Test this for overstatement, as follows: (A) Agree the list with the balances on the relevant accounts in the general ledger (B) Test the casts of the list of overstatement (C) Select prepayments from the list and test them for overstatement by comparing them with supporting independent documentation and with the corresponding amounts in prior years 3718 SESSION 37 – APPENDIX AUDIT PROGRAMS RECEIVABLE/PAYABLE CONFIRMATION SUMMARY HASTINGS & WARWICK Sch Ref CLIENT PREPARED BY DATE PERIOD REVIEWED BY DATE (Audit senior in charge) AUDIT AREA – DIRECT CONFIRMATION SUMMARY REVIEWED BY No of accounts % of total accounts Value $ % of total value –––––– 100.0 –––––– –––––– 100.0 –––––– Additional selections Total sample –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Population total Sample for confirmation DATE (Manager) Ref to supporting schedules Statistical selections Results of confirmation Confirmed by: (a) Letter (b) Fax (c) Telephone Replies reconciled Non-replies agreed by alternative procedures Total balances agreed Balances in dispute Total sample Date initial circularisation letter despatched Percentage reply on initial circularisation % Date of follow up letter 3719 SESSION 37 – APPENDIX AUDIT PROGRAMS BANK AND CASH BALANCES HASTINGS & WARWICK Sch Ref CLIENT PREPARED BY DATE PERIOD REVIEWED BY DATE (Audit senior in charge) AUDIT AREA – BANK AND CASH REVIEWED BY DATE (Manager) The purpose of the auditing procedures set out in this section of the program is to obtain reasonable assurance that bank and cash balances are not materially overstated RELIANCE ON INTERNAL CONTROL PROCEDURES Where we have placed reliance on the client’s internal control procedures, test that the controls on which we are relying have been complied with, and record the details of such tests in the working papers TESTS OF DETAIL CONFIRMING BANK BALANCES Note: Normally, bank balances should be confirmed at the end of the reporting period An interim date should not be chosen for confirmation unless the manager responsible for the audit expressly permits this Obtain or prepare a list of all bank accounts that were open at any time during the year Send out requests for confirmation to the banks concerned at least one week before the confirmation date (Use the firm’s standard confirmation request letter and ensure that the client has authorised the banks to divulge the required information to us.) Obtain, and retain, a copy of the clients’ bank reconciliations as at the confirmation date Test the reconciliations as follows: (A) Check the casts of the reconciliations and agree the balances with the general ledger (or where appropriate with the cash books) and with bank statements (B) Obtain bank statements for a sufficient period (usually ten working days) immediately subsequent to the confirmation date (If there are any suspicious circumstances, obtain these statements direct from the bank.) (1) Test for understatement of outstanding cheques and other items which decrease the cash book balance Select from payments recorded by the bank in the subsequent period and comparing these with the payment records to ensure that they were recorded in the correct accounting period Compare the cheques recorded prior to the confirmation date with the reconciliation (2) Check for overstatement any unbanked receipts and other items which increase the balance at the bank Do this by selecting from the list of unbanked receipts and comparing with paying-in slips and with bank statements Investigate the reasons for any delay in banking receipts (3) Test for worthless cheques deposited to cover shortages by scrutinising the bank statements for dishonoured cheques in the first ten working days after the end of the reporting period Agree bank certificates with the balances shown on the reconciliations as being due to or from the banks Also check that all other information given on the certificates agrees with the client’s records and is properly reflected in the accounts 3720 Work performed by Ref to supporting working paper