auditing-2 syllabi

AUDITING II(Pengauditan II) : 

AUDITING II(Pengauditan II) Course descriptions: This course will discuss the last two steps of auditing phases i.e performing the audit test and reporting the findings. The discussions will be focused on the implementation of test of control and subtantive test of financial accounting cycles. Following are the topics that will be elaborated.

Slide 2: 

Overview of Auditing I Auditing Revenue Cycle: - Substantive test of Accounts Receivable balance account Auditing Expenditure Cycle: - Substantive test of Accounts Payable balance account Auditing Production Cycle: - Substantive test of Inventory balance account

Slide 3: 

Auditing Investing Cycle: - Substantive test of Investment balance account - Substantive test of Plant Assets balance account Auditing Financing Cycle: - Substantive test of Bonds Payable/Longterm Debt balance account - Substantive test of Common Stocks balance account Auditing Cash balance account

Slide 4: 

Completing the audit: - Completion of fieldwork: - Review subsequent event - Read minutes of meeting - Obtain client’s letter of rep. - Perform analytical procedure - Evaluation of findings: - making final decision about materiality and audit risk - evaluation regarding company’s going concern - formulation of audit opinion and writing draft of audit report

Slide 5: 

- Communication between auditor and client: Internal control Performance the audit Preparation of letter of management

Prerequisite: Financial Accounting : 

Prerequisite: Financial Accounting Text books: - Modern Auditing: Walter G. Kell, William C. Boynton - Auditing: Mulyadi - Auditing: an integrated approach: Arens

Course design : 

Course design Course will be taught in Bahasa Indonesia, but some English terms will also be used interchangeably 75% attendance is required to be permitted to do the examination Cheating and any other illegal cooperation are strongly prohibited All regulations are effective for all students regardless the 1st, 2nd, or 3rd time the students taking the course

Overview of Auditing I : 

Overview of Auditing I Type of auditing Financial Statements Auditing General and specific purpose of auditing Audit opinion Auditing and accounting standards Audit evidence and procedure Audit phase Auditing procedures according to its purpose

Auditing the Revenue Cycle : 

Auditing the Revenue Cycle Nature of revenue cycle Classes of transactions Related Accounts Common Documents and Records Functions and Related Controls Substantive Test of Accounts Receivable balances account

Nature of Revenue Cycle : 

Nature of Revenue Cycle Revenue cycle consist of activities relating to the exchange of goods and services to customers and the collection of receivables in cash There are three major classes of transactions: - Credit sales transactions - Cash receipt transactions - Sales adjustment transactions

Related Accounts : 

Related Accounts - Sales Accounts Receivable Cost of Sales Inventory Cash Sales discounts Sales returns Bad-debt expense Allowance for uncollectible accounts

Consideration of Internal Control Structure Components : 

Consideration of Internal Control Structure Components Control environment Risk assessment Information and communication Monitoring Control activities: - Credit sales transactions - Cash receipts transactions

Control activities – sales transactions : 

Control activities – sales transactions Common documents and records: - Customer order - Sales order - Shipping document - Sales invoice - Authorized price list - Accounts receicable subsidiary ledger - Sales journal - Customer monthly statement

Slide 14: 

Related functions: - Accepting customer orders - Approving credit - Filling sales orders - Shipping sales orders - Billing customers - Recording the sales

Control activities – cash receipts transactions : 

Control activities – cash receipts transactions Common documents and records: - Remittance advice - Prelist - Cash count sheet - Daily cash summary - Validated deposit slip - Cash receipts transactions file - Cash receipts journal

Slide 16: 

Related functions: - Receiving cash receipts - Depositing cash in bank - Recording the receipts

Substantive Test of Accounts Receivable balance accounts : 

Substantive Test of Accounts Receivable balance accounts Initial procedure Analytical procedure Test of details of transactions Test of details of accounts balances Required procedure Presentation and disclosure

Initial procedure : 

Perform initial procedure: Trace beginning balance for accounts receivable and related allowance to prior year’s working papers Review activity in general ledger accounts for accounts receivable and related allowance and investigate entries that appear unusual in amount or source Obtain accounts receivable trial balance and determine that it accurately represent the underlying acctg records by: - footing - testing agreement Initial procedure

Analytical procedure : 

Perform analytical procedures: Calculate ratios: - Accounts receivable turnover - Accounts receivable to total current assets - Rate of return on net sales - Bad-debt expense to net credit sales - Bad-debt expense to actual uncollectible Analyze ratio result relative to expectations based on prior years, budgeted amount, industry data or other data Analytical procedure

Test of details of transactions : 

Vouch a sample of recorded receivables transactions to supporting documentations a. Vouch debits to supporting sales invoices, shipping documents, and sales orders b. Vouch credits to remittance advices or sales adjustment authorization Test of details of transactions

Slide 21: 

Perform cutoff test for sales and sales returns Perform cash receipts cutoff test

Test of details of accounts balances : 

Confirm accounts receivable Evaluate adequacy of allowance for uncollectible accounts Test of details of accounts balances

Required procedure : 

Required procedure Confirmation of receivables

Presentation and disclosure : 

Presentation and disclosure Compare statement presentation with GAAP Determine that receivables are properly identified and classified as to type and expected period of realization Determine whether there are credit balances that are significant in the aggregate and that should be reclassified as liabilities Determine the appropriateness of disclosures

Confirmation of Accounts receivable : 

Confirmation of Accounts receivable Generally accepted auditing procedure SAS 67 The Confirmation Process (AU 330): confirmation of A/R is required, unless: - A/R are immaterial to the fin.statements - The use of confirmations would be ineffective as an audit procedure - The auditor’s combined assessment of inherent and control risk is low

Slide 26: 

Form of Confirmation: - Positive - Negative - Blank AU 330.20 indicates that negative form shuold be used only when all three of the following conditions apply: - The acceptable level of detection risk is moderate or high - A large number of small balances is involved - The auditor has no reason to believe that the recipients of the requests are unlikely to give them considerations

Slide 27: 

Timing and extent of confirmation requests: - When the acceptable level of detection risk low the balance sheet date - When the acceptable level of detection risk moderate to high two or three months earlier

Slide 28: 

Controlling the request: - ascertaining: the amount, name and address - maintaining the custody until mailed - using return address envelope - personally depositing the request in the mail - insisting that the return be sent directly to the auditor

Slide 29: 

Examining of subsequent collection

Auditing the Expenditure Cycle : 

Auditing the Expenditure Cycle Nature of expenditure cycle Classes of transactions Related Accounts Common Documents and Records Functions and Related Controls Substantive Test of Accounts Payable balances account

Nature of Expenditure Cycle : 

Nature of Expenditure Cycle Expenditure cycle consist of activities related to the acquisition of and payment for plant assests and goods and services There are two major classes of transactions: - Purchases transactions - Cash disbursements transactions

Related Accounts : 

Related Accounts - Merchandising inventory Raw materials inventory Prepaid expenses Plant assets Other assests Accounts payable Purchase returns Purchase discounts Various expenses Cash

Consideration of Internal Control Structure Components : 

Consideration of Internal Control Structure Components Control environment Risk assessment Information and communication Monitoring Control activities: - Purchases transactions - Cash disbursements transactions

Control activities – Purchases transactions : 

Control activities – Purchases transactions Common documents and records: - Purchase Requisition - Purchase order - Receiving report - Vendor’s invoice - Voucher - Voucher summary - Voucher register - Purchase transaction file - Accounts payable master file

Slide 35: 

Related functions: - Requisitioning goods and services - Preparing purchase orders - Receiving the goods - Storing goods for inventory - Preparing the payment voucher - Recording the liability

Control activities – cash disbursements transactions : 

Control activities – cash disbursements transactions Common documents and records: - Check - Check summary - Cash disbursements transactions file - Cash disbursements journal or check register

Slide 37: 

Related functions: - Paying the liability - Recording the cash disbursement

Substantive Test of Accounts Payable balance accounts : 

Substantive Test of Accounts Payable balance accounts Initial procedure Analytical procedure Test of details of transactions Test of details of accounts balances Required procedure Presentation and disclosure

Initial procedure : 

Perform initial procedure on accounts payable balances and records that will be subjected to further testing: Trace beginning balance for accounts payable to prior year’s working papers Review activity in general ledger accounts for accounts payable and investigate entries that appear unusual in amount or source Obtain listing of accounts payable at balance sheet date and determine that it accurately represents the underlying acctg records by: - footing - testing agreement Initial procedure

Analytical procedure : 

Perform analytical procedures: Calculate ratios: - Accounts payable turnover - Accounts payable to total current liabilities Analyze ratio result relative to expectations based on prior years, budgeted amount, industry data or other data Compare expense balances to prior year or budgeted amounts for indications of possible understatement related to unrecorded payables Analytical procedure

Test of details of transactions : 

Vouch a sample of recorded accounts payable transactions to supporting documentations a. Vouch credits to supporting vouchers, vendor’s invoices, receiving report and purchase orders or other supporting documents b. Vouch debits to cash disbursements or purchse returns memoranda Test of details of transactions

Test of details of transactions : 

Perform purchses cutoff test a. Select a sample of recorded purchase trans. from several days before and after year-end and examine supporting vouchers, vendor’s invoices, and receiving report b. Observe the number of the last receiving report issued on the last bus. day and trace sample of lower and higher no. receiving report to related purchase documents Perform cash disbursements cutoff test a. Observe the number of the last check issued and mailed on the last day audit period and trace to acctg. report to verify accuracy of cufoff b. Trace dated on “paid” cheks returned with year-end and cutoff bank st. to dates recorded. Test of details of transactions

Test of details of transactions : 

Perform search for unrecorded liabilities a. Examine subseq. payments between balance sheet date and end of field work. When related docs. indicates payment was for obligation in existence at b/s date, trace to A/P listing. b. Examine the documentation for payables recorded after year-end that are still unpaid at end of field work. c. Investigate unmatched purchase orders, receiving reports and vendor invoices at year-end. d. Inquire of acctg and purchasing personnel about unrecord.payable e. Review cap.budgets, work orders and construction contracts for evidence of unrecorded payables Test of details of transactions

Test of details of accounts balances : 

Confirm accounts payable a. Identify major vendors by reviewing voucher register or accts payable sub.ledger and send confirm.request to vendors with large bal., unusual activity, small or zero and debit bal. b. Reconcile unconfirmed payable to monthly st.received by client from vendors. Test of details of accounts balances

Required procedure : 

Required procedure There is no procedure required. Confirmation of accounts payables is an optional procedure.

Presentation and disclosure : 

Presentation and disclosure Compare statement presentation with GAAP Determine that payables are properly identified and classified as to type and expected period of payment Determine whether there are debit balances that are significant in the aggregate and that should be reclassified as receivable Determine the appropriateness of disclosures

Substantive Test of Plant Assets Balance accounts : 

Substantive Test of Plant Assets Balance accounts Initial procedure Analytical procedure Test of details of transactions Test of details of accounts balances Required procedure Presentation and disclosure

Initial procedure : 

Perform initial procedure on plant asset bal. and records: Trace beginning balance for plant assets and related accumulated depreciation acct. to prior year’s working papers Review activity in general ledger plant asset, acc.depr.and depr.expense acct.and investigate entries that appear unusual in amount or source Obtain client-prepared schedules of plant asset additons and retirements and determine that they accurately represent the underlying acctg records by: - footing - testing agreement Initial procedure

Analytical procedure : 

Perform analytical procedures: Calculate ratios: - Plant asset turnover - Rate of return on plant assets - Plant assets to stockholders’ equity - Repairs expense to net sales Analyze ratio result relative to expectations based on prior years, budgeted amount, industry data or other data Analytical procedure

Test of details of transactions : 

Vouch plant asset additions to supporting documentations Vouch plant asset disposals to supporting documentations Review entries to repairs and maintenance expense Test of details of transactions

Test of details of accounts balances : 

Inspect plant assets a. Inspect plant asset additions b. Tour other plant assets and be alert to evidence for additions and disposals not included on client’s schedules and to conditions that bear on the proper val. and class. of plant assets. Examine title documents and contracts Review provisions for depreciation. Test of details of accounts balances

Required procedure : 

Required procedure There is no required proc. existed

Presentation and disclosure : 

Presentation and disclosure Compare statement presentation with GAAP Determine that plant assets and related expenses, gains, and losses are properly identified and classified in the fin.st. Determine the appropriateness of disclosures pertaining to the cost, book value, depr.method, and useful lives of major classes of plant asset, the pledging of plant assets as collateral, and the terms of lease contracts.

AUDITING THE PRODUCTION CYCLE : 

AUDITING THE PRODUCTION CYCLE Nature of production cycle Classes of transactions Related Accounts Common Documents and Records Functions and Related Controls Substantive Test of Inventory balances account

Nature of Production Cycle : 

Nature of Production Cycle Production cycle consist of activities relating to the conversion of raw materials to finished goods. This cycle includes PPC of the type and quantities of goods to be manucfactured, the inv.level to be maintained, and transac.and event pertaining to the manufacturing process.

Related Accounts : 

Related Accounts Goods in process, Finished goods

Consideration of Internal Control Structure Components : 

Consideration of Internal Control Structure Components Control environment Risk assessment Information and communication Monitoring Control activities: manufacturing transactionss

Control activities – manufacturing transactions : 

Control activities – manufacturing transactions Common documents and records: - Production order - Material requirements report - Materials issue slip - Time ticket - Move ticket - Daily production activity report - Completed production report - Inventory subs.ledgers or master files

Functions and related controls : 

Functions and related controls Planning and controlling produstion Issuing raw materials Processing goods in production Transferring completed work to finished goods Protecting inventories Determining and recording manufacturing cost Maintaining the correctness of inv.bal.s

Substantive Test of Inventory balance accounts : 

Substantive Test of Inventory balance accounts Initial procedure Analytical procedure Test of details of transactions Test of details of accounts balances Required procedure Presentation and disclosure

Initial procedure : 

Perform initial procedure: Trace beginning inventoty balances and records to prior year’s working papers Review activity in inventory accounts and investigate entries that appear unusual in amount or source Verify totals of perpetual records and other inventory schedules and their agreement with ending general ledger balances. Initial procedure

Analytical procedure : 

Perform analytical procedures: Review industry experience and trends Examine an analysis of inventory turnover Review relationship of inventory balances to recent purchasing, production, and sales activities Compare inventory balances to anticipated sales volume Analytical procedure

Test of details of transactions : 

On a test basis, vouch entries in inventory accts to supporting documentation On a test basis, trace data from purchases, manufacturing, completed production, and sales records to inv.accts Test of details of transactions

Test of details of transactions : 

Test of details of transactions Test cutoff of purchses and sales return (receiving), movement of goods through manufacturing depart (routing), sales (shipping)

Test of details of accounts balances : 

Observe client’s physical inventory count a. Decide on timing and extent of test b. Evaluate adequacy of client’s inv. taking plans c. Observe care taken in client’s counts and make test counts d. Look for indications of slow-moving, damaged, or obsolete inv e. Account for all inv.tag and count sheets used in physical count Test of details of accounts balances

Test of details of accounts balances : 

Test clerical accuracy of inventory listing a. Recalculate totals and extensions of quantities times unit prices b. Trace test counts to listing c. Vouch items on listing to inv.tags and count sheets d. Reconcile physical counts to perpetual records and general ledger bal. and review adjusting entries Test of details of accounts balances

Test details of accounts balances : 

Test inventory pricing a. Examine vendors paid invoices for purchased inventories b. Obtain market quotations and lower-of-cost or market test c. Compare inv.with entity’s current sales catalog and sales report d. Inquire about slow-moving or obsolete inv.and determine need for write-down Test details of accounts balances

Test details of accounts balances : 

Confirm inv. at locations outside the entity Examine consignment agreement and contrracts Test details of accounts balances

Required procedure : 

Required procedure Observation of physical inventory count

Presentation and disclosure : 

Presentation and disclosure Compare statement presentation with GAAP Confirm agreement for assignment and pledging of inventories Review presentation and disclosures for inventories in drafts fin.st. and determine conformity with GAAP

AUDITING THE INVESTING CYCLE : 

AUDITING THE INVESTING CYCLE Nature of investing and financing cycle Classes of transactions Common Documents and Records Functions and Related Controls Substantive Test of Investment balances account

Nature of Investing Cycle : 

Nature of Investing Cycle An entity’s investing cycle pertains to activities relating to the ownership of securities issued by other entities. Securities: CDs, Preferred and common stocks, corporate and government bonds The investing cycle interfaces with two other cycle: - Revenue cycle - Cash disbursements transactions

Consideration of Internal Control Structure Components : 

Consideration of Internal Control Structure Components Control environment Risk assessment Information and communication Monitoring Control activities: investment transaction

Control activities – investment transactions : 

Control activities – investment transactions Common documents and records: - Stock certificate - Bond certificate - Bond indenture - Broker’s advice - Books of original entry - Investment subsidiary ledger

Slide 76: 

Functions and related control: - Purchasing securities - Receiving periodic income - Selling securities - Recording transactions - Safeguarding securities - Recording market adjustment and reclassifications - Assessing investment performance and reporting

Substantive Test of Investing balances : 

Substantive Test of Investing balances Initial procedure Analytical procedure Test of details of transactions Test of details of accounts balances Required procedure Presentation and disclosure

Initial procedure : 

Perform initial procedure on investment balances and records that will be subjected to further testing: Trace beginning balances for investment asset and equity accounts to prior year’s working papers Review activity in all investment-related balance sheet and income statement accounts and investigate entries that appear unusual in amount or source Obtain client-prepared schedules of investment and determine that they accurately represent the underlying acctg records from which prepared by: - footing - testing agreement Initial procedure

Analytical procedure : 

Perform analytical procedures: Calculate ratios: - Short-term investment to total current assets - Long-term investment to total assets - Rates of return by investment classifications Analyze ratio results relative to expectations based on prior years, budgeted amount, industry data or other data Analytical procedure

Test of details of transactions : 

Vouch entries in investment and related income and equity accounts to supporting documentations Test of details of transactions

Test of details of accounts balances : 

- Inspect and count securities on hand - Confirm securities held by others - Recalculate investment revenue earned - Review documentation concerning fair values Test of details of accounts balances

Required procedure : 

Required procedure There is no procedure required.

Presentation and disclosure : 

Presentation and disclosure Compare statement presentation with GAAP Determine that investment balances are properly identified and classified in the fin.st. Determine the appropriateness of disclosures concerning the valuation bases for investment, realized and unrealizaed gain or loss components, related party investment and pledged investment.

AUDITING THE FINANCING CYCLE : 

AUDITING THE FINANCING CYCLE Nature of financing cycle Common Documents and Records Functions and Related Controls Substantive Test of : - Long-term Debt balances - Stockholders’ Equity balance

Nature of Financing Cycle : 

Nature of Financing Cycle An entity’s financing cycle consists of transactions pertaining to the acquisition and payback of capital fund. The financing cycle includes two major transaction classes as follows: - Long-term debt transactions - Stockholders’ equity transactions

Substantive Test of Long-term debt balances : 

Substantive Test of Long-term debt balances Initial procedure Analytical procedure Test of details of transactions Test of details of accounts balances Required procedure Presentation and disclosure

Initial procedure : 

Perform initial procedure on long-term debt balances and records that will be subjected to further testing: Trace beginning balances for long-term debt accounts to prior year’s working papers Review activity in all long-term debt and income statement accounts and investigate entries that appear unusual in amount or source Obtain client-prepared schedules of long-term debt and determine that they accurately represent the underlying acctg records from which prepared by: - footing - testing agreement Initial procedure

Analytical procedure : 

Perform analytical procedures: Calculate ratios: - Debt to total assets - Debt to total equity - Times interest earned - Interest expense to debt Analyze ratio results relative to expectations based on prior years, budgeted amount, industry data or other data Analytical procedure

Test of details of transactions : 

Vouch entries in long-term debt and related income statement accounts to supporting documentations Test of details of transactions

Test of details of accounts balances : 

- Review authorizations and contracts for long-term debt - Confirm debt with lenders and bonds trustees - Recalculate interest expense Test of details of accounts balances

Required procedure : 

Required procedure There is no procedure required.

Presentation and disclosure : 

Presentation and disclosure Compare statement presentation with GAAP Determine that long-term debt balances are properly identified and classified in the fin.st. Determine the appropriateness of disclosures concerning all terms, covenants, commitments, and retirement provisions pertaining to long-term debt.

AUDITING CASH BALANCE : 

AUDITING CASH BALANCE General consideration Relationship with other cycle Substantive Test of Cash Balances

General Considerations : 

General Considerations Cash balances: undeposited receipts on hand, cash in bank, general checking and savings accounts, petty cash, and payroll bank accounts CDs, bond sinking fund cash, certain foreign currencies balances and other accounts that have restrictions on their use are not cash

Substantive Test of Cash balances : 

Substantive Test of Cash balances Initial procedure Analytical procedure Test of details of transactions Test of details of balances Required procedure Presentation and disclosure

Initial procedure : 

Perform initial procedure on cash balances and records that will be subjected to further testing: Trace beginning balances for cash on hand and in banks to prior year’s working papers Review activity in general ledger account for cash and investigate entries that appear unusual in amount or source Obtain client-prepared summaries of cash on hand and in bank, verify mathematical accuracy, and determine agreement with general ledger Initial procedure

Analytical procedure : 

Perform analytical procedures: Compare cash balances with budgeted amounts, prior year balances, or other expected amounts Calculate cash as percent of current assets and compare to expectations Analytical procedure

Test of details of transactions : 

Perform cash cutoff test Observe that all cash received through the close of business on the last day of fiscal year is included in cash on hand or deposits in transit and that no receipts on the subsequent period are included Review documentation such as daily cash summaries, duplicate deposit slips and bank statements covering several days before and after the year-end date to determine proper cutoff Test of details of transactions

Slide 99: 

Perform cash cutoff test c. Observe the last check issued and mailed on the last business day of the fiscal year and trace to the accounting records to determine the accuracy of the cash disbursement cutoff, or d. Compare dates on checks issued for several days before and after the year-end date to the dates the checks were recorded to determine proper cutoff

Test of details of transactions : 

Trace bank transfers for several days before and after the year-end date to determine that each transfer is properly recorded as a disbursement and a receipt in the same accounting period and is properly reflected in bank reconciliations when applicable Test of details of transactions

Test of details of transactions : 

Prepare proof of cash for any bank accounts the entity has been unable to reconcile or for which there is a high risk that fraudulent transactions have occured Test of details of transactions

Test of details of balances : 

- Count undeposited cash on hand and determine that such amounts are included in cash balances - Confirm bank deposit and loan balances with banks - Confirm other arrangements with such as line of credit, compensating balance agreements and loan garantees Test of details of balances

Test of details of balances : 

- Scan, review, or prepare bank reconciliation - Obtain and use bank cutoff statements, to verify bank reconciliation items, detect any unrecorded checks that have cleared the bank, and look for evidence of window dressing Test of details of balances

Required procedure : 

Required procedure There is no procedure required.

Presentation and disclosure : 

Presentation and disclosure Compare statement presentation with GAAP Determine that cash balances are properly identified and classified Determine that bank overdrafts are re classified as current liabilities