ENGLISH FOR AUDITING

CHAPTER 3: ENGLISH FOR AUDITING 3.1 Basic Auditing 3.2 Techniques in Collecting Audit Evidence 3.3 Types of Audit Tests 3.4 Internal Control 3.5 Audit of Items in Financial Statements and Business Cycles 3.1 Basic Auditing 3.1.1 Nature of Auditing Auditing is the accumulation and evaluation of evidence about information to determine and report on the degree of correspondence between the information and established criteria Auditing should be done by a competent, independent person Information and Established Criteria To an audit, there must be information in a verifiable form and some standards (criteria) by which the auditor can evaluate the information FASB Criteria IASB Accumulating Evidence and Evaluating Evidence Evidence is any information used by the auditor to determine whether the information being audited is stated in accordance with the established criteria Transaction data Client Testimony Written and electronic Communications with outsiders Observations Competent, Independent Person Competence Judgment and Experience Independence Evaluation of Evidence Proper Conclusion 3.1.2 Types of Audits and Types of Auditors Types of Audits Audit of Financial Statements Operational Audit Compliance Audit Audit of Financial Statements Definition: A financial statement audit is conducted to determine whether the financial statements (the information being verified) are stated in accordance with specified criteria Audit of Financial Statements Example Annual audit of Boeing’s financial statements Information Boeing's financial statements Established Criteria Generally accepted accounting principles Available Evidence Documents, records, and outside sources of evidence 10 Relationships Among Transaction Cycles General cash Capital acquisition and repayment cycle Sales and collection cycle Acquisition and payment cycle Payroll and personnel cycle Inventory and warehousing cycle 92 Audit of the Sales and Collection Cycle 93 Overview of Accounts in the Sales and Collection Cycle Sales Cash sales Sales on account Cash in Bank Accounts Receivable Beginning Cash receipts balance Cash Discounts Taken Sales on account Sales returns and allowances Sales Returns and Allowances Ending balance Charge-off of uncollectible accounts Bad Debt Expense 94 Accounts in the Sales and Collection Cycle Accounts Receivable Beginning Cash receipts balance Sales on account Sales returns and allowances Ending balance Charge-off of uncollectible accounts Allowance for Uncollectible Accounts Charge-off of Beginning uncollectible balance accounts Estimate of bad debt expense Bad Debt Expense Ending balance 95 Business functions Processing Customer Orders Granting Credit Shipping Goods Billing Customers and Recording Sales Processing and Recording Cash Receipts Processing and Recording Sales Returns and Allowances Charging Off Uncollectible Accounts Receivable Providing for Bad Debts 96 Sales Transaction Accounts  Sales  Accounts receivable Business functions  Processing customer orders  Granting credit  Shipping goods  Billing customers and recording sales Documents and records  Customer order  Sales order  Customer order or sales order  Shipping document  Sales invoice  Sales transaction file  Sales journal or listing  Accounts receivable master file  Accounts receivable trial balance  Monthly statements 97 Cash Receipts Transaction Accounts  Cash in bank (debits from cash receipts)  Accounts receivable Business functions  Processing and recording cash receipts Documents and records  Remittance advice  Prelisting of cash receipts  Cash receipts transaction file  Cash receipts journal or listing 98 Sales Returns and Allowances Transaction Accounts  Sales returns and allowances  Accounts receivable Business functions  Processing and recording sales returns and allowances Documents and records  Credit memo  Sales and returns and allowances journal 99 Charge-off of Uncollectible Accounts Transaction Accounts Business functions  Accounts  Charging off receivable uncollectible  Allowance for accounts uncollectible receivable accounts Documents and records  Uncollectible account authorization form  General journal 100 Bad Debt Expense Transaction Accounts  Bad debt expense Business functions Documents and records  Providing for bad  General journal debts  Allowance for uncollectible accounts 101 Methodology for Designing Controls and Substantive Tests of Sales Transactions for Sales Understand internal control – sales Assess planned control risk – sales Determine extent of testing controls Design tests of controls and substantive tests of transactions for sales to meet transaction -related audit objectives Audit procedures Sample size Items to select Timing 102 Transaction-Related Audit Objectives for Sales Existence Completeness Accuracy Classification Timing Posting and summarization Recorded sales are for shipments actually made Existing sales transactions are recorded Recorded sales are for the amount shipped Sales transactions are properly classified Sales are recorded on the correct dates Sales transactions are properly included in the accounts receivable master file 103 Direction of Tests for Sales Customer order Shipping document Completeness start Duplicate sales invoice Sales journal Accounts General = receivable journal master file Existence start 104 Types of Audit Tests for the Sales and Collection Cycle Accounts Receivable Sales Cash in Bank Sales transactions Cash receipts transactions Audited by TOC, STOT, and AP Audited by TOC, STOT, and AP Ending balance Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient competent evidence per GAAS 105 “Thank you for your attention!” Love what you do! 106 ...3.1 Basic Auditing 3.1.1 Nature of Auditing Auditing is the accumulation and evaluation of evidence about information to determine... determine and report on the degree of correspondence between the information and established criteria Auditing should be done by a competent, independent person Information and Established Criteria... company to audit for the company’s board of directors and management 19 3.1.3 Fundamental Concepts in Auditing Learning objectives  Fraud and Error  Materiality and Audit risk  Audit Evidence 20