Professional Documents
Culture Documents
SUBSTANTIVETESTSOF
TRANSACTIONSANDBALANCES
Questions
1.
The cutoff bank statement is a bank statement sent by the bank directly to the
auditor, and it is usually for a fifteen or twenty day period following the
reconciliation date. The basic use of the statement by the auditor is to determine
whether outstanding checks were actually mailed before the reconciliation date.
2.
All cash funds (and negotiable investment stock and bond certificates) should be
counted at the same time (simultaneously) so that money (or securities) cannot
be shifted from one location to another to conceal a shortage. If simultaneous
count cannot be made, as each fund (or each negotiable asset) is counted, it
should be locked and sealed until all are counted.
3.
4.
5.
6.
8.
9.
Auditors get in the most trouble by missing overstated assets and understated
liabilities. Therefore, they need to audit for the existence of assets and the
completeness of liabilities.
10. Notes payable audit evidence obtained from a standard bank confirmation used
in the audit cash. Sales tax liability derived partially from the audit of sales
revenue (also commissions payable and excise taxes payable). Income tax
liability is derived from the net income number (audit of all revenue and
expense accounts).
11. The types of fraud and material misstatement with respect to cash disbursements
include:
1.
2.
3.
4.
2.
3.
20-3
12. The characteristics that the auditor is looking for in his review of the clients
inventory-taking instructions include:
1.
2.
3.
4.
17. Investment cost can be vouched to brokers advices, monthly statements and
canceled checks. The auditors can similarly vouch the price of securities sold
and investment income to this documentary evidence and then trace amounts to
income, gain and loss, and cash accounts.
18. If investments are sold at substantial losses early in the period following yearend, there is evidence that the securities were overvalued at the balance sheet
date. Accordingly, the auditor will consider whether such securities should be
written down in the financial statements of the period under audit.
19. The long-term liabilities (and fixed assets and owners equity) are characterized
by a few large transactions, unlike the current assets and liabilities which have
numerous small transactions. Except for the initial year of an audit, the entire
balance is not verified each year. Only the changes in the account that occurred
in the current period need to be audited. The results of the audit of prior years
changes are recorded in carry-forward working papers for these accounts.
20. By vouching open purchase orders, inquiry of purchase personnel, and
confirmation with suppliers, the auditor is seeking to learn of commitments to
20-5
b
b
d
d
5.
6.
7.
8.
c
c
c
b
9.
10.
11.
12.
b
c&d
b
b
13.
14.
15.
16.
c
d
d
c
17.
18.
19.
20.
d
a
a
c
Cases
1.
a.
The CPAs test of the sales cutoff at June 30 should include the following
steps:
1.
2.
3.
4.
Determine what JETOs cutoff policy is, review the policy for
reasonableness, and compare it to the prior year for consistency.
Select a sample of sales invoices (including the last serial invoice
number) from those recorded in the last few days of June and the first
few days of July.
Trace these sales invoices to shipping documents and determine that
sales have been recorded in the proper period in accordance with
company cutoff policy.
Determine that the cost of goods sold has been recorded in the period
of sale.
b.
Select a sample of shipping documents for the same period and trace
these to the sales invoice. Determine that the sale and the cost of goods
sold have been recorded in the proper period.
Review the cutoff for sales returns and allowances, determine that it
has been based upon a consistent policy and that there have not been
abnormal sales returns and allowances in July; this might indicate
either an overstatement of sales during the audit period or the need for a
valuation account at June 30 to provide for future returns and
allowances.
(1) The CPA will use the July 10 cutoff bank statement in his review of the
June 30 bank reconciliation to determine whether:
(a) The opening balance on the cutoff bank statement agrees with the
balance per bank on the June 30 reconciliation.
(b) The June 30 bank reconciliation includes those canceled checks
that were returned with the cutoff bank statement and are dated or
bear bank endorsements prior to July 1.
(c) Deposits in transit cleared within a reasonable time.
(d) Interbank transfers have been considered properly in determining
the June 30 adjusted bank balance.
(e) Other reconciling items which had not cleared the bank at June 30
(such as bank errors) clear during the cutoff period.
(2) The CPA may obtain other audit information by:
(a) Investigating unusual entries on the cutoff bank statement.
(b) Examining canceled checks, particularly noting unusual payees or
endorsements.
(c) Reviewing other documentation supporting the cutoff bank
statement.
2.
Review the companys method of sales cutoff at year-end and test billings
and shipments (including returns) for an adequate period before and after
year-end to establish that cut-off procedures have been adhered to.
Examine collections in early part of subsequent period to determine if a
substantial portion of the receivables has been collected.
Examine agreements entered into with the distributors. If price protection
clauses are included, review the current price position and distributor
4.
5.
3.
1.
2.
a.
b.
c.
3.
a.
b.
c.
4.
a.
b.
c.
4.
a.
20-7
The fact that the client made a journal entry to record vendors invoices
which were received late should simplify the CPAs audit for unrecorded
liabilities and reduce the possibility of a need for a further adjustment, but
the CPAs audit is nevertheless required. If the client has not journalized
late invoices, the CPA is compelled in his testing to substantiate what will
ultimately be recorded as an adjusting entry. In this examination the CPA
should audit entries in the 2004 voucher register to ascertain that all items
which according to dates of receiving reports or vendors invoices were
applicable to 2004 have been included in the journal entry recorded by the
client.
No. The CPA should obtain a letter in which responsible executives of the
clients organization represent that to the best of their knowledge all
liabilities have been organized. However, this is done as a normal audit
procedure to afford additional assurance to the CPA and it does not relieve
him of the responsibility for doing his own audit work.
c.
d.
In addition to the 2005 voucher register, the CPA should consider the
following sources for possible unrecorded liabilities:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
5.
a.
b.
20-9
Scan the inventory compilation for items added from sources other than
the physical inventory count. . .
At year end, obtain the number of the last shipping and receiving
documents . . . Use these to scan the sales, inventory/cost of sales, and
accounts payable entries for proper cutoff.
Confirm or inspect inventories held in public warehouses.
6.
7.
a.
b.
Inspect and count securities in the companys safe and safe deposit
box.
Examine brokers statements to obtain assurance that all
transactions were recorded.
Examine documents in support of purchases and sales of
investment securities.
Inspect the minutes of the board of directors meetings.
Review the audited financial statements of the (25 percent)
investee.
Verify the equity method of accounting was used for carrying
value of the investment in Dee Industrial.
Obtain a client representation letter that confirms the clients
representations concerning the noncurrent investment securities.
Verify the calculation of interest income.
Review the propriety of the presentation and disclosure of the
securities in the financial statements.
Make certain that the client representation letter includes the
proper assertions concerning accounts payable.
8.
a.
1.
2.
3.
4.
5.
6.
7.
b.
3.
4.
5.
Confirm the loan and terms of the agreement with the bank.
Review the agreement between Odette and the bank to determine that:
a. The debt is long-term (by reference to dates).
b. Provisions of the agreement have not been violated, e.g., that
Odette is complying with any restrictions on the payment of
dividends, on the amount of working capital to be maintained, or
on the uses to which the funds may be employed and is
maintaining the plant pledged as security for the loan.
c. The agreement was signed by person(s) having authority.
Trace the receipt of funds into the bank account and cash receipts book.
Check the computation of interest expense for the period May 1 to June
30, and trace the recording of the expense and the accrual on the books.
Determine that authority to borrow was granted and is recorded in the
board of directors minutes.