CHAPTER 23

These tests generally include the

following types of procedures:
1. Make inquiries of appropriate client
personnel.
2. Examine documents, records and
reports.
3. Observe control-related activities.
4. Re-perform client procedures.
 Assertions Potential Tests of
and Misstatements Controls
Controls
I. Sales
Transactions
A. Existence/
B. Occurrence
Recorded
sales are for
shipments
actually made to
customers.
 Recording of  Sales did not  Examine
sales is occur may be approved
supported by recorded. customer order,
customer sales order,
orders, sales shipping
orders document, and
approved by copy of sales
the credit invoice for a
department, sample of
and approved entries in the
and executed sales journal.
shipping
documents.
C. Completeness
All sales
transactions that
occurred are
recorded.
 Pre-numbered  Goods may  Observe
shipping be shipped procedure.
documents are but not billed. Examine
accounted for copy of
to determine invoices for a
that a sales sample of
invoice is shipping
prepared for documents.
shipment.
D. Rights and
Obligations
Sales recorded
represent only
sales transaction.
 Clerk checks  Consignment  Observe
sales order and transactions procedure.
sales invoice may be
for terms to recorded as
determine that
sales.
transaction is a
sale rather than
a consignment.
E. Valuation/
F. Measurement
Sales are
correctly billed
and recorded.
 Customer credit  Accounts  Examine
is approved by receivable sales order
a responsible may be for selected
official prior to uncollectible transactions.
merchandise
shipment.
G. Presentation
and Disclosure
Sales and
accounts
receivable are
recorded to result
in presentation
and disclosure in
accordance with
GAAP.
 An independent  Revenues may  Observe
review is made be procedure.
of account misclassified. For a sample
coding for of invoices,
recorded sales. recheck.
 Assertions Potential Tests of
and Misstatements Controls
Controls
II. Cash
Receipt
Transactions
A. Existence/
B. Occurrence
Recorded
receipts represent
actual collections
of cash from
customers.
 A trustworthy  Cash receipt  Observe
employee may be mis- whether a pre-
prepares a pre- appropriated. listing is
listing of cash prepared and
receipts before inquire of
further preparer about
processing. the procedures
followed.
C. Completeness
D. Rights and
Obligations
All receipts are
processed and
recorded.
 Prelisting of  Cash may be  Observe
cash receipts mis- monitoring
and cash appropriated. and inquire of
register pre-lister and
procedures are cash register
monitored. operator
about
procedure..
E. Valuation/
F. Measurement
Debits to cash
and credits to
accounts
receivable are
valued at amounts
received.
 Cash receipts  A customer  For a sample
are recorded at may be given of entries in
the amount credit for an cash receipts
received. amount journal,
greater than examine
payment. remittance
advices.
G. Presentation
and Disclosure
Cash receipt
transactions are
recorded to result
in presentation
and disclosure in
accordance with
GAAP.
 A supervisor  Entries be  Observe
approves made to wrong procedure.
account accounts. Examine
classification approvals by
made in supervisor.
journalizing.
 Assertions Potential Tests of
and Misstatements Controls
Controls
III. Purchases
Transactions
A. Existence/
B. Occurrence
Recorded
acquisitions are
for items that were
acquired.
 Approval of  Purchases that  Examine
acquisitions is did not occur approval
evidenced by may be signature.
signature on recorded.
the purchase
order.
C. Completeness
Acquisitions
that occurred are
recorded.
 Receiving
reports are pre-  Purchases  Observe
numbered and may be procedure.
accounted for. unrecorded. Account for a
numerical
sequence.
D. Rights and
Obligations
Recorded
acquisitions are
the entity’s
purchases and
liabilities.
 Receiving  Purchases  Observe
reports are that are not procedure.
prepared by legitimate
persons having business
access only to purchases
a blind copy of may be
purchase order unrecorded
details. and paid.
E. Valuation/
F. Measurement
Acquisitions
are recorded for
the proper
amounts.  Client could  Examine
 Invoice overpay for voucher for
amounts are goods or signature
verified by services. indicating
reference to
performance.
purchase
orders and
receiving
reports and
mathematics on
invoice rechecked.
G. Presentation
and Disclosure
Acquisitions
are recorded to
result in
presentation and
disclosure in
accordance with
GAAP.
 Chart of  Purchases may  Examine
accounts be charged to chart of
adequately wrong accounts.
describes accounts. Examine
accounts to be signature of
debited.
employee.
 Assertions Potential Tests of
and Misstatements Controls
Controls
IV. Cash
Payment
Transactions
A. Existence/
B. Occurrence
Recorded cash
payments
transactions.
 Authorized  Checks may be  Observe
individual signs written but not procedure.
and promptly issued or Examine
mails checks released. documents.
after reviewing
documentation.
C. Completeness
All cash
payments made
are recorded.
 Check are pre-  Checks may  Observe
numbered and be issued but procedure.
accounted for. not recorded. Account for
sequences.
D. Rights and
Obligations
All cash
payments made
are for obligations
of the entity.
 Check signer
who is  Purchases  Observe
dependent of that are not procedure.
voucher legitimate
preparation business
examines purchases
supporting may be
documentation unrecorded
before signing and paid.
checks.
E. Valuation/
F. Measurement
Debits to
various accounts
and credits to
cash are valued at
proper amounts.
 Amounts  Improper  Examine
(including amounts may voucher for
discounts be paid signature
taken) and because of indicating
calculations on math errors performance.
vendor’s or incorrect
invoices are discounts.
independently
verified.
G. Presentation
and Disclosure
Cash
payments are
recorded to result
in presentation
and disclosure in
accordance with
GAAP.
 Chart of  Payments may  Observe
accounts be charged to procedure.
adequately wrong Examine
describes accounts. chart of
accounts to be accounts and
used.
signature.
 Assertions Potential Tests of
and Misstatements Controls
Controls
V. Payroll
Transactions
A. Existence/
B. Occurrence
Recorded
payroll
transactions
occurred.
 Personnel  Payroll may  Examine
department include fictitious approval
officials employees, signature on
authorize former authorization
additions of employees, or for pay rate
employees to wrong rates. change.
payroll and
approve
changes in
status and
changes in pay
rates.
C. Completeness
All payroll
earned by
employees is
recorded.  Observe
 Payroll checks  Paychecks procedure.
are pre- may be Examine
numbered and issued but bank
accounted for not recorded. reconciliation.
in the bank
reconciliation
by a person
independent of
the payroll
function.
D. Rights and
Obligations
Record payroll
transactions are
for services
received..
 Employees  Employees  Observe
record their may be paid procedure.
time using a for hours they
time clock but did not work.
record no other
employee’s
time.
E. Valuation/
F. Measurement
Payroll
transactions are
recorded for the
proper amounts.
 Payroll  Payroll may  Examine
calculations are be for wrong payroll
verified. amounts. register for
signature
indicating
verification.
G. Presentation
and Disclosure
Payroll
transactions are
recorded to result
in presentation
and disclosure in
accordance with
GAAP.
 Account codes  Wages  Examine
assigned are expense may chart of
reviewed by be charged to accounts and
appropriate wrong signature.
levels of accounts.
management.
 Assertions Potential Tests of
and Misstatements Controls
Controls
VI. Production
Transactions
A. Existence/
B. Occurrence
Recorded
production
transactions
occurred.
 A materials  Transaction  Observe
requisition is that did not separation of
prepared by occur may be duties and
operating recorded.. examine
personnel and approval
signed by a signatures.
warehouse
custodian when
goods are
transferred to
production.
C. Completeness
D. Rights and
Obligations
All production
transactions that
occurred are
recorded.
 Production  Completed  Observe
orders are pre- production procedure
numbered and may not be and account
accounted for recorded. for numerical
to determine sequences.
that all
production is
recorded.
E. Valuation/
F. Measurement
Production
transactions are
recorded by the
proper amounts.
 Values for  Values may  Trace values
transactions not be based to bill of
are based on a on cost materials,
bill of materials, incurred. time cards,
approved labor and OH
tickets and rates.
rates for labor.
And
predetermined
OH rates.
G. Presentation
and Disclosure
Production
transactions are
recorded to result
in presentation
and disclosure in
accordance with
GAAP.
 Chart of  Cost may be  Examine
accounts assigned to chart of
adequately wrong accounts accounts and
describes signature.
accounts to be
used.
 Assertions Potential Tests of
and Misstatements Controls
Controls
VII. Inventory
Warehousing
Transactions
A. Existence/
B. Occurrence
Recorded
inventory
warehousing
transactions that
occurred are
recorded.
 A copy of a  Fictitious  Observe
receiving report receipts may be separation of
signed by a recorded. duties and
receiving clerk examine
is used by approval
inventory signature on
accounting to receiving
record receipt report.
of goods.
C. Completeness
All IWT that
occurred are
recorded.
 Receiving  Goods may  Observe
reports and be received procedure
materials or issued but and account
requisitions are not recorded. numerical
pre-numbered sequences.
and accounted
for by a clerk in
inventory
accounting.
D. Rights and
Obligations
IWT are for
goods that belong
to the entity.
 Goods received  Goods on  Inquire about
on consignment consignment and observe
are labelled may be the
and separated treated as procedure.
from goods the inventory.
entity owns.
E. Valuation/
F. Measurement
IWT are
recorded for the
proper amounts.
 Costs assigned  Inventory  Examine
to WIP and FG may be voucher for
are set misvalued. signature
procedures that indicating
are reviewed performance.
and periodically
evaluated.
Mathematical
accuracy is
tested.
G. Presentation
and Disclosure
IWT are
recorded to result
in presentation
and disclosure in
accordance with
GAAP.
 Chart of
accounts  Receipt or  Examine
adequately issue may be chart of
describes charged or accounts and
accounts to be credited to signature.
used. wrong accounts