Dr. Raymond N. Johnson, CPA MODERN AUDITING 7th Edition Developed by: Raymond N. Johnson Portland Sate University John Wiley & Sons, Inc. William C. Boynton

Dr. Raymond N. Johnson, CPA

MODERN AUDITING 7th MODERN AUDITING 7th EditionEdition

MODERN AUDITING 7th MODERN AUDITING 7th EditionEdition

Developed by:Raymond N. JohnsonPortland Sate University John Wiley & Sons, Inc.

William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State University at San Luis ObispoUniversity at San Luis Obispo

Raymond N. JohnsonRaymond N. JohnsonPortland State UniversityPortland State University

Walter G. KellWalter G. KellUniversity of MichiganUniversity of Michigan


Understanding AssertionsUnderstanding Assertions

• Transaction class

• Account balances

• Disclosures


Understanding the Business and IndustryUnderstanding the

Business and Industry• Key Questions

– How material is the transaction class to the audit client?

– What business risks exist within the transaction class?

– What expectations do you have regarding industry norms?

• Business practices

• Expected controls

• Expected ratios


Understanding the Business and IndustryUnderstanding the

Business and IndustryExample Industries• Retail grocery• Household appliance

manufacturer• Computer manufacturer• Hotel / Resort• School district

Key Issues• Significance of

transaction class• Business risks• Expectations

– Business practices

– Controls

– Ratios


Audit Risk ModelAudit Risk Model

AR = IR x CR x AP x TD

1. Assess IR

2. Consider preliminary audit strategy

3. Perform analytical procedures

4. Evaluate internal controls

5. Assess TD and perform remaining substantive tests


Inherent RiskInherent Risk

• Purchases and accounts payable– “Short-term” completeness problems

• Inventory– Net realizable value of inventory– Obsolete inventory– Overstatement of inventory to overstate profits

• Payroll– Employee fraud and payroll overstatements


Analytical ProceduresAnalytical Procedures

• Accounts payable– AP Turns– Evidence of understated payables

• Inventory – Inventory turns– Inventory growth relative to CGS– Manufacturing inputs to finished goods output– Quality control

• Payroll– Average payroll in key employee classes– Payroll costs per units of output (accomplishment)– Benefits and taxes to gross payroll


5 Elements of Internal Control5 Elements of

Internal Control• Control Environment

• Risk Assessment

• Information and Communication

• Control Activities

• Monitoring


Control EnvironmentControl Environment

• Establishes the tone that ensures a high level of control consciousness

• Establishes a tone of accountability for use of resources

• You must assume a strong control environment to place reliance on specific control activities


Control ActivitiesControl Activities

• Authorization

• Segregation of duties

• Safeguarding of assets

• Information processing controls– Computer general controls– Computer application controls

• Performance reviews


Direct Tests of User ControlsDirect Tests of User ControlsFigure 10-2Figure 10-2

Direct Tests of User ControlsDirect Tests of User ControlsFigure 10-2Figure 10-2


Low CR Assessment based on Application Controls Low CR Assessment based on Application Controls Figure 10-2Figure 10-2

Low CR Assessment based on Application Controls Low CR Assessment based on Application Controls Figure 10-2Figure 10-2


High CR Assessment based on Application Controls High CR Assessment based on Application Controls Figure 10-2Figure 10-2

High CR Assessment based on Application Controls High CR Assessment based on Application Controls Figure 10-2Figure 10-2

Inference


Designing or EvaluatingComputer Application Controls

Designing or EvaluatingComputer Application Controls

• Understand key functions– Initiating transactions– Delivery or receipt of good or services– Recording transactions– Consideration


PurchasingPurchasing

• Understand key functions– Initiating transactions

• Purchase requisition• Purchase order

– Delivery or receipt of good or services• Receiving report

– Recording transactions• Vendor’s invoice• Voucher

– Consideration• Check


InventoryInventory


• Production order• Material requirements report

– Delivery or receipt of good or services• Materials issue slip• Time ticket• Move ticket

– Recording transactions• Daily production activity report• Completed production activity report


PayrollPayroll


• Personnel authorization

– Delivery or receipt of good or services• Clock card

• Time ticket

– Recording transactions & consideration• Payroll register (journal)

• Payroll Check (from imprest bank account)


Substantive TestsSubstantive Tests

• Initial procedures– Understand the business and industry

– Test accuracy of data provided for audit

• Analytical procedures• Tests of details of transactions• Tests of details of balances• Tests of details of balances – accounting estimates• Procedures required by GAAS• Tests of presentation and disclosure


CHAPTER 15CHAPTER 15AUDITING THE EXPENDITURE CYCLEAUDITING THE EXPENDITURE CYCLE

CHAPTER 15CHAPTER 15AUDITING THE EXPENDITURE CYCLEAUDITING THE EXPENDITURE CYCLE


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Dr. Raymond N. Johnson, CPA MODERN AUDITING 7th Edition Developed by: Raymond N. Johnson Portland Sate University John Wiley & Sons, Inc. William C. Boynton