Chapter 3 (2)

AUDITING AND ASSURANCE

CHAPTER 3

AUDIT ON FINANCIAL STATEMENT

GROUP MEMBERS :

1. UMMI SARAH BINTI ABD KGUPOR 10DAT11F2006

2. NOR SHAWAL LEILA BINTI ZAHARUDIN 10DAT11F2011

3. NUR AZWEEN SYAFIERA BINTI ABD NASIR 10DAT11F2025

4. SITI AISHAH BINTI MUSA 10DAT11F2032

CLASS : DAT 6A

3.1 REVENUE AND EXPENDITURE

3.1.1 PURPOSE

• Measured at their fair value of the consideration received or receivable

• Ensure voluntary compliance between all documentations, control, policies and guidelines

• Test control for detection significant weaknesses and check financial statements

3.1.2 EVIDENCE

Evidence selectiona) Sales of goods and servicesb) Payments received for goods and servicesc) Good returned by claims received from

customers

a) Sales of goods and services

1) Receiving and recording customers orders2) Authorising credit terms and shipment3) Confirming orders4) Executing shipping orders for goods or work

orders for the performance of services5) Recording the shipments or services

performed

b) Payments received for goods and services

1) Receiving the cash and depositing in the bank cash

2) Comparing amounts remitted with recorded amounts

3) Authorising discounts and allowances4) Recording cash receipts, discounts and

allowances

c) Good returned by claims received from customers

1) Receiving and accepting goods and claims2) Preparing receiving reports3) Reviewing claims4) Authorising credits5) Preparing and mailing credit memo6) Recording returns and claim

3.1.3 SUITABLE AUDIT OBJECTIVES

1) authorisation – all are pre-approved by responsible personnel2) completeness – all valid transactions are included in the accounting records3) accuracy 4) Validity5) Physical safeguards and security 6) Error handling7) Segregation of duties

3.1.4 SUITABLE AUDIT TEST

1) Authoring sales transactions2) Adequate segregation of duties3) Adequate documents and records4) pre-numbered documents5) Monthly statements6) internal verifications procedures

3.1.5 SUITABLE AUDIT PROCEDURESAssertions Test of control Substantive test

Existence Examine sales invice for supporting bill of lading and customer order

An auditor is concerned with three types of misstatements:a) Recorded sale with no shipments-trace from sales

journal entry to shipping documentb) Sales recorded more than once – check cancellation

of shipping documentationc) Shipment made to nonexistent customers – person

recording sales shoud not authorised shipmments

Completeness Account for sequence of shipping documents

Many audits ignore completeness on the grounds that overstatement of income of is greater concern. However errors may still misstate financial statements.One effective proedure is to trace from shipping documents to the sales invoice and entry in the sales journal

Accuracy Examine the approved price list for accuracy and proper authorisation

Start with entries in the sales journal and compare the total of selected transactions with accounts receivable master file entries and duplicate sales invoices

Classification Examine document package for duplicate verification

When there are cash and credit sales, it is important not to debit accounts receivable for a cash sale or to credit sales for collection of a receivable.It is also important not to classify sales of operating assets as sales. A common procedure is to examine duplicate sales invoices for proper account classification

Timing Account for sequence of shipping documents

Sales should be billed when ownership is transferred to the customerA common procedure is to compare the date on the duplicate sales invice and bill of lading

Posting and summarisation Examine evidence that account receivable master file is reconciled to general ledger

Use audit software to foot the sales journal and trace totals to general ledger.

3.2 CASH AND BANK BALANCES EVIDENCE

3.2.1 PURPOSE

• Consist of confirmation of bank balances and other matters from the client’s bankers at the period end.

• Standard letters are used to confirm information with the bank where the client has dealings.

3.2.2 EVIDENCE

• Liquid assets and include: notes and coins, bank current accounts, bank deposit accounts.

• Vulnerable assets because of its liquidity. • Easily verified because they can be confirmed

directly by third parties or by physical counts.

3.2.3 Audit Objectives and assertions

Assertions Descriptions

1. Existence To ensure that the cash is actually in existence and belong to the company at a given date or at the year-end date.

2. Completeness To ensure that there is no unrecorded cash.

3. Accuracy To ensure cash at bank stated on the reconciliation is accurate

4. Cut-off To ensure that amounts are correctly recorded in the proper period

5. Presentation and disclosure

To ensure that the cash balance and related statement of comprehensive income entries are correctly disclosed in the financial statements in accordance with legislation and accounting standards.

6. Detail tie-in Cash in the bank as stated on the reconciliation foots correctly and agrees with the general ledger

3.2.4 Suitable audit test to be used when auditing

CASH BALANCES

Audit Objectives

Substantive Procedures

1. Occurrence, completeness and valuation

Agree balance on bank confirmation with bank reconciliation and cash book.Trade deposits in transits, outstanding cheques and other reconciling items to cut-off bank statements.

2. Accuracy Check calculation of bank reconciliation and agree with book balance on cash book and general ledger.

3. Cut-off For cash receipts, observe cash count for the last day of the year end and trace deposits to cash receipts journal and cut-off banks statement.For cash disbursement, record the last cheque issued at the year end date and trace to cash payments in the cash book; and trace outstanding cheques on bank reconciliation and investigate any cheque clearing after a long delay.

4. Classification, presentation and disclosure

Review board of directors’ minutes, bank letter, loan agreement or other documents for any restrictions on cash.Ensure bank loans and overdrafts are not offset against positive bank balances in the financial statements.

BANK BALANCES

(a) Test the mathematical accuracy of the bank reconciliation and agree the balance in the cash book.

(b) Agree the bank balance on the bank reconciliation with the balance on bank confirmation.

(c) Trace the deposits in transit on the bank reconciliation to the cut-off bank statement covering a week after the date on which the bank account is reconciled.

(d) Agree any charges included on the bank statement to the bank reconciliation.

(e) Agree the adjusted book balance on the cash account lead schedulE

(f) Trace bank transfers for last week of financial year under review and first .

(g) Identify irregular items and obtain necessary explanation.

3.2.5 Suitable audit proceduresAudit Objectives Substantive Procedures

1. Occurrence / Existence

Select samples of cash receipts from cash book and trace to remittance advices, pay-in slips, and bank statement. Select samples of cash payments from cash book and trace to payment vouchers (with supporting documents) and bank statements. Scan through the entries and trace all the unusual items, like contra items, stopped payment items and cancelled cheques, to support documents and authorization.

2. Completeness Trace a sample of remittance advices and pay-in slip to cash receipt journal. Trace a sample of payment vouchers (with supporting documents) to cash book.

3. Accuracy Agree the total of cash receipts and payments to general ledger.

4. Valuation Compare a sample of remittance advices with amount in cash receipts recorded in the cash book.Compare a sample of (cancelled) cheques with amounts in cash recorded in the cash book.

5. Cut-off Compare the dates for recording a sample of cash transactions with the dates of cash deposited in bank or cheques sent.

6. Classification Examine a sample of cash receipts and payments transactions for proper classification.

3.3 CONCEPT OF AUDITING IN INVESTMENT

3.3.1 Purpose

• To ensure that purchases and disposals of investments are properly authorized , recorded and accounted for

• To ensure that investments are properly valued and disclosed in the financial statements

3.3.2 Evidence

a) The investment may be in debt or equity securities may be marketable or non marketable

b) Investment may be a loan or an advance rather than security

c) Company have security are held may be affilated or non affilated

d) Long term investment

3.3.3 Suitable audit objectives and assertions on investment component.

Existence or occurrence– Recorded investment asset and equity balances represent investments that

exist at the balance sheet date.– Investment revenues, realized gains and losses, and unrealized holding gains

and losses included in income resulted from transactions and events that occurred during the period.

Completeness

– All investments are included in the balance sheet investment accounts..– The income statement effects of all investment transactions and events

during the period are included in the income statement accounts.

Rights and obligations– All recorded investments are owned by the reporting entity.

• Valuation or allocation– Investments are reported on the balance sheet at fair value, cost,

amortized cost, or the amount determined by the equity method, as appropriate for particular investments.

– Investment revenues, and realized and unrealized gains, and losses are reported at proper amounts.

• Presentation and disclosure– Investment balances are property identified and classified in the financial

statements.– Appropriate disclosures are made concerning (1) related party

investments, (2) the bases for valuing the investments, and (3) the pledging of investments as collateral.

3.3.5 Suitable audit procedure Audit Procedures Audit Assertion

1. Obtain a listing of investments held by the company at year end

2. Ascertain the nature of the investments, ie. Subsidiaries, associates, joint venture, and other investments.

3. Sight minutes of the board and/or shareholders (where relevant) for authorization for the purchase/disposal of the investments

4. For quoted shares, vouch purchases/disposal to brokers’ buy/sell transaction notes to unsure that the number of the shares bought/sold, the share price, commissions and other charges are taken up correctly

5. For quoted shared, vouch to the Central Depository Systems(CDS) statements to confirm the date and the number of shares purchased/sold and the number of shares held as at year end

Occurrence

Completeness

ExistenceCompleteness

ExistenceCompleteness

Audit Procedures Audit Assertions

6. For unquoted shares, vouch purchases/sales to purchase/sale agreements for the number of shares purchased/sold, the purchase/sale price, the terms and conditions for payment

7. Ensure payments/proceeds for the purchases/sales are properly accounted for and recorded in the books

8. Ensure that dividends or interests have been received and properly accounted for in the book

9. Ensure proper disclosure of investments in the financial statements

ExistenceCompleteness

CompletenessAccuracy

Right/ObligationsAccuracy

Classification/understandability

THE END