You must have directional testing completely down. When reading a question, don't focus on the words “Trace” or “Vouch” because sometimes that will lead you to the wrong answer, instead, focus on the procedure being done… also, tracing and vouching can start at any time in the cycles (i.e it's NOT always from source doc to GL and from GL to Source doc)—>this is why it is important for you to be familiar with the order of the documents involved in the different Cycles… For example:Shipping Doc is 1ST and an Invoice comes 2ND – If you go from Shipping Doc to Invoice= Tracing & if you from Invoice to Shipping = Vouching.
Below are the notes I used to study this topic, hope they help!
Audit Procedures by Transaction Cycle:
*Bank Cut-Off testing!! – obtain the bank cut-off that includes trxs for 10 to 15 days AFTER year-end. The outstanding checks & deposits in transit at yr-end in on the bank recon should agree w/ the info in the bank cut-off statement.
*Check kiting=low average balance compared to high level of deposits
*Bank Confirms= check both the cash in bank w/ collateral for loans (in the same form)
-May not be useful bc bank employee may not know all the financial relationships w/ the client
*Upon receiving checks in the mail=prepare remittance list (duplicate listing of checks received)
**1ST-Shipping Doc 2ND- Invoice
*Shipping docs to Invoice= to ensure proper billing
*Invoice to Shipping= to ensure proper shipment
*Observing the mailing of monthly stmts= Existence assurance & Rights/Obligations assertions
*Marketable Securities=After looking @ negotiable securities, obtain an acknowledgement from the client that the securities were returned intact.
-2 officials should have control and should be kept in a bank safe-deposit bank
-Confirm the # of shares owned held by an independent custodian
-When client uses a trust company as custodian of its mktble securities, the Trust company should have no direct contact w/ the employee whom maintains investment accounting records
*Use negative confirmations when AR, CR, IR is low
-Negative confirms does not provide explicit evidence
*Test dividend income by looking @ investment advisory services
*When you assess CR @ a low level, you do TOC and a limited amount of trx testing (SUB tests) (mainly just recalculate payroll accruals
*Payroll= the most common test is to compare payroll costs w/ entity standards or budgets
-Occurrence in Payroll= make sure checks are issued to valid employees – observe SoD in HR & Payroll
-Supervisor should approve time cards to ensure pmts are for work actually performed
*PP&E Testing=
-To test recording Retirements=Vouch from GL/insurance/tax records to Plant -(You see that Equipmt is fully depreciated per the GL, so you want to make sure they are no longer using the Equipmt)
-To test recording Additions= Trace from Plant to GL (You see Equipmt in plant and want to make sure it is recorded in the GL)
*Inspecting loan agreements under which inventory is pledged = completeness w/ respect to presentation and disclosure
*Test inventory valuation by= testing the computation of overhead rates
*Repairs & maintenance account= to check that all expenditures for pp&e have not been charged to expense because in all reality, they should be capitalized
*Periodic inventory counts are used to adjust the perpetual inventor records
*When client uses derivatives: understand the economic substance of each derivative and the risk exposure to determine whether they need to recognize any losses
*In a reasonableness test= data in two or more fields are checked for consistency
**Inventory=Trace from auditor/tag test count sheet to client's Inv listing=Completeness
Trace from client's listing to auditor/tag count= Existence/validity
***To check COMPLETENESS OF INV= do cutoff of shipping & receiving
*Analyticals indicate a lower than expected return on equity method investment= caused by an error in recording amtzn of the excess of the investor's cost over the investments book value
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