Assertion: verify that recorded sales are valid
Procedures (answer): Select a sample of entries in the sales journal and compare with the related shipping documents
What are you trying to determine? You're trying to make sure that the accountant didn't go “Hmm, we need more revenue, let's make 157 sales for reasonable amounts and hope the auditor doesn't notice that we didn't really sell or ship anything. So, how do you find out if that happened? Well, if the accountant did this, then there's 157 sales entries which wouldn't have any shipping documentation, because they didn't really happen. If you take a sample of sales and try to trace the $250 sales for Mrs. T. J. Smith, and find no documentation that a package was ever shipped to Mrs. T. J. Smith, you've got a pretty good hint that it's time to ask the accountants some questions. (Or that the guy who was supposed to ship her the diamond necklace gave it to his wife for Christmas instead, or…or…etc.)
Assertion: verify all valid sales were recored
Procedure (answer): Select sample of shipping document and identify those for which no related invoice exists.
What are you trying to determine? You're trying to make sure the accountant didn't get lazy at the end of the day and decide not to enter the last 173 shipping documents because he figured they only added up to about $1000 anyway so weren't worth his time because the Mets game that was coming on TV was more important. So, how do you do that? You take shipping documents, and when you come across one of those 173, you'll see that we shipped a package to Mr. F. S. Brown, but you can't find any record of the sale in the computer and there's no invoice to Mr. F. S. Brown, so he got the goods for free. (Either that or the guy shipping the goods pocketed the money, so Mr. Brown paid for it but the company didn't get the money…or…etc.)
Assertion: test for understatement of accounts payable
Procedure (answer): select sample of cash payments made after year end and identify those for which there is related payable at year end. WHY IS THIS A GREAT WAY TO SEARCH FOR UNRECORDED LAIBILITIES?
What are you trying to determine? You're trying to see if there were current liabilities that weren't accrued – if OfficeMax had sent the invoice for the paper used in December, but the AP department didn't enter it till January and just wrote the check as if it was Net 5 terms instead of Net 60, so that the invoice didn't show as a current liability at year end. So, the way to do this is see if anything paid after the end of the year looks like it should've been accrued for. If the office manager went to Office Max on Jan 5 and paid cash for supplies, that's no problem, because she just purchased them on Jan 5…but if there's a check through AP to OfficeMax for an invoice and the check is sent Jan 5, there's a good chance that the supplies were purchased prior to Jan 1, and as such should've been an outstanding current liability on Dec 31. Not sure I'm making sense here. 😐
Assertion: verify cash disbursements were properly authorized
procedure (answer): select sample of entries in the cash disbursements journal and compare with related voucher packages.
What are you trying to determine? You're trying to see if prior to a check being written, the appropriate documentation and authorizations were in place – you're trying to make sure that the clerk who prints the checks couldn't put in a request for a check to her uncle and get it processed without anyone authorizing it. So, you get the supporting documentation and look for appropriate signatures. Let's say corporate policy is that the requesting employee and his/her manager must sign off on any request for a disbursement. So, in the supporting paperwork for a check to OfficeMax, you'd have a copy of the invoice showing the goods purchased, and a signature from the employee who ordered/used the goods as well as that employee's manager, both authorizing AP to issue a check to pay for these goods. If you check your 1000 sample voucher packages and discover that in 10 of them, the only signatures are the signature of the AP clerk initialing that the request has been processed, you've got a problem!
Hope this all helps some – I don't think I'm in my clearest explaining mode right now. 😐
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