Audit Procedures

CPA Exam Forum AUD AUD Review Audit Procedures

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    Ok so here is the deal… I am studying for Audit with Becker and for the most part I understand the concepts and find them relatively straight forward. However, I am really struggling with applying audit procedures by transaction cycles. My weakness is questions that have to do with real audit procedures but because of my lack of experience it is really hard for me to grasp what each question is looking for in order to test a certain assertion. After doing the homework for this section I feel a little better with it but I am still very uncomfortable with the subject and don't feel confident in any of my answers. For anyone who has mastered this subject I would like your advice on how you studied or grasped these concepts.

    Thanks for your help!



    You must have directional testing completely down. Also, look at the Flow charts on Becker's book, these will help you understand how the Cycles work and will enable you to answer questions. 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



    @jenuno01 thank you so much… you have no idea how much that actually helped me. I was kinda lost on where to even begin with trying to understand some of this stuff!!

    Again, Thanks for your help



    You're welcome…don't get too caught up with transaction cycles, they are important…but the other sections are MUCH more important, in my opinion. Good luck!



    Jenuno, I'm just posting to say I love your new pic.

    Also, I agree about transaction cycles. If you have a basic understanding, I wouldn't spend a lot of time on that at all unless you're just looking for something to study at the end.



    That is good to hear because I feel pretty comfortable with all of the other sections but these audit procedures/transaction cycles make me want to throw my computer out the window! Thanks again



    @katie thanks! It's my favorite cartoon! lol

    @Texas – I would get very frustrated as well, but after hundreds of multiple choice questions, you'll start to notice a pattern. Like Katie said, don't waste too much time there, just have a very basic understanding and nail the other parts which are much more important : )



    Thanks for the notes Jenuno! Cool pic also. “honk honk”



    Just got a 33% on a sim, next sim 100%, can praying help me because I'm done

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