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1 AUDIT PROGRAM DESIGN PART II

Audit Program Design Part II

2 AUDIT PROGRAM DESIGN PART II Audit Program Design Part II During the audit process it is important to design tests of controls, substantive tests of transactions, and analytical procedures. This subject of this paper is to explore the sales and collection, payroll and personnel, and acquisition and payments cycles for Apollo Shoes. It will explain the various objectives related to the test of controls processes. It will also identify the key internal controls used by Apollo Shoes, Inc. Sales and Collection Cycle Performance of the analytical procedures in the sales and collection cycle at Apollo will consist of scanning the sales journal to look for large and unusual transactions, compute the receivables turnover ratio and compare with prior years, calculate the gross margin percentage and compare with prior years, and review sales by month over a period of 18 months for inconsistencies (Arens et al., 2006). Test of Controls The test of controls, substantive tests of transactions and analytical procedures in the sales and collection cycle at Apollo will focus on each transaction-related audit objective. These objectives include existence, completeness, accuracy, classification, timing, and posting and summarization. Existence Objective The test of controls the auditors will perform to verify that the existence objective is met will be to examine customer orders for evidence of customer approval, examine sales invoices for supporting bill of lading and customer order, and determine if monthly statements are sent.

3 AUDIT PROGRAM DESIGN PART II The substantive test of transactions will include accounting for the sequence of sales invoices, reviewing sales journals and master files for unusual transactions and amounts tracing sales journal entries to supporting documents (Arens et al., 2006). Completeness, Accuracy, and Classification Objectives The test of controls the auditors will perform for the completeness, accuracy, and classification of transactions will include accounting for a sequence of shipping documents, observing whether monthly statements are sent, and examining document packaging for internal verification. The substantive tests for these objectives are tracing selected shipping documents to the sales journal, trace entries in sales journal to sales invoice, and examine duplicate sales invoice for proper account classification (Arens et al., 2006). Timing, Posting, and Summarization Objective The test of controls for the timing objective will be limited to accounting for a sequence of shipping documents and the substantive tests will be to compare the date of recording the sale in the sales journal with duplicate sales invoices and bills of lading. Finally, the test of controls for the posting and summarization objective will be to examine evidence that the accounts receivable master file is reconciled to the general ledger and observe whether monthly statements are sent to customers. The substantive tests to verify these tests of controls include tracing selected sales invoices from the sales journal to the accounts receivable master file and test for amount, date, and invoice number. Finally, the auditors at Apollo should use audit software to foot and cross-foot the sales journal and trace totals to the general ledger (Arens et al., 2006).

4 AUDIT PROGRAM DESIGN PART II Payroll and Personnel Cycle The payroll cycle contains only one class of transactions that are more significant than related balance sheet accounts. An effective payroll control will reduce the risk of harsh federal and state penalties for errors in payroll taxes. Therefore, the auditor needs to emphasize tests of controls, substantive tests of transactions, and analytical procedures in the audit for payroll. Before designing tests of controls and substantive tests of transactions, it is essential to understand and familiarize oneself with the business functions and records in the payroll and personnel cycle for Apollo Shoes, Inc. This includes personnel records, deduction authorization form, time card, payroll journal, payroll check, and payroll bank reconciliation. The efficient method to perform tests of controls and substantive tests of transactions for payroll and personnel cycle starts with understanding the internal control over the payroll process as well as to determine the strengths and weaknesses identified by number on the payroll flowchart. Internal Controls Some of the key controls the auditor may consider consist of: 1. Adequate separation of duties 2. Proper authorization 3. Adequate documents and records 4. Independent checks on performance 5. Preparation of Payroll Tax Forms 6. Relationship between payroll and inventory valuation.

5 AUDIT PROGRAM DESIGN PART II Apollo Shoes Internal Controls Below are presented a few key internal controls used by Apollo Shoes to enhance the control over payroll and personnel cycle: 1. Hourly employees (clerical and warehouse personnel) are paid biweekly based on hours recorded on the time cards using a time clock machine; 2. Time cards are approved by the supervisors, who take the approved time cards to the payroll department 3. The personnel department must approve new hires, termination, and hourly rate changes. 4. The payroll department maintains the individual employees payroll records and the forms signed by employees for pay deductions; Test of Controls For these key internal controls, the efficient test of controls and test of transactions have to be based on: 1. Examine the card for indication of approval; Review and examine personnel policies 2. Review the payroll journal, general ledger, and payroll earnings records for unusual amounts; 3. Examine indication of internal verification;

6 AUDIT PROGRAM DESIGN PART II 4. Examine payroll records and authorization in payroll file 5. Recompute hours worked from time cards
6. Compare pay rates with the contract approved by Apollo Shoes Board of

Directors The analytical procedures are used in the payroll and personnel cycle to detect any misstatements in payroll expense accounts, and direct labor and inventory and are based on comparison of the payroll expense account balance with the previous year. Acquisition and Payment Cycle In auditing the acquisition and payment cycle, the accounts affected by the acquisitions of goods and services and the cash disbursements are evaluated to ensure that they are fairly represented in accordance with the generally accepted accounting principles (GAAP). The acquisition and payment cycle involves the decisions and processes necessary for obtaining the goods and services for operating a business. In this cycle, there will be a test of controls, substantive tests of transactions, and analytical procedures related to Apollo Shoes, Inc. (Arens et al., 2006). Tests of Controls Extensive tests of controls will be used for the acquisition and payments cycle to detect understatements. Tests of controls for this cycle would include: 1. Purchase order, purchase requisition and vendors invoice are attached to the voucher and examined for existence.

7 AUDIT PROGRAM DESIGN PART II 2. 3. Acquisitions are approved at the proper level and the approval examined. Accounts payable master file contents are internally verified with an examination of the internal verification. 4. Batch totals are compared with computer summary reports with the file of batch totals examined for initials of data control clerk, and the totals are compared to summary reports (Arens et al., 2006). Substantive Tests of Transactions The substantive tests of transactions that would be included in this audit will include: 1. Review the acquisitions journal, general ledger, and accounts payable master file for large or unusual amounts. 2. 3. Examine underlying documents for reasonableness and authenticity. Test clerical accuracy by footing the journals and tracing postings to general ledger and accounts payable and inventory master files. 4. Recomputed the clerical accuracy on the vendors invoice (Arens et al., 2006).

Analytical Procedures The use of analytical procedures is important in the acquisition and payment cycle for uncovering misstatements in accounts payable. Some procedures can include: 1. Compare acquisition-related expense account balances with prior years.

8 AUDIT PROGRAM DESIGN PART II 2. Review list of accounts payable for unusual, non-vendor, and interest-bearing payables. 3. 4. Compare individual accounts payable with previous years. Calculate ratios, such as purchases divided by accounts payable, and accounts payable divided by current liabilities (Arens et al., 2006). Conclusion In this paper the subject explained is the sales and collection, payroll and personnel, and acquisition and payments cycles for Apollo Shoes. It offered a better understanding of the various objectives related to the test of controls processes as well as identified the key internal controls used by Apollo Shoes, Inc. Through this paper it is learned why it is important to design tests of controls, substantive tests of transactions, and analytical procedures.

9 AUDIT PROGRAM DESIGN PART II References Arens, A. A., Elder, R.J., & Beasley, M.S. (2006). Auditing and assurance services: An Integrated approach (11th Ed.). New York, New York: Pearson. Louwers, T.J., & Reynolds, J.K. (2002). Apollo Shoes Casebook. New York, New York: McGraw-Hill.