Appendix C

Auditing Objectives and Procedures:

Revenue Cycle
Sales Transactions
Audit Objectives

Audit Evidence and Procedures

Existence, Completeness and valuation

Analytical Evidence
Compare sales, costs of sales, and gross profit with prior year, on a month-by-month basis and
account for major changes.
Compare sales patterns and gross profit rates with industry averages.
Calculate turnover of accounts receivable, and compare with prior year and industry average.
Compare sales returns and allowances as a percentage of sales, with prior year, and account for
material change.
Compare miscellaneous and other non- operating revenue accounts with prior year for both
source and amount, and investigate significant changes.
Documentary Evidence
Review accounts receivable subsidiary ledger for large balances, unusual balances, and credit
balances.
Perform sales cutoff procedures, by examining documentary evidence for a few days before and
after year-end.
Vouch credits to miscellaneous revenue accounts on a test basis by examining underlying
documentation.
Confirmation Evidence
Confirm accounts receivable on a test basis.

Consider stratifying population and confirming larger accounts on a positive basis.

Examine evidence of shipment and remittance advice for those customers not responding to
second and third requests for positive confirmation.
Consider confirming miscellaneous revenue transactions, if material, or if analytical review
procedures indicate major changes.
Mathematical Evidence
Prepare an aging analysis of accounts receivable, and evaluate the adequacy of the allowance for
doubtful accounts.
Agree accounts receivable subsidiary ledger to controlling accounts.

Presentation and Disclosure

Documentary Evidence
Examine Directors Minutes, correspondence, and contracts for evidence regarding pledging or
assignment of accounts receivable.
Confirmation Evidence
Examine bank confirmation for evidence of pledging or assigning receivables as collateral for
loans.
Hearsay Evidence
Inquire of management as to related party transactions and non-trade receivables included in
accounts receivable.
Inquire of credit manager as to extended credit terms that may require noncurrent classification
of certain receivables.

CASH RECEIPTS TRANSACTIONS

Audit Objectives
Audit Evidence and Procedures
Existence, Completeness and Valuation
Analytical Evidence

Compare cash receipts from miscellaneous sources with prior year and acoount for major
changes.

Physical Evidence
If present for inventory observation at year- end, count and list cash on hand.
Documentary Evidence
Trace cash count to cash receipts record and to bank statement.
Determine that above cash count agrees with final entry in cash receipts record for the year.
Vouch significant cash receipts from sources other than customers, such as sales of plant assets
or investments, and loan proceeds.
Trace to deposit tickets and bank statements on a test basis.

Mathematical Evidence
Reconcile bank accounts as of year-end.
Prepare analysis of interbank transfers to detect kiting and errors resulting in unrecorded cash.
Confirmation Evidence
Confirm bank balances directly with banks, compare balance on confirmation with year-end
bank statement. Obtain cutoff bank statements directly from banks Trace reconciling items on
year-end reconcilations to cutoff bank statements, noting especially:
Agreement of payees appearing on returned checks with cash disbursements record.
Agreement of payees on face of returned checks with endorsements on back of checks.
Outstanding checks at year-end cleared bank within reasonable period.
Deposits in transit at year-end were credited by bank within reasonable period.
Presentation and Disclosure
Documentary Evidence
Examine loan agreements and directors minutes for compensating balance requirements, and
consider reclassifying as noncurrent if significant.
Confirmation Evidence

Examine bank confirmation for other information provided by bank, such as outstanding
indebtedness and contingent liabilities.
Hearsay Evidence
Inquire as to status of inactive bank accounts.

APPENDEX D
Plant Assets
Auditing Objectives
Existence and Completeness
Audit Evidence and Procedures
Physical Evidence
Inspect major additions
Analytical Evidence
Compaire depreciation expense and maintenance and repairs with prior year and
account for major changes.

Review inventory taking instructions for such matters as:

1. Timing and location of inventory taking.
2. Counting procedures
3. How counts are documented (tages, sheets, cards, etc).
4. Arrangement of obsolete inventory and consignments in
5. Control over production during inventory.
Physical Evidence
Observe physical inventory taking:

1. Test count and compare with sheets or tags.

2. Keep record of test counts for later comparsion with final inventory
listings.
3. Control movements within areas to be tested.
4. Account for numeric sequence of tags or sheets, and control auditors
copies.
5. Note possible obsolescence or overstocking (mark tags or listings for
later checking on final audit).
6. Note environmental conditions as to arrangement and security over areas.
7. Note stage of completion for work in progress.
8. Verify that consigned in goods are not inventoried
9. Included loading docks and receiving areas in inventory observation.
Confirmation
Confirm goods in public warehouses and goods out on consignment.
Rights, Obligations, and Valuation
Documentary Evidence
Test for proper cutoff:
1. During inventory observation, record document numbers of last receiving
report, sales invoice, shipping order, and bill of lading.
2. During inventory observation, trace substance (goods) to receiving areas or
shipping area.
3. Trace to purchase and sales records (should be last entry of the year)
4. Examine documents for a few days before and after balance sheet date
(especially sales invoics, sales orders, shippers, and bills of lading; receivers,
vouchers, and freight bills) and determine when title passed.

5. Trace both ways, documents to accounting records and accounting records to

documents.
Examine inventory adjustment to determine that book inventory has been properly
adjusted to physical inventory.
Test pricing of final inventory:
1. Cost accounting system will have been examined as part of compliance
testing during interim audit.
2. Trace final inventory prices to audited price lists: audited materials price
lists should include a charge for freight and be exclusive of discount;
finished goods price lists ordinarily assume the form of audited standard cost
records; and work in progress, given stage of completion, should be traced to
audited routing sheets that accumulate costs by stage.
3. Perform lower of cost or market value test
4. Determine proper valuation of goods appearing on tags or sheets marked
obsolete or slow moving.
Trace tags or sheets to final inventory listings:
1. Both counted and not counted
2. To determine that client has not added digits, tags, or sheets.
Mathematical Evidence
Test extensions and footings:
1. Cover most large value items and sample remainder.
2. Use computer to assist in this procedure.
Analytical Evidence
Use the gross profit method to estimate ending inventory:
1. Compare with audited inventory

2. Investigate further if this procedure produces wide variance.

Presentation and Disclosure
Hearsay Evidence
Inquire about obsolescence.
Inquire about pledging.
Inquire about consigned goods
Inquire about cutoff.
Inquire about inventory held for use or consumption rather than for manufacture or
resale.

Plant Assets Audit Objectives ---- and Completeness

Audit Evidence and procedures
Physical Evidence
Inspect major additions
Analytical Evidence
Compare depreciation expense and maintenance and repairs with prior year and account for
major changes.
1. Increase in depreciation may denote additions to plant assets.
2. Increase in maintenance and repairs expense may be the result of plant asset additions
having been erroneously expensed.
Hearsay Evidence
Examine plant ledger for fully depreciated assets:
1. Inquire as to status
2. If no longer in use, an entry is needed to remove.
Documentary Evidence

Vouch repairs and maintenance accounts along with plant assets:

1. The audit objective is to locate possible misclassifications (plant assets charged to repairs
or repairs charged to plant assets)
2. Vouch major expenditures and test the remainder.
Valuation and Ownership
Mathematical Evidence
Prepare a lead schedule of plant assets and accumulated depreciation by major classes:
1. Should reflect beginning balances, additions, disposals, and ending balances.
2. Should be classified according to the following categories: Land, Buildings, Equipment,
autos and trucks, leasehold improvements, leased assets, and office equipment.
Reconcile subsidiary ledger with controlling accounts and agree to ending balances appearing
on plant assets lead schedule.

Evaluate appropriateness and consistency of depreciation method(s)

Recalculate depreciation and gain or loss on disposals.

Calculate change in differed taxes related to depreciation timing differences.

For self-constructed assets, recalculate

1. Overhead allocation , and

2. Interest during construction, if applicable.
Documentary Evidence
Vouch plant asset additions and disposals on a test basis
1. Examine vendors invoices and fright bills for purchased assets.
2. Examine work orders for constructed assets.
3. Trace receipts from disposals to bank statements.
4. Compare method of recording depreciation in year of acquisition and disposal withy
company policy for consistency.
Examine directors minutes and purchase and sale agreements for proper authorization and
accounting for major acquisitions ad disposals.

Presentation and Disclosure

Hearsay Evidence
Inquire as to assets not used in production
1. Standby
2. Awaiting disposal
3. Held for investment purposes.
Documentary Evidence
Examine all lease agreements and determine proper classification as to financing versus
operating.
Examine loan agreements for possible pledging of plant assets as collateral.
Mathematical Evidence
Evaluate appropriateness of discount rate used in calculating net present value of minimum lease
payments
Recalculate minimum lease payments for financing leases.
Recalculate contingent rentals on a test basis.
INTANGIBLE ASSETS, PATENTS, COPYRIGHTS, TRADEMARKS, GOODWILL, ETC)
Audit Objectives, Existence and completeness
Audit Evidence and Procedures
Documentary Evidence
Examine documentation supporting intangible assets:
1. Patents, copyrights, and trademarks
2. Franchise and merger agreements
Vouch additions and disposals.
1. Include research and development expense.
2. Possibility of purchased intangibles being debited to R&D.
Examine minutes for proper authorization of acquisitions and disposals.

Analytical Evidence
Perform analytical review of amortization expense and R &D by comparing with prior year and
investigating material changes.
Valuation and ownership
Documentary Evidence
Vouch additions and disposals on a test basis.
1. Examine agreements
2. Examine cancelled checks
3. Be particularly alert to the possibility of capitalized R & D or related party transaction.
4. Trace receipts from disposals to bank statements.
Mathematical Evidence
Recalculate gain or lose on disposal
Evaluate appropriateness of amortization period, and recalculate amortization on a test
basis.

Presentation and Disclosure

Analytical Evidence
Evaluate future economic benefit by relating assets to revenue produced by them.
Compare R&D with prior year and investigate major changes (may be the result of errors in
classifying expenditures).
Hearsay Evidence
Inquire of management and legal counsel as to possible contingencies relating to intangible
assets (e.g. patent infringement suits)
CURRENT LIABILITIES
Audit Objectives
Existence and completeness

Audit Evidence and procedures

Conformation Evidence
Obtain a lawyers letter to identify contingencies requiring adjustment or footnote disllosure
Examine bank confirmation for loans.

Documentary Evidence
Search for Unrecorded Liabilities:
1. Examine invoices and voucher register for a short period before and after the balance
sheet date, and determine that recording took place in the proper period.
2. Trace to clients year-end adjustment for unrecorded liabilities.
3. Examine loan agreements for possible existence of imputed interest.
Analytical Evidence
Compare year-end accruals with prior year, and accounting for significant changes or
omissions.
Hearsay Evidence
Inquire as to contingencies
.
Obtain client representation letter.
Valuation
Mathematical Evidence
Recompute the following, as applicable, on a test basis:
1. Interest accruals
2. Tax accruals
3. Liability for product warranty
4. Pension cost and liability
5. Vacation pay

6. Profit sharing and bonus.

Presentation And Disclosure
Documentary Evidence
Determine that Contingent liabilities are properly disclosed.
Analytical Evidence
Examine prior years financial statements for possible footnote disclosures required in the
current years statements.

APPENDEX E

Examine minutes for proper authorization of major purchase and salses.

Examine income statements of unconsolidated subsidiaries accounted for on an equity basis.
Determine market value as of the balance sheet date.
Mathematical Evidence
Recompute premium or discount amortization on long term bond investments.
Recompute gain or loss on disposal.
Recmpute interest accrual.
Calculate implicit interest where applicable.
Perform cost or market value test for marketable securities.
1. Do separate analysis for long-term and shortterm portfolios.
2. Determine need for adjustment based on aggregate portfolio.
Analytical Evidence
Compare interest and dividends with prior years and investigate changes.
Presentation and Disclosure
Hearsay Evidence

Inquire of management as to nature of investments and reasons for holding them.

Inquire as to pledging of securities as loan collateral.
Inquire as to related party transactions.
Documentary Evidence
Examine minutes for evidence of pledging or related-party transactions.
Determine, by vouching, that dividends on stock reported under the equity method have been
reflected as reeducations in the investment account.

BORROWOING TRANSACTIONS
Audit Objectives

Audit Evidence and Procedures

Existence and Completeness

Documentary Evidence
Examine the following for possible failure to record long-term liabilities:
1. Lease agreement
2. Pension and profit-sharing plans
3. Directors minutes
Testing Transactions
Audit Objectives

Audit Evidence and Procudure

and Completioness
Physical Evidence
Assume control over all negotiable securities, cash on hand and cash funds (to prevent
substitution).
Examine securities and record serial numbers for later comparison with recorded accountability
(investment ledger). Obtain receipt upon return of cash and securities.

Confirmation Eveidence
Confirm existence of securities not on premises

Obligations
Physical Evidence
Examine securities for evidence that client is the registered owner.
Examine for evidence of pledging as collateral on loans.
Confirmation Evidence
Confirm ownership with holders of securies not on the premises.

Evaluation
Documentary Evidence
Perform cutoff tests.
1. Verify deividends by reference to standard and Poors or Moodys.
2. Analyze intercompay accounts, making certain both sides of intercompany transactions
have been consistently recorded and look for related party transactions.
Trace securities examined or confirmed two ways:
1. Bank Confirmations
2.

Bond indentures and mortgage agreement

Hearsay Evidence
Obtain Client representation letter.
Valuation

Confirmation Evidence
Confirm Liabilities as appropriate,

Documentary Evidence

Examine lease agreements for contingent rentals.

Examine pension agreements for vesting provisions
Examine loan agreements for possible need to impute interest.
Vouch the following on a test basis:
1. Interest payments
2. Lease payments
3. Pension plan contributions.

Mathematical Evidence
Recompute the following on a test basis
1. Premium and discount amortization
2. Lease amortization
3. Contingent rentals
4. Interest accruals
5. Gain or loss on bond redemptions
6. Product warranty liability
7. Change in deffered taxes
8. Pension Liability
Compute implicit interest, if applicable.

Analytical Evidence
Compare liabilities and related expenses with prior year and investigate significant
changes.

Hearsay Evidence
Obtain client representation letter.
Presentation and Disclosure

Documentary Evidence
Examine liability agreements for the following:
1. Restrictive convenants ; consider adequacy of disclosure given violations of restrictive
convenants
2. Collateral requirements; consider adequacy of disclosure given collateral requirements.
3. Other disclosure requirements (future cash flows under lease agreements, details
surrounding bond issues, pensions provision etc.)

Confirmation Evidence
Examine bank confirmations for possible guarantees of indebtedness.
STOCKHOLDERS EQUITY TRANSACTIONS
Audit Objectives
Audit Evidence and procedures
Valuation

Physical Evidence
Examine treasury stock certificates.

Confirmation Evidence
Confirm stock issuance and dividends with registrar ad transfer agent.

Documentary Evidence
Examine minutes for dividend declarations and proper authorization of the following:
1. Stock issuance
2. Stock reacquisition
3. Stock retirements
4. Stock options
Vouch dividend declarations and payments.
Vouch treasury stock transactions.
Trace stock issuance proceeds to bank statement.
Examine evidence of valuation where stock is issued for noncash assets.
Mathematical Evidence
Determine whether simple or complex capital structure and recomputed earnings per share.
Recomputed stock option credit.
Recalculate debit to retained earnings for stock dividends.
Presentation and Disclosure

Documentary Evidence
Examine and loan agreements and directors minutes for possible restrictions on retained
earnings.
Examine Stock option agreements for details surrounding the options:
APPENDIX D:
1.
2.
3.
4.

PROCEDURES FINANCING AND INVESTING CYCLE

Employees participating
Shares involved
Option prices
Exercise dates

Examine corporate charter for description of various classes of stock:

1. Whether preferred is participating or cumulative
2. Dividends in arrears on cumulative preferred
3. Liquidation values of preferred, if different from par.