AUDIT

ACCOUNTS ACCOUNTS
PROCEDUR
CASH RECEIVABLE PAYABLE INVENTORY
ES
 Inquire if historically  Inquire with the management on  Compare expenses to budget  Inquire an error trend in prior years
there has been any the significant variances (if any) in and examine any unexplained for specific inventory items, they
instance of fraud or the movement of trade receivables. variances will be more likely to test these
misappropriation in  Critically inquire the reasoning of  When control weaknesses are items again.
the cash and bank the change of the provisioning present, design and perform
balances. policy, ensuring that the fraud detection procedures
INQUIRY  Review the policies
related to cash and
management duly approved the
policy.
bank and identify if  Inquire if a receipt is issued against
there is any weakness each collection ensuring that no
in the designing of collection remains unaccounted in
internal controls. the books of the accounts of the
company.

CONFIRMATIO  Ask for verification or  A primary technique for verifying  Account payable confirmation is  Cutoff analysis. The auditors will
confirmation to the the existence of accounts receivable the confirmation that prepare examine your procedures for
N third party, which is is to confirm them with the and process by auditors to halting any further receiving into
the bank, on the cash company's customers. cross-check the amount and the warehouse or shipments from
accounts and balances information between the it at the time of the physical
that the company has  This is a letter signed by a company client’s records and client’s inventory count.
at the bank. officer (but mailed by the auditor) supplier’s records.  Those
to customers selected by the including the outstanding  The auditors want to be
 It is done through auditors from the company's balances, and transaction. comfortable with the procedures
bank confirmation accounts receivable aging report. It you use to count the inventory.
letter which is usually requests that customers contact the  It is not normal that auditors This means that they will discuss
used for inquiry about auditors directly with the total perform account payable the counting procedure with you,
outstanding interests, amount of accounts receivable from confirmation to suppliers. In observe counts as they are being
contingent liabilities the company that was on their most case, auditors perform done, test count some of the
and guarantees in books as of the date specified in the bank and account receivable inventory themselves and trace
addition to the cash confirmation letter. confirmation. their counts to the amounts
amount that the recorded by the company's
company has with the  Positive and Negative Confirmation.  But, if auditors want to obtain counters, and verify that all
bank. the confirmation from third inventory count tags were
parties about the information accounted for.
related to account payable, then
probably auditor need to have
the control that the control or
documents related to the
 recording of account payable
are not reliable.

 Match the  Check subsequent positioning of the  Review original documents—  The auditors need to know where
confirmations letters receivables, i.e., check the including purchase orders, purchased costs in your accounting
replied by banks with movement in the balance after the vendor invoices, journal entries records come from, so they will
the bank balances in reporting date but before audit for both AP and inventory, and compare the amounts in recent
the bank reconciliation report issuance. bank records—at random to supplier invoices to the costs listed
statements. ensure all information is correct, in your inventory valuation.
 Obtain proforma  Check for any dishonoured cheques payment has been properly  Test for lower of cost or market.
samples of signatures of material amounts subsequent to made, and terms and conditions The auditors must follow the lower
of authorized closing period. have been satisfied. of cost or market rule, and will do
signatories and assess so by comparing a selection of
the risk of copying  Match the balances of the trade  Conduct vendor verifications by market prices to their recorded
these signatures by receivables break-up and the requesting outstanding balances costs.
any party. provision break-up with the and comparing the answers to  Finished goods cost analysis. If a
financial statements and the notes the amounts recorded in the AP significant proportion of the
to the financial statements ledger. Exceptions are noted inventory valuation is comprised of
and tagged for follow-up. finished goods, then the auditors
INSPECTION  Verify the accuracy of financial
will want to review the bill of
materials for a selection of finished
OF statements. Policies and
accounting procedures for close
goods items, and test them to see if
they show an accurate compilation
DOCUMENTS processes (month, quarterly, of the components in the finished
annual, etc.) are evaluated to goods items, as well as correct
ensure items are recorded in costs.
period in which the expense was
 Direct labor analysis. If direct labor
actually incurred. Policies and
is included in the cost of inventory,
procedures for related-party
then the auditors will want to trace
transactions and cash payments
the labor charged during
are also scrutinized, along with
production on time cards or labor
the transactions themselves, to
routings to the cost of the
develop a complete record
inventory. They will also investigate
of all financial information for
whether the labor costs listed in
the audit period.
the valuation are supported by
payroll records.