8
CHAPTER 2
THEORETICAL FOUNDATION
2.1
Audit
2.1.1 Definition of Audit
Arens, Elder, and Beasley (2006, p. 4) define auditing, as “the accumulation and
evaluation of evidence about information to determine and report on the degree of
correspondence between the information and established criteria, and it should be done
by a competent, independent person.”
Another useful definition of auditing developed by the American Accounting
Association (AAA) in A Statement of Basic Auditing Concepts (ASOBAC) is “a
systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between
those assertions and established criteria and communicating the results to the interested
users.” (Gay & Simnett, 2007, p. 16)
Moreover, according to AUS 106.05, audit means “a service where the auditor’s
objective is to provide a high level of assurance through. This may be done by issuing a
positive expression of an opinion that enhances the credibility of a written assertion(s)
about an accountability matter (“attest audit”); or by providing relevant and reliable
information and a positive expression of opinion about an accountability matter where
9
the party responsible for the matter does not make a written assertion(s) (“direct
reporting audit”).” (Gay & Simnett, 2007, p. 12)
2.1.2 Audit Objectives
SAS 1 (AU 110) stated that “the objective of the ordinary audit of financial
statements by the independent auditor is the expression of an opinion on the fairness
with which they present fairly, in all material respects, financial position, results of
operation, and each cash flow inconformity with generally accepted accounting
principles”. Moreover, according to Arens, Elder, and Beasley (2006, p. 134), there are
five steps to develop audit objectives, which are:
1. Understand objectives and responsibilities for the audit
Auditors have their responsibilities to detect material misstatement in the financial
statements. When the auditor reports on the effectiveness of the internal control over
financial reporting, the auditor is also responsible for identifying material
weaknesses in internal control.
2. Divide financial statements into cycles
When the audit process is performed, the financial statements have to be divided
into smaller components so that the audit becomes more manageable and aids in the
assignment of tasks to different members of the audit team. After the audit for each
component is done, the results will be combined, and then the conclusion about the
financial statement as a whole can be derived.
10
3. Know management assertions about accounts
Before examining the audit objectives in more detail, understanding management
assertions is very important. Management assertions are directly related to
Generally Accepted Accounting Principles (GAAP) and they are part of the criteria
that management uses to record and disclose accounting information in financial
statements. Therefore, auditors must understand the assertions to do adequate audits.
Categories of management assertions about financial information will be explained
more in the following paragraphs.
4. Know general audit objectives for classes of transactions and accounts
For the general transaction-related, the audit objectives are regarding the existence,
completeness, accuracy, classification, timing, and posting and summarization. On
the other hand, for the balance-related, the audit objectives are existence,
completeness, accuracy, classification, cutoff, detail tie-in, realizable value, rights
and obligations, and presentation and disclosures.
5. Know specific audit objectives for classes of transactions and accounts
The specific audit objectives are those that are developed from the general audit
objectives. They are also applied to each class of transactions, but are stated in
terms modified to a class of transactions, such as sales transactions.
ASA 500 (ISA 500) stated that there are three categories of assertions, which are;
classes of transactions, account balances, and presentation and disclosure. These are set
out in ASA 500.22 (ISA 500.17) as follows:
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1. Assertions about classes of transactions and events for the period under audit
a. Occurrence - transactions and events that have been recorded have been occurred
and pertain to the entity.
b. Completeness - all transactions and events that should have been recorded have
been recorded.
c.
Accuracy - amounts and other data relating to recorded transactions and events
have been recorded appropriately.
d.
Cutoff - transactions and events have been recorded in the correct accounting
period.
e. Classification - transactions and events have been recorded in the proper account.
2. Assertions about account balances at the period end
a. Existence - assets, liabilities, and equity interests exist.
b.
Rights and obligations - the entity holds or controls the right to assets and
liabilities are the obligations of the entity.
c.
Completeness - all assets, liabilities, and equity interests that should have been
recorded have been recorded.
d. Valuation and allocation - assets, liabilities, and equity interests are included in
the financial report at appropriate amount and any resulting valuation
adjustments are appropriately recorded.
3. Assertions about presentation and disclosures
a. Occurrence, rights, and obligations - disclosed events, transactions, and other
matters have occurred and pertain to the entity.
12
b. Completeness - all disclosures that should have been included in the financial
report have been included.
c. Classification and understandability - financial information is appropriately
presented and described and disclosures are clearly expressed.
d. Accuracy and valuation - financial and other information is disclosed fairly and
at appropriate amounts.
2.1.3 Types of audit
Based on Leung et al., (2004, pp.35-38), there are six types of audit activities,
which are audit of financial statements, compliance audit, performance audit,
comprehensive auditing, environmental audit and internal audit. The explanation of each
audit activity is going to be presented in the following.
1. Audit of financial statements
According to Australian Auditing Standard 202, the objective of a financial
statement audit is to enable auditors to represent an opinion as to whether the
financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework. The financial statement audit involves
obtaining and evaluating evidence about the company’s financial affairs so as to
establish the degree of correspondence between the management’s assertions and
the establish criteria, such as legal requirements and accounting standards.
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2. Compliance audit
A compliance audit involves obtaining and evaluating audit evidence to determine
whether certain financial and operational activities of a company meet the terms
with specified conditions, rules or regulations. The outputs of this type of audit are
reported to management as the primary group concerned with the extent of
compliance with certain prescribed procedures and regulations.
3. Performance audit
A performance audit involves obtaining and evaluating evidence about the
efficiency, economy, and effectiveness of an entity’s operating activities in relation
to specified objectives. This type of audit activity may also referred to as a valuefor-money (VFM), operational or management audit.
4. Comprehensive auditing
Comprehensive auditing occurs when an auditor undertakes a range of audit and
related services for a client. Additionally, this type of audit consists of the elements
of a financial statement audit, a compliance audit and a performance audit.
5. Environmental audit
An environmental audit is an audit that responds to the growing concern of business
to control their environmental performance more effectively and to comply with a
range of environmental regulation.
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6. Internal audit
An internal audit is an independent appraisal function established within an
organization to examine and evaluate the activities of an entity as a service to the
entity. Furthermore, internal audit is also become one of the management tools to
enhance internal control.
2.2
Performance Audit
2.2.1 Definition of Performance Audit
According to AUS 806.2, performance audit is “an audit of all or part of an
entity’s or entities’ activities to assess economy and/ or efficiency and/ or effectiveness.
It includes any audit directed to:
1. The adequacy of an internal control structure or specific internal controls, including
those intended to safeguard assets and to ensure due regard for economy, efficiency
and effectiveness;
2. The extent to which resources have been managed economically and efficiently; and
3. The extent to which activities have been effective.”
Leung et al., (2004, pp.726) also described a performance audit in accordance
with Australian National Audit Office (ANAO) as follows:
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“An independent and systematic examination of an organization, program or function
for the purpose of:
1. Forming an opinion about:
a. Whether the organization, program or function is being managed in an
economical, efficient, and effective manner; and
b. The adequacy of internal procedures for promoting and monitoring economy,
efficiency, and effectiveness; and
2. Suggesting ways by which management practices, including procedures for
monitoring performance, might be improved.”
2.2.2 Objectives and Purposes of Performance Audit
According to AUS 806.07, the objective of a Performance audit is “to enable the
auditor to express an opinion whether, in all material respects, all or part of an entity’s or
entities’ activities have been carried out economically and/or efficiently and/or
effectively”. In addition, Gay and Simnett (2007, p. 716) stated that the objectives of
Performance Audit in the public sector are as follows:
1. To provide Parliament with assurance about the quality of management of public
resources; and
2. To assist public sector managers by identifying, promoting, and protecting better
management practices.
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Moreover, the Performance Audit consists of a combination of three following
purposes, which are:
1. Assess performance – by comparing the manner in which the entity is conducting its
activities to the objectives set by management or the engaging party and to other
suitable measurement criteria.
2. Identify opportunity for improvement – by analyzing interviews with individuals
(within or outside the entity), observing operations, reviewing past and current
reports, analyzing transactions, making comparisons with industry standard, and
other appropriate means.
3. Develop recommendation for improvement or further actions – there is a variety of
the nature and extent of recommendations developed in the course of management
audit. In some cases, the auditor makes specific recommendations, while in some
other cases, there is further study beyond the scope of engagement is required.
Leung et al., (2004, p.672) stated main purpose of performance auditing is to
assist the management of the audited company to increase the effectiveness, efficiency,
and economy of its operation. Furthermore, Leung et al. (2004, pp.678-679) stated the
terms in accordance with AUS 806 ‘Performance Auditing’ as follows:
1. Economy
‘Economy’ is the obtainment of relevant quality and quantity of resources at the
appropriate time and the lowest cost.
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2. Efficiency
3.
The process audit approach
‘Efficiency’ is using resources to maximize output for a given set of inputs, or to
minimize input for any given quantity and quality of output.
3. Effectiveness
‘Effectiveness’ refers to the achievement of the objectives or other intended results
of operations, programs or activities.
2.2.3 Approaches of Performance Audit
According to Leung et al., (2004, pp.672) there are three approaches of
Performance Audit, which are:
1. The risk-based approach
This kind of audit approach identifies the areas of greatest risk, and uses an
objective/risk/controls formula and a matrix to document and analyze an effective
audit program. Furthermore, the risk-based approach also differentiates between
control adequacy (what should be) and control effectiveness (what is).
2. The value-for-money audit approach
It defines attributes of effectiveness and focuses on effectiveness, efficiency, and
economy of operations from customers’ viewpoints.
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The process audit approach determines the effectiveness of process and
distinguishes value-added from non-value-added activities, building the control
framework into the processes.
2.2.4 Stages of Performance Audit
There are five stages of Performance Audit, as stated in Gay and Simnett (2007,
p. 719), which are planning, preliminary study, implementation, reporting, and followup. Each stage is going to be presented subsequently.
1. Planning stage
This stage requires an ongoing watch on the entity to develop and maintain useful
information in determining potential areas for audit. AUS 806.18 and AUS 808.02
oblige the auditor too plan the audit work in order to have an effective management
audit. Moreover, the auditors have to analyzed and rank potential audit topics to
form an annual audit strategy. Particularly there have to be a good understanding of
the entity and their risks, emphasizing on identifying the value that would be added
by an audit. AUS 808.06 requires the performance auditor to obtain sufficient
knowledge of the business.
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2.2.5
Differences between Performance and Financial Statement Audits
After the audit topic has been selected, a preliminary study has to be conducted to
determine whether to continue or not. If it is going to proceed, the preliminary study
identifies the fundamental issues, structures the audit approach, defines the scope
and focus of coverage and proposes timetable. Procedures used in this stage include
inquiry, observation, and inspection of internal report.
3. Implementation stage
During this stage, the auditor develops an audit program, obtains sufficient audit
evidence, and forms audit findings, conclusion, and recommendation.
4. Reporting stage
At the end of the fieldwork, the audit team must hold an interview with the
management to discuss the findings and recommendations. The proposed
performance audit reports then will be sent to the audited entity under s. 17(4) of the
Auditor-General act 1997.
5. Follow-up stage
In this stage, the auditors are expected to follow-up the audit reports to ensure that
the recommendations have been implemented at the appointed time and effectively.
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2.
Preliminary study stage
According to Arens, Elder, and Beasley (2006, p. 776), there are three major
differences between Performance Audit and Financial Statement Audits, which are:
1. Purpose of the audit
The purpose of financial auditing is to emphasize whether the historical information
was correctly recorded. Meanwhile, the purpose of performance audit is to
emphasize effectiveness and efficiency. Moreover, the financial auditing is oriented
to the past, whereas performance auditing concerns operating performance for the
future.
2. Distribution of the reports
The report of financial auditing typically goes to many users (external users) of
financial statements, such as stockholders and bankers. Meanwhile, the performance
audit reports are intended primarily for management.
3. Inclusion of nonfinancial areas
Performance audit cover many aspect of efficiency and effectiveness in an
organization and can therefore involve a wide variety of activities. Meanwhile,
financial audits are limited to matters that directly affect the fairness of financial
statements presentations.
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3.
Transaction are carried out in accordance with management’s general or specific
2.3.1
Definition of Internal Control
Gay and Simnett (2007, p. 767) in accordance with the Auditing standard ASA
315.54 define the internal control as “the process designed and effected by those charged
with governance, management and other personnel to provide reasonable assurance
about the achievement of the entity’s objectives with regard to reliability of financial
reporting, effectiveness, and efficiency of operations and compliance with applicable
laws and regulations.”
According to Leung et al. (2004, pp.672), internal control is “management’s
philosophy and operating style and all the policies and procedures adopted by
management to assist in achieving the entity’s objectives, including the safeguarding of
assets, the prevention and detection of fraud and error, the accuracy and completeness of
the accounting records, and the timely preparation of reliable financial information.”
2.3.2
Objectives of Internal Control
Gay and Simnett (2007, p. 339) state that the objectives of internal control are to
make sure that:
1.
Risks are identified and minimized;
2.
Management decision making is effective and business processes are efficient;
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2.3
Internal Control
authorization;
4. Laws, rules, and regulations are complied with;
5. Transactions are promptly recorded in the correct amount, in the appropriate
accounts and in the correct accounting period so as to allow the preparation of the
financial report within a framework of recognized accounting policies and to
maintain accountability for assets;
6. Access to assets is permitted only accordance with management’s authorization; and
7. The record of accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any differences.
2.3.3 Components of Internal Control
In accordance with ASA 315.55 (ISA 315.43) states that a company’s internal
control consists of five elements:
1. Control environment – includes management’s overall attitude, awareness, and
actions regarding internal control and its importance in the entity.
2. Entity’s risk assessment process – it is a process for identifying and responding to
business risks and the results thereof.
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responsibility to be sure that the information is fairly presented in accordance with
reporting requirements such as GAAP.
classify, record and report exchange transactions and relevant events and condition
and to maintain accountability for the related assets, liabilities, revenues and
expenditure. It also consists of infrastructure (physical and hardware components),
software, people, procedures, and data.
4. Control activities – control activities are the policies and procedures that help
ensure that management directives are carried out, for example, that necessary
actions are taken to address risks that threaten the achievement of the entity’s
objectives.
5. Monitoring of controls – it is a process to assess the quality of internal control
performance over time. It involves assessing the design and operation of controls on
a timely basis and taking necessary corrective actions.
2.3.4 Relation between Performance Audit and Internal Control
There are three concerns in setting up good internal controls according to Arens,
Elder, and Beasley (2006, p. 777), which are:
1. Reliability of financial reporting
Management is responsible for preparing financial statements for investors,
creditors, and other users. Thus, management has both a legal professional
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3.
Information system – an information system includes its accounting system and
consists of the methods and records established to identify, assemble, analyze,
2. Efficiency and effectiveness of operations
Controls within an organization are meant to encourage efficient and effective use
of its resources to optimize the company’s goals.
3. Compliance with applicable laws and regulations
Section 404 requires all public companies to issue a report about the operating
effectiveness of internal control over financial reporting. In addition to the legal
provisions of section 404, public, non-public, and not-for-profit organizations are
required to follow many laws and regulations.
The second of these three client concerns is clearly related to performance
auditing, but the other two also affect efficiency and effectiveness. Moreover, Arens,
Elder, and Beasley (2006, p. 778) also stated that there are two significant differences in
internal control evaluation and testing for financial and performance auditing, which are:
1. The purpose of the evaluation and testing of internal controls
2. The normal scope of internal control evaluation
The primary purposes of internal control evaluation for financial auditing are to
determine the extent of substantive audit testing required and report on effectiveness if
internal control over financial reporting for public companies. Meanwhile, the purpose
of performance auditing is to evaluate efficiency and effectiveness of internal control
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and make recommendations to management. A financial auditor often does the same
internal control evaluation, but the primary purpose is to reduce confirmation of
accounts receivable or other substantive tests. However, the secondary purpose of many
financial audits is also to make operational recommendations to management.
The scope of internal control evaluation for financial audits is restricted to the
effectiveness of internal control over financial reporting and its effect on the fair
presentation of financial statements, whereas performance auditing concerns any control
affecting efficiency or effectiveness.
2.4
Sales Transaction
2.4.1 Sales Overview
Definition of sales according to Schroeder, Richard, Clark, Myrtle, Cathey, and
Jack (2001, p.186) is “the act of transferring goods or services from one to another,
accompanied by the exchange of money and by some sort of credit arrangement.”
Furthermore, according to http://financial-dictionary.thefreedictionary.comsales could
be defined as:
1. In general, a transaction between two parties where the buyer receives goods
(tangible or intangible), services and/or assets in exchange for money
2. An agreement between a buyer and seller on the price of a security
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Dictionary of finance and investment terms (http://www.allbusiness.com) also
describe the definition of sales as:
“Revenue recognition from the delivery of merchandise or from rendering a service in
exchange for consideration. Consideration may be in the form of cash, cash equivalent,
or other property. Revenue can be recognized at the time of sale because an exchange
has taken place, selling price is determinable, and expenses are known.”
There are two types of sales, which are cash sale and credit sale. According to
Schroeder, Richard, Clark, Myrtle, Cathey, and Jack (2004, p. 46) the definition of cash
sale is “sale made for cash, not on credit, and recorded on cash payments journal” and it
will
increase
the
revenue
and
cash
accounts.
Additionally,
according
to
http://connection.cwru.eduthe definition of credit sale is “sales made to customers
during the current period for which cash was not paid at the time of sale, leading to an
account receivable.”
2.4.2
Applicable Control Procedures on Sales Transaction
There are five steps in processing credit sales according to Leung et al. (2004,
pp.404), those are:
1.
Accepting customer orders
In this step, the sales orders are checked for its authenticity, acceptability of terms
and condition, and the availability of inventory. The writing form of customer order
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can be ready evidence to the authenticity of the orders. Specification of an order
number provides reasonable assurance that the order has been issued in accordance
with the customers’ purchasing procedures. The terms and conditions relate with the
price of the goods, delivery dates and modifications. The orders should only be
accepted when they meet the entity’ terms and condition. Moreover, the checking of
availability in inventory before accepting the order is also necessary.
Auditors usually only have little interests in this step of accepting the customers’
orders. The possible risks occurred during this step are the loss of business and the
acceptance of an unprofitable business, which then will lead to misstatements in
recorded transactions.
2. Approving credit
The credit approval is the responsibility of an independent credit department rather
than the sales department. This is to prevent the sales personnel from subjecting the
entity to excessive credit risks just to boost sales. The credit supervisor is the one
who responsible for determining an appropriate credit limit for the customers.
Credit approval is then going to be refused when the order would take the balance
over the customer’s credit limit, or if the account is overdue.
In terms of audit process, control over the credit approval will reduce the risk of
sales transaction being recorded in an amount in excess of the amount of cash
expected to be realized. Thus, controls over credit approval help the management to
make a more reliable estimation regarding the size of allowance for bad debts
needed.
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3. Filling and dispatching sales orders
In filling the order and releasing the good from the warehouse to shipping
department (or dispatch area), a copy of the approved sales order form has to be sent
to the warehouse as an authorization. To reduce the risk of inventory shortages
caused by unrecorded or unauthorized release of inventory, segregation of duties
between the custody of the inventory with the maintenance of inventory records and
the physical check of verifying recorded accountability has to be implemented.
Moreover, segregating responsibility for dispatch from responsibility for filling and
approving orders also prevent the dispatch clerk in making unauthorized shipment.
Besides, several copies of dispatch notes have to be prepared to provide evidence
that goods were shipped.
4. Invoicing customers
This step involves preparing and sending sales invoices to customers. The control
objective for this step is to ensure that all deliveries are invoiced to customers at the
authorized prices and the amount of the invoice is accurately calculated.
In addition, the control procedures to achieve the objectives is by segregating
invoicing from the foregoing functions, checking the existence of the dispatch note,
matching the approved sales order before each invoice is prepared, and comparing
the control totals for dispatch notes with corresponding totals for sales invoices.
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5. Recording the sales
The main control objective of this step is to ensure that sales invoices are recorded
accurately and in proper period, which is usually when the goods are shipped.
Hence, to accomplish the objectives, the company should regularly check the
balances in the accounts receivable ledger against the balance in the control account
in general ledger.
2.4.3 Assessment of Control Risk on Sales Transaction
Leung et al. (2004, pp.414 & 419) provide an example of control risk assessment
procedures for credit sales transaction and cash receipts. These following tables contain
a partial listing of possible misstatements, necessary controls, potential tests of the
operating effectiveness of controls, and related transaction class audit objectives for
credit sales and cash receipt.
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Function
Potential
misstatement
Necessary control
Possible test of
operating
effectiveness
Relevant transaction
class audit objective
(from table 10.1)
EO1
Accepting
customer
orders
Approving
credit
Filling sales
orders
Shipping
Sales may be
made to
unauthorized
customer.
Determination that
customer is on
approved customer
list
Observe
procedure;
Re-perform.
Approved sales
order form for each
sale
Examine
approved sales
order forms.
Credit department
credit check on all
new customers
Inquire about
procedures for
checking credit
on new
customers.
Check on
customer's credit
limit before each
sale
Examine
evidence of credit
limit check before
each sale.
Goods may be
released from
warehouse for
unauthorized
orders.
Approved sales
order for all goods
released to
dispatch
Observe
warehouse
personnel filling
orders.
Goods dispatched
may not agree
with goods
ordered.
Independent check
by dispatch clerks
of agreement of
goods received
from warehouse
with approved
sales order
Examine
evidence of
performance of
independent
check.
Sales may be
made without
credit approval.
C1
VM1
√
D1
√
√
√
√
√
√
*Sometimes performed as part of dual-purpose tests.
Table 2.1 - Control risk assessment procedures - credit sales transactions
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Function
Potential
misstatement
Unauthorized
shipments may be
made.
Invoicing
customers
Necessary control
Possible test of
operating
effectiveness
Relevant transaction
class audit objective
(from table 10.1)
D
EO1 C1 VM1
1
Segregation of
duties for filling
and dispatching
orders
Preparation of
dispatch note for
each shipment
Observe the
segregation of
duties.
Invoices may be
made for
fictitious
transactions, or
duplicate invoices
may be made.
Matching of
dispatch note and
approved sales
order for each
invoice
Vouch invoices to
dispatch notes
and approved
sales orders. *
Some shipments
may not be
invoiced.
Matching of sales
invoice with each
dispatch note
Trace dispatch
notes to sales
invoices. *
√
Periodic
accounting for all
dispatch notes
Observe
procedure; reperform.
√
Independent check
on pricing of
invoices
Inspect copy of
invoice for
evidence of
performance.
Re-perform the
check on the
accuracy of
pricing. *
Sales invoices
may have
incorrect prices.
Inspect dispatch
notes.
√
√
√
√
√
*Sometimes performed as part of dual-purpose tests.
Table 2.1 - Control risk assessment procedures - credit sales transactions (continued)
32
Function
Recording
the sales
Potential
misstatement
Necessary control
Possible test of
operating
effectiveness
Fictitious sales
transactions may
be recorded.
Requirement of
sales invoice and
matching
documents for all
entries
Vouch recorded
sales to
supporting
documents. *
Invoices may not
be journalized or
posted to
customer
accounts.
Independent check
of agreement of
sales journal
entries and
amounts posted to
customer accounts
with control totals
of invoices
Review evidence
of independent
check; re-perform
check; trace sales
invoices to sales
journal and
customer
accounts. *
Periodic
accounting for all
sales invoices
Observe
procedure; reperform. *
Chart of accounts
and supervisory
review
Observe
procedures; reperform. *
Invoices may be
posted to the
wrong customer
account.
Mailing of
monthly statements
to customers, with
independent
follow-up of
customer
complaints
*Sometimes performed as part of dual-purpose tests.
Relevant transaction
class audit objective
(from table 10.1)
D
EO1 C1 VM1
1
√
√
√
√
√
√
Observe mailing
and follow-up
procedures. *
3
3
3
Table 2.1 - Control risk assessment procedures - credit sales transactions (continued)
3
33
Function
Potential
misstatement
Receiving
cash receipts
Cash sales may
not be registered.
Recording
the receipts
Relevant transaction
class audit objective
(from table 10.1)
EO2
C2
VM2
D2
√
√
√
√
√
√
√
√
√
Re-perform
independent
check. *
√
√
Re-perform
independent
check. *
√
Use of cash
registers or pointof-sale devices
Observe of cash
sales procedures.
Periodic
surveillance of
cash sales
procedures
Inquire of
supervisors about
the results of
surveillance.
Restrictive
endorsement of
cheques
immediately on
receipt
Observe mail
opening,
including the
endorsement of
cheques.
Immediate
preparation of
rough cash book or
prelist of mail
receipts
Observe the
preparation of
records.
Cash and cheques
received for
deposit may not
agree with the
cash count list
and prelist.
Independent check
of agreement of
cash and cheques
with register totals
and prelist
Examine
evidence of
independent
check. *
Cash may not be
deposited intact
daily.
Independent check
of agreement of
validated deposit
slip with daily cash
summary
Some receipts
may not be
recorded.
Independent check
of agreement of
amounts
journalized and
posted with daily
cash summary
Mail receipts may
be lost or
misappropriated
after receipt.
Depositing
cash in the
bank
Necessary control
Possible test of
operating
effectiveness
* Sometimes performed as part of dual-purpose tests.
Table 2.2 - Control risk assessment considerations – cash receipt
34
Function
Potential
misstatement
Necessary
control
Errors may be
made on journaling
receipts.
Preparation of
periodic
independent
bank
reconciliations
Receipts may be
Mailing of
posted to the
monthly
wrong customer
statements to
account.
customers
* Sometimes performed as part of dual-purpose tests.
Possible test of
operating
effectiveness
Relevant transaction
class audit objective
(from table 10.1)
EO2
C2
VM2
D2
√
√
√
√
√
√
√
Examine bank
reconciliations. *
Observe mailing of
monthly
statements.
Table 2.2 - Control risk assessment considerations – cash receipt (continued)
Notes:
Assertion Category
Existence or occurrence
Transaction Class Audit Objectives
Recorded sales transactions represent goods shipped during the period (EO1).
Recorded cash receipts transactions represent cash received during the period
(EO2).
Completeness
All sales (C1) and cash receipts (C2) transactions that occurred during the
period have been recorded.
Valuation or
All sales (VM1) and cash receipts (VM2) transactions are correctly
Measurement
journalized, summarized, and posted.
Disclosure
The details of sales (D1) and cash receipts (D2) transactions support their
presentation in the financial statements, including their classification and
related disclosures.