SAMPLE AUDIT PROGRAM

SAMPLE AUDIT PROGRAMS

CASH

Risks Cash transactions may not be recorded accurately Cash may not exist

Steps1. Confirm selected bank accounts and special arrangements

Select bank accounts for confirmation in order to obtain a moderate to low level of assurance that the aforementioned audit objectives are achieved. Bank confirmations should be sent to all banking relationships to identify accounts not included in the general ledger.

Confirmation requests should be sent under our control and, second requests and, where warranted, third requests should be mailed when responses to confirmation requests have not been received within a reasonable time.

Consider sending a special inquiry letter to ascertain the existence of special arrangements or restrictions, for example, compensating balance arrangements, security arrangements, written guarantees.

2. Review confirmation replies

For confirmations returned:

a) agree account information and account balance to comparative summary; b) investigate all discrepancies reported or questions raised in review and determine whether any adjustments are necessary; and c) assess impact of special arrangements or restrictions identified and determine

whether disclosure is appropriate.

3. Test accounts where there is no confirmation

In the unusual situation where we do not receive a bank confirmation and are willing to forego the receipt of the bank confirmation, consider performing the following procedures to obtain a high level of assurance that the aforementioned audit objectives are achieved:

a) obtain subsequent month bank statement, bank reconciliation and supporting documentation. Consider obtaining information directly from the bank;b) test the mathematical accuracy of the bank reconciliation; (accuracy)c) trace outstanding items listed on the bank reconciliation to the subsequent month's bank statement and for those not traced, trace to the cash disbursements records for the period prior to the balance sheet date; (accuracy and existence/occurrence)d) trace deposits in transit listed on the bank reconciliation to the subsequent month's bank statement and for those not traced, trace to the cash receipts records for the period prior to the balance sheet date; (accuracy and existence/occurrence)


e) obtain explanation for large, unusual reconciling items and trace to supporting documentation and/or entries in the cash records, as appropriate; (accuracy and existence/occurrence) f) review the date the above items cleared the bank or were recorded in the client's books to ensure appropriate recording period. Trace to supporting documentation as necessary; and (cut-off)g) investigate items such as, long outstanding items, dishonoured checks and significant adjustments in the subsequent month, and record adjustments as necessary. (accuracy and existence/occurrence)

4. Test bank reconciliations

Test bank reconciliation in order to obtain a moderate to low level of assurance that the aforementioned audit objectives are achieved by performing the following:

a)test the mathematical accuracy of the reconciliation; (accuracy)b) trace book balances on the client's bank reconciliation to the comparative summary; (accuracy)c) trace bank balances on the client's bank reconciliation to the bank statement; (accuracy)d) test reconciling items on the bank reconciliation by performing the following:

i) obtain subsequent month bank statement and supporting documentation. Consider obtaining information directly from the bank;

ii) trace outstanding items listed on the bank reconciliation to the subsequent month's bank statement and for those not traced, trace to the cash disbursements records for the period prior to the balance sheet date; (accuracy and existence/occurrence)

iii) trace deposits in transit listed on the bank reconciliation to the subsequent month's bank statement and for those not traced, trace to the cash receipts records for the period prior to the balance sheet date; (accuracy and existence/occurrence)

iv) obtain explanation for large, unusual reconciling items and trace to supporting documentation and/or entries in the cash records, as appropriate; (accuracy and existence/occurrence)

v) review the date the above items cleared the bank or were recorded in the client's books to ensure appropriate recording period. Trace to supporting documentation as necessary; and (cut-off)

vi) investigate items such as, long outstanding items, dishonored checks and significant adjustments in the subsequent month, and record adjustments as necessary (accuracy and existence/occurrence).

e) review client's bank reconciliation for review and approval by appropriate management and timely completion of reconciliation.


ACCOUNT RECEIVABLE

Risks The accounts receivable listing or individual balances may be inaccurate Accounts receivable balances may not exist Accounts receivable may not be collectible Bad debts write-offs may not be valid Sales transactions may be processed in the wrong period

Steps1. Agree a detailed listing of accounts receivable to the summary

Obtain a detailed listing of accounts receivable balances (aged by customer, if possible) and:

a) trace totals to the comparative summary of accounts receivable balances;

b) select reconciling items in order to obtain a moderate to low level of assurance that accuracy is achieved andi) trace these items to supporting documentation; andii) determine whether the results of the client's investigations have been reviewed

and approved by a responsible official;

c) test, to an extent to obtain a moderate to low level of assurance, the mathematical accuracy of the detailed listing; and

d) if appropriate, examine support for any significant adjustments made throughout the year in reconciling detailed accounts receivable records with the account(s) in the general ledger.

2. Positively confirm selected accounts receivable balances

Select customers' account from the detail accounts receivable listing for positive confirmation in order to obtain a moderate to low level of assurance that the aforementioned audit objectives are achieved. Perform the following:

a) send positive confirmation requests under our control. Where appropriate, send itemized statements to customers to facilitate responses. Second requests and, where warranted, third requests should be mailed when responses to positive confirmation requests have not been received within a reasonable time. When management requests us not to confirm certain accounts receivable balances, consider whether there are valid grounds for such a request. Before accepting a refusal as justified, examine any available evidence to support management's explanations.

b) summarize confirmation coverage.

3. Review confirmation replies

For confirmations returned:


a) agree account information and account balance to detail listing;

b) reconcile the account detail between the returned confirmation and the detail listing, where applicable; and

c) investigate all reconciling items and determine whether any adjustments are necessary.

4. Test accounts where there is no confirmation

When confirmation is not carried out, or where it is not possible to confirm a selected amount (including where confirmation requests are unanswered), select customer accounts from the detail accounts receivable listing for verification and perform the steps outlined below in order to obtain a moderate to low level of assurance that the aforementioned audit objectives are achieved.

a) compare subsequent remittances credited to accounts with remittance advices or other receipts (e.g. deposit slips and bank statement) and ascertain that payments relate to the account balances;

b) examine documentation such as shipping documents, copies of sales invoices, customer sales orders, and other relevant correspondence supporting the unpaid portion of the account balances. Coordinate this test with the review of the collectibility of overdue accounts; and

c) consider whether it is necessary to verify further the existence of the customer.

5. Assess adequacy of allowance for doubtful accounts

To an extent based upon materiality and inherent risk, assess the adequacy of allowance for doubtful accounts by performing the following procedures:

a) obtain a list of accounts for which an allowance has been established. Review and test the process used by management to develop their estimate of collectibility;

b) where provisions are made by the use of formulae based on the aged listing, determine by reference to the details in our notes of the client's procedures whether the basis is:

i) consistent with prior years;ii) appropriate to the circumstances of the business; andiii) in accordance with the accounting policy;

d) determine the effect, if any, of the client's policies and experiences regarding the timing of the passage of title, sales returns and allowances where right of return exists, and bill and hold situations; and

e) discuss collectibility with management and review other documentation supporting collectibility as necessary.


6. Review bad debt writeoffs

Review, in order to obtain a moderate to low level of assurance that valuation is achieved, bad debt writeoffs by performing the following:

a) consider the reasonableness of bad debt expense in light of the levels of bad debt write-offs compared with prior years; and

b) examine documentation relating to write-offs during the period and determine whether the write-offs were properly authorized.

7. Test sales/accounts receivable cutoffAccounts receivable cutoff testing is typically performed in conjunction with testing inventory cutoff and may be tested in the Inventory audit area. If cutoff is tested in the Accounts receivable audit area, perform the following:

Select sales and credit memoranda to obtain a moderate to low level of assurance that cutoff is achieved by reviewing the cutoff at the time of inventory taking and at year-end (if different) and performing the following:

a) for selected sales for periods before and after the cutoff date, examine the related records of goods shipped and services performed to determine that the sales invoices are recorded as sales in the proper period;

b) for selected credit (debit) memoranda for periods before and after the cutoff date, examine the related records of returns and claims from customers to determine that the credit (debit) memoranda are recorded in the proper period;

c) determine whether there are unusually high volumes of returned goods after year-end; and

d) consider unusual fluctuations in sales or return patterns before and after year-end and, if present, review for possible cutoff errors.

INVENTORY

Risks Inventory records may not be complete Inventory transactions may be processed in the wrong period Inventory items may not exist Inventory carrying values may not be realizable

Steps1. Observe physical inventory

To an extent based on materiality and inherent risk, perform the following:

a) inspect the premises to determine whether:

i) the arrangement of inventory is such that an accurate count is possible.


ii) the inventory is in good condition with adequate storage space, and whether items are properly packed or binned in a convenient manner for counting.

iii) scrap, obsolete, and damaged goods are adequately identified and segregated.

iv) inventory owned by third parties is adequately identified and segregated.v) inventories appear to be adequately safeguarded against access by

unauthorized persons and protected against deterioration.

b) in observing physical inventory counts, determine whether:

i) the counts are carried out under proper supervision. Determine whether this official is independent of the custody and recording of inventory. Observe whether persons supervising the inventory make test counts in all areas and review all areas where inventory are kept to ensure that they have all been counted and the counts are recorded.

ii) appropriate procedures are employed to control inventory movements (e.g., transfers, stock picking, etc.) during the count.

iii) quantities and descriptions are properly entered on the inventory tags or sheets.

iv) the methods used to determine quantities are reasonably accurate.v) there are adequate procedures for determining quantities of goods not

susceptible to direct physical counting (e.g., screws, nails).vi) count totals are adequately checked by persons other than the original

counters.vii) there are adequate procedures to ensure that all inventory (other than that on

the company's premises owned by others) is counted and that no inventory is counted more than once.

viii) inventory on the company's premises owned by others has been appropriately identified and counted.

ix) tags or count sheets are signed by individuals carrying out the count, or other suitable means of identifying individuals carrying out the count have been established, such as assigning tags or count sheets to count teams.

c) test the counting of inventory items by selecting items from the inventory tags or sheets and perform an independent count. Perform other counts of inventories and compare the results with those recorded on the inventory tags or sheets by company personnel. Follow up any differences noted in the counts. Record selected items counted for subsequent comparison with priced inventory listings. (Existence/Occurrence, Accuracy)

d) determine that procedures for accounting for all inventory tags and count sheets are followed and that all such tags and sheets have been accounted for, including used and unused tags and sheets, and that they are secured against alteration. Obtain details of records in order to test later for suppression, manipulation, addition or substitution of records after the physical inventory count (e.g., take copies of some or all of the count sheets) (Completeness)

e) determine whether slow-moving, obsolete, and damaged items are identified and recorded by the count teams.


f) consider the procedures established for determining cutoff , visit the receiving and shipping departments and note the last receiving and shipping document numbers before the count. If the client's procedures are not based on prenumbered documents, then prepare a list of shipping and receiving documents for a period immediately before and after the end of the period. Include documents for returns to suppliers and from customers, if different documents are used.

c) if appropriate, involve an expert to provide assistance in evaluating the appropriateness of the value assigned.

2. Examine receiving and issuing activity

Test, to obtain a moderate to low level of assurance, the cutoff of inventory by using information obtained at the physical inventory observation and data from cutoff procedures and the search for unrecorded liabilities. Perform the following:

a) examine issues transactions and supporting documentation for a period before the balance sheet date and determine that goods issued before the balance sheet date have been excluded from raw materials inventory, and that goods included in raw materials inventory are not included in work in progress, finished goods, sales and cost of sales.

b) select receiving reports for goods received before the balance sheet date and determine that all goods received before the inventory have been included in inventory and liabilities.

c) review supporting documentation for goods not included in the physical count but included in the general ledger inventory control account (e.g., inventory in transit, duty and freight, returns) and determine that the goods are properly included in inventory and the related liability has been recorded.

d) examine purchase and issues transactions and detailed supporting documents for the period after the balance sheet date to determine that they have been reflected in the proper period. Where pre-numbered documents are used, ensure that documents have been used in sequence and earlier numbers are included in and later numbers excluded from transactions in the period.

e) review records of returned goods and claims against suppliers and related debit (credit) memoranda for periods before and after the cutoff date to determine that returns and claims against suppliers made after the cutoff date have been entered in the appropriate period

3. Test obsolete, slow-moving, scrapped or damaged listing

Test, to an extent based upon materiality and inherent risk, the schedules of slow-moving, obsolete, scrapped or damaged items used to determine the net realizable value of inventory by performing the following:

a) determine whether slow-moving, obsolete, scrapped or damaged items have been adequately identified by:


i) obtaining and reviewing a schedule of items that have shown little or no recent movement;

ii) tracing information obtained during the observation of the physical inventory to management reports of slow-moving, obsolete, scrapped or damaged items;

iii) reviewing detailed inventory records, bin cards, etc.;iv) reviewing periodic reports to management concerning such information;v) discussing with management quantities held in the light of current production

requirements, sales orders received and future marketing forecasts; examine documentation, including, where appropriate, aged listings of inventory balances, substantiating the information obtained; and

vi) discussing with management whether any substantial inventory amounts may not be realizable because of major delays or disputes, defective work, marketing difficulties, etc.

b) review the pricing of such inventory and determine whether it is priced in excess of net realizable value.

4. Test client's costing of inventory detail

Test the costing of the detailed priced raw materials inventory listings to obtain a moderate to low level of assurance that accuracy is achieved by performing the following:

a) obtain and document an understanding of methods and procedures for costing inventory;

b) perform audit procedures to ensure that the inventory costs are appropriate, e.g., trace unit costs of inventory items to and from suppliers' invoices or standard costing information;

c) determine whether the method of inventory pricing is consistent with the prior year; and

c) if appropriate, involve an expert to provide assistance in evaluating the appropriateness of the value assigned.

ACCOUNTS PAYABLE

Risks The accounts payable listing may not be accurate There may be unrecorded accounts payable balances Accounts payable transactions may be processed in the wrong period

Steps1. Agree detailed accounts payable listing to summary

Obtain detailed accounts payable listing (aged by vendor, if possible) and perform the following:

a) trace totals from the detailed accounts payable listing to the totals of the summary;


b) select reconciling items in order to obtain a moderate to low level of assurance that accuracy is achieved. Trace the selected reconciling items to supporting documentation; and

d) where there are significant reconciling items, determine whether the results of the investigations have been reviewed and approved by a responsible official.

2. Test for unrecorded liabilities

Obtain a moderate to low level of assurance that completeness and cutoff are achieved for accounts payable by selecting all invoices above $xx and a sample of other invoice amounts from all accounts payable sources (i.e. the disbursement records, invoices received and recorded records, goods received not yet invoiced records and credits for returns) for the period after the balance sheet date up to the date of the completion of fieldwork. By reference to supporting documentation, determine whether the item has been properly included as a liability or properly excluded.

Documents

SAMPLE AUDIT PROGRAM