CAEA 3228 ADVANCED AUDITING

AUDITING THE INCOME STATEMENT & BALANCE SHEET ITEMSCAEA 3228 ADVANCED AUDITING

Auditing Income Statement Items

Substantive test for revenueSubstantive test for purchasesSubstantive procedures for payrollPrepayment and prepaid expenses

Substantive test for revenueInquire of management or review documentation obtained previously on: the nature of the clients business and industry and the factors that affect operationsany major changes during the period. obtain an understanding of the clients revenue recognition policies and determine that they are in accordance with GAAP. evaluate, changes in revenue recognition policies and significant, unusual, and complex transactions occurring at or near year end.Practical considerations auditor as a business expertunderstand the business and how it makes money. how management views its approach to making a bottom-line profit. understanding normally should include:The types of products and services sold.Whether the clients business is seasonal or cyclical.Client policies related to sales returns, discounts, extension of credit, delivery, and payment terms.What personnel are involved in processes affecting revenues (such as order entry, extension of credit, and shipping).

Practical considerations revenue recognitionunderstanding how controls over revenue transactions may be overridden and what the clients motivation to misstate revenue may be.conditions that may indicate improper revenue recognition practices and require special consideration

Auditing specific selected expense accountsBasis of selection - accounts that are sensitive or subject to unusual risk:select specific individual large disbursements and examine the documents supporting such transactions. repairs and maintenance, legal fees, consulting fees, and similar accounts, and any other expenses that should be vouched because the auditor, or his firm, has tax return preparation responsibility.Explain the nature and reason for any expense amounts that lack the proper support.Determine that the amounts tested are properly classified and recorded in the correct general ledger account.Document the items tested.A common form of fraudulent financial reporting:charge fixed asset additions to repairs and maintenance or some other expense account to reduce income taxes. If identified, consideration should be given to testing material repair and maintenance transactions to determine if amounts should be capitalized as fixed assets.

Procedures for payroll (if significant)Review the with management and determine the key factors related to payroll Determine the total employees by type or class from a review of the payroll records. Identify the normal rate of pay for employees at various levels. Design and document a predictive test of the total compensation expense recorded and compare the results with the salary expense in the general ledger. Document explanations for significant or unusual differences.

Finally.Consider whether the results of audit procedures indicate reportable conditions in internal control and, if so, add to the memo of points for the communication of reportable conditions. Conclude: We have performed procedures sufficient to achieve the audit objectives for the income statement, and the results of these procedures are adequately documented in the accompanying working papers. Otherwise: (If you are unable to conclude on any objective) prepare a memo documenting your reasons.Substantive audit procedures for cashSubstantive audit procedures for PPEAuditing long term liabilitiesAuditing dividend and share capital accountAuditing reserves and retained profits

Auditing Balance Sheet ItemsOverall ObjectivesProvide an understanding of the balance sheet accountsProvide an understanding of the relationships between balance sheet and income statement accountsExplain audit techniques for certain balance sheet accountsExplain the use of analytical procedures in auditing

Cash (cont)Standard Audit ProceduresTrace amounts to reconciliations/support and to the general ledgerTest bank reconciliations for cash in bankAgree to bank statementTest reconciling itemsOutstanding ChecksDeposits in transitAccounting errorsAgree cash on hand to cage accountability documentation and underlying supportAgree hopper load and chip/token balances to count sheets Clearing AccountsTypically used to estimate revenue as all amounts are not counted each nightClearing accounts should clear the following day or next count, as the true revenue/cash numbers are availableAgree the clearing account estimate to the supporting calculation and then the adjusting entry to the actual count documentation

Cash (cont)Additional ProceduresDiscuss any restrictions with managementReview bank agreements for restrictionsConfirm balances with the bank (primarily performed by external audit firmsAccounts ReceivableStandard Audit ProceduresTrace amounts to reconciliations/support and to the general ledgerReview A/R aged detail trial balances for large/unusual balancesTypically we would review casino and hotel receivables based on materialityWhat is large/unusual?Discuss and document any large balances, as defined by materiality, that are over 180 days old with managementTest the aging of the trial balance by selecting a sample of accounts receivables and tracing them to the original invoice/marker to ensure the aging is accurate in the trial balanceReview the allowance for doubtful accounts support and calculations Again, typically for hotel and casino, based on materialityEnsure the schedules agree to the aged trial balances and the g/lRecalculate the schedules on a scope basisDiscuss any changes in the schedules/calculations since the previous audit with managementDiscuss and document any known collectibility issues with management.

Accounts Receivable (cont)Additional ProceduresVouching subsequent receiptsConfirmation of receivable balancesWhy is this difficult in the casino industry?

InventoryStandard Audit ProceduresTrace amounts to reconciliations/support and to the general ledgerReview the inventory system support for the material inventory accounts and ensure the balances agree to the inventory balanceTypically F&B and RetailDiscuss the accounting methodology for the PAR values of material inventory accounts, ensure the property follows corporate accounting policy and obtain detail support for the amountsReview the detail of Other Inventory if material and review invoice/payment support of any material items

Inventory (cont)Observation of inventorySample countingUpstream/downstream testingPrice TestingFIFO, LIFO

Prepaid AssetsStandard Audit ProceduresWhat is a prepaid asset?A prepaid asset is when the company pays for something in advance of incurring the expenseWhat are some examples?Prepaid property taxes, prepaid gaming taxes, prepaid rentTrace amounts to reconciliations/support and to the general ledger Review a detail of all material prepaid accounts Obtain the detail invoice and payment support for a sample of the items and agree to the scheduleRecalculate the amount that is prepaid and agree to the schedule

Other Current AssetsStandard Audit ProceduresWhat are some examples?Deposits (due within one year)Review a detail of all material other asset accounts Trace amounts to reconciliations/support and to the general ledgerObtain the detail invoice and payment support for a sample of the items and agree to the scheduleEnsure the amount is current or will be utilized within one year.

Property, Plant and EquipmentStandard Audit ProceduresReview the roll forward of PP&E and Accumulated Depreciation from beginning of year to current audit date.Ensure the amounts tie to the g/l as of the previous year end and the amounts agree to the current g/l.Review the support for any retirement/sales of assets over a defined dollar limit. Agree the support to the fixed asset ledger and the recalculate the gain/loss and agree to the income statement.Agree change in depreciation to the depreciation expense line item.Perform a reasonableness test on the depreciation expense.Test of average amounts, average depreciable lives, ratio of depreciation to fixed asset balance.

Property, Plant and Equipment (cont)Standard Audit ProceduresObtain a listing of asset additions from the beginning of the year to the current audit date.Ensure the amounts tie to the rollforward.Test the invoice/support and payment support for all additions over a defined scope.Ensure the amounts are properly capitalizable and are capitalized in the correct period.Review the Detail Fixed Assets listing for any unusual amounts.Review a sample of asset descriptions from the listing and ensure the asset is properly classified and the depreciable life is consistent with policy.Other Long-Term AssetsStandard Audit ProceduresWhat are some examples?Deferred Charges, Chips/Tokens, Goodwill, Customer Lists, Other Intangible AssetsObtain the detail listing of these assets and test any material items.Trace amounts to reconciliations/support and to the general ledgerReview the invoice/support and the payment support for any items above the defined dollar level.Ensure they still have value

Accounts Payable/AccrualsStandard Audit ProceduresTrace amounts to reconciliations/support and to the general ledger.Review the Aged Accounts Payable Trial Balance for unusual/large balances.What is large/unusual?

Accounts Payable/Accruals (cont)Obtain the check registers for all bank accounts from which A/P checks are written from the day after the balance sheet date you are auditing through the date of your fieldwork.Request and review the invoices and check copies (if available) for all checks over the predetermined dollar amountEnsure the expenses/assets were incurred/purchased and recorded in the proper periodFor all items relating to the period before the balance sheet date, the items should be in A/P or accruals, and therefore you can trace to those accounts.For all items relating to the period subsequent to the balance sheet date, the items should not be included in A/P or accruals, so ensure the amounts are not listed

Accounts Payable/Accruals (cont)Obtain a detail of all material accrualsTypically the material accruals will be payroll and the related taxes, medical insurance, insurance claims, accrued taxes (other than payroll), accrued legal, chip/token liability, accrued player pointsRequest support/calculations and review for reasonableness/accuracy.Review the trends for the accruals for spikes or valleys which could indicate issues.

Intercompany and Equity AccountsTypically the audit team will ensure intercompany accounts eliminate in consolidation and review the process for the posting and reconciliation of intercompany accounts.Audit procedures for equity accounts include confirmation of balances, rollforward of equity, reviewing equity issuance documents and the recalculation/verification of other comprehensive income.

ReconciliationsReview reconciliations for balance sheet accounts over a predetermined dollar amount.Agree the balances to both the detail and the general ledger.Test/verify any reconciling items over a predetermined dollar amount.Ensure the adjustments are posted timely.Ensure there are not significant unreconciled amounts listed in the reconciliation.

Thank you for your attentionDr. Noor Adwa Sulaiman

Room A1-10,

Consultation Hours:Monday (23pm) and by appointment

Email: nooradwa.sulaiman@gmail.com