basis of documentation

The purpose of this part of the audit process for Apollo Shoes is to design tests of controls, substantive tests of transactions, and analytical procedures for the sales, collection, payroll, personnel, acquisition, and payment cycles. These test and procedures are with intent to attest operating effectiveness of internal controls of Apollo Shoes on the basis of documentation provided. It is with the understanding that with the performing of test and procedures an opinion can be formed but management of Apollo shoes is responsible for the maintenance and assessment internal controls of over financial reporting.

The design of test of controls of the sales and collection cycle follows. Sales and Collection Cycle Tests of Controls Sales Cycle: The review of the revenue and collection cycle manual of Apollo Shoes provides the improper record keeping of sales orders and that sales orders are not numbered which may affect the accuracy of pricing on invoices so steps. The test of controls for sale cycle to determine accuracy will be: 1. Examine sample 1004345 for Anglonesia Rehabilitation and Reprogramming Institute invoice to review unit prices of merchandise listed.

Compare unit prices on invoice for merchandise to these shoe types from inventory status report of 2007. 3. Verify unit prices on invoices are correct. Collection Cycle: A review of balance confirmation from customers provides a customer of Apollo Shoes Neutralizer’s account balance was understated by $ 1,388. 75, which prompts testing of existence of collections. With that information, the test of controls of existence of collections will be: 1. Determine if bank reconciliation has been performed. . Request bank deposit slips and for end of year for 2007 and bank statement with information for deposit for end of year 2007. 3. Review accounts receivable aged trial balance. 4. Compare deposit amount listed on bank statement to deposit slips. 5. Review balance on reconciliation. 6. Compare payments customers indicate on balance confirmations to those listed on deposit slips for end of year 2007 and payments indicated on accounts receivable aged trial balance.

Verify the amounts of reconciliation, bank statement, deposit slips, and accounts receivable aged trial balance align. Substantive Tests of Transactions Sales Cycle: With the same rationale of attesting to accuracy of recorded sales with the test of controls notation of a customer indicating receipt of merchandise not requested, the steps of substantive test of transactions are: 1. Examine sample 1004345 for Anglonesia Rehabilitation Trace invoice back to shipping documents, sales and customer order. 2. Verify shipping amount is correct. . Verify if what is listed is sales order was shipped. 4. Verify if what listed on sales or is what Anglonesia Rehabilitation requested Collection Cycle: In regards to collections, the same rationale for test of controls proving existence with the basis of Neutralizer having an understated balance, the substantive test for collections would be: 1. Review cash receipts journal for the amount of the cash receipt indicated by customers. 2. Review bank statement for deposits indicated. 3. Review deposit slips for list of deposits. 4.

Verify amount customers indicate they payment is listed on deposit slips and are included on deposits listed on bank statement. Analytical Procedures Sales Cycle: From the basis of negative press that Larry Lancaster addresses in the letter to shareholders the assumption is that sales will decrease. The analytical procedures to confirm expectations for the sales cycle will be: 1. Review the sales trial balances from end of year 2006 and 2007. 2. Divide the sales trial balances for 2007 by the 2006 trial balance. 3. Determine the percentage change and if it is positive to confirm expectation.

Collection Cycle: From the same basis for the analytical procedure for the Sales cycle and questions of collectability from Mall-Wart, it is the expectation that AR will balance will be larger than last year so the analytical procedure will be: 1. Review audited balance of AR for 2006 and the unaudited balance of 2007. 2. Determine if the AR balance has increase as expected. Payroll and Personnel Cycle The payroll and personnel cycle have a high level of internal control to ensure that employees are paid accurately and on time.

This also ensures that the company files accurate and timely payroll returns with the government. Tests of Controls 1. Review time cards for hourly employees to ensure that the time clock was used to record all hours worked. 2. Review time cards for hourly employees to confirm that the supervisor has approved them. 3. Examine the last payroll or employees listing which supervisors checked and compare it with personnel files to confirm that all paid employees are current employees.

Review personnel files to confirm that all current pay rates have been properly authorized by supervisors and properly documented. . Review personnel files to confirm authorized pay rates match the paychecks from the last pay cycle. 6. Review personnel files for current and updated W-4 and I-9 forms. 7. Observe the segregation of duties in the payroll department and confirm that payroll forms are reviewed before checks are issued. 8. Confirm that the correct payroll forms are sent to accounts payable. 9. Confirm that there is a segregation of duties in the treasurer’s office. 10. Confirm with supervisors that all paychecks are distributed or turned back in to the treasurer’s office.

Verify that all paychecks are signed for when picked up or dispersed. 12. Confirm that all payroll checks are numbered and accounted for. 13. Review payroll tax liability accounts and ensure they are properly recorded. 14. Review payroll tax expense and tax liability accounts and confirm amounts against the quarterly payroll tax returns. 15. Review the bank statements for the payroll account to verify that deposits are transferred every two weeks and payroll checks are the only withdrawals. Substantive Tests of Transactions 1. Review the payroll journal for adjusting entries or unusual entries. . Compare cancelled checks against payroll journal and verify that the information matches and is correct.

Examine the endorsement on the cancelled checks to ensure that they were endorsed correctly. 4. Compare cancelled checks against the list of current employees. 5. Reconcile the distributions in the payroll journal with the checks cleared on the bank statement. 6. Confirm and review bank reconciliations for the payroll account. 7. Select 100 hourly employees and recomputed their hours worked from the time cards for three separate pay cycles.

Select 100 hourly employees and recomputed their gross pay based on their time cards for three separate pay cycles. 9. Select 200 employees and confirm that withholding amounts are accurate based on W-4 and current tax tables. 10. Use the same 200 employees in the previous test and recalculate net pay based on verified gross pay and withholding calculations. 11. Examine the payroll transactions to ensure that expenses are being allocated to the correct expense account. 12. Examine cleared check dates and compare them with the pay cycle pay dates.

Compare the payroll expense account balances with the previous year payroll expense account balance (adjust for increases in pay or new hires). 2. Compare direct labor costs as a percentage of sales and compare with prior years’ percentage. 3. Compare payroll tax expense as a percentage of salaries and wages with prior years’ percentage (adjust for increases in tax rates). 4. Compare accrued payroll tax accounts with prior years. 5. Compare accrued vacation, sick pay, and other benefits as a percentage of salaries and wages with prior years’ percentage (adjust for any policy changes and new hires). 6.

Verify accrued payroll taxes with the subsequent period’s payroll tax returns to determine the amount of the liability at the balance sheet date. Acquisition and Payment Cycle The acquisition of goods and services is important to ensure proper internal controls are in place and being followed because these include purchases of raw materials, equipment, supplies, maintenance, and research and development. In reviewing Apollo Shoes acquisition and payment cycles, and developing the audit plan, tests of controls must be reviewed, followed by substantive tests of transactions, and finally analytical procedures.

Tests of Controls 1. Complete a walk-through of five judgmentally selected receipts of inventory. a. Verify the procedures in the client’s memo by interviewing the workers. b. Is the segregation of duties still being observed? 2. Complete a walk-thorough of five judgmentally selected payments. c. Verify the procedures in the client’s memo by interviewing the workers. d. Is the segregation of duties still being observed? 3. In order to test if the process for authorizing payments is working, judgmentally select ten payments and check each for: e.

Is it canceled? f. Is the purchase requisition attached? g. Is the receiving report attached and showing the same quantity invoiced and ordered? h. Is the receiving report signed by the receiving clerk? i. Does the quantity paid and the price paid, match the invoice and the purchase requisition and purchase order? j. Did the vendor offer a cash discount? If so, was the discount taken? k. Was the invoice paid on time? 4. In order to test if the process for receiving goods is working, judgmentally select ten receipts from last month and check each for: l.

Was it supported by a valid purchase requisition and purchase order? m. Was the receipt signed by the receiving clerk? n. Was the quantity received the same as the quantity ordered? o. Was the shipment paid in the right quantity and prices (as ordered)? 5. In order to test if the process for purchasing capital assets is working, judgmentally select two capitalized assets from the general ledger and check each for: p. Was it authorized? q. Is the depreciation taken correct each month and started with asset being put into service? r. Observe the asset. 6.

Review any old receiving, requisition, or purchase orders that are not matched. Review any old invoices that are not matched. Inquire about their status. Substantive Tests of Transactions 1. Observe the client’s year-end inventory count. a. Judgmentally select ten count tags and make copy. b. Note any slow moving or damaged items. c. Resolve any differences between inventory records and counts. d. Get copy of full count when complete. 2. Verify count is recorded in the GL (and subsidiary ledger agrees with GL): e. Trace selected items from inventory count into general ledger detail.

Select several items from GL and trace to count sheet. g. Verify that slow-moving and damage inventory is valued at salvage estimates (odd sized shoes). h. Test foot (verify math) of inventory valuation. i. Test pricing of inventory by tracing to purchase invoice. j. Test cut-off by reviewing receipts two weeks before and after year-end and determine that they were recorded in the correct period and counted or excluded from inventory as appropriate. k. Review inventory adjustment for reasonableness based on differences found during count.

Review costing method (LIFO/FIFO) journal entries. l. Review reserves for obsolescence. 4. Review payments since year end that are over 10% of materiality. Verify that if they were incurred prior to year end that they are accrued in year-end payables. 5. Obtain a letter from legal counsel about contingent liabilities. 6. Read minutes of the board of directors for contingent liabilities or subsequent events. 7. Ask management about any incurred but not paid amounts. m. Review any old receiving, requisition, or purchase orders that are not matched with invoices.

Review any old invoices that are not matched with purchasing documentation. 8. Inquire about the status of the large shipment of odd sized shoes at year end. Was this paid? Analytical Procedures 1. Compare current transactions with previous year’s statements. a. Similar expenses should not have significant variances period to period. b. Any significant variances should be examined to determine the reason. 2. Accounts payable transactions should be reviewed to ensure no unusual vendors or companies received payment when they shouldn’t have.

Ratios should be calculated and compared from period to period. Any significant variances should be examined to determine the reason. c. Average Accounts Payable Trade Balance d. Accounts Payable Turnover e. Days in Accounts Payable 4. Compute inventory turnover and compare to prior years to see if trend is reasonable. 5. Compute a three year trend for inventory, payables, cost of goods sold, and operating expenses. 6. Calculate inventory and payables as a percent of assets and expenses as a percent of sales. f. Ask the client to explain fluctuations that are large or unusual.