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Friday, February 22, 2019

Management of a Public Accounting Firm

Professional Fees
 Methods of Billing
o Actual time charges or per diem basis
o Flat or fixed fee basis
o Maximum fee basis
o Retainers basis
 Out of pocket expenses
 Contingent fees
Organization of a CPA Firm
 Audit Partner
 Audit Manager/Supervisor
 In-Charge (Senior) Auditor
 Staff Auditor
Acquisition and Retention of Audit Clients
 Preliminary Considerations
o Identify potential client
o Evaluate relationship between auditor and potential client
o Evaluate auditability
o Evaluate management's integrity
o Prepare engagement letter
 Client continuance
o Lack of management integrity
o Difficulty in working with client personnel
o Inability to negotiate an acceptable increase in audit fee
o Client need for specialized services
Evaluate Management's Integrity
 Review financial statements
 Discuss the company's management with predecessor auditor
 Discuss the company's management with members of the financial community
 Consider engaging professional/investigators to evaluate the principals associated with the
prospective client.
 Obtain credit reports when deemed necessary.
Engagement Letter
 It is a formal written agreement between the CPA firm and the client for the conduct of the audit
and related services.
o Factors to consider when deciding to issue a separate audit letter in an audit of
components:
 Who appoints the auditor of the component
 Whether a separate audit report is to be issued on the component
 Legal requirements
 Extent of any work performed by other auditors
 Degree of ownership by parent
 Degree of independence of the corporate management
Role of Audit Committee
 Audit committee is a selected number of members of a company's board of directors whose
responsibilities include helping auditors remain independent of management through:
o Nominating the public accounting firm to perform the audit
o Review the plans for the audit with the auditor
o Oversee internal audit activities
o Discuss disagreements between management and the auditor
o Discuss major problems the auditor encounters
o Review financial statements and the auditor's report

Saturday, January 19, 2019

Audit of Inventories

The Use of Assertions in Obtaining Audit Evidence

Assertions about classes of transactions and events for the period under audit (COCAC):
 Completeness - all transactions and events that should have been recorded have been recorded.
 Occurrence - transactions and events that have been recorded have occurred and pertain to the
entity.
 Classification - transactions and events have been recorded in the proper accounts.
 Accuracy - amounts and other data relating to recorded transactions and events have been
recorded appropriately.
 Cutoff - transactions and events have been recorded in the correct accounting period
Assertions about account balances at the period end (RECV)
 Rights and Obligations - the entity holds or controls the rights to assets, and liabilities are the
obligations of the entity.
 Existence - assets, liabilities, and equity interests exist.
 Completeness - all assets, liabilities and equity interests that should have been recorded have
been recorded.
 Valuation and allocation - assets, liabilities, and equity interests are included in the financial
statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately
recorded. 
Assertions about presentation and disclosure (COCA)
 Completeness - all disclosures that should have been included in the financial statements have
been included.
 Occurrence and rights and obligations - disclosed events, transactions, and other matters have
occurred and pertain to the entity.
 Classification and understandability - financial information is appropriately presented and
disclosures are clearly expressed.
 Accuracy and valuation - financial and other information are disclosed fairly and at appropriate
amounts.
Internal Control Measures
1. Authority and responsibility for controlling inventories should be centralized management and in
one person.
2. There should be careful selection of inventory personnel and intensive training of such personnel
in policies, objectives and system of inventory control.
3. Adequate physical facilities for handling and storage of inventory should be provided.
4. Adequate system of procedures, forms and reports related to the management of inventories
should be developed and implemented.
5. Quantitative controls through perpetual inventory records; book quantities verified with physical
counts at least once a year and differences being investigated, promptly adjusted and reported to higher
authority should be implemented.
6. Deliveries of materials, finished stock and merchandise should be made only upon specific
authorizations emanating at authorized levels.
7. Slow-moving, obsolete and damaged stock should be identified and reported following periodic
reviews of physical and book records by qualified employees. Valuation on the basis of approved cost-
mark-down methods should be reviewed.
8. Safeguards against that action of the element and inaccuracies in recording receipts and issues
should be adopted. Example - maintaining adequate insurance coverage.
Substantive Audit of Inventories

Inventory Balances

Existence: Recorded inventory exist

1. Before the client takes the physical inventory, review and approve the client's written plan for
taking it.
2. Observe the client personnel physically counting inventory.
3. Confirm inventories on consignment and held in public warehouses.
Completeness: All inventory of the entity recorded
1. Obtain a copy of prenumbered inventory tags used by the client in taking inventory and reconcile
the tags to the listing.
2. For selected items, trace from tags to listing.
3. Perform cutoff procedures. Obtain the receiving report number for the last shipment received prior
to year-end and determine that the item is included in inventory. Also, identify the last shipping document
and determine, based on shipping terms, whether the item was properly recorded in sales or inventory.
4. Perform analytical procedures.
Rights and obligations: Inventory is owned by the entity
1. Determine that consigned inventory has been excluded from inventory and that inventory pledged
has been properly disclosed. Examine confirmations from financial institutions and read minutes of the
board of director's meetings.
Valuation and allocation: Recorded inventory is valued in accordance with GAAP
1. Considering the method the client uses for inventory valuation, examine invoices for inventory on
hand or trace prior year's inventory listing to verify cost.
2. For selected items, determine net realizable value (NRV) of the inventory and apply the lower of
cost or NRV.
3. Verify computations in the inventory listing.
4. Review the obsolescence of the inventory by:
1. being alert while observing inventory being taken for damaged, slow-moving, or scrap
inventory.
2. scanning perpetual records for slow-moving items and discussing their valuation with
client.
Presentation and disclosure: Inventory is classified and disclosed in accordance with GAAP
1. Determine whether accounts are classified and disclosed in the financial statements in
accordance with GAAP.
Purchases

Completeness: Purchases that occurred are recorded

Trace a sequence of receiving reports to entries in the voucher register. Test cutoff. Account for a
sequence of entries in the voucher register.

Occurrence: Recorded purchases are for items that were acquired

Examine underlying documents for authenticity and reasonableness. Scan voucher register for large or
unusual items. Trace inventory purchased to perpetual records. Scan voucher register for duplicate
payments.

Classification: Purchase transactions have been recorded in the proper accounts

For a sample of entries in the purchases journal, verify the accuracy of account coding.

Accuracy (Valuation): Purchases are recorded proper amounts

Recompute invoices and compare invoice price to purchase order.

Production

Completeness: All production transactions that occurred are recorded

Account for a sequence for production reports.

Occurrence: Recorded production transactions occurred

For selected transactions, examine signed materials requisitions, approved labor tickets, and allocation of
overhead.

Classification: Production transactions have been recorded in the proper accounts

For a sample of entries, verify the accuracy of account coding.

Accuracy (Valuation): Production transactions are recorded at proper amounts

Test cost records by tracing to underlying documents, such as bill of materials, labor tickets, authorized
labor rates, and standard overhead rates. Review variances.

Sunday, January 13, 2019

Audit Sampling
Risks in Sampling

 Sampling Risk
o Alpha Risk: affects EFFICIENCY
 Test of Control: Risk of underreliance
 Substantive Test: Risk of incorrect rejection
o Beta Risk: affects EFFECTIVENESS
 Test of Control: Risk of overreliance
 Substantive Test: Risk of incorrect acceptance
 Non-sampling Risk
o Human errors
Controlling the Risks
 Sampling Risk
o Increasing the sample size
o Using an appropriate sample selection method
 Non-sampling Risk
o Proper planning
o Adequate direction, review, and supervision of the audit team
General Approaches to Audit Sampling
 Statistical Sampling
o Uses random-based selection of sample
o Uses the law of probability to measure sampling risk and evaluate sample results
 Non-statistical/Judgment Sampling
o Purely uses auditor's judgment in estimating sampling risks, determining sample size,
and evaluating sample results.
 Both
o Are acceptable
o Require use of auditor's judgment
o Can not assure that the sample will be representative of the population
 Difference
o Statistical sampling allows the auditor to MEASURE OR QUANTIFY the sampling risks
with the use of mathematical formula. Thus, statistical sampling helps the auditor to:
 Design an efficient sample
 Measure the sufficiency of evidence obtained
 Objectively evaluate the sample results
Costs associated with sampling
 Training audit staff
 Designing sampling plans
 Selecting items for examination
Audit Sampling Plans
 Attribute Sampling
o Used to estimate frequency of occurrence of a certain characteristic (occurrence rate).
o Generally used for TESTS OF CONTROLS to estimate the rate of deviation
 Variable Sampling
o Used to estimate a numerical measurement of a population such as peso value
o Generally used in SUBSTANTIVE TESTS to estimate the amount of misstatements
Basic Steps in Audit Sampling
1. Define the Objective
2. Determine the Procedure
3. Determine the Sample Size
4. Select the Sample
5. Apply the Procedures
6. Evaluate the Results
Basic Steps in Audit Sampling Illustrated

Define the Objective

 When auditing accounts receivable, the auditor's objective could be:
o To determine whether accounts receivable balances exists as of the balance sheet date
(i.e., EXISTENCE)
Determine the Procedure
 Objective: Existence of Accounts Receivable
 Procedure: Sending confirmation letter
 Population: Customers' account balances as of Balance Sheet date
 Characteristic to be tested: Monetary amount of misstatement
Determine the Sample Size
 Objective: Existence of Accounts Receivable
 Procedure: Sending confirmation letter
 Sample Size: The auditor may decide to examine only 100 out of the total 5,000 customers'
accounts
Select the Sample
 Objective: Existence of Accounts Receivable
 Procedure: Sending confirmation letter
 Sample Size: The auditor may decide to examine only 100 out of the total 5,000 customers'
accounts
 Sample selection technique: Computer software that generates random numbers that match with
customer numbering system.
Apply the Procedures
 Objective: Existence of Accounts Receivable
 Procedure: Sending confirmation letter
 Sample Size: The auditor may decide to examine only 100 out of the total 5,000 customers'
accounts
 Sample selection technique: Computer software that generates random numbers that match with
customer numbering system
 Applying the procedure: The auditor sends confirmation letter to the customers selected to
determine accuracy of the recorded account balances
Evaluate the Results
 Objective: Existence of Accounts Receivable
 Procedure: Sending confirmation letter
 Sample Size: The auditor may decide to examine only 100 out of the total 5,000 customers'
accounts
 Sample selection technique: Computer software that generates random numbers that match with
customer numbering system
 Applying the procedure: The auditor sends confirmation letter to the customers selected to
determine the accuracy of the recorded account balances
 Evaluation: The auditor will have to summarize the customers' confirmation replies and decide
whether the account balances are materially misstated or whether additional audit procedures need to be
performed
Sampling for Tests of Control

Determination of Sample Size

 Factors to consider:
o Acceptable sampling risk
 INVERSE relationship with sample size.
o Tolerable deviation rate
 Maximum rate of deviations the auditor is willing to accept
 INVERSE relationship with sample size
o Expected deviation rate
 Rate of deviations the auditor expects to find in the population before testing
begins
 DIRECT relationship with sample size
Sample Selection Method
 Principal methods:
o Random number selection
o Systematic selection
o Haphazard selection
 Voided documents
o If properly voided, replace
 Missing documents
o If unable to determine whether control has been properly performed, consider as
DEVIATION
Evaluation of results
 Determine the sample deviation rate
o Divide the number of deviations found in the sample by the sample size
 e.g., if there are 4 deviations out of the 200 sample items, then: 4/200=2%
 Compare the sample deviation rate with the tolerable deviation rate and draw an overall
conclusion about the population
o Sample deviation rate>Tolerable deviation rate
 Control risk will be assessed at a high level and more extensive substantive tests
should be performed
o Sample deviation rate<Tolerable deviation rate
 Auditor should consider allowance for sampling risk
 Determine how close the sample deviation rate is to the tolerable deviation rate.
As the sample deviation rate approaches the tolerable deviation rate, the allowance for sampling risk
decreases
 If sample deviation rate is considerably lower (i.e., 2% vs 10%)
 If sample deviation rate is barely lower (i.e., 8% vs 10%), there is a high
possibility that actual deviation rate will EXCEED tolerable deviation rate
 If non-statistical, auditor will most likely conclude that sample
results do not justify his preliminary assessment of control risk
 If statistical, the auditor determines the maximum population
deviation rate. If maximum population deviation rate is greater than the tolerable rate, the sample results
do not support auditor's preliminary assessment of control risk thus increase scope of substantive tests
Other sampling applications for tests of controls
 Sequential Sampling
o Used as an alternative form of testing controls when an auditor expects very few
deviations within the population
o Does not use fixed sample size
o "Stop-or-go" sampling
 Discovery Sampling
o Most appropriate when no deviations are expected
o Normally used when auditor suspects irregularity
o Auditor determines sample size sufficient to discover at least one deviation to confirm
whether an irregularity has occurred
Sampling for Substantive Tests

Determination of Sample Size

 Factors to consider
o Acceptable sampling risk
 Consider the components of audit risk
 Generally, the acceptable level of Detection Risk is the acceptable sampling risk
after giving adequate consideration to the risk that the analytical procedures may fail to detect material
misstatements in an account balance
 INVERSE relationship with sample size
o
o Tolerable misstatement
 INVERSE relationship with sample size
o Expected misstatement
 DIRECT relationship with sample size
o Variation in the population
 Measured by standard deviation
 The more variable, the larger the sample size
Sample Selection Method

 Random number selection, systematic, haphazard
 Stratified Sampling
o Decreases the effect of variance
o Allows more emphasis to those items with higher monetary values
 Value Weighted Selection
o Probability of an item to be selected is directly proportional to the monetary value of such
item
Evaluating the results
 Project the misstatements to the population
o RATIO ESTIMATION
 Uses book values of the population size and sample size to project misstatement
o DIFFERENCE ESTIMATION
 Uses number of, for instance, customers to project misstatements to the
population
 Compare the projected misstatements together with tolerable misstatements and draw an overall
conclusion
o If Projected Misstatements>Tolerable Misstatements, materially misstated. The auditor
may:
 Examine additional units
 Perform suitable alternative procedures
 Request client to adjust account balance
o If Projected Misstatements<Tolerable Misstatements, consider allowance for sampling
risk
 Illustration:

o Using ratio estimation:

 P48,000 x (P10,000,000/P1,000,000) = P480,000
o Using difference estimation:
 P48,000 x (200 customers/24 customers) = P400,000
Summary of Essential Audit Sampling Steps
Sunday, May 6, 2018

Audit Procedures
Scope of an audit

Refers to the audit procedures deemed necessary in the circumstances to achieve the objective of an
audit.

Audit Procedures

Are the methods or acts that auditors use to gather evidence to determine the validity of the FS
assertions.
Examples are:

Audit Procedure Description

Inspection / Examination of Consists of examining records, documents, or tangible assets.
Documents
Consists of examining Consists of looking at a process/procedure being performed by
records, documents, or others.
tangible assets.
Inquiry and Confirmation Inquiry – seeking information of knowledgeable persons
Confirmation – consists of the response to an inquiry to
corroborate information contained in the accounting records.
Computation / Computation – checking the mathematical accuracy of source
Reperformance documents and accounting records or performing independent
calculation.
Reperformance – repeating a client activity
Tracing Involves establishing completeness of transaction processing by
following through accounting records.
From documents to records.
Reconciliation Involves establishing agreements between 2 sets of
independently maintained but related records.

Vouching Involves following a transaction back to supporting documents

from a subsequent processing step (also referred to as “tracing
back”). Establishes existence or occurrence.
From records to documents.
Analytical procedures Consists of comparing relationships between data to determine
reasonableness of recorded amounts.

Relationship of Audit Techniques, Audit Procedures, and Assertions

Audit Techniques are the basic tools or means employed to obtain audit evidences.

Audit Technique Illustrative Application Assertion Substantiated

Count Counting of inventory, cash PHYSICAL EXISTENCE.
securities, unmatured To establish existence and,
promissory notes. where applicable, ownership
and condition of assets.
Confirm Obtaining confirmation EXISTENCE, RIGHTS AND
directly of details of account OBLIGATIONS.
balances. To verify validity and
accuracy of balances & other
 information with outside
parties.
Inquire Obtaining client’s COMPLETENESS.
representation letter; To obtain knowledge.
explanation to many diverse
questions raised during the
audit.
Examine / Inspect / Review / Examining (or vouching) OCCURRENCE,
Trace / Verify / Vouch paid checks, vendors’ MEASUREMENT.
invoices, approved client To verify the validity and
documents, titles, contracts, propriety of accounting
and other documentary treatment & internal control
materials. compliance.
Observe / Test / Verify Observing the taking of EXISTENCE.
physical inventories by client To determine compliance
personnel; of actual operation with prescribed procedures.
of internal control.
Extend / Foot Rechecking clerical MEASUREMENT.
determinations by client. To verify the accuracy of
computations and transfer of
information made by client.
Compare / Trace Comparing current period COMPLETENESS.
account balances or operating To disclose and determine the
data with similar information reasons for significant
for prior periods and changes.
investigation of unusual data
relationship.
Analytical review Compare sales with sales COMPLETENESS.
budget.

Types of Audit Tests

Classification according to purpose:

 Compliance Tests
o Tests done to provide reasonable assurance that accounting control procedures are
being applied as prescribed.
o PURPOSE: To see whether prescribed accounting control procedures are being
followed. This identifies the control procedures that can be relied upon.
 Substantive Tests
o Tests done to obtain evidence of the validity and propriety of the accounting treatment of
transactions and balances, or, conversely, of errors or irregularities therein.
o PURPOSE: To see whether the peso amount of an account is properly stated.
Compliance Tests

Types:
 No Trail
o Does not leave a visible trail in the supporting documents of the performance of control
procedure by the client’s employees. The auditor makes inquiries and observations to determine how
control procedures are performed and who performs them.
 Documentary Trail
o Leaves a visible trail in the supporting documents.  The auditor inspects documents
supporting a particular type of transaction to see whether a control procedure was performed and who
performed it.
Substantive Tests

General Categories:
 Tests of Details of Transactions or Balances
o Involves obtaining evidential matter on the items (or details) involved in an account
balance or class of transactions.  They are also referred to as:
 TESTS OF TRANSACTIONS
 Tests of the processing of the individual transactions by inspection of
documents and accounting records involved in processing.
 TESTS OF BALANCES
 Tests applied directly to details of balances in general ledger accounts. 
They establish the monetary correctness of the accounts they relate to.
 Analytical Review Procedures
o Involve study and comparison of relationships among accounting data and related
information.  They identify unusual fluctuations for investigation and focus on the rationale of the
relationship.
Are compliance tests and tests of controls the same?

Tests of Controls

Necessary in the following circumstances:

 To support the risk assessment
 When substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.
When control risk is assessed at the
 maximum: use SUBSTANTIVE APPROACH
 Less than maximum: RELIANCE APPROACH
Sample Tests of Controls – Credit Sales

Control Activity Example Tests of Controls

Performance Reviews Comparing actual sales Inspect reports, inquiry
activity to budget.
Information Processing Sales made on account are Inspect sales orders.
(Authorization) authorized.
Information Processing Sales are recorded using Inspect sales invoices.
 (Documents) prenumbered sales
invoices.
Information Processing Sales invoices are Inspect sales invoice,
(Independent Checks) mathematically verified. reperform.
Physical Controls Inventory is kept in a Observation, Inquiry
physically secure location
with restricted access.
Segregation of Duties Authorization, Observation, Inquiry
recordkeeping, &
custodianship are
segregated.

Methods to test controls

 Inspection of documents
o Ascertain proper transaction approvals, reviews, and account distribution. 
 Inquiries of client personnel and observation of client activities
o Auditor to ask open questions and look out for incomplete answers.
 Reperformance of internal controls
o Can provide evidence that the theoretical design of the control is effective.
Evaluating the planned substantive tests

Situation Course of Action

Final control risk is less The auditor would reduce the
than planned control risk. planned effectiveness of
substantive tests.
Final control risk is equal The auditor would not modify the
to planned control risk. planned effectiveness of
substantive tests.
Final control risk is greater The auditor would need to
than planned control risk. increase the planned effectiveness
of substantive tests.

Substantive Tests
 Are audit procedures performed to detect material misstatements at the assertion level.
 “Tests of Assertions”
 Include:
o Tests of details
o Substantive analytical procedures
FS assertions and Level of aggregation
 Completeness Validity Accuracy

Financial All valid account All account balances included All valid account
statement balances are in the FS item (i) do exist and balances included in
item level included in the FS (ii) do pertain to the entity. the FS item are
item. accurate as to (i)
valuation and (ii)
presentation and
disclosure.
Account All valid assets, Balance sheet account balances: All valid assets,
balance liabilities,equities, All assets, liabilities, and liabilities, equities,
level revenues & expenses equities included in the account revenues, and
are included in the balance (i) do exist, and (ii) are expenses included in
account balance. owned (controlled) by, or owed the account balance
by the entity as at balance sheet are accurate as to (i)
date.  valuation, and (ii)
presentation and
Income statement account disclosure.
balances:All income and
expenses included in the
account balance (i) do pertain to
the entity and (ii) have occurred
during the relevant period.
Class of All valid economic All economic events included in All valid economic
transaction events are included the class (i) do pertain to the events included in the
level in the class of entity, and (ii) have occurred class are accurate as
transaction. during the relevant period. to (i) value and (ii)
description.

Detection Risk and Substantive Procedures

As the acceptable level of detection risk decreases, the assurance directly provided from substantive
tests increases. Thus, the auditor should design more effective audit procedures in order to achieve the
desired level of assurance.

Validity, Completeness, Accuracy

 Validity
o Existence or occurrence 
o VOUCHING
 Top down approach
 Completeness
o Completeness
o TRACING
 Bottom up approach
 Accuracy
o Either tracing or vouching
Types of Substantive Tests
 Substantive analytical procedures
o Often applied to accounts in the income statement
o Particularly useful for testing estimates based on future events.
 Tests of details of transactions
o Performed to test whether individual transactions have been correctly recorded.
 Tests of details of account balances
o Performed to directly test whether a specific account is correctly stated in total.
Common types of substantive tests of details of transactions & balances

 Observation and inquiry

 Reperformance and recalculation
 Confirmation
o Receivables confirmation are of two types:
 Positive
 Customers respond irrespective of whether they agree or disagree
 Negative 
 Customers only respond when they disagree
 More appropriate under the following circumstances:
 Assessed level of material misstatement is lower
 Large number of small balances is involved
 Substantial number of errors is not expected
 Auditor has no reason to believe that respondents will disregard
these requests
 Physical examination
 Examination of documentary evidence
 Reconciliation
 Cut off tests
General points to remember:
1. Confirmation letters should be printed on the client’s letterhead, or facsimile, and signed by the
client officer
2. Auditors should be very careful that the recipient’s address is reliable and not subject to alteration
by the client in such a way as to misdirect the confirmation.
3. The request should seek information the recipient can supply, like the amount of a balance or the
amounts specified in invoices or notes.
4. Confirmations should be controlled by the audit firm, not given to client personnel for mailing.
5. Responses should be returned directly to the audit firm, not the client.
Summary of Substantive Testing Procedures

Substantive Test Competence Assertion (s) Example

Physical observation Direct evidence EO (all accounts), Cash count
RO, CO, VA
(some accounts)
 Examining documents: Varies, depending CO, VA Trace the checks returned
on the source with the bank statement to
a. Tracing EO, RA, VA the client’s bank
Varies, depending reconciliation.
b. Vouching on the source
Vouch from deposits listed
on the client’s bank recon to
deposit slips.
Confirmation Evidence received EO (all accounts), Confirm cash balance on
directly from RO, CO, VA deposit with bank.
external parties (some accounts)
Analytical procedures Direct evidence EO, RO, CO, VA Compare recorded cash
balance to budgeted cash
balances.
Recalculation Direct evidence VA Mathematically verify the
client’s bank reconciliation
Comparison Direct evidence VA Compare total from bank
reconciliation schedule of
cash balances.
Oral inquiry Evidence obtained PD (All accounts), Inquire about existence of
from the client. VA (some compensating balances
accounts) related to cash.

Substantive Analytical Procedures

Factors to consider:
 The suitability of using substantive analytical procedures given the assertions
 The reliability of the data, whether internal or external, from which the expectation of recorded
amounts or ratios are developed
 Whether the expectation is sufficiently precise to identify a material misstatement at the desired
level of assurance
 The amount of any difference of recorded amounts from expected values that is acceptable.

Elements / Steps:
1. Developing an expectation of the recorded amount.
2. Determining the amount of variation between the expectation and the recorded amount that is
acceptable without explanation (“threshold”).  If the difference is material, the auditor makes inquiries of
management and obtains corroborative evidence.
3. Investigation variations that cannot be accepted without explanation. If explanation or
corroborative evidence is not adequate, the auditor should conduct other audit procedures.
Sample Analytical Procedures

1. Reasonableness test
2. Scanning
3. Review
4. Regression Analysis
5. Roll forward procedures
6. Cut-off tests
7. Review of movements
8. Scanning
9. Review reconciliations
10. Ratio Analysis
11. Common size analysis
Examples of Ratios Used

Ratio Formula Audit Significance

Current Ratio CA / CL A significant increase in current ratio compared to

prior year’s experience may indicate a
completeness problem. However, this ratio may be
influenced by changes in asset accounts.
A/ P Turn Days 365 days / AP Prior experience in AP Turn Days combined with
Turnover knowledge of current purchases can be used in
estimating current payables. A shortening of the
period may indicate completeness problems.
Inventory Growth ((Invtyn/ Invtyn-1)-1) / Ratios larger than 1.0 indicate that inventories are
to Cost of Sales ((Cost of salesn / growing faster than sales. Large ratios may
Growth Cost of salesn-1)-1) indicate possible inventory obsolescence
problems.
Fixed Asset Net Sales / Average An unexpected increase in fixed asset turnover
Turnover Fixed assets may indicate the failure to record or capitalize
depreciable assets.
Free Cash Flow Cash flow from Negative free cash flows indicate the need for
operations less expected financing to prevent drawing down on
Capital expenditures cash investments.
END