Audit Procedures for Liabilities and Inventory

Auditor Procedures for Unrecorded Liabilities

• Obtain a listing of payments made after the balance sheet date up to the current date.
• Select payment items and obtain supporting documents.
• Review documents to determine the payment time period (based on service/shipment dates).
• Determine if the liability was properly recorded in the correct period.
• Review unpaid/open invoices during fieldwork for the same.

Inventory Costing Audit Procedures

• Obtain a detailed inventory listing and select a sample.
• Obtain original purchase documents to verify the cost of sampled inventory items.
• Recalculate average cost in inventory and compare to the cost shown on the inventory listing.
• Recalculate finished goods costs by assessing labor and overhead components.

Physical Inventory Count Procedures

• Scrutinize how client employees follow the inventory plan.
• Observe that each item is counted only once (if tagged, avoid double tagging).
• Ensure electronic count media, pre-numbered tags, or compilation sheets are properly controlled.
• Perform test counts and trace quantities to the final count (sheet-to-floor or floor-to-sheet).
• Look for empty containers or hollow squares (empty spaces) in stacked goods.
• Identify the last receiving/shipping documents and ensure received goods are segregated.
• Check for damaged/obsolete inventory and evaluate its general condition.
• Inquire about slow-moving inventory.
• Ensure consignment inventory is properly separated and marked.
• Count locations outside the entity or confirm with locations.
• Examine consignment contracts or agreements.

Bank Reconciliation Items and Testing

• Major items: outstanding checks, deposits in transit, cash receipts, and cash disbursements.
• Foot the reconciliation and outstanding check listing.
• Trace book balances to the general ledger.
• Obtain bank confirmation and trace the bank balance to the bank reconciliation.
• Obtain a cutoff bank statement and trace deposits, outstanding checks, and other reconciling items.

Relationship Between Cash, Revenue, and Purchases/Payables Audits

• Cash balances are affected by internal controls related to cash receipts and disbursements.
• Controls over cash receipts and disbursements are tested as part of revenue and purchasing process testing.
• Inventory is affected by internal controls related to purchases and revenue sales.
• Tracing documentation of transactions decreasing inventory balances (such as sales) verifies existence, valuation, and accuracy assertions.
• Helps determine if entries were recorded and entered at correct amounts.

Audit Considerations for Pending or Threatened Litigation

• Obtain information on the existence of uncertainties from litigation.
• Note the time period when the cause for legal action occurred.
• Determine the probability of an unfavorable outcome for the client.
• Estimate potential loss.

Subsequent Events in Financial Statement Audits

• Type 1 events: provide evidence of conditions that existed at the financial statement date (require adjustments to financial statements)
• Type 2 events: provide evidence of conditions that arose after the financial statement date (no adjustments).

Audit Report Modifications

• Scope limitations: insufficient evidence about something in financial statements (qualified opinion or disclaimer).
• Departures from GAAP: material effects on financial statements (qualified opinion or adverse opinion).
• Auditor independence issues: prohibited relationship with the entity (disclaimer).

Audit Report Sections (Private Company)

• Title (must include independent).
• Address.
• Opinion section.
• Basis for opinion paragraph.
• Management's responsibility paragraph.
• Signature.
• Date
• Key differences between public and private company audit reports:
  • Clean opinion for PCAOB is unqualified, ASB is unmodified.
  • ASB audit report is called "independent auditors report," PCAOB is not.
  • Critical audit matters are required for PCAOB (public) reports; but not always for ASB (private) reports (voluntary).

Audit Report Requirements

• To corroborate oral representations by management
• Serves as evidence (but cannot be the sole evidence for everything)
• Obtained at completion of the date
• Signed by the financial reporting head (CEO, CFO, audit committee chair)

This quiz covers essential audit procedures focusing on unrecorded liabilities and inventory costing. It includes steps for verifying payments, reviewing documents, and conducting physical inventory counts. Perfect for accounting students or professionals looking to enhance their understanding of audit processes.