5Cs of Auditing PDF

5Cs of AUDITING  OBJECTIVE 1. Understand how to analyze issues and concerns through the principles of 5Cs. 2. Develop an organize thinking process using 5Cs. 3. Be able to document issues in a concise, easy to understand and clear manner.  The 5Cs CONDITION CAUSE CONSEQUENC C...

5Cs of AUDITING  OBJECTIVE 1. Understand how to analyze issues and concerns through the principles of 5Cs. 2. Develop an organize thinking process using 5Cs. 3. Be able to document issues in a concise, easy to understand and clear manner.  The 5Cs CONDITION CAUSE CONSEQUENC CRITERIA CORRECTIV E E ACTION CONDITION 5Ws and 1H W – hat is the issue W – ho are involved W – hen did it occur W – here was it identified W – hy do we consider it as a concern or issue H – ow did we find out CONDITION The Company does not perform bank reconciliation and only uses balances based on booked entries. CONDITION The Company does not perform bank reconciliation and only uses balances based on booked entries. WHAT is the issue? The Company cannot provide bank reconciliation to support that balances in their Cash in Bank account is based on the adjusted balances considering reconciling item. CONDITION The Company does not perform bank reconciliation and only uses balances based on booked entries. WHO are involved? Based on the discussion with the Company’s Accountant and the Finance Head, it has never been the practice of the Company to perform bank reconciliation since inception. They make use of the book balance for the year end financial statements and bank balances is used only to identify if they have available cash to payout bills and cash withdrawals. CONDITION The Company does not perform bank reconciliation and only uses balances based on booked entries. WHEN did it occur? Upon checking last year’s audit issues report/management letter comments, this has been a forgoing audit issue even with the prior years until present. CONDITION The Company does not perform bank reconciliation and only uses balances based on booked entries. WHERE can this be validated? It can be validated by looking into the Company’s balances per books, bank statements and upon requesting for bank reconciliation. CONDITION The Company does not perform bank reconciliation and only uses balances based on booked entries. WHY was this an issue/concern? Balances per Cash in Bank does not reflect the actual amounts of cash deposited in the bank because these checks are still in the custody of the Company and not the bank. CONDITION The Company does not perform bank reconciliation and only uses balances based on booked entries. HOW was this identified? It was identified upon checking that there were undeposited checks by the end of 2023 and was only deposited in the bank the next working day of 2024. Said amounts were recorded as part of Cash in Bank.  CONDITION It was identified upon checking that there were undeposited checks by the end of 2023 and was only deposited in the bank the next working day of 2024. Said amounts were recorded as part of Cash in Bank. The Company does not perform bank reconciliation and only uses balances based on booked entries. The Company cannot provide bank reconciliation to support that balances in their Cash in Bank account is based on the adjusted balances considering reconciling item. Based on the discussion with the Company’s Accountant and the Finance Head, it has never been the practice of the Company to perform bank reconciliation since inception.  CONDITION They make use of the book balance for the year end financial statements and bank balances is used only to identify if they have available cash to payout bills and cash withdrawals. Upon checking last year’s management letter comments, this has been a forgoing audit issue even with the prior years until present. It can be validated by looking into the Company’s balances per books, bank statements and upon requesting for bank reconciliation. Balances per Cash in Bank does not reflect the actual amounts of cash deposited in the bank because these checks are still in the custody of the Company and not the bank. CONDITION CAUSE CONSEQUENC CRITERIA CORRECTIV E E ACTION CAUSE What is the reason why this has occurred? Who are the people responsible? Do not settle for the cause, look for the root cause. Who are the people responsible? CAUSE The Company does not perform bank reconciliation and only uses balances based on booked entries. There is a shortage of staff and when the Company started, there were few transactions involved and most of them are on cash basis. By the time that the Company grew, the Management was unable to identify the need to improve the process and proceed with the old practice.  Who are the people responsible? CONDITION CAUSE CONSEQUENC CRITERIA CORRECTIV E E ACTION Who are the people responsible? CONSEQUENCE What is the impact of the issue? Internal risk External risk Financial impact Who are the people responsible? CONSEQUENCE The Company does not perform bank reconciliation and only uses balances based on booked entries. Possible overstatement or understatement of the Company’s Cash in Bank account Financial data can lead to wrong decision making e.g. purchase of capital assets thinking that the Company has sufficient cash to pay it Mislead 3rd party stakeholders such as creditors in thinking that the Company is liquid because the Managements representation in the FS  Who are the people responsible? CONDITION CAUSE CONSEQUENC CRITERIA CORRECTIV E E ACTION Who are the people responsible? CRITERIA What is the standard based on: Accounting standards Best practice Company policies Regulatory requirements Who are the people responsible? CRITERIA The Company does not perform bank reconciliation and only uses balances based on booked entries. Monthly bank reconciliation should be performed in order to provide reliable data for stakeholder’s regular decision making. Annual audited financial statements show reflect adjusted balances to provide reliable data to both external and internal stakeholders Reconciling items such as undeposited checks, deposited in transit, uncleared checks, bank credit memo etc. should be adjusted accordingly.  Who are the people responsible? CONDITION CAUSE CONSEQUENC CRITERIA CORRECTIV E E ACTION  Who are the people responsible? CORRECTIVE ACTION Should answer the following: What can be done to correct the issue? What specific steps should be undertaken to resolve the concern and move forward? What type of monitoring or review will occur after solutions has been implemented?  Who are the people responsible? CORRECTIVE ACTION The Company does not perform bank reconciliation and only uses balances based on booked entries. Reconcile balances as of the year ended December 31, 2023, and adjust the books accordingly Moving forward, perform regular monthly bank reconciliation to bring records to adjusted balances Finance Head to ensure to perform review of monthly financial statements including bank reconciliation  Who are the people responsible? USES OF THE 5Cs Analyzing and documenting audit procedures Identifying if the concern on hand is: An issue or not If an issue, it is audit issue or management letter comments Writing the Management Letter Who are the people responsible? GATHER ORGANIZE SIMPLIFY INFORMATI THOUGHTS THE IDEA ON Who are the people responsible?  Who are the people responsible? ACTIVITY Write-down possible 5Cs for the following Scenarios: 1. Upon auditing Company A’s Fixed Assets (FA) account, you noticed that there are a lot of FA have already zero carrying value but are still in the books. You inquired from the accountant the status of the Company’s fixed assets and she replied that they have not yet performed physical sighting of the existing assets.  Who are the people responsible? ACTIVITY 2. The Accounts Receivable balance per TB does not tie up with the Subsidiary Ledger accounts. There were unidentified Accounts Receivable amounting Php2 million pesos out of the Php3.5M AR balance.