Endunamoo BCTA Support Course (BCTA2018)

Transcription

1 Endunamoo BCTA Support Course (BCTA2018) AUE3702: Formulating Substantive Procedures: Cycles Khanyisile Mthethwa

2 Introduction

3 The Code of Professional Conduct, By-Laws and rules regarding improper conduct King IV The Auditing Profession Act (IRBA) The Companies Act (2008) The Audit Process Preliminary engagement activities Planning Establish overall audit strategy Develop an audit plan Obtain audit evidence (the auditor s response to assessed risk) Perform tests of control Perform substantive procedures Evaluation, concluding and reporting 3

4 Acquisition & Payments Cycle

5 Recap An audit (substantive) procedure should address the following: How: Applicable verb What: Source of evidence (Document) Why: Reason for the audit procedure which should address an assertion 5

6 Acquisition & Payments Cycle Goods and services are acquired by a business for resale or for manufacture of a product, so the consequences of a poor acquisition cycle will have a negative effect on the business Basic Functions of any acquisitions and payment cycle Ordering of goods Receiving of goods Recording of purchases (acquisition) Payment preparation Actual payment and recording of the payment 6

7 Acquisition & Payments Cycle Documentation used in the cycle includes: Requisition Purchase order form Suppliers delivery note Goods received note Purchase invoice Credit note Creditors Statements Remittance Advice 7

8 Acquisition & Payments Cycle Types of accounts found in this cycle ad their respective assertions 1. Purchases (Income Statement Account) Occurrence: Purchases has occurred and it pertains to that entity Accuracy: The Amount of the purchase has been recorded appropriately Cut-off: The purchase has been recorded in the correct accounting period Classification: The purchase has been recorded in the proper accounts Completeness: All purchases that should have been recorded have been recorded 8

9 Acquisition & Payments Cycle 2. Payments (Income Statement Account) Occurrence Accuracy: The amount of the payment has been recorded appropriately Cut-off: The payment has been recorded in the proper accounting period Classification: The payment has been recorded in the proper accounts Completeness: All payments that should have been recorded have been recorded 9

10 Acquisition & Payments Cycle 3. Trade Payables (Balance Sheet Account) Obligation: The trade payables represent obligations pertaining to the company. Existence: Trade payables included in the balance actually exist, they are not fictitious. Valuation: Trade payables are included in the AFS at appropriate amounts and related disclosures have been appropriately measured. Completeness: All trade payables and accruals which should have been recorded have been recorded. 10

11 Acquisition & Payments Cycle Factors to be mindful of when required to perform substantive procedures using CAATS: The creditors masterlist can be cast to obtain total amount owing and the detailed list of creditors and their balances can be printed out. The Masterfile can be scanned for error conditions i.e. blank fields and debit balances The Masterfile for the current year can be compared to the prior year Masterfile to identify significantly reduced balances and creditors who no longer appear. The software can be used to extract samples i.e. amounts above a certain amount and nil balances. 11

12 Acquisition & Payments Cycle The software can be used to extract lists of any creditors which can be identified by a particular field or code. The creditors Masterfile will usually contain the following fields: Account number Name Address and contact details Total amount payables Aging of total amounts payables Payment and discount terms Please study Chapter 11 of J&S 12

13 Inventory & Production Cycle

14 Inventory & Production Cycle The cycle is given a number of names such as the conversion cycle, the inventory and warehousing cycle. The cycle deals with: The custody and safekeeping of inventory in whatever form it is i.e. goods held for resale or manufacture and finished goods. The recording of costs where a production/manufacturing process occurs. The beauty about this cycle is that is it integrates more than one subject: Accounting IAS 2 Management Accounting Standard Costing 14

15 Inventory & Production Cycle Basic Functions of any acquisitions and payment cycle Receiving Raw Material and component store Production Finished goods Goods for resale warehouse Despatch 15

16 Inventory & Production Cycle Documentation used in the cycle includes: Good received note Material (components) requisitions, material (components) issues note Manufacturing or production schedules Job cards Production report Costing schedule Transfer to finished goods note Picking slip and delivery notes Inventory sheet Inventory adjustment form 16

17 Inventory & Production Cycle Types of accounts found in this cycle ad their respective assertions 1. Inventory (Balance Sheet Account) Rights: The company holds or controls the rights to the inventory Existence: Inventory included in the statement of financial position actually exists Completeness: All inventory which should have been recorded, has been recorded Valuation: Inventory is included in the financial statements at appropriate amount 17

18 Inventory & Production Cycle Valuation There are certain aspects of the valuation assertion that links to other subjects: Arithmetic accuracy Pricing of inventory purchased locally Pricing imported inventory purchases Pricing manufacturing goods Lower of cost or net realisable value Inventory Obsolescence allowance Therefore when required to give substantive procedures for the assertion valuation, do not panic but rather expand on the above. 18

19 Inventory & Production Cycle You are the audit manager of an existing client, Tiger Trailers (Pty) Limited, which manufactures standard light duty trailers. The manufacturing of trailers is not a complex process and can be easily understood by observing the production process. The risk of material misstatement of inventory is at an acceptable level. You attended the client s annual inventory count and are satisfied with the counting procedures. You made copies of the final inventory count sheets. The inventory count sheets are computerised and have the following columns: product code with a description, quantity, selling and cost price. The cost accountant gave you the formula costing records. This is a blueprint of a particular trailer with the exact specifications, product codes and costing. From these records the cost price of a particular trailer is determined. The cost price is then utilised to complete the inventory count sheets for each specific trailer indicated on the inventory count sheets. 19

20 Inventory & Production Cycle Cost is determined on the FIFO basis. Direct costs of manufacturing and a proportion of manufacturing overheads, based on normal operating capacity, are included in the cost of manufactured goods Inventories at cost on 28 February R 000 Finished goods Work-in-progress (70% complete) Raw materials

21 Inventory & Production Cycle Required: Describe the manual substantive procedures that you will perform to ensure that finished goods are accurate, correctly valued and allocated at year end. Your answer should not deal with substantive procedures regarding the related disclosures of the finished goods balance. 21

22 Inventory & Production Cycle INVENTORY Raw materials Obsolete Stock Manufacturing overheads Finished goods Labour costs 22

23 Inventory & Production Cycle Inventory count sheets 1. Recalculate the value of individual items on the final inventory list by multiplying the quantity with the unit price. 2. Cast the final inventory list. 3. Agree the total of the final inventory list (audited) to the balance of the inventory control account in the general ledger and the trial balance. 4. Perform standard analytical tests, including comparisons with previous years figures and calculating the inventory turnover and gross profit percentages. Obtain acceptable explanations for deviations identified. 5. Perform an analytical procedure to identify slow moving stock by comparing this year s monthly purchases with this year s monthly sales 23

24 Inventory & Production Cycle and in the months where the movement of purchases does not correlate to a similar movement in sales, perform a detailed analysis thereof. 6. Compare the selling price on the approved price list with cost price on the inventory list to identify instances where the cost price is higher than the selling price. 7. Determine through enquiries from management and the sales staff, as well as by inspection of the minutes and correspondence files, whether any of the inventory items are subject to special sales conditions/offers. 8. Confirm the selling prices by inspecting a number of sales invoices before year end with the selling prices on invoices after year end to determine that the selling prices did not drop. 9. Where selling prices are lower than cost prices, request management to make the required adjustment to net realisable value (if material). 24

25 Inventory & Production Cycle 10. Confirm through inspection of the previous year s financial statements that the accounting policy with regard to inventory is applied consistently. Production records 11. Obtain the production records and the formula for the finished goods. Match the formula with that of the previous year for consistency and obtain explanations for deviations. 12. Cast the formula costing records and agree the unit price of a trailer to the cost price reflected on the finished goods inventory list. 13. Perform the following test on the formula costing records: 25

26 Inventory & Production Cycle 13.1 Raw material component: Compare the component codes and unit prices as reflected in the formula costing records with the codes and unit prices reflected in the raw material inventory list to ensure that they are the same. Trace unit price to the relevant supplier s invoices to establish whether the correct prices have been used in terms of the FIFO cost formula Labour component Confirm the allocated labour costs with the approved wages information received from the wages department. Agree the hourly rate in the formula costing records with the hourly wage rate in the wage records and actually paid. 26

27 Inventory & Production Cycle 13.3 Overheads Confirm the allocated manufacturing overheads with the approved allocation basis and the use of accurate information pertaining to normal operating capacity. Evaluate the manufacturing overheads allocation basis, including the periodic changes to this basis, for reasonableness and discuss with the financial manager if required. 14. Inspect the inventory count sheets and the inventory records for possible obsolete inventory. Discuss with management the possibility of a provision for obsolete inventory. 15. Obtain a management representation letter with regard to the inventory value as at year end. 27

28 Payroll & Personnel Cycle

29 Payroll & Personnel Cycle The payment of salaries and wages is an integral part of any business and as it is a cycle which results in an outflow of funds from the business, it is extremely important that the accounting system and related internal control activities are sound. The major differences between salaries and wages are: Salaries are fixed monthly amounts whilst wages are based on hours worked Salaries earners are not usually paid for working overtime, whilst wage earners are usually paid overtime at an increased hourly rate. Salaries are usually paid by direct EFT into the bank accounts whilst wage earners in some situations are still paid in cash. Salaries are paid monthly whilst wages are paid weekly or every 2 weeks 29

30 Payroll & Personnel Cycle The basic functions for a payroll and personnel cycle are Personnel (Human Resources) Timekeeping Payroll preparation Payment preparation and pay-out Deductions: Payment and Recording 30

31 Payroll & Personnel Cycle Documentation used in this cycle Employment contracts /employee files Payroll amendment form List of employees Clock card Batch control sheet and batch register Deduction tables and returns Payroll (wage journals) Pay-packets, payslips, salary advice Unclaimed wage register Wage/Salary reconciliation 31

32 Payroll & Personnel Cycle Assertions and accounts specific to this cycle 1. Salaries and Wages expense (Income Statement Account) Occurrence: Total balance recorded for salaries and wages include only amounts paid to genuine employees in respect of genuine hours. Completeness: All salaries and wages paid or payable for the period, have been included in the account balance Accuracy: Amounts paid for salaries and wages and other related data have been recorded appropriately Cut-off: The payments have been recorded in the correct accounting period. Classification: The amounts have been recorded in the proper accounts 32

33 Payroll & Personnel Cycle The integration between the subject to this cycle is still relevant. Please also consider the following sections when studying this cycle: Sec 30 of Companies Act (Auditing) The JSE Listing requirements (Finance) Mergers and Acquisitions Chapter The King IV Report and Corporate Governance IAS 1 Presentation of Financial Statements IAS 19 Employee Benefits IAS 24 Related Party IAS 37 Provisions, Contingent Liabilities and Contingent Assets 33

34 Payroll & Personnel Cycle ACTIVITY Clothing-4-U Limited (C4U) is a company that manufactures clothing for all Mr Price outlets in South Africa. Over the past year the company has grown constantly and currently has 600 permanent wage workers employed at its factory. Your audit firm is appointed as the auditor of C4U, with you as audit senior in charge of auditing the payroll and personnel cycle. A major concern for you is that you will fail to detect material overstatement of the salary and wage expenses, mainly owing to the following: Inclusion of fictitious employees on the payroll Inclusion of time not worked (normal and overtime) in the salary and wage calculations Calculation of wages at an incorrect wage rate 34

35 Payroll & Personnel Cycle The following information about the factory wage workers is available to you: (1) C4U uses an automated salary and wage system. (2) All staff are permanently employed and a complete personnel file containing all the necessary information about the employees is maintained in the human resources department. (3) Employees are paid a fixed hourly rate depending on their job grade. The job grade is determined on appointment and reviewed once a year based on experience and years of service at the company. (4) Overtime can only be worked if authorised by Mr Hat and may not exceed 30 hours per month. (5) The rates per hour for the three different job grades are as follows: 35

36 Payroll & Personnel Cycle (6) Rates are increased annually at the beginning of the financial year by 12%. (7) Wages are based on actual hours worked (normal and overtime) which are determined by using a biometric reader access system that records the time of entry and exit at the factory. Controls over the biometric reader access system appear to be sound. (8) Wages are paid directly into the employees bank account and are based on the hours worked during the calendar week and are paid the following Friday. (9) The employee master file contains the following information: employee name employee number employee identity number employee taxation number employee bank account number gender and race 36

37 Payroll & Personnel Cycle address and contact information date of employment/dismissal/resignation job grade normal hours worked each month overtime hours worked each month rate of normal hours worked rate of overtime hours worked PAYE/SITE amount to be paid each month medical aid contribution to be paid each month net wages for each month net wages year to date You have decided to use CAATs to perform substantive procedures. 37

38 Payroll & Personnel Cycle Required: Formulate the substantive procedures that you will perform in the payroll and personnel cycle of C4U to obtain evidence that no fictitious employees are being paid and that employees are only paid for actual hours worked and at the correct wage rate. Your answer should specifically deal with the occurrence and accuracy assertions. Limit your answer to substantive procedures using CAATs. Your answer should not deal with substantive procedures regarding the related disclosures. 38

39 Payroll & Personnel Cycle Occurrence 1. Use CAATs to select a sample of employees from the employee master file of C4U and follow up on differences with management (11 2 marks each): Verify all information against the personnel files kept in the human resources department, for example inspect employee contracts, copies of identity documents, banking details and taxation numbers. Perform physical positive identification of the employees on a surprise basis by inspecting the information on the staff card. Inspect the returns made to outside entities, for example SARS, to ensure that the employees in the sample are included on the SARS return. Enquire with managers to whom the employee reports whether the employee has been employed throughout the year. 2. Use CAATs to extract and compare a list of employees from the employee master file of C4U for the prior year and for the current year in order to identify additions or removals of employees and compare the information with supporting documents in the personnel files 39

40 Payroll & Personnel Cycle 3. Use CAATs to extract a list of employees with information in the date of employment/dismissal/resignation fields and compare the information with the supporting documents in the personnel files (employee contract/resignation letter, etc.). 4. Use CAATs to scan the employee master file of C4U for error conditions and print an exception report to discuss these cases with management. For example (11 2 marks each): Duplicated identity numbers or bank account numbers or employee numbers or taxation numbers Where an employee has resigned or has been dismissed, but still has a value in the net wages field after the date of resignation or dismissal 40

41 Payroll & Personnel Cycle Accuracy 1. Use CAATs to recalculate net wages to confirm the accuracy of net wages. 2. Use CAATs to compare total of the net wages in the master file with the balance in the general ledger and trial balance. 3. Use CAATs to extract a sample of employees indicating the normal or overtime hours worked and compare with the hours logged by the biometric reader access system. 4.vUse CAATs to scan the employee master file for any job grade or rate changes during the year and follow differences up with management. (There should be no changes because job grade and rate changes are only reviewed annually.) 5. Use CAATs to compare the rate of job grades A, B and C with applicable rates for normal hours and overtime hours in the master file of C4U and print an exception report whenever the wrong rate is used for a specified job grade. Follow exceptions up with management. 6. Use CAATs to extract a sample of employees reflecting the rate and job grades and verify these details with details described in the personnel file in the 41

42 Payroll & Personnel Cycle human resources department. Follow up on any differences. Use CAATs to extract a sample of employees indicating their deductions and inspect whether all deductions are in accordance with appropriate tables and rules by comparing these with supporting documentation 7 Use CAATs to extract a sample of employees indicating their deductions and recalculate the deductions (PAYE, medical aid) to confirm that calculations are performed correctly. Follow differences up with management. 8. Use CAATs to scan the employee master file of C4U for error conditions and print an exception report to discuss these cases with management, i.e. Negative wages, hours worked, rates or deductions No amounts in the net wages field where an employee has been employed Net wages greater than gross earnings Overtime hours worked exceeding 30 hours per month 42

43 Payroll & Personnel Cycle Analytical procedures 1. Perform analytical procedures by using CAATs to compare the following: The total wage expense for the current year with the total wage expense for the prior year. Follow up on any differences above or below the 12% increase with management (accuracy/occurrence). Current year wage expense compared with the budget. Follow up on any differences with management (accuracy/occurrence). Compare the month to month wages and follow up on any material differences (accuracy/occurrence). 2. By using CAATs and the fields available in the master file of C4U perform analytical procedures by comparing the total of the net wages value per month for each employee with the total net wages year to date value for each employee. Follow differences up with management (accuracy). 3. Perform the following analytical procedures by using CAATs: Calculate the average wages per employee for each month Compare the number of employees of this year with the prior year 43

44 Finance & Investment Cycle

45 Finance & Investment Cycle The audit of the finance and investment cycle can be very difficult and will require a technically proficient and experience member of the audit team to be responsible for it. This is the cycle where everything goes that was not classified under the 4 cycles we have done thus far. The following are examples of accounts you will find in the finance cycle: Share Capital Debentures Long term loans Finance lease liability Provisions, Contingent Liabilities and Contingent Assets 45

46 Finance & Investment Cycle The following are examples of accounts you will find in the finance cycle: Property, plant and equipment Investment in shares Long term loans made by the company Intangible assets 46

47 Finance & Investment Cycle Assertions which will affect the finance and investment cycle are both for the balance accounts and also the income statements accounts. 1. Assets/ Liabilities (Balance Sheet Accounts) Existence Rights and Obligation Completeness Valuation and Allocation Presentation and Disclosure 47

48 Finance & Investment Cycle 1. Income/ Expenses (Income Statement Accounts) Occurrence Accuracy Completeness Cut off Classification 48

49 End of the lecture Any questions? 49

50 Thank you Presenter s details Khanyisile Mthethwa kc.mthethwa@gmail.com Cellphone number: BCTA2018 Administration Rejoyce Mutengera admin@endunamoo.co.za