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Quick Guide to Auditing
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Quick Guide to Auditing in an IT Environment

TABLE OF CONTENTS
Chapter 1: Introduction to Information Technology Audit
 What is an IT Audit?
Audit? 3
 Basic Components of an Audit
Audit 3
 Overview of the 3 Phases of IT Audit
Audit 5

Chapter 2: Test of Controls


 Objectives of Internal Control
Control 7
 Modifying Assumptions
Assumptions 7
 Five Components of Internal Control
a. Control Environment 8
b. Risk Assessment 8
c. Information and Communication 8
d. Monitoring 9
e. Control Activities
- Physical Controls 9
- Computer Controls 11
 Testing Computer Application Controls
Controls 14
 Five CAATT Approaches to Test Application Controls
Controls 15

Chapter 3: Substantive Tests


 Substantive Tests of Revenue Cycle
Cycle 40
 Substantive Tests of Expenditure Cycle 48
 Substantive Tests of Other Financial Statement Accounts 59

Solutions to Substantive Test


Testing Exercises
 Exercises 10 - 15
15 70

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Quick Guide to Auditing in an IT Environment

CHAPTER 1:
INTRODUCTION TO INFORMATION TECHNOLOGY AUDIT

What is an Information Technology (IT) Audit?

An IT audit focuses on the computer


computer-based aspects of an organization’s information system. This
includes assessing the proper implementation, operation, and control of computer resources. Since
most modern information systems employ information technology, the IT audit is typically a significant
component of all external (financial) and internal audits.

Auditing is a systematic process of objectively obtaining and evaluation evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between those
assertions and established criteria and communicating the results to interested users.

BASIC COMPONENTS OF AN AUDIT

SYSTEMATIC PROCESS
Conducting an audit is a systematic and logical process that applies to all forms of information systems.
While important in all auditudit settings, a systematic approach is particularly important in the IT
environment. The lack of physical procedures that can be visually verified and evaluated injects a high
degree of complexity into the IT audit. Therefore, a logical framework for cond
conducting
ucting an audit in the IT
environment is critical to help the auditor identify all
all-important
important processes and data files.

MANAGEMENT ASSERTIONS AND AUDIT OBJECTIVES


The organization’s financial statements reflect a set of management assertions about the financial
fina
health of the entity. The task of the auditor is to determine whether the financial statements are fairly
presented. To accomplish this, the auditor establishes audit objectives, designs procedures, and gathers
evidence that corroborates or refutes m management’s
anagement’s assertions. These assertions fall into five general
categories:

1. Existence or Occurrence assertion - affirms that all assets and equities contained in the balance sheet
exist and that all transactions in the income statement actually occurred.
2. Completeness assertion - declares that no material assets, equities, or transactions have been
omitted from the financial statements.
3. Rights and Obligations - assertion maintains that assets appearing on the balance sheet are owned
by the entity and that the
he liabilities reported are obligations.

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Quick Guide to Auditing in an IT Environment

4. Valuation or Allocation assertion


assertion- states that assets and equities are valued in accordance with
generally accepted accounting principles and that allocated amounts such as depreciation expense
are calculated on a systematic
ystematic and rational basis.
5. Presentation and Disclosure assertion - alleges that financial statement items are correctly classified
(e.g., long-term
term liabilities will not mature within one year) and that footnote disclosures are
adequate to avoid misleading ng the users of financial statements.

Generally, auditors develop their audit objectives and design audit procedures based on the preceding
assertions.

Audit objectives may be classified into two general categories. The preceding assertions related to
transactions
ransactions and account balances that directly impact financial reporting. The second category pertains
to the information system itself. This includes the audit objectives for assessing controls over manual
operations and computer technologies used in tra
transaction processing.

OBTAINING EVIDENCE
Auditors seek evidential matter that corroborates management assertions. In the IT environment, this
process involves gathering evidence relating to the reliability of computer controls as well as the
contents of databases that have been processes by computer programs. Evidence is collected by
performing tests of controls, which establish whether internal controls are functioning properly, and
substantive tests, which determine whether accounting databases fairly rreflect
eflect the organization’s
transactions and account balances.

ASCERTAINING MATERIALITY
The auditor must determine whether weaknesses in internal controls and misstatements found in
transactions and account balances are material. In all audit environments, assessing materiality is an
auditor judgment. In an IT environment, however, this decision is complicated further by technology and
a sophisticated internal control structure.

COMMUNICATING RESULTS
Auditors must communicate the results of their tests to iinterested
nterested users. An independent auditor
renders a report to the audit committee of the board of directors or stockholders of a company. The
audit report contains, among other things, an audit opinion. This opinion is distributed along with the
financial report
port to interested parties both internal and external to the organization. IT auditors often
communicate their findings to internal and external auditors, who can then integrate these findings with
the non-IT aspects of the audit.

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Quick Guide to Auditing in an IT Environment

OVERVIEW OF THE 3 PHASESS OF IT AUDIT


The IT audit is generally divided into three phases: audit planning, tests of controls, and substantive
testing.

1. AUDIT PLANNING

The first step in the IT audit is audit planning. Before the auditor can determine the nature and
extent of the tests to perform, he or she must gain a thorough understanding of the client’s
business. A major part of this phase of the audit is the analysis of audit risk. The objective of the
auditor is to obtain sufficient information about the firm to plan the other phases of the audit. The
risk analysis incorporates an overview of the organization’s internal controls. During the review of
controls, the auditor attempts to understand the organization’s policies, practices, and structure. In
this phase of the audit, it, the auditor also identifies the financially significant applications and
attempts to understand the controls over the primary transactions that are processed by these
applications.
The techniques for gathering evidence at this phase include questionnaires,
questionna interviewing
management, reviewing systems documentation, and observing activities. During this process, the
IT auditor must identify the principal exposures and the controls that attempt to reduce these
exposures. Having done so, the auditor proceed
proceedss to the next phase, where he or she tests the
controls for compliance with pre
pre-established standards.

2. TESTS OF CONTROLS
The objective of the tests of controls phase is to determine whether adequate internal controls are
in place and functioning properly
properly.. To accomplish this, the auditor performs various tests of
controls. The evidence gathering techniques used in this phase may include both manual
techniques and specialized computer audit techniques.
At the conclusion of the tests
tests-of-controls phase, the auditor must assess the quality of internal
controls. The degree of reliance the auditor can ascribe to internal controls affects the nature and
extent of substantive testing that needs to be performed. The relationship between tests of
controls and substantive
antive tests is discussed late.

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3. SUBSTANTIVE TESTING

The third phase of the audit process focuses on financial data. This involves a detailed investigation
of specific account balances and transactions through what are called substantive tests. For
example,, a customer confirmation is a substantive test sometimes used to verify account balances.
The auditor selects a sample of accounts receivable balances and traces these back to their source
– the customers-toto determine if the amount stated is in fact owed by a bona fide customer. By so
doing, the auditor can verify the accuracy of each account in the sample. Based on such sample
findings, the auditor is able to draw conclusions about the fair value of the entire accounts
receivable asset.

Some substantive tests are physical, labor


labor-intensive
intensive activities such as counting cash, counting
inventories in the warehouse, and verifying the existence of stock certificates in a safe. In an IT
environment, the information needed to perform substantive tests (such as acc
account
ount balances and
names and addresses of individual customers) is contained in data files that often must be
extracted using Computer Assisted Audit Tools and Techniques (CAATTs) software.

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Quick Guide to Auditing in an IT Environment

CHAPTER 2:
TEST OF CONTROLS

OBJECTIVES OF INTERNAL CONTROL


The internal control system comprises policies, practices, and procedures employed by the organization
to achieve four broad objectives:
1. To safeguard assets of the firm.
2. To ensure accuracy and reliability of accounting records and information.
3. To promote efficiency in the firm’s operations.
4. To measure compliance with management’s prescribed policies and procedures.
The internal control system serves as a shield that protects the firm’s assets from numerous undesirable
events that bombard the organization. These include attempts at unauthorized access to the firm’s
assets (including information), fraud perpetrated by persons both in and outside the firm, errors due to
employee incompetence, faulty computer programs, and corrupted input data, and mischievous acts
such as unauthorized access by computer hackers and threats from computer viruses that destroy
programs and database.

A weakness in internal control may expose the firm to one or more of the following types of risks:
1. Destruction of assets (both physi
physical assets and information)
2. Theft of assets
3. Corruption of information or the information system
4. Disruption of the information system

MODIFYING ASSUMPTIONS
Inherent in these control objectives are four modifying assumptions that guide designers and auditors
audito of
internal control systems.

1. Management Responsibility
This concept holds that the establishment and maintenance of a system of internal control is a
management responsibility.
2. Reasonable Assurance
The internal control system should provide reasonable assurance that the four broad objectives of
internal control are met. This means that no system of internal control is perfect and the cost of
achieving improved control should not outweigh its benefits.
3. Methods of Data Processing
The internal control system should achieve the four broad objectives regardless of the data processing
method used. However, the techniques used to achieve these objectives will vary with different types of
technology.
4. Limitations
Every system of internal control has limitations on its effectiveness. These include (1) the possibility of
error – no system is perfect, (2) circumvention – personnel may circumvent the system through
collusion or other means, (3) management override – management is in a position to override control
procedures by personally distorting transactions or by directing a subordinate to do so, and (4) changing
conditions – conditions may change over time so that existing controls may become ineffectual.

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FIVE COMPONENTS OF INTERNAL CONTROL

Control Information and


Risk Assessment
Environment Communication

Control
Monitoring
Activities

CONTROL ENVIRONMENT
The control environment is the foundation for the other four control components. The control
environment sets the tone for the organization and influences the control awareness of its management
and employees.

RISK ASSESSMENT
Organizations
tions must perform a risk assessment to identify, analyze, and manage risks relevant to financial
reporting. Risks can arise out of changes in circumstances such as:
 Changes in the operating environment that impose new competitive pressures on the firm.
 New w personnel who possess a different or inadequate understanding of internal control.
 New or reengineered information systems that affect transaction processing.
 Significant or rapid growth that strains existing internal controls.
 The implementation of new technology into the production process or information system that
impacts transaction processing.

INFORMATION AND COMMUNICATION


The accounting information system consists of the records and methods used to initiate, identify,
analyze, classify, and record the organization’s transactions and to account for the related assets and
liabilities. The quality of information generated by the AIS impacts management’s ability to take actions
and make decisions in connection with the organization’s operations and to prepare reliable financial
statements. An effective accounting system will:

 Identify and record all valid financial transactions.


 Provide timely information about transactions in sufficient detail to permit proper classification and
financial reporting.
 Accurately
ccurately measure the financial value of transactions so their effects can be recorded in financial
statements.
 Accurately record transaction in the time period in which they occurred.

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SAS 78 requires that auditors obtain sufficient knowledge of the organization’s information system to
understand:
 The classes of transactions that are material to the financial statements and how those transactions
are initiated.
 The accounting records and accounts that are used in the processing of material transactions.
transaction
 The transaction processing steps involved from the initiation of an economic event to its inclusion in
the financial statements.
 The financial reporting process used to prepare financial statements, disclosures, and accounting
estimates.

MONITORING
Management
agement must determine that internal controls are functioning as intended. Monitoring is the
process by which the quality of internal control design and operation can be assessed. This may be
accomplished by separate procedures or by ongoing activities.
Ann organization’s internal auditors may monitor the entity’s activities in separate procedures. They
gather evidence of control adequacy by testing controls, and then communicate control strengths and
weaknesses to management. As part of this process, inter
internal
nal auditors make specific recommendations
for improvement to controls.
Ongoing monitoring may be achieved by integrating special computer modules into the information
system that capture key data and/or permit tests of controls to be conducted as part of routine
operations.
Another technique for achieving ongoing monitoring is the judicious use of management reports. Timely
reports allow managers in functional areas such as sales, purchasing, production, and cash
disbursements to oversee and control the their
ir operations. By summarizing activities, highlighting trends,
and identifying exceptions from formal performance, well well-designed
designed management reports provide
evidence of internal control function or malfunction.

CONTROL ACTIVITIES
Control activities are thee policies and procedures used to ensure that appropriate actions are taken to
deal with the organization’s identified risks. Control activities can be grouped into two distinct
categories: computer controls and physical controls.
A. Physical Controls
Thiss class of control activities relates primarily to traditional accounting systems that employ manual
procedures. However, an understanding of these control concepts also gives insights to the risks and
control concerns associated with the IT environment. TThere here are six traditional categories of Physical
Control Activities.
1. Transaction Authorization
The purpose of transaction authorization is to ensure that all material transactions processed by
the information system are valid and in accordance with management’s objectives. Authorizations
may be general or specific. General authority is granted to operations personnel to perform day-
day
to-day
day operations. An example of general authorization is the procedure to authorize the purchase
of inventories from a designated vendor only when inventory levels fall to their predetermined
reorder points. This is called a programmed procedure (not necessarily in the computer sense of
the word). The decision rules are specified in advance, and no additional approvals are required.

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On the other hand, specific authorizations deal with case


case-by-case
case decisions associated with non-
non
routine transactions. An example of this is the decision to extend a particular customer’s credit
limit beyond the normal amount. Specific authority is usually a management responsibility.

2. Segregation of Duties
One of the most important control activities is the segregation of employee duties to minimize
incompatible functions. Segregation of duties can take many forms, depending upon the specific
duties
ties to be controlled. However, the following three objectives provide general guidelines
applicable to most organizations.
Objective 1
The segregation of duties should be such that the authorization for a transaction is separate
from the processing of the transaction. For example, purchases should not be initiated by
the purchasing department until authorized by the inventory control department. This
separation of tasks is a control to prevent the purchase of unnecessary inventory by
individuals.
Objective 2
Responsibility for the custody of assets should be separate from the recordkeeping
responsibility. For example, the department that has physical custody of finished goods
inventory (the warehouse) should not keep the official inventory records. Accounting
Acco for
finished goods inventory is performed by inventory control, an accounting function. When a
single individual or department has responsibility for both asset custody and recordkeeping,
the potential for fraud exists. Assets can be stolen or lost, and the accounting records
falsified to hide the event.
Objective 3
The organization should be structured so that a successful fraud requires collusion between
two or more individuals with incompatible responsibilities. In other words, no single
individual should have sufficient access to assets and supporting records to perpetrate
p a
fraud.
Implementing adequate segregation of duties requires that a firm employ sufficiently large number
of employees. Achieving adequate segregation of duties often presents difficulties for small
organizations. Obviously, it is impossible to separate five incompatible tasks among three
employees. Therefore, in small organizations or in functional areas that lack sufficient personnel,
management must compensate for the absence of segregation controls with close supervision. For
this reason, supervision is often called a compensating control.
3. Supervision
Implementing adequate segregation of duties requires that a firm employ a sufficiently large number
of employees. Achieving adequate segregation of duties often present difficulties for small
organizations. Obviously, it is impossible to separate five incompatible tasks among three
employees. Therefore, in small organizations or in functional areas that lack sufficient personnel,
management must compensate for the absence of segregation contro controls
ls with close supervision. For
this reason, supervision is often called a compensating control.
4. Accounting Records
The traditional accounting records of an organization consist of source documents, journals, and
ledgers. These records capture the economic essence of transactions and provide an audit trail of
economic events. The audit trail enables the auditor to trace any transaction through all phases of its
processing from the initiation of the event to the financial statements.

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5. Access Controls
The purpose of access controls is to ensure that only authorized personnel have access to the firm’s
assets. Unauthorized access exposes assets to misappropriation, damage, and theft. Therefore,
access controls play an important part in safeguarding assets. Ac Access
cess to assets can be direct or
indirect. Physical security devices, such as locks, safes, fences, and electronic and infrared alarm
systems, control against direct access. Indirect access to assets is achieved by gaining access to the
records and documentss that control their use, ownership, and disposition.
6. Independent Verification
Verification procedures are independent checks of the accounting system to identify errors and
misrepresentations. Verification differs from supervision because it takes place after the act, by
an individual who is not directly involved with the transaction or task being verified. Examples of
independent verifications include:
 Comparing physical assets with accounting records.
 Reconciling subsidiary accounts with control account
accounts

B. Computer Controls

Computer controls constitute a body of material that is of primary concern to us. These controls, which
relate specifically to the IT environment and IT auditing, fall into two broad groups: general controls and
application controls.
1. General Controls
Pertain to entity-wide
wide concerns such as controls over the data center, organization databases,
systems development, and program maintenance.
2. Application Controls
Application controls are programmed procedures designed to deal with potential exposures that
threaten specific applications, such as payroll, purchases, and cash disbursements systems.
Application controls fall into three broad categories: input controls, processing controls, and output
controls.

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INPUT CONTROLS
The data collection component of the information system is responsible for bringing data into the
system for processing. Input controls at this stage are designed to ensure that these transactions are
valid, accurate, and complete. Data input procedu
procedures
res can be either source document-triggered
document and
direct input.

Source document input requires human involvement and is prone to clerical errors. Some types of
errors that are entered on the source documents cannot be detected and corrected during the data
input stage. Dealing with these problems may require tracing the transaction back to its source (such as
contacting the customer) to correct the mistake. Direct input, on the other hand, employs real-time
real
editing techniques to identify and correct errors iimmediately,
mmediately, thus significantly reducing the number of
errors that enter the system.
Classes of Input Control

These control classes are not mutually exclusive divisions. Some control techniques that we shall
examine could fit logically into more than one class.
Source Document Controls
Source document fraud can be used to remove assets from the organization. To control this type of
exposure, the organization must implement control procedures over source documents to account for
each document, as describe
ibe below:
a. Use of pre-numbered
numbered source documents
b. Use of source documents in sequence
c. Periodically audit source documents

Data Coding Controls


Coding controls are checks on the integrity of data codes used in processing. A customer’s account
number, an inventory
ntory item number, and a chart of accounts number are all examples of data codes.

Validation Controls
Input validation controls are intended to detect errors in transaction data before the data are
processed. Validation procedures are most effective when they are performed as close to the source of
the transaction as possible. However, depending on the type of CIS in use, input validation may occur at
various points in the system.

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There are three levels of input validation controls:


1. Field interrogation
2. Record interrogation
3. File interrogation
Field Interrogation
Field interrogation involves programmed procedures that examine the characteristics of the data in the
field. The following are some common types of field interrogation:
a. Missing data checks are used to examine the contents of a field for the presence of blank spaces.
When the validation program detects a blank where it expects to see a data value, this will be
interpreted as an error.
b. Numeric-alphabetic
alphabetic data checks determine whether the correct fform
orm of data is in a field.
c. Limit checks determine if the value in the field exceeds an authorized limit.
d. Validity checks compare actual values in a field against known acceptable values. This control is used
to verify such things as transaction codes, stat
state
e abbreviations, or employee job skill codes. If the
value in the field does not match one of the acceptable values, the record is determined to be in
error.

Record Interrogation
Record interrogation procedures validate the entire record by examining the interrelationship of its field
values. Some typical tests are discussed below.

a) Reasonableness checks determine if a value in one field, which has already passed a limit check and a
range check, is reasonable when considered along with oother data fields in the record.

b) Sign checks are tests to see if the sign of the field is correct for the type of record being processed.
For example, in a sales order processing system, the dollar amount field must be positive for sales
orders but negative for sales return transactions. This control can determine the correctness of the
sign by comparing it with the transaction code field.

PROCESSING CONTROLS

After passing through the data input stage, transactions enter the processing stage of the system.
Processing controls are divided into three categories: run
run-to-run
run controls, operator intervention
controls, and audit trail controls.
1. Run-to-Run Controls
2. Operator Intervention Controls
3. Audit Trail Controls

The preservation of an audit trail is an important objective of process control. In an accounting system,
every transaction must be traceable through each stage of processing from its economic source to its
presentation in financial statements. In a CBIS environment, the audit trail can become fragmented and
difficult
ult to follow. It thus becomes critical that each major operation applied to a transaction be
thoroughly documented. The following examples of techniques used to preserve audit trails in a CBIS.

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OUTPUT CONTROLS
Output controls ensure that system output is not lost, misdirected, or corrupted and that privacy is not
violated.

TESTING COMPUTER APPLICATION CONTROLS


Control testing techniques provide information about the accuracy and completeness of an application’s
processes. These tests follow two genera
generall approaches: (1) the black box (around the computer)
approach and (2) the white box (through the computer) approach.

Black Box Approach


With an understanding of what the application is supposed to do, the auditor tests the application by
reconciling production
duction input transactions processed by the application with output results. The output
results are analyzed to verify the application’s compliance with its functional requirements.

White Box Approach


The white box approach relies on an in
in-depth understanding of the internal logic of the application
being tested. The white box approach includes several techniques for testing application logic directly.
Some of the more common types of tests of controls include the following:

 Authenticity tests, which


hich verify that an individual, a programmed procedure, or a message (such as
EDI transmission) attempting to access a system is authentic. Authenticity controls include user Ids,
passwords, valid vendor codes, and authority tables.

 Accuracy tests, which ensure that the system processes only data values that conform to specified
tolerances. Examples include range tests, field tests, and limit tests.

 Completeness tests, which identify missing data within a single record and entire records missing
from a batch.

 Access tests, which ensure that the application prevents authorized users from unauthorized access
to data. Access controls include passwords, authority tables, user user-defined
defined procedures, data
encryption, and inference controls.

 Audit trail tests, which


ich ensure that the application creates an adequate audit trail. This includes
evidence that the application records all transactions in a transaction log, posts data values to the
appropriate accounts, produces complete transaction listings, and generates error files and reports
for all exceptions.

 Rounding error tests, which verify the correctness of rounding procedures. Rounding errors occur in
accounting information when the level of precision used in the calculation is greater than that used
in the reporting.

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FIVE CAATT APPROACHES TO TEST APPLICATION CONTROLS


1. Test Data Method
2. Base Case System Evaluation
3. Tracing
4. Integrated Test Facility
5. Parallel Simulation

Test Data Method


The test data method is used to establish application integrity by processing specially prepared sets of
input data through production applications that are under review. The results of each test are compared
to predetermined expectations to obtain an objective evaluation of application logic and control
effectiveness.

To perform the test data technique, the auditor must obtain a copy of the current version of the
application. In addition, test transaction files and test master files must be created. Results from the test
run will be in the form of routine output reports, transacti
transaction
on listings, and error reports. In addition, the
auditor must review the updated master files to determine that account balances have been correctly
updated. The test results are then compared with the auditor’s expected results to determine if the
application
tion is functioning properly. This comparison may be performed manually or through special
computer software. Any deviations between the actual results obtained and those expected by the
auditor may indicate a logic or control problem.

Creating Test Data


When creating test data, auditors must prepare a complete set of both valid and invalid transactions. If
test data are complete, auditors might fail to examine critical branches of application logic and error-error
checking routines. Test transactions should tes
testt every possible error, logical process, and irregularity.

Base Case System Evaluation


When the set of test data in use is comprehensive, the technique is called the base case system
evaluation (BSCE).

Tracing
Another type of the test data technique is ccalledalled tracing performs an electronic walkthrough of the
application’s internal logic. The tracing procedure involves three steps:
1. The application under review must undergo a special compilation to activate the trace option.
2. Specific transactions or types oof transactions are created as test data.
3. The test data transactions are traced through all processing stages of the program, and a listing is
produced of all programmed instructions that were executed during the test
test.

The Integrated Test Facility


The integrated
grated test facility (ITF) approach is an automated technique that enables the auditor to test an
application’s logic and controls during its normal operation. The ITF is one or more audit modules
designed into the application during the systems developmen
developmentt process. In addition, ITF databases
contain “dummy” or test master file records integrated with legitimate records. During normal
operations, test transactions are merged into the input stream of regular (production) transactions and
are processed againstt the files of the dummy company.

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ITF audit modules are designed to discriminate between ITF transactions and routine production data.
This may be accomplished in a number of ways. One of the simplest and most commonly used is to
assign a unique range of key values exclusively to ITF transactions. For example, in a sales order
processing system, account numbers between 2000 and 2100 can be reserved for ITF transactions and
will not be assigned to actual customer accounts. By segregating ITF transactions from f legitimate
transactions in this way, routine reports produced by the application are not corrupted by ITF test data.
Test results are produced separately on storage media or hard copy output and distributed directly to
the auditor. Just as with the testt data techniques, the auditor analyzes ITF results against expected
results.

Parallel Simulation
Parallel simulation requires the auditor to write a program that simulates key features or processes of
the application under review. The simulated application is then used to reprocess transactions that were
previously processed by the production application. The results obtained from the simulation are
reconciled with the results of the original production run to establish a basis for making inferences
inferen
about the quality of application processes and controls.

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Quick Guide to Auditing in an IT Environment

EXERCISE 1: Transaction Authorization

Perform transaction with a programmed procedure

a. Open SAP Business One


- On the desktop, double--click SAP Business One.
- Click the ‘Change Company’ then on tthe he Choose Company window, click the RU Laptops,
Laptops Co.
Enter the User ID: Lukas Password: 1234
Note: Use the user account of Lukas Ibarra to have the proper authorizations for the transaction
to be made.
b. Create a Sales Order
- Navigate to Sales – A/R Module > Sales Order.
- In the Customer field, choose C1100 Jacob Electronics.
- Click the Logistics Tab, then check the box for Procurement Document by clicking it.
- Type the current date in the delivery date. Posting date is at its default which is the system
date.
- Click the Contents Tab. Add Item S1000 in the Item Field with the Quantity of 20.
- Press Enter. Item Availability Check window will appear as shown below. Choose Continue
and click OK.
- Click Cancel to cancel the document

The Item Availability Check is a programmed procedure to ensure that proper action will be
performed regarding sales order on items that could not be available at the moment.

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Exercise 2:
Transaction Authorization
Perform transaction with specific authorizations.

You found out in the Company policies that no Purchase Order amounting to more than P200,000
shall be allowed to be posted without the approval of the manager first. Test this kind of control in
the system.
a. Log in to the account of Karla Sy to have the proper authorizations for the transaction to be
made.
Go to Administration > Choose Company > Change User > User ID: Karla then Password: 1234

b. Create a Purchase Order that will qualify for the Approval Procedure
- Navigate to Purchasing – A/P Module > Purchase Order.
- In the Vendor field, choose V1000 Laptop Queen Philippines, Inc..
- Dates are defaults which are the system date.
- In the Contents Tab, add Item S1000 in the Item Field with the Quantity of 10. Enter Unit
Price of P22,000.00 then click Add. Total amount of Purchase Order should be PhP246,400
which should trigger the approval procedure.
- Cancel the document.

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EXERCISES 3: Segregation of Duties

Business Process Segregation.


Upon reading the Organization Chart, you found out that Lukas Ibarra is designated as a Sales Officer
so he should be able the work on the documents that are related to Sales. While for other documents
such as those relating to Purchasing, he should not have authorization to open it. Test the segregation
of duties
ies as defined in the Authorization Table.

a. Log in to the account of manager to view the authorizations made for Lukas Ibarra.
Go to Administration > Choose Company > Change User > User ID: manager then Password: 1234
b. View the authorizations of Lukas Ibar
Ibarra.
Go to Administration > System Initialization > Authoriza
Authorizations
tions > General Authorizations
Choose Lukas. You can see that he has Full Authorization in Sales – A/R but No Authorization in
Purchasing A/P.

c. Test the Segregation of Duties by checking if the Authorizations are functioning properly.
- Log in to Lukas account.
Go to Administration > Choose Company > Change User > User ID: Lukas then Password: 1234
- Open Sales Order. Since he has authorization for Sales – A/R, he should be able to open it.
Go to Sales – A/R > Sales Order
- Open Purchase Order. Since he has no authorization for Purchasing – A/P, he should not be
permitted to open it.
Go to Purchasing – A/P > Purchase Order
(Note: If Purchaser Order and other documents in the Purchasing – A/P module
modul is not visible,
click the Form Settings tool in the Toolbar. Then set the documents in the Purchasing A/P as
visible.

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- Test further the other users based on their authorizations, follow same procedures.

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Exercise 4: Accounting Records.

Identify which document In n SAP Business One that can give simple audit trail.
Log in to Auditor’s account: User Name: Auditor Password: 1234
a. View document trail on marketing documents.
- Open a closed A/R Invoice.
Go to Sales – A/R > A/R Invoice > Switch to Find Mode by pressing Ctrl + F > Type 28 on the No.
field then press Enter.
- On the Remarks Field, you can see the base documents related to the A/R Invoice.
- Another way is to view the relationship map. Right click on any blank part of the A/R Invoice
In
then choose relationship map.

- You can double click on any document in the relationship map to view the actual document.

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b. View a list of all transactions posted in SAP Bus


Business
iness One or generate transaction log.
- Open a document – A/R Invoice for example. Go to Sales – A/R > A/R Invoice
- In the toolbar, click the Transaction Journal tool.

- Choose All Transactions in the Original Journal field then set the posting date from 01.01.13 to
12.31.13. This is to show all the transaction journal records for the whole fiscal year 2013 that
could be use for analysis.

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c. Plot SAP Business One to the Accounting Cycle (Still using Auditor’s Account)

Accounting Cycle SAP Business One


1. Journal General Journal Generate Transaction Journal Report (See Previous
Step but change the Original Journal criteria to
Journal Entry to view only the manual journal
entries made.)

Special Journals
a. Sales Journal Sales – A/R
b. Purchases Journal Purchasing – A/P
c. Cash/Check Receipts Banking – Incoming
d. Cash/Check Banking – Outgoing
Disbursements

2. Ledger General Ledger Financials > Financial Reports > Accounting >
General Ledger
- Uncheck the Business Partner Checkbox then
check the Accounts Checkbox to show only
General Ledger Accounts
- Mark ‘X’ the accounts
- Change the Posting Date range ‘From 01.01.13’
‘To 12.31.13’
- Then Click ‘OK’ to show the General Ledger

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Subsidiary Ledger Financials > Financial Reports > Accounting


>General Ledger
- Check the Business Partner Checkbox then
uncheck the Accounts Checkbox to show only
Subsidiary Accounts
- To view a particular SL, change the BP Code
‘From C1100’ and ‘To C1100’
- Change the Posting Date range ‘From 01.01.13’
‘To 12.31.13’
- Then Click ‘OK’ to show the Subsidiary Ledger
for this Business Partner

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TrialBalance Financials > Financial Report > Financial > Trial


Balance
(Note: Do the same process with General Ledger)

3. AdjustingEntries Financial > Journal Entry > Click Adjustment Box


(Note: The process given is how to create Adjusting
Entries)

4. FinancialStatements Financials > Financial Report > Financial >Profit


> &
Loss or Balance Sheet
(Note: Just change to desired period then click OK)

5. ClosingEntries Administration > Utilities > Period End Closing

'

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6. Post-Closing
Closing Trial Balance Financials > Financial Report > Financial > Trial
Balance > Check Add Closing Balances

7. Reversing Entries Financials > Journal Entry > Click Reversal Box
(Note: The process given is how to create Reversing
Entries)

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EXERCISE 5: General Controls


Have an experience on how to view an actual database in a database management system. This can be
exemplified using the SQL Server Management Studio Express.
1. Open SQL Server Management Studio Express
From your desktop, click the start button, choose All Programs then navigate to SQL Server
Management Studio Express.

Ask assistance from your IT personnel, if you cannot find it. It should look like the one below. On the
left side under the databases folder, you can see a list. For database management purposes, a new
database can be added and an existing database can be deleted. For internal control purposes, this
function should only be given to the database administrator
administrator.

2. Perform database backup and store it in another storage device

a. Click Start Button (lower leftmost corner of the screen)


b. Click All Programs
rams > Microsoft SQL Server 2005
2005> SQL Server Management Studio Express

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c. Click Connect
Note: If connection is unsuccessful, call the attention of your technical support to put in the
correct Server Type
ype and Server Name.

d. Click + before the Databases to expand and view all databases > Right Click on the database that
you want to back up > Click Tasks > Click Backup.

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e. Click OK when Backup Database window appears. Take note of the default location of the
backup. See example below
(c:\Program Files\Microsoft
Microsoft SQL Server
Server\MSSQL.1\MSSQL\Backup\)

f. Retrieve the backup database.


Go to Start > Computer > Local Disk (C:) > Program Files > Microsoft SQL Server > MSSQL.1 >
MSSQL > Backup
g. Copy the backup file with an extension file of .bak and save it to another storage device.
3. Perform Database Restore
a. Follow steps a, b and c, in Number 2.
b. Right-click
click + before the Databases > Click Restore Database and a new window Restore
Database will appear.
c. Type in the field
ld ‘To database:’ your new database name (in the example below it is Sample).
d. Click ‘From device:’ and the button. A new window Specify Backup will appear. Click Add Button
and locate your backup file. Click Ok. Click Ok.
e. Click box under Restore. Click O
OK to execute restoration.
f. To check, expand Databases and view the restored database.
g. Refresh databases in SAP B1 to view the restored database by double
double-clicking
clicking the SAP B1
shortcut from your desktop. Click the Change Company button. In the Choose Company screen,
click Refresh.

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EXERCISE 6: Source Document Controls

 View the list of a particular document to identify if there is any document missing by double checking the
numbering of source documents
 Double check if the source documents were used in sequence.
1. Open SAP Business One
- On the desktop, double--click SAP Business One.
- Click the ‘Change Company’ then on the Choose Company window, click the RU Laptops,
Laptops Co.
Enter the User ID: auditor
auditor, Password: 1234
2. See the list of a particular document i.e. Sales Order
- Go to Sales – A/R > Sales Order
- Switch to Find mode by pressing Ctrl + F
- In the No. field, enter an asterisk symbol (*) then press Enter.
- A list of Sales Order will appear where you can examine tthehe sequence of the document based on
its numbering.
- You can do this test to other documents as well. To test if the sequence of numbering is correct,
you can sort the list by date then double check if the numbering is still chronological. Any
irregularity will be considered as an exception.

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EXERCISE 7: Data Coding Controls

1. View the list of Business Partners and examine if the codes used were according to the adapted BP Codes
of the Company
- Go to Business Partners > Business Partner Master Data
- Change the BP Type to Customers.
- Type an asterisk symbol (*) in the code field then press Enter. The list of Business Partners will
appear.
- What is the coding control for Customers BP? Any irregularity will be considered as an exception.
- Do the same process for V Vendors BP.

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EXERCISES 8: Field Interrogation

a. Missing Data Checks. Test if marketing documents in SAP Business One has this control.
(Note: Use Lukas user account)
- Open a Sales Order.
Go to Sales – A/R > Sales Order
- Insert the following Information in the Sales Order:
Customer: C1100
Name: Jacob Electronics
Item No.: D1000
Unit Price: PhP 32,000
- Click Add. SAP Business One should flag an error message due to missing delivery date.
- Cancel the Sales Order. You can test other documents ffor this control.

b. Numeric-alphabetic
alphabetic Data Checks. Test if marketing documents in SAP Business One has this control.
- Open a Sales Order.
Go to Sales – A/R > Sales Order
- Insert the following Information in the Sales Order:
Customer: C1100
Name: Jacob Electronics
ronics
Item No.: A1000
Delivery date: Current System date
Quantity: ABC
- Click Add. SAP Business One should flag an error message due to invalid monetary value.
value
- Cancel the Sales Order. You can test other documents for this control.

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c. Limit Checks.. Test if creating a User Account in SAP Business One has this control.
- Log in to the account of manager to view to see the User Setup window.
Go to Administration > Choose Company > Change User > User ID: manager then Password: 1234
- Go to Administration > Setup > General > Users. Users – Setup window will appear. Make sure
you are in Add mode.
- Insert in the User Code field the word ‘‘Administrator’. SAP Business One will flag an error
message due to exceeding of characte
character limit.
- Cancel the Users – Setup.

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d. Validity Checks. Test if Business Partner Master Data has this control.
control.(Use
(Use Auditor’s Account)
- Go to Business Partners > Business Partner Master Data. Make sure you are in Find mode (i.e. Ctrl + F)
- In the BP Code field, d, type ‘L1000’ then press Enter. SAP Business One should flag an error message due
to no matching records.
- Cancel the Business Partner Master Data. You can try this control to other documents with known
values.

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EXERCISE 9: Audit Trail Controls

View some techniques used to preserve audit trails in SAP Business One.

a. Transaction Logs.
Every transaction successfully processed by the system should be recorded on a transaction log, which serves
as a journal.
View a list of all transactions posted in SAP Business One or generate transaction log.
- Open a document – A/R Invoice for example. Go to Sales – A/R > A/R Invoice
- In the toolbar, click the Transaction Journal tool.

- Choose All Transactions in the Original Journal field then set the posting date from 001.01.13
1.01.13 to 12.31.13.
This is to show all the transaction journal records for the whole fiscal year 2013 that could be use for
analysis.

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b. Listing of Automatic Transactions


Some transactions are triggered internally by the system. To maintain control over automatic transactions
processed by the system, the responsible end user should receive a detailed listing of all internally
generated transactions.
c. Unique Transaction Identifiers
Each transaction processed by the system must be uniquely identified with a transaction number. This is
the only practical means of tracing a particular transaction through a database of thousands or even
millions of records.

View examples of unique identifiers in SAP Business One.


a. View automatic journal entry created .
- Open a closed A/R Invoice.
Go to Sales – A/R > A/R Invoice > Switch to Find Mode by pressing Ctrl + F > Type 28 on the No. field
then press Enter.
- Click the Accounting Tab then click the Journal Remark link arrow. This will open up the automatic
journal entry created by SAP Business One for this transaction.

b. Take note of the unique identifiers in the A/R Invoice Transaction.


- Take note of the Origin field. The original transaction is navigated when the arrow is clicked. These are
just some of the originating tr
transactions:
IN - AR Invoice
RC - Incoming Payments
PU - AP Invoice
PD - Goods Receipt PO
PS - Outgoing Payments

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If the entry is entered manually, origin is JE.

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CHAPTER 3
SUBSTANTIVE TESTS

SUBSTANTIVE TESTS OF REVENUE CYCLE

Revenue Cycle Risks and Audit Concerns


In general, the auditor’s concerns in the revenue cycle pertain to the potential for overstatement of
revenues and accounts receivable rather than their understatement. Overstatement of accounts can
result from material errors in the pro
processing
cessing of normal transactions that occur throughout the year. In
addition, the auditor should focus attention on large and unusual transactions at or near period-end.
period

Testing the Accuracy and Completeness Assertions


Accuracy assertion pertains to managem
management
ent assertions that all transactions were recorded at the
appropriate amount while completeness assertion says that all transactions that should have been
recorded have been recorded. In the Revenue Cycle audit, accuracy and completeness assertions states
that all sales transactions were recorded accurately and completely.

Review Sales Documents and Balances for Unusual Trends and Exceptions
A useful audit procedure for identifying potential audit risks involves scanning data files for unusual
transactionss and account balances. For example, scanning accounts receivable for excessively large
balances may indicate that the company’s credit policy is being improperly applied.

Review Sales Invoices and Customer Master Data for Missing and Duplicate Items
Searching
ching for missing and/or duplicate transactions and data entries is another important test that
helps the auditor corroborate or refute the completeness and accuracy assertions. Duplicate and
missing transactions in the revenue cycle may be evidence of ove
overr or understated sales and accounts
receivable.

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EXERCISE 10: Testing the Accuracy and Completeness Assertion (USE AUDITOR’S ACCOUNT)

a. Review Sales Documents and Balances for Unusual Trends and Exceptions
Open a list of Sales Order for examination for any unusual trends and exception using Query.

- Open Query Generator and create a query statement to produce an ad hoc report showing the
list of all sales order
Go to Tools Menu > Queries > Query Generator

- On the Table field, Type ‘ORDR’ then press Tab. The Field names and description will appear.
(Note: ORDR is the table name of Sales Order in the MSSQL where the database used in SAP are
running)
- Double click the following field names: (Tip: You can list the field name alphabetically by double
clicking the name title)
DocNum, DocDate, CardCode, CardName, DocTotal

- Click in the Sort Byy field then double click DocTotal in the list of Field names.

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- Then click execute to produce the ad hoc report, “List of Sales Order”

Now you can examine all the Sales Order and scan for any unusual items. For example, a Sales Order
amounting to PhP 894,080 was executed at December 31, 2013 which is considered as a holiday in the
Philippines. Also, the amount is unusually large as compared with other sales order. The auditor should
inquire this to the management of the company and seek for additional information.

You can do the same procedures for other Sales documents. You just need to know the appropriate
Table Name.
(Tip: To get a list of SAP documents and their equivalent table names. Open a blank query generator. In the table
field name, type the asterisk symbol (*) then press tab. The list of table and field names will appear.)

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b. Review customer balances for unusual trends and exceptions


- Open a Blank Master Data. Go to Business Partners > Business Partner Master Data
- Change the BP Type to Customer then insert an anterisk symbol (*) in the code field then press
Enter. A List of Business Partners for customers will appear.

Upon examination of the list of customers and their balances, you noticed that the balance of
Lappy Trading is negative. This is unusual considering that customer balances are normally debit
or positive. The auditor can investigate further this exception. List your finding below and your
propose adjusting entry:
________________________________________________________________________
________________________________________________________________________
___________________________________________________
________________________________________________________________________
_____________________

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c. Review List of Customers for any duplicate items


- Open a Blank Master Data. Go to Business Partners > Business Partner Master Data
- Change the BP Type to Customer then insert an anterisk symbol (*) in the code field then press
Enter. A List of Business Partners for customers will appear.
- List alphabetically the list of customers by double clicking the BP Name Header.

As you scan the list of business partners, some of the customer names look familiar. You can further
investigate this issue by comparing the master data. Open two business partner master data, one for Jacob
Electrics and one for Jacob Electronics. Do the same for the other two then list your finding here:
__________________________________________________
________________________________________________________________________
______________________
________________________________________________________________________
________________________________________________________________________

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Testing the Existence Assertion


Existence assertion pertains to management assertions that the assets, liabilites and equity balances
exist. For the revenue cycle audit, existence assertion declares that the customer balances recorded in
the system really exist.

Send Confirmation to Customers to Confirm Balances


One of the most widely performed tests of existence is the confirmation of accounts receivable. This
test involves direct written contact between the auditors and the client’s customers to confirm
account balances and transactions.

Testing the Valuation and Allocation A Assertion


Valuation and Allocation assetion pertains to management assertions that the assets, liabilities and
equity balances are included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropri
appropriately
ately recorded. For the revenue cycle audit, valuation
and allocation assertion states that the customer balances recorded are in their proper values.

Aging Accounts Receivable


The auditor’s objective regarding proper valuation and allocation is to corro
corroborate
borate or refute that
accounts receivable are stated at net realizable value. This objective rests on the reasonableness of
the allowance for doubtful accounts, which is derived from aged accounts receivable balances. To
achieve this objective, the auditor needs to review the accounts receivable aging process to
determine that the allowance for doubtful accounts is adequate. As accounts age, the probability
that they will ultimately be collected is decreased. Therefore, as a general rule, the larger the
number
ber of older accounts that are included in an company’s accounts receivable file, the larger the
allowance for doubtful accounts needs to be to reflect the risk.

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Exercise 11: Testing the Valuation and Allocation Assertion

View the Aging of Accounts Receivable and provide for Allowance for Doubtful Accounts based on Company’s
policies.
- Open the Aging Report of the company’s customer balances
Go to Financials > Financial Reports > Accounting > Aging > Customer Receivables Aging
- In the Selection Criteriaa insert the following information:
Code: From C1100 To C2200
Aging Date: 03.31.14
Then click OK
- SAP Business One will generate Customer Receivables Aging showing the age of receivables from the
customers.
- Now the auditor can perform his analysis based on this aging and compute the appropriate amount of
Allowance for Doubtful Accounts based on the Company’s policies.
- Compute the amount of Allowance for Doubtful Accounts
According to the industry experiences, the collectability of accounts are as follow:
0 – 1 month = 100%
Over one month not over two months = 98%
Over two months not over three months = 95%
Over three months not over four months = 92%
Over four months = 90%
How much is the proposed Allowance for Doubtful Accounts? ____________

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SUBSTANTIVE TESTS OF EXPENDITURE CYCLE

Expenditure Cycle Risks and Audit Concerns


Taking the most narrow attest-function
function view, external auditors are concerned primarily with the
potential for understatement of liabilities and related expenses. Susbstantive tests of expenditure cycle
accounts are therefore directed toward gathering evidence of understatement and omission of material
items rather than their overstatement.

Testing the Accuracy Assertion


Accuracy assertion pertains to man
management
agement assertions that all transactions were recorded at the
appropriate amount In the Expenditure Cycle audit, accuracy states that all expense transactions were
recorded accurately.
Review Purchasing Documents and Balances for Unusual Trends and Exceptions
A useful audit procedure for identifying potential audit risks involves scanning data files for unusual
transactions and account balances. For example, scanning accounts payable for excessively large
balances may indicate abnormal dependency on a particular supplier.

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EXERCISE 12: Testing the Accuracy Assertion (USE AUDITOR’S ACCOUNT)


a. Review A/P Invoices for Unusual Trends and Exceptions
Open a list of A/P Invoices for examination for any unusual trends and exception using Query.
- Open Query Generator erator and create a query statement to produce an ad hoc report showing the
list of all A/P Invoice
Go to Tools Menu > Queries > Query Generator
- On the Table field, Type ‘‘OPCH’’ then press Tab. The Field names and description will appear.
(Note: OPCH is the table name of A/P Invoice in the MSSQL where the database used in SAP are
running)
- Double click the following field names: (Tip: You can list the field name alphabetically by double
clicking the name title)
DocNum, DocDate, CardCode, Ca CardName, DocTotal
- Click in the Sort Byy field then double click DocNum in the list of Field names.

- Then click execute to produce the ad hoc report, “List of A/P Invoice”

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Now you can examine all the A/P Invoice and scan for any unusual items. To have fu further
rther examination,
you can click the small graph icon to see an analysis of AP Invoice depicted on a graph.

You can do the same procedures for other Purchasing documents. You just need to know the
appropriate Table Name.

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Testing the Completeness Assertion


Completeness assertion says that all transactions that should have been recorded have been recorded.
In the Expenditure Cycle audit, completeness declares that all expense transactions were completely
recorded.
Searching for Unrecorded Liabilitiesies
The search for unrecorded liabilities involves matching the records used by the warehouse
department such as a receiving report to indicate receipt of inventory with the billing invoice from
supplier which is used to record liabilities. A receiving report with no matching billing invoice might
indicate that a liability was not recorded.

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Exercise 13: Testing the Completeness Assertion

a. Scan for any open Goods Receipt PO which could indicate that no liabilities has yet been created for
this account.
Open the Open Items List report to view any open GRPO
- Go to Reports > Sales and Purchasing > Open Items List. Then on the Open Documents drop down
menu, choose Goods Receipts POs.

- The auditor will see that there are two open GRPOs meaning, no A/P Invoice
Invoic has yet been
recorded in this account thus understating the vendor balances.

Double check the findings made by comparing the list of GRPO and A/P Invoice. Open a list of
GRPO and a list of A/P Invoice.
- Go to Purchasing – A/P > Goods Receipt PO. Make it Find mode by pressing Ctrl + F.
- On the No. field, type the asterisk symbol (*) then press Enter.
- Upon pressing Enter, a list of GRPOs will appear.
- Do the same procedure for A/P Invoice to see the list of A/P Invoice then compare the list.

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- Now, the auditor can compare the list of A/P Invoices available against the GRPO. Note your findings
below and your proposed adjusting entries:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

(Tip: To see the original entry made by SAP for the Goods Receipt PO documents, open the unmatched
GRPOs then n go to Accounting tab. Beside the Journal Remark, click the link arrow to know the original

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Testing the Existence Assertion


Existence assertion pertains to management assertions that the assets, liabilites and equity balances
exist. For the expenditure cycle audit, existence assertion declares that the vendor balances recorded in
the system really exist.

Examine Subsequent Payments to Suppliers


This test involves involves scanning the payments made in the subsequent period and check if the
payables recorded
orded in the last period were paid.

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Exercise 14:
Testing the Existence Assertion
a. Scan the payments made in the subsequent period using Query
Open a list of Outgoing Payments for the month of January 2014 (Subsequent Period) for
examination of subsequent payments.
- Open Query Generator and create a query statement to produce an ad hoc report showing the list
of Outgoing Payments for the month of January 2014.
Go to Tools Menu > Queries > Query Generator
- On the Table field, Type ‘‘OVPM’ then press Tab. The Field names and description will appear.
(Note: OVPM is the table name of Outgoing Payments in the MSSQL where the database used in
SAP are running)
- Double click the following field names: (Tip: You can list the field name alphabetically by double
clicking the name title)
DocNum, DocDate, CardCode, CardName, DocTotal
- Click in the Where field to enter the condition. Double click DocDate in the list of field names
then click Conditions button. Conditions pane will appear.
- Click again in the Where fieldfield, make sure that the cursor is on the end of T0.[DocDate].
T0.[DocDate] Then
double click the condition ‘Greater or Equal’ followed by a double click on any variable. For
example [%0]
- Another condition will be added so scroll down in the list of condition then double click ‘And’.
Continue the condition by double clicking again the DocDate in the list fo field names followed
by a double click on the condition ‘Smaller or Equal’ then double click again on any variable
except the one used before. For example, use [%1]
- Click in the Sort Byy field then double click DocDate in the list of Field names.
- Then click execute.

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- Query – Selection Criteria window will appear where we can enter our condition. Insert 01.01.14
in the Greater or Equal field and 01.31.14 in the Smaller or Equal field to show only the Outgoing
Payments made in January 2014. Then click OK.

- Now, the auditor can trace the payments to existing liabilities as of December 31, 2013. List your
findings here and your proposed adjusting entries:
________________________________________________________________________
__________________________________________
________________________________________________________________________
______________________________
________________________________________________________________________

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Testing the Valuation and Allocation Assertion


Valuation and Allocation assertion pertains to management assertions that the assets, liabilities and
equity balances are included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately re recorded.
corded. For the expenditure cycle audit,
valuation and allocation assertion states that the customer balances recorded are in their proper values.

Send Confirmation to Vendors to Confirm Balances


One of the most widely performed tests of existence is the confirmation of accounts payable. This test
involves direct written contact between the auditors and the client’s vendors to confirm account
balances and transactions.

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Exercise 15: Testing the Valuation and Allocation Assertion

View the Aging of Accounts


ounts Payable as a basis for sending the confirmation to the vendors.
- Open the Aging Report of the company’s vendor balances
Go to Financials > Financial Reports > Accounting > Aging > Vendor Liabilities Aging
- In the Selection Criteria insert the following information:
Code: From V1000 To V900
Aging Date: 12.31.13
Then click OK

SAP Business One will generate Vendor Liabilities Aging showing the age of payables to the
vendors. This aging could be the basis of the auditor in sending his confirmation of the balances to
the company’s vendors.

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SUBSTANTIVE TEST OF OTHER FINANCIAL STATEMENT ACCOUNTS

Audit of Cash
Perform manual bank reconciliation to know the correct balance of cash that should be reported by
the Company. Reconcile the Balance per SAP records and Balance per Bank Statement.

The accountant showed the auditor the Bank Statement sent by the bank for the month of
December as shown below:

Beginning Balance, December 1, 2013 PhP 112,207.20


Date Remarks Deposit Withdrawal

December 1, 2013 Debit Advice 93,000.00 19,207.20

December 7, 2013 Deposit 190,000.00 209,207.20

December 8, 2013 Encashment 25,000.00 184,207.20

December 20, 2013 Deposit 339,750.40 523,957.60

December 31, 2013 Interest 1,200.00 525,157.60

December 31, 2013 Bank Charge 500.00 524,657.60


*** Nothing Follows ***
a. Open the General Ledger of the Cash Account in SAP Business One to reconcile it with the Bank
Statement.
- Go to Financials > Financial Reports > Accounting > General Ledger
- In the General Ledger – Selection Criteria, uncheck the Business Partner Box and check the
accounts box. Make sure that no accounts are marked with ‘x’.
- Change the level of accounts to 5.
- Mark ‘x’ the CA201 – Metrobank Account No. 9021
- For the posting date From field, enter 01.01.13 and To field 12.31.13 to show the transactions
for the whole fiscal year 2013 for this account.
- Then press Ok.

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Balance per Bank Ref. No. 524,657.60


Add: Deposits in Transit

Less: Outstanding Checks

Total adjustments
Adjusted Balance

Balance per Book 1,101,550.40


1,101,5
Add:

Less:
Total Adjustments
Adjusted Balance

The deposit in the bank statement amounting to PhP 190,000.00 was traced to a deposit slip
sent by Solid Electrics on January 2014. Upon inquiry by the client, the deposit pertains to a
partial payment made by Solic Electrics regarding its amount due to the client.

Now the auditor can perform his bank reconciliation by comparing the records per bank and the
records per SAP Business One. Write below your findings and proposed adjusting entries:
____________________________________________________________________________
______________________________________________________________
____________________________________________________________________________
______________
____________________________________________________________________________

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Audit of Inventories
Ensure that inventories are stated at lower of cost or net realizable value.

The company’s manager told the auditor that on December 20, the compartment where the laptops
are being stored caved in resulting in some exterior damages on the units. The laptops are still
working properly however the physical appearance have been damage and they fear that they might
not sell it on their intended prices so they decide to hire someone to compute the net realizable
values of the laptops. This list of net realizable values were given to the auditor

Acer Laptops PhP28,000.00


Dell Laptops PhP25,000.00
Lenovo Laptops PhP28,000.00
Samsung Laptops PhP30,000.00

a. Compare the recorded costs of the inventories with their NRV and compute for the necessary
adjustment to recognize inventory loss (use Manager’s Account).
- Open the Inventory Audit Report
Go to Inventory > Inventory Reports > Inventory Audit Report
- On the Selection Criteria insert the following information in the specified field.
Change to Posting Date
From 01.01.13, To 12.31.13 to include the transactions for the whole fiscal year 2013.
Item Code: From A1000 To S1000
Then click OK.

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- The Inventory Audit Report will appear. If you click on the black arrow beside the yellow arrow, the
details of a particular item will expand. Now the auditor can know the actual cost recorded per
system and compare it with its net realizable value. Take note that the valuation method used for
the laptops is First In, First Out (FIFO).

Enter your Inventory Cost and NRV analysis here:

Laptops Cost NRV Difference

Write down your findings and proposed adjusting entries below:


____________________________________________________________________________
____________________________________________________________________________
____________________________________________________________________________

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Audit of Prepayments
Check if prepayments were representative its actual prepaid amount. If not, make necessary
adjustments to recognize the expense.

Upon checking the Trial Balance of the company, the auditor noted two items that are considered as
prepayments. Thee auditor examine the SAP Business One documents used to record the prepayments
and also the journal entry. He also examined any third party document related to that asset

b. View the Trial Balance as a basis of selecting accounts to audit


- Open Trial Balance in SAP Business One
Go to Financials > Financial Reports > Financial > Trial Balance
In the Selection Criteria, enter the following information:
- Uncheck BP Box
- Change the level to 5
- Check G/L Accounts Box
- Mark ‘x’ all G/L accounts
- Date is Posting Date
- From 01.01.13 To 12.31.13
Then click OK.
Change the Level to Level 5 to see a more detail Trial Balance

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Upon seeing the contents of the Trial Balance, the auditor decided to audit the Office Supplies account
and Insurance Expense account. He wants to se see
e the SAP Business One documents used to record
these accounts as well as any third party documents.

Open the SAP Business One document used to record Office Supplies.
- Go to Financials > Financial Reports > Accounting > General Ledger
- In the General Ledger – Selection Criteria, uncheck the Business Partner Box and check the accounts box.
Make sure that no accounts are marked with ‘x’.
- Change the level of accounts to 5.
- Mark ‘x’ the CA500 – Office Supplies
- For the posting date From field, enter 01.01.13 and To field 12.31.13 to show the transactions for the
whole fiscal year 2013 for this account.
- Then press Ok.
- The General Ledger for Office Supplies will appear.
- To view the SAP Business One document used, click the link arrow on the Doc. No. Column (i.e. PS 8)
- To view the journal entry, click the link arrow on the posting date column (i.e. 02.14.13)

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According to company’s personnel, the estimated remaining Office Supplies is 20% of the original
purchased amount.
As for the insurance, upon examination of the Insurance Contract, it is for 2 years starting on its
purchase date which is also the posting date. Do the same procedure for Insurance Expense.
(Hint: The insurance premium is recorded using Expense Method)

Note yourr findings below and your proposed adjusting entries:


__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________

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Audit of Fixed Assets


Determine the correct amount of depreciation that should be recorded for the year.

Upon checking the Trial Balance, the auditor noted that depreciation expenses were yet to be entered in
the accounting records so the auditor examine the SAP Business One documents used to record the
acquisition of the asset as well as any third party document to properly know the start date of
depreciation then compute the depreciation expense based on the company’s policy on depreciating
fixed assets.

Depreciation Method:
10% Salvage Value
5 year Useful Life – Office Equipment, Office Furniture
20 year Useful Life – Leasehold Improvements

a. View SAP Business One document u used to record Office Equipment


Open the SAP Business One document used to record Office Equipment.
- Go to Financials > Financial Reports > Accounting > General Ledger
- In the General Ledger – Selection Criteria, uncheck the Business Partner Box and check the accounts
box. Make sure that no accounts are marked with ‘x’.
- Change the level of accounts to 5.
- Mark ‘x’ the NC101 – Office Equipment
- For the posting date From field, enter 01.01.13 and To field 12.31.13 to show the transactions for
the whole fiscal year 2013 for this account.
- Then press Ok.
- The General
neral Ledger for Office Equipment will appear.
- To view the SAP Business One document used, click the link arrow on the Doc. No. Column
- To view the journal entry, click the link arrow on the posting date column (i.e. 03.29.13)
Do the same for Office Furniture, Delivery Truck and Leasehold Improvements. Just make sure
that you use the correct date of acquisition.

b. Compute the depreciation expense for the fixed assets


assets.. Use the table below for your computation.

Acquisition Acquisition Salvage Yearly 2013


Fixed Asset Date Cost Value Depreciation Depreciation
Office Equipment
Office Furniture
Delivery Truck
Leasehold Improvements
TOTAL DEPRECIATION FOR 2013

Note your findings below and your proposed adjusting entries:


__________________________________________________________________________
__________________________________________________________________________
__________________________________________________________________________

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SOLUTIONS
TO THE SUBSTANTIVE TESTING EXERCISES
(Exercises 10 - 15)

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Exercise 10-b
Review customer balances for unusual trends and exceptions.

Upon examination of the list of customers and their balances, you noticed that the balance of Lappy Trading
is negative. This is unusual considering that customer balances are normally debit or positive. The auditor can
investigate further this exception.

1. Choose Lappy Trading on the list of business partners to open the Business Partner Master Data.

2. Click the ‘link arrow’ beside the Account Balance field.

3. Account balance details of Lappy Trading will open. Change the Posting Date from ’01.01.13’ to
’12.31.13’. Then click the ‘link arrow’ beside the origin number. (ie. 25)

4. Incoming Payment document will open. If you examine the document, no invoice has been selected
for payment which is not typical for an incoming payment of A/R Invoice.

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4. This could be due to a wrong application of collection from a different customer. Examine the
balances of the customer to see if there is a similar amount. You will see that Zebra Computers has the
same balance with the wrong payment.
> Go to Business Partner Master Data.
> Go to Find mode (Ctrl + F).
> Put an asterisk on the code field then press enter.
> List of Business Partners will appear.

Proposed Adjusting Journal Entry:


Dr. Accounts Receivable – Lappy Trading 368,808.00
Cr. Accounts Receivable – Zebra Computers 368,808.00

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Exercise 10-c
Review list of customers for any duplicated items

1. Open both the Business Partner Master Data for Jacob Electrics and Jacob Electronics.
 Go to Business Partners > Business Partner Master Data.
 Go to Find mode (Ctrl + F).
 Put an asterisk on the code field then press enter.
 List of Business Partners will appear.
 Select first Jacob Electrics. Then repeat the process for Jacob Electronics.

2. Upon comparison and examination of both the Business Partner Master Data, we can conclude that
Jacob Electrics and Jacob Electronics pertain to one customer only.

3. Transfer the balance of Jacob Electrics to Jacob Electronics. Then set the Business Partner Master Data
of Jacob Electrics to ‘Inactive’. However, you can only do this on once
ce all the open invoices for Jacob
Electrics are closed.

4. Do the same process for New World Dot Net and New World Dot Net Co.

Exercise 11: Testing the Valuation and Allocation Assertion


View the Aging of Accounts Receivable and provide for Allowance fo
forr Doubtful Accounts based on Company’s
policies.
IMPORTANT: Before you compute the Allowance, make sure that you use the correct balances of the
customer. Consider the previous exercises.

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Unadjusted
Balance of Adjusted
Customer Invoices Adjustments Balance 0 - 30 31 - 60 61 - 90 91 - 120 121 +
Jacob - - 241,401.60
Electronics 201,168.00 496,214.40 697,382.40 254,812.80 201,168.00
Zebra - - -
Computers 368,808.00 (368,808.00) - - -
Lappy - - -
Trading (145,288.00) 368,808.00 223,520.00 223,520.00 -
New World - 458,216.00 -
Dot Net, Co 469,392.00 726,440.00 1,195,832.00 469,392.00 268,224.00
Solid - 424,688.00 -
Electrics,
Inc. 424,688.00 - 424,688.00 - -
Jacob - - -
Electrics 496,214.40 (496,214.40) - - -
New World - - -
Dot Net 726,440.00 (726,440.00) - - -
TOTAL 2,541,422.40 - 2,541,422.40 947,724.80 469,392.00 - 882,904.00 241,401.60
Percentage 2% 5% 8% 10%
Doubtful - 70,632.32 24,140.16
Accounts 9,387.84
Provision
for
Doubtful
Accounts 104,160.32

Proposed Adjusting Journal Entry:

Dr. Doubtful Accounts Expense 104,160.32


Cr. Allowance for Doubtful Accounts 104,160.32

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EXERCISE 13: Testing the Completeness Assertion


It was noted that there were no A/P Invoices yet recorded for the Goods Receipt PO. This means that
the particular vendor subsidiary ledgers were not yet updated. You need to create an adjusting entry to
update the vendors’ subsidiary ledgers.

1. See the journal entry created for the GRPO to create a proper adjusting entry.
 Go to Purchasinging A/P > Goods Receipt PO
 Go to Find mode (Ctrl + F).
 Put an asterisk on the vendor field then press enter.
 List of GRPO will appear.
 Select GRPO No. 27. Goods Receipt PO No. 27 will open.

2. Inside the GRPO No. 27, go to Accounting Tab then click the link arrow beside the journal remark.
Automatic journal entry created will open. Use the journal entry created as the basis for the adjusting
entry.

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3. Do the same process for GRPO No. 26 to get the total amount of adjustment needed.

Proposed Adjusting Journal Entry:


Dr. Goods Received Not Invoiced 477,120
Dr. Input Tax 60,480
Cr: PC Express 224,000.00
Cr: Hexagon Computer Shop 313,600.00

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EXERCISE 14: Testing the Existence Assertion


You should check the payments made in January 2014 of those liabilities pertaining to the year 2013 and
make sure that it is recorded in the proper period.

1. Click the link arrows beside each Document number to open the Outgoing Payment, each document
should have a related A/P Invoice set up.

2. Open the Relationship Map of each Outgoing Payment document. Right click anywhere inside the
Outgoing Payment then choose Relationship Map.

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3. Do this for all Outgoing Payment documents. Those documents with no A/P Invoice mean that no
liabilities
abilities have been recorded for 2013.
Without A/P Invoice: OP No. 63, 64, 65
With A/P Invoice: OP No. 66 and 67

4. To double check if there were really no A/P Invoices recorded for the noted Outgoing Payments. Do
this for Salaries Payable.
 Go to Financials
ials > Chart of Accounts
 Click the Liabilities drawer then select Salaries Payable.
 Click the link arrow beside the Balance to open the General Ledger of Salaries Payable
 Change the Posting Date: ‘From’: 01.01.13 ‘To’: 12.31.13
 Upon scrolling down, you wil willl see that there is no balance as of December 31, 2013.

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Proposed Adjusting Journal Entry:


Salaries and Wages 93,000
Utilities Expense 77,000
Salaries Payable 93,000
Utilities Payable 77,000

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SUBSTANTIVE OF OTHER FINANCIAL STATEMENT ACCOUNTS

Audit of Cash
1. Perform the Bank Reconciliation.

DEPOSITS IN TRANSIT – Examine the deposit documents created for the month of December then
compare this with the deposits reflected in the bank statement.
 Go to Banking >Deposits > Deposit
 Go to Find mode (Ctrl + F). Type an asterisk (*) on the Deposit No. field then press ‘Enter’
 Examine the deposits created for December then traced it to the Bank Statement. If it is not
present in the Bank Statement, those will be considered as reconciling items for Balance per
Bank as Deposits in Transit.

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OUTSTANDING CHECKS – Examine the checks that were issued for the month of December then
compare this with the checks reflected in the bank statement
 Go to Banking >Outgoing Payments > Checks for Payment
 Go to Find mode (Ctrl + F). Type an asterisk (*) on the Internal ID field then press ‘Enter’
 Examine the checks created for December then traced it to the Bank Statement. If it is not
present in the Bank Statement, those will be considered as reconreconciling
ciling items for Balance per
Bank as Outstanding Checks.

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RECONCILING ITEMS FOR BALANCE PER BOOKS


 Credit Memo: Partial collection from amount due from Solid Electrics (P190,000.00)
 Credit Memo: Interest income for the year (P1,200.00)
 Debit Memo: Bank charges for the month (P500.00)

Balance perBank Ref.No. 52


24,657.60
Add:DepositsinTransit
Lappy Trading IP No. 25 368,808.00
Lexxus Computer Shop IP No. 24 223,520.00
Jacob Electronics IP No. 23 321,868.80
EZ Electronics and Gadgets IP No. 22 357,632.00 1,271,828.80
Less:OutstandingChecks
MeralSa Ck No. 1048 45,000.00
Asiatique Computers Ck No. 1049 156,800.00
Computer Man Enterprises Ck No. 1050 302,400.00
Bank error (Transposition) 36.00 (504,236.00)
Total adjustments 767,592.80
Adjusted Balance 1,292,250.40

Balance perBook 1,10


101,550.40
Add:
Partial collection from Solid 190,000.00
Interest Income 1,200.00 191,200.00

Less: Bank Charge (500.00)


Adjusted Balance 1,292,250.40

Proposed Adjusting Journal Entry:


Dr.Metrobank Account No. 9021 190,700.00
Dr. Bank Charge 500.00
Cr. Accounts Receivable – Solid Electrics 190,000.00
Cr. Interest Income 1,200.00

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Audit of Inventories
1. Use the First-In, First-Out
Out (FIFO) method in computing the inventory value. To compute, here is an
example using ACER Laptop inventory using the Inventory Audit Report
 According to the report, there are 20 units of Acer Laptops on the day when the compartment
collapsed.
 If FIFO has been used, these units are composed of the latest purchases made.
 Count backwards from the latest purchase which is December 11 until you have 20 units.

So the cost of Acer Laptops using FIFO is computed as follows:


Date Units Purchase Price Total

12.11.13 8 27,000.00 216,000.00

11.25.13 5 26,000.00 130,000.00

10.11.13 8 24,000.00 192,000.00

TOTAL 20

2. Compare the cost computed with the net realizable value. According to standards, the inventories
should be valued at lower of cost or net realizable value (NRV). If NRV is lower, that would be the
new value of inventory and an inventory loss should be recorded. So for Acer Laptop, this would be
the computation.
Date Units Cost NRV Write Down

12.11.13 8 27,000.00 28,000.00 -

11.25.13 5 26,000.00 28,000.00 -

10.11.13 8 24,000.00 28,000.00 -

TOTAL 20

3. Since NRV is higher than cost, no write down is needed.


4. Do the same for other inventory items.

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Date Units Cost NRV Write Down TOTAL

DELL (27 units)

11.11.13 15 27,000.00 25,000.00 (2,000.00) 30,000.00

09.09.13 12 25,000.00 25,000.00 - -

LENOVO (15 units)

11.28.13 8 29,000.00 28,000.00 (1,000.00) 8,000.00

10.30.13 7 27,000.00 28,000.00 - -

SAMSUNG (No units as -


of 12.20.13) - - - -
TOTAL 38,000.00

Proposed Adjusting Journal Entry:


Dr. Inventory Losses 38,000.00
Cr. Inventories 38,000.00

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Audit of Prepayments
It is duly noted that both prepayments, Office Supplies and Insurance Expense should be adjusted.

1. For Office Supplies, 80% should be recorded as expense. That is P16,000.00.


Proposed Adjusting Journal Entry:
Dr. Office Supplies Expense 16,000.00
Cr. Office Supplies 16,000.00

2. As for the Insurance, it was initially recorded using expense method so the unexpired portion should
be recognized as asset.
 Go to Financials > Chart of Accounts
 Click the Operating Costs drawer then select ‘Insurance Expense’
 Click the link arrow beside the balance to open the ledger of Insurance Expense. Change the dates:
From: 01.01.13; To: 12.31.13
 Take note of the date of transaction which indicates the start of the insurance period.

3. Compute the unexpired portion of insurance based on the posting date of the transaction
Total Amount of Insurance Premium P50,000.00
Ratio
o of Unexpired Period (14 months) 14/24
Unexpired Portion P29,166.67

Proposed Adjusting Journal Entry:


Dr. Prepaid Insurance 29,166.67
Cr. Insurance Expense 29,166.67

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Audit of Fixed Assets


1. Obtain the date of purchase of the various fixed assets to properly compute depreciation.
(Instructions on the Quick Guide)

Acquisition Acquisition Salvage Depreciable Useful Yearly Period 2013


Fixed Asset Date Cost Value Cost Life Depreciation for 2013 Depreciation
Office Equipment 03.29.13 240,000.00 24,000.00 216,000.00 5 43,200.00 9 months 32,400.00
Office Furniture 01.15.13 200,000.00 20,000.00 180,000.00 5 36,000.00 11.5 months 34,500.00
Delivery Truck 02.28.13 1,000,000.00 100,000.00 900,000.00 10 90,000.00 10 months 75,000.00
Leasehold 01.31.13 1,500,000.00 150,000.00 1,350,000.00 20 67,500.00 11 months 61,875.00
TOTAL DEPRECIATION FOR 2013 203,775.00

Proposed Adjusting Journal Entry:


Dr. Depreciation Expense 203,775.00
Cr. Accumulated Depreciation – Office Equipment 32,400.00
Cr. Accumulated Depreciation – Office Furniture 34,500.00
Cr. Accumulated Depreciation – Delivery Truck 75,000.00
Cr. Accumulated Depreciation – Leasehold Improvements 61,875.00

*** NOTHING FOLLOWS ***

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