TBS/SIMS NOTES

RATIOS:
When quick ratio goes down cause could be CL going up which is due to sgf
portions of LTD becoming C/L.
When Debt to equity goes down cause could be increase in EQUITY which is
due to higher profits.
When A/R T/O goes down that means cr sales reduced or A/R increased or
overstated OR, sales went up but with higher A/R impact - main cause
increased sales in CY.
Items shipped on consignment during the last month of the year were
recorded as sales both sales and A/R go up with A/R at a higher rate.
A larger % of sales occurred during the last month of the year as
compared to PY.
A/R overstated due to credit memos remaining unrecorded at y/end.
Operating income goes up but net income goes down diff = interest exp
and ytax exp both have to increase to have this effect.
Gross margin % was constant but gross margin increased i.e. gp was
higher probably becoz sales increased at a higher rate than COGS.
If credit terms are restricted on several large a/cs during the year the likely
result would be a decrease in A/R. This would decrease days sales in A/R.
AUDIT RISK
1. Decrease in A/risk and RMM
Increased federal and state funding providing a profitable year would
decrease AR & RMM since mgt will have less need to overstate profits.
Elimination of a loss contingency due to a lawsuit being dropped
eliminates the possibility of understating a potential liability.
Involvement of principal s/h in mgt decreases audit risk and is not a FRF.
In general, when an owner is involved in mgt, it increases oversight over
employees and decreases risk of fraud.

2. Increase in A/risk and RMM

An initial public offering there is greater incentive to overstate profitability
and financial position, thereby increasing A/risk.
A high t/over of personnel in a/cing dept results in greater likelihood of
errors.
Changing the method of a/cing, even to a more favorable method,
increases the likelihood of errors.
 Shifting to equity method of investment from CFS increases audit risk due
to the reduced ability to obtain info and also increase RMM.
Entering into RP transaction increases the possibility that the transaction
will not be properly a/ced for.
Unusual transactions like acquiring title to a contaminated site, creates a
contingent liability thereby increasing RMM.
Guaranteeing a refund creates a contingent liability.
Moving to a computerized system even though in the long run wud be
favorable would lead to errors in the initial stages but is not FRF.
New unprofitable branch increases audit risk and is a FRF- mgt may be
motivated to minimize the negative impact by overstating the unprofitable
branchs results.
Volatility of interest rates increases the likelihood that an error will be
made in interest calculations.

1. Inherent risk for a co if a co depends on mainly one product the risk

of obsolescence wud be its inherent risk.
2. Volatility of interest rates increases audit risk but is not a FRF.
3. Availability of mortgage funds decreases audit risk and is not a FRF.

4. Instituting a new procedure whereby internal auditor distributes payroll

cheques to employees for selected cycles reduces CR.
5. Centralizing functions thereby increasing dependence on one person
increases CR.
6. When a co extends its existing warranty program on certain of its major
progs to increase revenue increases inherent risk.

Entity-level controls include: find correct section to tfer

controls related to the control environment,

controls over management override,
the company's risk assessment process,
centralized processing and controls, including shared service environments,
controls to monitor results of operations,
controls to monitor other controls, including activities to monitor the internal audit function, the
audit committee, and self-assessment programs,
controls over the period-end financial reporting process, and
policies that address significant business control and risk management practices.
 1. Ratio effect:
Omission of inventory or materials in transit = DR. inventory and CR.
COGS, therefore inventory ratio decreases as numerator decs and
denominator incs. COGS goes down means that Profit goes up therefore
ROE increases.
Omission of payment of cash dividends = DR. Dividends pd CR. Cash
Dividends reduce R/E and equity therefore reduces denominator in ROE
and so increases ROE.
Selling inventory on a/c will increase Current ratio (4:1) because
inventory goes up by cost value of stock but A/R goes up by selling
price of stock.

Remember that the inventory relief entry is involves: COGS and Inventory.
Increase or decrease in COGS affects NY which affects ROE.
Failure to record materials-in-transit accruals means that:
Dr. Purchases Cr. A/P
However, purchases have already been closed to COGS so will not impact
PURCHASES. The adjusting entry needed will be:
Dr. Inventory Cr. A/P
BANK RECONN
When deposits in transit take a long time to clear then likely that there is a
misappropriate of assets and an attempt to hide that cash shortage.
1. Balance as per bank
o confirm directly with bank
o Trace items on bank recon to cut off statement the balance as per
bank opening should be equal to the beginning balance on the cut-
off statement.
o Do not compare to general ledger IT WILL NEVER MATCH!!!
2. Deposits in transit
o Trace to cash receipts journal
o Ascertain reason for unusual delay
o Inspect sup docs
o Trace items on the bank recon to cut-off statement to see it exists.
o Trace items on the cut-off to bank recon to confirm that all deposits were
recorded.
o Do not confirm directly with bank only applies to BAL AS PER BANK.
3. Outstanding checks
o Trace to cash disbursements journal
o Ascertain reason for unusual delay
 o Inspect sup docs
o Trace items bank recon to cut off
o Trace items cut off to bank recon
4. When a bank collects a customers note the company would have received a
credit memo explaining the transaction. The auditor should inspect the credit
memo.
5. Error by bank
o Inspect debit/credit memo
o Trace items on the bank recon to cut off statement should be able to
trace the debit/credit to the cutoff statement.
6. Balance as per books compare to general ledger the balance per books
should equal the amount reported on the F/S and should agree with the amount
in the G/L.
Confirm directly with bank only for opening balance as per bank!!!
Not for anything else!!!

BADDEBT
RECORD BAD DEBT EXP (AFFECTS I/S & NRV OF A/R)
DR. BAD DEBT EXP
CR. ALLOWANCE FOR BAD DEBT
W/OFF RECABLES (DOES NOT AFFECT I/S NOR NRV OF A/R)
DR. ALLOWANCE FOR BAD DEBT
CR. A/R
DRS
If RMM in sales is high and TOC reveals 6/10 mistakes then CONFIRM ALL
BALANCES not just those above materiality threshold.
The auditor may inquire about discounting, pledging, factoring but does
not need to inquire about confirming balances as that is an audit procedure
already c/out by audit firm.
For N/REC obtain a summary schedule for all NR a/cs.
Agree each a/c balance to the T/B
Foot /recalculate all totals on the summary schedule. Even if the
source of the schedule is a spreadsheet, the spreadsheet formulae
may contain errors.
Tie the schedule to the F/S.
Petty cash is usually an immaterial amount so no need to do AP.
No need to test foot all spread sheet totals just some.
 Generally, assuming that the auditor can rely on prior year testing of PY items
means that auditor needs to focus on new A/R and review NEW loan
agreements.
Bank cut-off statements amounts on these should be found on both the bank
statements and the company prepared bank recon. Agreeing the amounts to
these 2 documents satisfied the audit objectives.
Prepaid expenses are part of the purchasing cycle and so increases will be
found on premium notices and invoices, but decreases are less likely to be
explained by these documents.
If the auditor suspects that the loan created a lien on the entitys real estate
that is not disclosed in the F/S cannot chk deed. Better to confirm terms of
borrowing arrangements with the lender. This can be accomplished by using a
std bank confirmation to the lending institution.
Lapping compare the details fo the cash receipts journal entries with the
details of the corresponding daily deposit slips and sending requests to
confirm the entitys A/R on a surprise basis at an interim date.
WORKING PAPER SYMBOLS
Symbol on the left of names of banks indicates that the auditor confirmed the
IR, payment terms and collateral for such loans.
Symbol left of current year borrowing indicate that the auditor has verified that
the CYs borrowings were properly recorded i.e. tracing the amount to the loan
agreement, a deposit and authn by BOD mins.
Normally current year reductions are payments and BOD mins will not be
checked. However, if the payment is made earlier then auditor would trace the
payment to a cancelled check and verify that the early payment was authorized
by BOD mins.
INTERNAL CONTROL PROCEDURES
If customer checks are misappropriated before being fwded to the cashier for
deposit no other way to check as no cash summary and no deposit so no bank
recon. Therefore only source to confirm is get A/R confirmation.
Errors made in recording in the cash journal which means cash book will also be
wrong, then prepare bank recon.
Goods shipped to customers do not agree with goods ordered by customers
shipping clerk must compare goods received from warehouse with SALES
ORDER not invoice.

AUDIT REPORTS/SSARs/OTHER SERVICES

 ID of F/S includes Balance sheet, and the related statements of income,
changes in the stockholders equity, and the cash flows for the year
ended and the related notes to the F/S.
When reviewed F/S are presented in comparison to a PY audited F/S, a
separate para is added describing the responsibility being assumed for the
F/S of the previous period. The separate para will not identify the
individual F/S of the previous period.
In our opinion, the schedule of profit participation referred to above,
presents fairly..in acc with provisions of the agreements referred to
above. Report on Audit of F/S prepared in acc with Special Purpose
Framework.
In our opinion, the managements assumptions provide a reasonable basis
for presenting the sgf effects directly attributable to the above-mentioned
transaction. Examination Report on Pro Forma Financial Info.
In our opinion the CFS and F/S schedules audited by us and included in
the registration statement comply as to form in all material respects with
the Act and related rules and regulations adopted by the SEC. Comfort
letter.
Actual results in the future may differ materially from mgts present
assessment of this info because events and circumstances frequently do
not occur as expected. Examination Report on MD&A.
The sufficiency of these procedures is solely the responsibility of the
specified parties Agreed Upon Procedures Report.
This report is intended solely for the info and use of the BOD of ABC co
and should not be used other than these specified parties Agreed Upon
Procedures Report.
Audit opinion on a single F/S Unmodified Audit Report for a Limited
Reporting Engagement.
We have no responsibility to update this report for events and
circumstances occurring after the date of this report Compilation
Report/Examination Report on Forecasted F/S.
The audit will not be designed to provide assurance on ICFR or to detect
sgf deficiencies in I/C Audit Engagement letter.
To the best of our knowledge and belief, no events have occurred
subsequent. Mgt Representations Letter.

Nothing came to our attention that caused us to believe that there was
any change in capital stock/LTD.with the amounts shown in the
unaudited CBSheet. Letter for underwriters auditor providing
negative assurance on unaudited F/S.
 Any report on I/C and performance of company is Auditors
communications on reportable conditions.

Any report on difficulties with mgt or mgt consulting with other a/cants are
OTHER THAN WITH REPORTABLE CONDITIONS to audit committee.