AUDIT PROGRAM DESIGN – PART II
Audit Program Design – Part II
Matthew Montag, Dominique Payne, Benjamin Powers, and Shynelle Cade
March 26, 2012
March 26, 2012
Chairman, President and CEO
Apollo Shoes Inc.,
123 Shoestring Lane
Shoetown, ME 00001
Dear Mr. Lancaster:
Anderson, Olds, and Watershed CPAs want to again thank the management of Apollo Shoes Inc. for allowing us to continue with the necessary auditing activities. AOW will work diligently to ensure the trust placed in our services is well-founded, and results in a desire for an ongoing auditing partnership for future needs. As requested, we have ...view middle of the document...
” The internal controls currently in place provide information for assessing the control risks involved. Once the controls and deficiencies are determined, AOW will proceed with the tests and procedures. Some of the deficiencies found include inadequate separation of duties, improper authorization, inadequate documents and records, and duplicated documents. “For audits of public companies, the auditor must perform tests of key controls, and evaluate the impact of the noted deficiencies on the auditor’s report on internal control over financial reporting” (Arens et al., 2006, p. 419).
After gathering information on the volume of testing controls, AOW will proceed by designing the tests of controls. According to Arens et al. (2006), “For each key control, one or more tests of controls must be designed to verify its effectiveness.” One internal control of Apollo Shoes Inc. requires credit approvals for sales. To test this internal control, we will examine all sales transactions for the proper credit approvals. Another test of control involves examining all sales invoices for supporting bill of ladings. These are just two of many tests of controls used in auditing Apollo Shoes Inc.’s internal controls.
The design of substantive tests of transactions for sales may sometimes depend on the results from the tests of controls. Some of the objectives used for this part of the audit include recorded sales that exist, recorded sales for which there were no shipments, sales recorded more than once, and shipments made to nonexistent customers. AOW will also check to ensure the sales transactions were accurately recorded in the proper accounts. It is important to note that the same methodology used for designing tests of controls and substantive tests of transactions for sales is used for collections (Arens, Elder, & Beasley, 2006).
Payroll and Personnel Cycle
The process for testing the payroll and personnel cycle consists of several steps. Tests of controls and substantive tests of transaction are, according to Arens, Elder, and Beasley (2006), “the most important means of verifying account balances in the payroll and personnel cycle” (p. 565). Apollo Shoes is a publicly traded company, so the tests of internal controls must provide sufficient evidence to express an opinion on the effectiveness of internal control in addition to ensuring control risk is below the maximum. Substantive tests of transactions will focus on determining if the audit objectives are met for transactions. Analytical procedures will help detect misstatements through comparison to previous period expenses.
The characteristics of the payroll and personnel cycle generally result in effective internal control. The federal and state governments enforce payroll regulations with harsh penalties, and employees are vocal when paychecks are incorrect or late (Arens et al., 2006). The tests of controls begin with inquiring of management whether Apollo Shoes employs...