Auditing Manual For A Poultry Business

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NATURE OF THE BUSINESS
Flores Poultry Farm is a sole proprietorship operated by Engr. Eden Flores-Borja
that is engaged in the business of growing broiler chicken and is under an agreement
with Bounty Agro Ventures Incorporated, a corporation duly organized and existing in
the business, among others, of breeding, hatching and growing broiler chicks, poultry
dressing and processing, and manufacturing of poultry and livestock feeds. The poultry
farm and its facilities are situated at a 13-hectare land in Brgy. Laniton, San Lorenzo,
Camarines Norte and has been fully operating since April of the year 2014. Its building
can house up to 8000 chickens in its full capacity.
The Flores Poultry Farm is tasked with providing land, well-maintained housing,
feed storage, facilities, poultry equipment, skilled labor, water, power, light, fuel, and all-
weather access and in-farm roads for proper caring and growing of broilers to
marketable size and for the continuous and unimpeded access to the farm. The Flores
Poultry Farm is also responsible for holding in trust and securing for Bounty Agro
Ventures Inc. a specified number of 36-day old chicks, quantity of feeds, vaccines, and
other items which Bounty Agro Ventures Inc. will provide. Securing permits, licenses,
and paying such taxes as may be required insofar as the Flores Poultry Farm is
concerned are all in the hands of the operator.

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AUDIT OF DIFFERENT ACCOUNTS

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AUDIT OF CASH
Introduction
Cash is the customary medium of exchange in business and trade. It comprises of,
among others, currency, coins, checks, bank drafts, money orders, and demand
deposits. The following accounts may be established by most of the firms so that
management will be provided with sufficient details regarding cash balances:
1. Petty Cash Fund- accounts for currency and coins used to make immaterial
disbursements.
2. Cash on Hand- account for cash not yet remitted to the bank.
3. Cash in Bank- maintained for checking accounts.
Cash is valued at face value. However, when the recoverable amount is estimated
to be lower than the face amount, cash should be valued at estimated realizable
value.
Internal Controls Over Cash Transactions
Cash in General
1. All cash that should have been received was in fact received, recorded
accurately, deposited promptly.
2. Cash disbursements have been made only for approved purposes and have
been properly documented.
3. Cash balances are kept at adequate but not excessive, levels by projecting
expected cash receipts and payments related to normal operations.
4. Do not allow any employee to handle a transaction from beginning to end.
5. Isolate cash handling from recordkeeping.
6. Concentrate receiving cash as much as possible.
7. Record cash receipts straightaway.

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8. Encourage customers to get official receipts.
9. Deposit day’s cash receipts intact.
10.Make all disbursements by check, with the exception of small expenditures, petty
cash.
11.Conduct a monthly bank reconciliation prepared by employees not responsible
for the issuance of checks or custody of cash. The completed reconciliation
should be reviewed by the appropriate officials.
12.Bank accounts and check signors must be authorized by the owner.
13.All bank accounts in the business’ name should be recorded in the books.
14.Cash should be counted on surprise basis.
Petty Cash Fund
15.Imprest system should be adopted so that the balance of petty cash fund in the
general ledger is fixed.
16.Petty cash custodian should be independent of cashiers.
17.Limit the petty cash fund balance and amount payable from the fund.
18.Petty cash fund vouchers should be written in ink, amount in words and figures.
19.Replenishment checks should be made in the name of the custodian and
properly supported.
20.Petty cash vouchers, when replenished, should be presented to the check signor
for inspection.
21.Petty cash vouchers should be cancelled with the word “PAID” by the chech
signor to prevent duplicate replenishments.
22.Petty cash vouchers should be acknowledged by the payee of supported by
invoices for items purchased.
Cash Receipts
23.Inbound collections should be controlled.
24.Cash collections should be forwarded directly to the cashier before being
handled by the any one responsible for bookkeeping.

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25.For collections through mail, a list should be prepared by an employee other than
the cashier and bookkeeper.
26.Limited endorsements should be placed on incoming checks as soon as they are
received whether the checks are currently dated or post-dated.
27.When payments are made in person, cash register tapes, sales slips, or collector
receipts should be prepared and checked by an employee independent of the
cashier.
28.Duplicate deposit slips should be prepared, receipted by the bank and retained
on file.
29.Maintain a log of all money received.
30.Keep cash/checks in a locked and secured area until they can be deposited.
31.Personal checks should not be cashed.
Cash Disbursements
32.Checks should be prenumbered.
33.Unused checks should be controlled and kept in a secure place.
34.The supply of blank checks should not be made available to the check signors.
35.Signing and countersigning of blank checks should not be allowed.
36.Drawing checks payable to cash should be prohibited.
37.Spoiled checks should be destroyed.
38.Signature plates should be protected.
39.All checks signed should be properly accounted for.
40.Disbursement vouchers should be properly supported.
41.After signing of disbursement checks, supporting papers should be cancelled.
42.There should be a proper cut-off of receipts and disbursements.

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Audit Program for Cash
Company Balance Sheet Date
The company has the following general ledger accounts that are classified in the cash caption
of the balance sheet.
General Ledger
Account Number Description
Bank
Account Number
Authorized
Check Signer
Audit Program for Cash
Audit
Objectives
Audit Procedures for Consideration
N/A
Performed
by
Workpaper
Index
FINANCIAL STATEMENT ASSERTIONS
E/O Existence or occurrence. V/A Valuation or
allocation.
C Completeness. P/D Presentation
and disclosure.
R/O Rights and obligations.
AUDIT OBJECTIVES
A. Cash exists and is owned by the client (assertions E/O
and R/O).
B. Cash balances reflect a proper cutoff of receipts and
disbursements (assertions E/O, C, and V/A).
C. Cash balances as presented in the balance sheet
properly reflect all cash and cash items on hand, in transit, or on

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deposit with third parties (assertions E/O, C, and P/D).
D. Cash balances are properly classified in the financial
statements, and any restrictions on the availability of funds are
properly disclosed (assertions R/O and P/D).
IDENTIFICATION CODES
The letters preceding each of the above audit objectives, i.e., A,
B, etc., serve as identification codes. These codes are
presented in the left column labeled Audit Objectives when a
procedure accomplishes an objective. If the alpha code appears
in a bracket, e.g., [A], [B], etc., the audit procedure only
secondarily accomplishes the objective. If an asterisk precedes
a procedure, it is a preliminary step or a follow up step that does
not accomplish an objective.
BASIC PROCEDURES
A 1. Request confirmation as of the audit date for each bank
account. Also request confirmation of material cash in savings
institutions, certificates of deposit, and compensating balances.
Retain copies of all confirmations in the workpapers. Mail
second requests if necessary.
¯ If the client only has a few bank accounts, confirmations
should generally be sent for every account. However, if the
client has one or two primary accounts and numerous
secondary accounts that have minimal activity, confirmations
might only be requested for the primary accounts. For the
accounts not confirmed, the bank balance shown on the bank
reconciliation can simply be agreed to the bank statement.
¯ In addition to the standard bank confirmation form to
confirm deposit accounts (for example, checking accounts,
savings accounts, or certificates of deposit) the auditor should
consider separately confirming details of existing cash-related
matters such as the following with the appropriate official of the
financial institution responsible for the client’s account:
¯ ¯ Compensating balance requirements or restrictions on
withdrawals of funds.
¯ ¯ Automatic investment services.
¯ ¯ Cash management services.
¯ ¯ Certificates of deposit held in safekeeping
¯ Normally, account numbers or certificate of deposit
numbers to be confirmed should be listed. Bank account
numbers are often incorrectly listed, thus you may want to check

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these before mailing.
¯ Retain a copy of your bank confirmation request in case a
second mailing is necessary. In lieu of a second mailing,
consider whether a phone call to the bank may be more
effective.
¯ Inefficiencies can be avoided by relying on alternative
procedures for confirmations not received. Rather than incur
significant time trying to follow up on nonresponses (or incorrect
responses) for secondary accounts, the auditor might elect to
simply agree the bank balance per the bank reconciliation to the
bank statement.
* 2. Determine those bank accounts for which subsequent
period cutoff bank statements may be necessary and request
from the bank(s) by letter that such cutoff statements be mailed
directly to our (auditors’) post box.
Acct. Name &
No.
Bank
Address
Cutoff
Period
¯ Normally, a small business will have one primary bank
account used for general receipts and disbursements for which

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a cutoff may be requested. Other accounts may not have
sufficient transaction volume to necessitate testing by using a
cutoff bank statement.
¯ If possible, procedures that use cutoff bank statements
should be timed to allow the return of the statement without
interruption of the client’s normal operations.
A, B, C,
[D]
3. Obtain copies of each account’s bank reconciliation for
the workpapers and perform the following procedures:
a. Trace the bank balance on the reconciliation to the
standard bank confirmation received from the bank (or the
balance per bank statement for any accounts not confirmed).
b. Trace the reconciled book balance to the general
ledger, trial balance, or lead schedule as applicable.
c. Test the clerical accuracy of the reconciliation and detail
supporting schedules.
d. Review the cash receipts and disbursement ledgers for
each bank account for a reasonable period (normally five
business days before and after the balance sheet date) or
perform other appropriate procedures to identify interbank
transfer checks and deposits, then visually determine recording
in proper period. Specifically determine that:
(1) Transfers between each ledger were recorded in the
same period, i.e., all before-year end transfers were recorded in
each ledger before year end, and vice-versa for post-year end
transfers.
(2) Transfers not clearing the bank in the same accounting
period as they were initiated are properly reflected as
reconciling items on bank reconciliations.
Note: If interbank transfers during this period are too
numerous to make a visual determination feasible, consider an
additional procedure to prepare a transfer schedule.
e. Review the nature and extent of the reconciling items
(primarily deposits in transit and outstanding checks) for
reasonableness. For bank accounts with unusual items or a
large volume of reconciling items, perform the following
procedures using a cutoff or subsequent month bank statement:
(1) Compare the beginning bank balance on the cutoff
bank statement to the bank reconciliation. Investigate any
differences.
(2) Trace deposits in transit per the bank reconciliation to
deposits in the cutoff bank statement noting reasonableness of
the time period between book and bank recording.
(3) Inspect selected canceled checks returned with the

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cutoff bank statement. Trace checks dated before the balance
sheet date to the list of outstanding checks.
(4) Inspect the dates that checks cleared the bank.
Investigate any large or unusual outstanding checks that cleared
with the cutoff statement, but took a long time to clear, and/or
outstanding checks that did not clear (still outstanding). Such
checks may be more properly designated accounts payable if
they were dated before year end, but not mailed until after year
end.
(5) Determine the propriety of other reconciling items as
deemed necessary.
Practical Considerations:
¯ These procedures should be performed for accounts that
have significant activity or unusual items. For most small
businesses, these procedures will only be necessary for the
main operating account.
¯ In recent years, some banks have abandoned the practice
of returning canceled checks to the client with the monthly bank
statement. Such banks may send the auditor canceled checks
or copies of such checks with the cutoff statement if the client
makes a special request to appropriate bank personnel well in
advance of the cutoff period. The auditor might confirm the
details of disbursements with payees listed in the client’s
records as an alternative to examining a canceled check.
f. For savings account balances and certificates of deposit,
tie confirmation amounts to general ledger amounts. Consider
the possibility of unrecorded interest or substitution of certificate
numbers.
¯ Audit inefficiencies often occur because of poorly prepared
bank reconciliations. Have the client clearly document the
following:
¯ ¯ The date and deposit slip total for each deposit in transit.
¯ ¯ The check number, date written, payee, and amount of
each outstanding check in lieu of the frequently received adding
machine tape.
¯ ¯ The nature and cause of each major reconciling item,
including the date the item first appeared.
¯ For some small businesses, the nature and extent of
reconciling items, i.e., deposits in transit and outstanding

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checks, in most bank accounts are insignificant; accordingly,
additional procedures are unnecessary. This would be true for
most small imprest payroll bank accounts. However, the nature
and extent of reconciling items in the general account normally
require additional procedures.
D 4. Review the confirmation(s) received from the bank or
other financial institutions along with loan and debt agreements,
corporate minutes, and inquiries of management and determine
whether: (Coordinate this work with your debt and contingency
procedures in other program areas.)
a. Accounts are subject to withdrawal restrictions.
b. There are related guarantees, endorsements and/or
letters of credit, including guarantee arrangements for related
parties.
c. There are amounts designated for special purposes.
d. Amounts are restricted in any manner, including
minimum balance requirements of loan agreements or debt
service funds established by debt indentures, or compensating
balances maintained for or by related parties.
e. Amounts are appropriately classified as cash, cash
equivalents, or other short-term investments.
* 5. After performing all appropriate procedures, return
cutoff bank statements and obtain a receipt from the client
evidencing their return.
* 6. Consider the need to apply one or more additional
procedures. The decision to apply additional procedures should
be based on a consideration of whether information obtained or
misstatements detected by performing substantive tests or from
other sources during the audit alter your judgment about the
need to obtain a further understanding of control activities, the
assessed level of risk of material misstatements (whether
caused by error or fraud), and on an evaluation of whether the
basic procedures have been sufficient to achieve the audit
objectives. Attach audit program sheets to document additional
procedures.
* 7. Consider whether procedures performed are adequate
to respond to identified fraud risk factors.
CONCLUSION
We have performed procedures sufficient to achieve the audit

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objectives for cash, and the results of these procedures are
adequately documented in the accompanying workpapers. (If
you are unable to conclude on any objective, prepare a memo
documenting your reason.)

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AUDIT OF ACCOUNTS RECEIVABLES
Introduction
Receivables not only include claims against contract and other customers, but
also include a variety of miscellaneous claims such as loans to employees and owners,
claims for refunds, and advances to suppliers.
Presentation and disclosure are the main concerns of auditors regarding this
account.
Internal Controls Over Accounts Receivables and Sales of Rejected Broilers
Transactions
1. Credit standing, in case of a credit sale of rejected broilers, must be approved
first before proceeding with the sale.
2. Notice to the billing employee must first be given in case of deliveries to
customers other than the Bounty Agro Ventures Inc.
3. Sales invoice with errors must properly be cancelled.
4. Internal control over credit sales is strengthened by a division of responsibilities
for the following duties:
 Sales order preparation
 Credit approval
 When sales orders are received, the employee responsible for
credit approval must refer to the customers’ file for credit limit and
credit standing.
 Evidences of authorization must be shown in approved sales
order.
 The billing employee prepares the sales invoice to be given to the
customer.
 The bookkeeper updates the accounts receivable subsidiary
ledger with reference to the sales invoice.

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 Issuance of rejected broilers
 Delivery
 Billing
 Invoice verification
 Maintenance of control accounts
 Maintenance of subsidiary ledgers
 Approval of allowances
 Authorization of write-offs of uncollectible accounts
5. Delivery receipts, sales invoices and other pertinent documents must be pre-
numbered and accounted for.
6. Cash on delivery sales should be documented appropriately.
7. There must be adequate controls on sales discounts and allowances.
8. Customers of rejected broilers must first inspect the birds personally.
9. Collection efforts should be continued even after receivables are written off.
10.Miscellaneous receivables should be immediately recognized.
11.Employees’ advances should be authorized by the proper official or the owner.
12.Mathematical accuracy of accounts receivable subsidiary ledgers should be
checked and reconciled with the general control account monthly.
13.Reviewing of the balances should be done by an employee other than the
disbursing and receiving officers.
14.Whenever practicable, aging of accounts receivables should be done.
15.Monthly statements should be sent to customers with outstanding accounts.
16.Accounts receivables should be confirmed at least once a year.

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Audit Program for Accounts Receivable
The company has the following general ledger accounts that are classified in the
accounts, notes, or other receivables captions of the balance sheet:
General
Ledger
Number
Description or Brief Purpose
of the Account
Current or
Noncurrent Asset?
Audit
Objectives
N/A
Performed
by
Workpaper
Index
allocation.
and disclosure.
AUDIT OBJECTIVES
A. Accounts receivable are authentic obligations owed to
the company at the balance sheet date (assertions E/O, R/O,
and V/A).
B. Accounts receivable include all amounts owed to the
company at the balance sheet date (assertion C).
C. The allowance for doubtful accounts is adequate but
not excessive. If the direct write-off method is used, all
significant doubtful accounts have been written off, and the bad
debt exposure in the remaining accounts is insignificant
(assertions V/A and P/D).

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D. Pledged, discounted, or assigned accounts receivable
are properly disclosed. Related party receivables are properly
disclosed (assertions R/O and P/D).
E. Accounts receivable are appropriately classified in the
balance sheet, and required disclosures are made (assertion
P/D).
presented in the left column labeled “Audit Objectives” when a
BASIC PROCEDURES
* 1. Obtain or prepare an aged trial balance of accounts
receivable.
a. If the trial balance is prepared by the client, test the
clerical accuracy. Do not test the accuracy of the aging of
individual accounts until you start Step 7.
b. Briefly inquire of management as to steps taken to
ensure the trial balance is complete, i.e., that all receivables due
the company are included on the trial balance.
c. Reconcile the balance to the general ledger account
balance.
¯ Meet with the client before the balance sheet date and
arrange for a duplicate copy of the trial balance for your
workpapers.
¯ If the listing is manually prepared, instruct the client to
identify each customer and account number on the aging and to
leave adequate space to record subsequent collections. Stress
the importance of clarity and neatness in preparing the schedule
as it will be the primary worksheet.
¯ Utilize client employees whenever possible to reduce the
time required to test clerical accuracy. For example, for long
reports, remove several pages and have the client foot the
remaining pages, then add your page totals. Also, avoid footing
all the columns on the trial balance. Instead, foot two columns
and crossfoot the total line.

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* 2. Review the aged trial balance to determine if there are
natural groups within the total population of accounts.
¯ ¯ Customers with individually significant account balances or
one customer with numerous small account balances that, when
totaled, are significant..
¯ ¯ Accounts with unusual characteristics other than the peso
amount of the balance. Such characteristics might include
significant past due balances, an unusual customer name,
accounts prone to misstatement, etc.
¯ ¯ Accounts with credit balances.
¯ ¯ Related party accounts.
¯ ¯ All other accounts.
¯ The groups do not need to be documented or listed in a
separate schedule. Tickmarks can be used to identify accounts
within a group, or you can simply have a mental awareness of
each individual group. Groups may also be identified by simply
scanning the trial balance.
A, E,
[B], [C]
3. Select those groups that will be confirmed 100% by the
use of positive confirmation letters. (Do not confirm accounts
until the subsidiary ledger has been reconciled to the general
ledger.)
a. Identify the accounts selected on the aged trial balance.
b. Review those accounts selected for confirmation with
the owner/manager. If the client objects to a confirmation with a
particular customer, determine if this restriction will affect your
ability to accomplish the audit objectives for receivables.
c. Have the client prepare the positive confirmation letters
reflecting, if possible, on the face of the letter or in an attached
statement, the individual invoice number, invoice date, and
invoice amounts that make up the customer’s balance.
d. Include the audit firm’s return address on all envelopes
to ensure that all confirmation requests that are undeliverable by
the post office are returned directly to the audit firm.
e. Be sure that the confirmations are to be returned
directly to the auditor and contain a return envelope for this
purpose.
f. Control the mailing of the letters.
g. Send second requests approximately 10 days after the
first mailing. Determine the cause for confirmation requests

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returned as undeliverable. If possible, obtain new addresses
and remail.
h. Retain copies of all confirmations in the workpapers.
A, E,
[B], [C]
4. For the remaining balance that is not confirmed 100% in
Step 3, determine if a sample of the accounts making up the
balance should be selected for confirmation.
a. If sampling is appropriate, document the sampling
selection process.
b. Repeat program Steps 3a through 3h on accounts being
sampled.
A, E,
[B], [C]
5. For significant employee receivables, notes receivable,
or other receivables not on the aged trial balance, consider
mailing positive confirmations. Retain copies of all confirmations
in the workpapers.
Practical Consideration:
¯ Normally these receivables are not material, and audit
procedures are not warranted. If the owner/manager has a large
payable to the company, the auditor should evaluate whether
the receivable actually represents salary or a dividend.
Confirmation of a loan to an owner/manager can also be
obtained in the management representation letter if the
owner/manager is the party signing the representation letter.
A, E,
[B], [C]
6. Process the confirmation replies:
a. Reconcile differences reported by customers on
confirmation replies.
¯ In most instances, it is efficient to have the client’s
personnel perform the initial reconciliation of the confirmation
replies. In that case, a copy of the confirmation reply should be
provided to the client with instructions on the format they should
use to reconcile the customer’s balance to the client’s balance.
If practical, client personnel should be requested to attach
supporting documentation, such as validated deposit slips,
invoices, and shipping documentation, to each reconciliation to
facilitate examination by the auditor.
¯ Respondents sometimes use nontraditional means such as
fax machines or e-mail to answer confirmation requests. In
those cases, the auditor should consider the following additional
steps:

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¯ ¯ Verifying the source and content of the response over the
telephone and documenting in the workpapers that this was
done.
¯ ¯ Requesting that the respondent mail the original
confirmation directly to the auditor.
b. Perform alternative procedures for those customers that
do not respond.
¯ Generally, the following approach can be used to perform
alternative procedures for each nonreply:
¯ ¯ First, examine cash receipts subsequent to the
confirmation date.
¯ ¯ If a portion of the balance has not been collected, examine
sales invoices and corresponding shipping documents.
The auditor may also examine shipping documents on the
subsequently collected portion if additional evidence about sales
cutoff is needed.
¯ If practical, alternative procedures should be performed on
all nonreplies. However, if a nonreply will be extremely time-
consuming to test, consider classifying the entire nonreply
customer balance as a misstatement. In that case, if the
nonreply was part of a sampling application, the misstatement
should be projected to the population. Then, if the resulting
projected misstatement in the total account is acceptable,
additional testing is not necessary.
c. For groups confirmed 100%, summarize the results of
confirmation procedures and indicate the total accounts and
balances confirmed without exception, confirmations reconciled,
nonreplies with alternative procedures performed, and
confirmations and nonreplies with misstatements.
d. For accounts receivable groups that were sampled,
summarize and evaluate the sample results and project the
misstatements in the strata.
e. Based on results of confirmation procedures, determine
if additional confirmation or alternative procedures are
warranted on untested customer balances.
C 7. Test the adequacy of the allowance for doubtful
accounts:
a. Have the client post subsequent cash collections to your
copy of the aged trial balance obtained in Step 1.
b. Test the client’s subsequent collections on major
account balances by examining deposit slips and remittance

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advices. Document the account balances selected for testing.
c. If uncollected accounts are significant, test the aging of
the remaining accounts. (It is advisable to use original sales
documents to test the propriety of aging.)
d. If practical, for each material past due account, inspect
credit files, review customer correspondence, or discuss the
status of collection with the client. Identify potentially doubtful
accounts.
e. Inquire if there are collection problems likely to occur
with accounts that are presently classified as current.
f. If you become aware that individual accounts have been
converted to notes, determine if they should be classified as
noncurrent assets.
g. Relate your findings in Steps 7a to 7f to the allowance
for doubtful accounts and evaluate its adequacy. If meaningful,
consider computing prior year bad debt statistics and prior year
collection statistics.
h. If the company uses the direct write-off method,
evaluate the exposure that significant uncollectible accounts
remain in accounts receivable.
i. Consider the collectibility of significant employee
receivables, notes receivable, or other receivables not on the
aged trial balance.
¯ Comments made by client personnel should not be taken at
face value without other evidence to support the accuracy of
client comments.
¯ Other considerations or approaches that you may wish to
use are:
¯ ¯ Use alternative approaches to develop an independent
estimate.
¯ ¯ Compare the allowance with actual results after the
balance sheet date.
¯ ¯ Consider the client’s process for estimating the allowance,
including the qualifications and experience of the person who
determines the amount of the allowance account.
¯ ¯ Determine whether the estimate of the allowance balance
was subjected to management review.
¯ ¯ Determine what steps the company takes to identify any
unusual variations and the reasons therefor.
¯ In evaluating the allowance for doubtful accounts, it may be
helpful to determine a range of amounts within which the

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company’s bad debt allowance would be acceptable. If the
company’s balance does not fall in this acceptable range, the
potential error would be the difference between the client’s
amount and the closest amount in the acceptable range.
¯ For significant delinquent balances, it may be necessary to
evaluate the creditworthiness of the debtor and the value of any
collateral pledged to secure payment of the receivable.
D, [A] 8. Based on a review of confirmation replies from financial
institutions, loan agreements, minutes, inquiry with the
owner/manager, and work performed in other audit areas,
determine if there are pledged, discounted, or assigned
receivables.
D, E 9. Based on work performed in previous steps and
knowledge obtained in other audit areas, determine that the
following accounts are identified for separate classification in the
balance sheet.
a. Large credit balances that should be classified as
accounts payable.
c. Material employee receivables.
e. Noncurrent receivables that should be reclassified.
B 10. Evaluate whether evidence obtained in the preceding
steps and from procedures in the audit of revenue is adequate
to support the completeness assertion, i.e., whether all
transactions are included in revenue and related accounts
receivable balances.
A, [B] 11. Perform the following analytical procedures. For any
significant differences noted, investigate the nature and cause of
the differences and consider whether additional procedures are
needed to test sales cutoff:
a. Compare sales for the last month of the fiscal year to
sales for the rest of the year and the first month after year end.
¯ Basic accounts receivable confirmation procedures and the
preceding analytical procedures are usually adequate to test the
sales cutoff. However, the following circumstances warrant
consideration of performing additional cutoff tests:
¯ ¯ When accounts receivable are confirmed as of an interim
date.
¯ ¯ When there has been a large increase in sales during the
last month of the year under audit or in the first month of the
new year.

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¯ ¯ When there has been a large increase in sales returns or
credit memos in the first few months after year end.
¯ ¯ When the auditor’s knowledge of the client and/or
understanding of internal control indicates a high risk of material
misstatement of sales cutoff.
procedures.
* 14. Consider whether the results of audit procedures
indicate reportable conditions in internal control and, if so, add
to the memo of points for the communication of reportable
conditions.
CONCLUSION
objectives for accounts receivable, and the results of these
procedures are adequately documented in the accompanying
workpapers. (If you are unable to conclude on any objective,
prepare a memo documenting your reason.)

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AUDIT OF INVENTORIES
Introduction
The term inventories is used to take account of goods on hand ready-for-sale,
either merchandise of a trading concern or finished goods of a manufacturer, goods in
the process, and goods to be consumed directly or indirectly, consisting of raw
materials, purchased parts and supplies.
Special importance is given to inventories in accounting and auditing literatures
because of the following reasons:
1. Inventories usually make up the largest current asset of an enterprise and are
very vulnerable to mistakes and irregularities.
2. There are many different methods for costing and valuation of inventories being
allowed by the accounting profession.
3. The determination of inventory value directly affects the cost of goods sold and
has a major effect upon net income for the year.
4. The determination of inventory measure, condition, and worth is a complex and
challenging task for the auditor to accomplish. Many objects such as precious
gems, construction in progress, agricultural/farm products, present difficulties of
identification and valuation.
Internal Controls Over Inventories and Disposal Costs
1. Requests to Bounty Agri Ventures Inc. of vaccines, medicines, broiler chicks,
disinfectants, et cetera, should be properly accounted for.
2. Request forms should be serially numbered.
3. Request forms should be forwarded to the person/s in charge of accounting and
receiving.
4. There should be a division of labor among requisition, receiving and recording
functions.

24 | P a g e
5. All deliveries of Bounty Agri Ventures Inc. to the poultry farm should be
monitored and documented by proper employees.
6. The person in charge of receiving should detect damaged or defective
inventories.
7. The person in charge of receiving should prepare a receiving report.
8. Farm personnel and those responsible for the housing of the broiler chicks
should count, inspect, and acknowledge the receipt of inventories.
9. Farm personnel and those responsible for the housing of the broiler chicks
should list the names of the count team, the exact time of the count, the cut-off
information that should be listed and the forms to be filled up.
 They should also notify the accounting department of the amount
received.
 Limit access to the poultry farm.
 Keep the chicks and supplies in safeguarded areas with locks and other
forms of security measures.
 Installation of burglar alarms and CCTVs.
 Employment of security guards.
 Insurance coverage
 Proper arrangement of chicks and supplies
10.Issuance of chicks to Bounty Agri Ventures Inc. for evaluation and or to other
customers should be documented and properly authorized.
11.Physical count of chicks should be conducted after every loading of broilers.
12.Monitoring of the broiler chicks with the aid of the veterinarian should be made
weekly and any abnormalities observed by the farm personnel should be
immediately forwarded to the management.
13.Poultry feeds and supplies, such as vaccines, disinfectants, medicines, should be
kept in a conducive area.
14.Accounting records should be up to date and reconciled with the physical count.
15.Proper valuation should be established and followed consistently.
16.Sanctions should be strictly implemented in case of violating employees.

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Audit Program for Inventory
General
Ledger
Number
Description or Brief Purpose
of the Account
Cost Method
Used
Audit Program for Inventory
Audit
Objectives
N/A
Performed
by
Workpaper
Index
allocation.
and disclosure.
AUDIT OBJECTIVES
A. Inventory reflected in the accounts represents a
complete listing of products, materials, and supplies owned by

26 | P a g e
the company, and such assets are physically on hand, in transit,
or stored at outside locations at the balance sheet date
(assertions E/O, C, and R/O).
B. Inventory listings are accurately compiled, extended,
footed, and summarized, and the totals are properly reflected in
the accounts (assertions E/O and V/A).
C. Inventory is valued in accordance with generally
accepted accounting principles consistently applied
(assertion V/A).
D. Excess, slow-moving, obsolete, and defective inventory
is reduced to net realizable value (assertion V/A).
E. Inventory is properly classified in the balance sheet,
and disclosure is made of pledged or assigned inventory, major
categories of inventory, and the methods used to value
inventory (assertions R/O and P/D).
BASIC PROCEDURES
A, [C] 1. Observe the company’s physical inventory.
* 2. Discuss the valuation procedures used by the client to
determine any changes in specific products, changes in
production methods, accounting policies used, methods used to
accumulate cost of inventory items, the pricing policies and
procedures of the company, results of physical observation
during the year and their effects on inventory valuation.
B 3. Test the clerical accuracy of the company’s physical
inventory summary.
a. Trace test counts recorded during the observation to the
physical inventory summary.
b. On a test basis, compare the tag or count sheet control
numbers obtained during the observation to those used to
compile the inventory summary. Investigate any tags or count
sheets added or deleted.

27 | P a g e
c. If applicable, trace in quantities at remote locations that
were confirmed.
d. Test the extensions of several items and foot the totals.
Scan the listing for obvious decimal slides.
e. Reconcile the physical inventory summary to the
general ledger account balance. Investigate and explain major
reconciling items.
¯ If footing is performed, use the client to foot the inventory
summary to a “blind total,” i.e., remove five pages and add them
to the client’s total.
¯ Preferably, a copy of the inventory summary should be
obtained for the workpapers. However, inventory summaries are
very voluminous, and it may be difficult to bind a copy in the
workpaper files. A separate “bulk file” can be used in these
circumstances. Be sure to arrange for an auditor’s copy of the
listing.
* 4. Review the physical inventory listing and determine
individually significant items Document the items selected.
¯ Normally, individually significant items would be:
¯ ¯ Those with extended totals that are individually significant to the financial
statements.
¯ ¯ Those key products that are representative of many other
similar items carried in the company’s inventory.
¯ ¯ Those products that have a prior history of costing errors
or are otherwise prone to misstatement.
¯ Most small businesses have a few key items of inventory
that, once tested, can be used as a basis to test the
reasonableness of other items in inventory.
¯ Selection of individually significant items is not sampling.
Normally the testing of such items coupled with analytical tests
of the remaining items in inventory provides adequate evidential
matter about pricing. However, sampling procedures should be
considered when the population has numerous items (none of
which are more significant than the other) or when effective
analytical procedures cannot be applied to the remaining
population strata.
5. Determine if the valuation method is in accordance with
GAAP, consistently applied.

28 | P a g e
C 6. If a sample is selected to test the pricing of inventory:
a. Determine the sample size
b. Document the sampling plan, including the items
selected.
c. Test the items selected by performing program Steps 5
and 6.
d. Evaluate the results and project the misstatement.
¯ Normally the scope of items selected in Step 4 is adequate
to test the pricing.
¯ Extreme care should be exercised in projecting the
misstatement. Misstatements noted in an inventory price test
are often not random, i.e., they are peculiar to the category of
the item tested. In such cases, it is generally preferable to
isolate and separately evaluate items that may be susceptible to
or affected by those same types of misstatements.
D 7. Determine whether allowances have been made for
scrap, obsolete, unsalable, slow-moving, or overstocked items.
Perform the following procedures:
a. Determine the client’s method for identifying potential
problems.
b. Compare information obtained in the observation of
physical inventory count to the final inventory listing.
c. Review perpetual records, sales analyses, and other
information to determine actual usage of the items during the
year.
d. Review old or inactive jobs and determine whether
individual items are properly valued based upon potential
market value.
e. Compare the prior year listing of obsolete items to the
final inventory listing of the current year to determine that prior
year valuations have not been increased.
f. Investigate and explain any unusual exceptions to these
steps.
¯ Care should be taken not to assume that positive comments
made by client employees provide adequate evidence to offset
other indications of obsolescence problems.

29 | P a g e
A 9. Trace all shipping and receiving transactions selected
for testing during the inventory observation to the appropriate
journals or detail lists of accounts payable. Determine that these
transactions are properly reported in the period to which they
apply.
E 10. From a review of bank confirmations, debt
confirmations, directors’ minutes and inquiry of management,
determine whether any inventory has been pledged or assigned
to others to collateralize debt. Summarize any such situations
for disclosure.
procedures.
conditions
CONCLUSION
objectives for inventory, and the results of these procedures are

30 | P a g e
AUDIT OF PROPERTY, PLANT AND EQUIPMENT
Introduction
The term “property, plant and equipment” generally denotes noncurrent tangible assets,
including those held under capital leases used by a trade to generate and issue its
goods and services. The term “fixed assets” is also used to define the property, plant
and equipment accounts. Related accounts that are audited in the same mode as
property, plant and equipment are leasehold improvements and construction in
progress.
Internal Controls Over Property, Plant and Equipment and Related Expenses
1. A subsidiary ledger comprising of a separate record for unit of property should be
provided.
2. Each property record should have the following information
 Asset description
 Asset identification number
 Asset serial number
 Supplier
 Date purchased or constructed
 Voucher or work order numbers
 Total cost
 Location
 Whether owned, leased or borrowed
 Estimated useful life
 Salvage value
 Depreciation method
3. Property records should reflect additional acquisitions, expenditures, retirements,
et cetera.

31 | P a g e
4. There should be a physical count of property periodically which must be
reconciled with the records.
5. There must be a system of authorization as to acquisitions to ensure that all
acquisitions are legitimate, necessary and proper.
6. Disposal and retirements need to be properly approved.
7. The management’s accounting policies should clearly state the policy concerning
the capitalization and expending of items.
8. Small tools and items should be safeguarded and should be physically counted
at the end of the balance sheet date.

32 | P a g e
Audit Program for Property
The company has the following general ledger accounts that will be classified in the
property component of the balance sheet.
General Ledger Account Number
Description of Account Fixed Asset
Accumulated
Depreciation
Related
Expense
Audit
Objectives
N/A
Performed
by
Workpaper
Index
allocation.
and disclosure.
AUDIT OBJECTIVES
A. Property, plant, and equipment reflected in the accounts
represent a complete listing of capitalizable cost of assets
purchased, constructed or leased by the company, and such
assets are physically on hand. Accordingly, noncapitalizable
costs are properly expensed, and capitalizable costs are

33 | P a g e
excluded from maintenance or other expense accounts
(assertions E/O, C, and R/O).
B. Property, plant, and equipment is valued at cost in
accordance with GAAP (assertion V/A).
C. The costs and related depreciation applicable to all
sold, abandoned, damaged, or obsolete property have been
properly removed from the accounts (assertions E/O, C, and
V/A).
D. Depreciation charged to income during the period is
adequate but not excessive and has been computed on an
acceptable basis consistent with that used in prior years
(assertion V/A).
E. The balances in the depreciation allowance accounts
are reasonable, considering the expected useful lives of the
property units and estimated salvage value. Accordingly, the net
carrying values of property presented in the financial statements
are expected to be recoverable in the ordinary course of
business (assertion V/A).
F. Property is properly classified in the balance sheet, and
liens, significant fully depreciated assets, idle property, and
property held for investment purposes are properly disclosed.
The financial statements also include disclosure of the major
classes of depreciable assets, accumulated depreciation,
depreciation methods and amounts, basis of valuation, amounts
of capitalized interest, capital leases, impaired assets, assets
held for sale, and asset retirement obligations (assertion P/D).
G. Information necessary to prepare the company’s tax
return has been obtained (optional objective if the auditor also
has tax return responsibilities).
BASIC PROCEDURES
* 1. Determine the most efficient workpaper approach to
audit property—(a) work directly from a copy of the company’s
detailed property records or (b) use a lead schedule that

34 | P a g e
summarizes the transactions in each account, then supplement
with detailed schedules showing significant additions,
retirements, or adjustments to each account. Test the clerical
accuracy of these workpapers, cross reference amounts, and tie
totals to the general ledger.
¯ The auditor’s firm may also be engaged to prepare the
detailed property records. When this occurs, it is normally less
expensive to have one of the firm’s paraprofessionals update
the property records before the start of the audit.
¯ If a summary lead schedule is used as the primary
workpaper, it should contain the following columns for each
property and related accumulated depreciation account.
¯ ¯ Prior year-end general ledger property balance.
¯ ¯ Current year additions to property.
¯ ¯ Current year retirements of property.
¯ ¯ Other adjustments (a column just in case there were
transfers between property accounts).
¯ ¯ Current year-end general ledger property balance.
¯ ¯ Adjustment column(s) (this can be one column or separate
debit and credit columns).
¯ ¯ As adjusted current year general ledger property balance.
¯ ¯ A column with a brief description of the depreciation
method and life.
¯ ¯ Prior year-end general ledger depreciation allowance
balance.
¯ ¯ Additions to the allowance account for current year
depreciation.
¯ ¯ Reductions to the account for current year retirements,
sales, disposals, etc.
¯ ¯ Other adjustments (a column just in case there were
transfers between allowance accounts).
¯ ¯ Current year-end general ledger allowance balance.
¯ ¯ Adjustment column(s).

35 | P a g e
¯ ¯ As adjusted current year general ledger allowance
balance.
A, B,
[C]
2. For current year additions to property, perform the
following procedures:
a. Inquire of the owner/manager if there are any major
additions (purchased or constructed by the company or
capitalizable leases) that are omitted from the workpapers.
Relate these facts to additions you observed during the
inventory observations or plant tours.
b. If repairs and maintenance accounts have material
balances, obtain an analysis of transactions in the account.
Scan the analysis to determine if additional vouching of repairs
and maintenance is necessary. If so:
(1) Examine significant invoices for repairs and
maintenance expenses. Document the items tested.
(2) Determine if the expenses contain significant
components that should be capitalized as current year additions
to property, plant, or equipment.
C 3. For current year retirements, perform the following
procedures:
a. Inquire of the owner/manager if there are any major
retirements, sales of property, abandonments, or damages to
property not reflected on the workpapers obtained in Steps 1
and 2. Relate these facts to retirements, abandonments, etc.,
you noted during the inventory observation or plant tours.
b. Scan revenue accounts for significant proceeds from
the sale of assets. Determine if the related cost and
accumulated depreciation of the assets sold are reflected in the
retirement workpapers obtained in Steps 1 and 2.
c. Inquire if any major sales of fixed assets were
sale/leaseback transactions. If so, determine the propriety of
accounting for them.
d. Scan the workpapers obtained in Steps 1 and 2 to
determine if additional procedures are warranted. Additional
procedures normally are not warranted unless there are
significant retirements.
D 4. Test the adequacy of current year depreciation by
performing the following procedures.
a. Inquire of the owner/manager if there has been any
change in depreciation lives or methods, and if there are
significant amounts of fully depreciated assets.
b. Scan the workpapers obtained in Steps 1 and 2 to
determine if useful lives of assets are reasonable, if depreciation

36 | P a g e
methods are in accordance with GAAP and consistent, and if
depreciation expense for the year appears reasonable.
c. Perform analytical procedures, if practical, to test the
reasonableness of the current year depreciation. (A predictive
test based on prior year methods and ratios may be effective.)
d. If considered necessary, recompute depreciation
expense on selected assets.
e. Cross-reference current year depreciation charged to
the various allowance accounts to depreciation reflected in the
expense accounts.
E 5. Using information obtained in the above procedures,
evaluate whether the remaining useful lives of assets are
reasonable and if the net carrying values of property are
recoverable in the ordinary course of business.
¯ Auditors should be aware of inconsistent approaches to
writedowns. Inconsistency may indicate an attempt by
management to manipulate earnings.
F, [A],
[B]
6. Determine the following based on inquiry of the
owner/manager and the results of procedures performed in
other areas (i.e., review of minutes, items noted during inventory
observations, confirmation procedures in liabilities and reading
lease agreements):
a. Whether idle property and property held for sale is
appropriately identified and valued.
b. Whether encumbrances and liens related to property
have been identified. Conversely, whether property currently
pledged as collateral on a loan has not been sold or damaged.
c. Whether significant amounts of property held for
investment purposes are properly identified.
d. Whether significant capitalizable leases exist that are
not reflected in the schedules obtained in Steps 1 and 2. (If so,
propose adjustments to record such capital leases.)
e. Whether the company has any legal obligations
associated with the retirement of long-lived assets that should
be recognized
F 7. Obtain or prepare workpapers showing the proper
classification of idle property, property held for sale, and capital
leases.
F 8. Summarize in the workpapers the information needed to
prepare any required financial statement disclosures.

37 | P a g e
procedures.
conditions.
CONCLUSION
objectives for property and its related depreciation allowance
accounts, and the results of these procedures are adequately
documented in the accompanying workpapers. (If you are
unable to conclude on any objective, prepare a memo

38 | P a g e
AUDIT OF DEFERRED CHARGES AND OTHER ASSETS
Introduction
Advances for services or benefits to be received are properly regarded as deferred
charges. The balance sheet group “Other Assets” includes assets that do not fit in some
other categories. Examples of these are the following:
1. Long term advances to officers
2. Long term receivables
3. Deposits to utility companies
4. Security deposits on leased properties
5. Deferred income taxes
Internal Controls Over Deferred Charges and Other Assets
1. A periodic review is required to determine if the balances are stated properly.
2. Long term deferred charges should be established only by authorized persons.
3. Accounting entries should be monitored closely.

39 | P a g e
Audit Program for Deferred Charges and Other Assets
The company has the following general ledger accounts that will be classified in
the prepaid, deferred charge, intangible, or other assets captions of the balance sheet.
General Ledger Number
Description or
Brief Purpose of Account
Current or
Noncurrent Asset?
Audit Program for Deferred Charges and Other Assets
Audit
Objectives
N/A
Performed
by
Workpaper
Index
allocation.
and disclosure.
AUDIT OBJECTIVES
A. Deferred charges and other assets represent a complete
listing of the company’s costs that are allocable to future periods
and that can reasonably be expected to be realized through
future operations or otherwise (assertions E/O, C, R/O, and
V/A).
B. Other assets are properly amortized or written off on an
acceptable basis consistent with that used in prior periods. Any

40 | P a g e
permanent impairment of balances is recognized by write-downs
charged to operations (assertion V/A).
C. Deferred charges and other assets, and their related
amortizations or write-downs, are properly described and
classified. Any restrictions, pledges, or liens against other
assets are disclosed (assertion P/D).
BASIC PROCEDURES
A, B, C 1. For deferred charges
a. Review the nature of each account and evaluate if it is
appropriate to allocate such cost to future periods.
b. If there are significant deferred tax assets, test these
balances when performing the audit of income taxes.
c. Compare the current year asset balances to the prior
year asset balances and explain unusual variations. Review the
balances in the related current year expense amortization
accounts and compare them to the prior year’s balances.
Explain unusual variations noted by these procedures.
d. Vouch significant additions to invoices, purchase
agreements, minutes, etc. Document the items tested.
e. Determine the reasonableness of the remaining asset
balances and remaining amortization lives. Determine if the
amortization methods are in accordance with GAAP and are
consistent with prior years.
f. Determine the proper financial statement descriptions
and classifications between current and noncurrent assets.
A, B, C 2. For other assets such as deposits and cash surrender
values of life insurance:
a. Vouch significant additions to deposits.
b. Review the reasonableness of major cash surrender
values of life insurance.

41 | P a g e
(1) Review the policy for major cash surrender values and
determine that the company is indeed the beneficiary or
otherwise owns the cash surrender value. If possible, compare
cash surrender values to valuation tables in the policy.
(2) Inquire if there are any policy loans against cash
surrender values. If there are loans, consider whether they have
been appropriately accounted for.
(3) Consider confirming the current status of life insurance
policies. Retain copies of all confirmations in the workpapers.
c. Determine the proper description and classification
between current and noncurrent assets.
procedures.
conditions.
CONCLUSION
objectives for deferred charges, deferred charges, intangibles,
and other assets, and the results of these procedures are

42 | P a g e
AUDIT OF LIABILITIES
Introduction
The term accounts payable is used to describe short-term obligations arising
from the acquisition of goods and services in the normal course of business. Usual
transactions generating accounts payables include purchase on credit of merchandise,
raw materials, plant assets, and office supplies. Other causes of accounts payable
include the receipt of services, such as legal and accounting services, advertising,
repairs, and utilities. Interest-bearing obligations should be excluded from accounts
payable and shown distinctly.
Accounts payable arising from purchase of goods or services and most other
liabilities are usually supported by invoices and statements received from providers.
However, accrued liabilities generally amass over time, and management must make
accounting approximations of the year-end liabilities. Such estimates are often needed
for salaries, pensions, interests, taxes and related items.
Internal Controls Over Accounts Payable
1. Authorization should be required both for the incurring of liabilities and payments.
2. In the case of purchases, payroll and other expenses, authorization is indicated
in the documents such as purchase requisitions, purchase orders, payroll sheets
and expense vouchers.
3. Detailed records should be kept such as voucher register, subsidiary accounts
payable ledger, note register, et cetera.
4. The system should also provide for adequate forms and documentation.
5. Pre-numbered purchase orders, receiving reports, et cetera are the sources of
information as to how much will be paid and to whom payments should be made.
6. If there are discounts, they should be availed. Payments are made when due.
7. Subsidiary records should be reconciled periodically to general ledger accounts.
Any discrepancy should be investigated and properly taken up in the books.

43 | P a g e
Audit Program for Accounts Payable
the accounts payable and other liabilities captions of the balance sheet:
Description or
Brief Purpose of the Account
Audit Program for Accounts Payable
Audit
Objectives
N/A
Performed
by
Workpaper
Index
allocation.
and disclosure.
AUDIT OBJECTIVES
A. Accounts payable represent a complete presentation of
authorized current obligations that arose from the purchase of
goods or services. Accounts payable are properly classified as
current liabilities, and disclosure is made of related party
payables, payables with explicit payment terms, and assets
pledged as collateral against payable balances (assertions E/O,
C, R/O, V/A, and P/D).
B. Accrued and other liabilities represent a complete
presentation of unpaid cost and expenses for which the benefit

44 | P a g e
has been received in the current period, and such balances are
computed, classified, and described in a consistent manner
(assertions E/O, C, R/O, V/A, and P/D).
BASIC PROCEDURES
Accounts Payable
A 1. Obtain or prepare a listing of trade accounts payable as
of the balance sheet date.
a. Test the clerical accuracy of the listing and reconcile the
balance to the general ledger. (If the client maintains accounting
records on the cash basis, also test the journal entry necessary
to record the accounts payable.)
b. Scan the listing for large debit balances and consider
confirming individually significant debit balances during the
accounts receivable audit procedures. Prepare a reclassifying
adjustment if debit balances are significant. Retain copies of all
confirmations in the workpapers.
c. Scan the listing for related party accounts payable.
Prepare appropriate financial statement disclosures. Also,
inquire if there are noninterest bearing liabilities with explicit
payment terms included in the listing. If so, consider
reclassifying such term liabilities to notes payable and consider
whether the liabilities should be discounted. Also, inquire if
assets are pledged as collateral on such liabilities.
d. Perform a search for unrecorded liabilities to a date on
or near the conclusion of fieldwork:
(1) Inspect files of unprocessed invoices and vendor
statements. If the goods or services were received on or before
year end, determine if the liability is included in the accounts
payable listing (or the listing of accrued liabilities).
(2) Review the cash disbursements journal for
disbursements after the balance sheet date: obtain and examine
supporting detail for material disbursements and determine if the

45 | P a g e
goods or services on the paid invoices were received on or
before year end. If so, determine if the liability is recorded.
Document the source and selection criteria for items tested. (If
the company uses a voucher register, perform the same
procedures on material transactions vouchered after the
balance sheet date.)
(3) Inquire of responsible client personnel about their
knowledge of additional sources of unprocessed invoices,
unrecorded commitments, or contingent liabilities. (See the
separate general program for additional procedures to detect
commitments and contingent liabilities.)
(4) Trace receiving cutoff information obtained during the
inventory observation to the accounting records, noting whether
the liability for the merchandise is recorded in the proper
accounting period.
Accruals and Other Liabilities
B 2. Scan the working trial balance and determine those
accrual or other liability accounts that require additional testing.
a. Determine the basis and method of accrual.
b. Test the reasonableness of the accrual by recalculating
the amount, performing a predictive test of the amount, or by
examining subsequent payments.
c. See the general program for additional testing of
commitments and contingencies and representations of legal
counsel.
d. Consider whether immaterial balances appear
reasonable.
[B] 3. Consider whether an accrued loss should be recorded
for environmental remediation liabilities.
* 4. Relate the findings in the search for unrecorded
liabilities to the accrued balances.
[B] 5. Scan the expense accounts in the working trial balance
and compare their balances to prior year balances. Investigate
unusual fluctuations that may indicate an unrecorded accrual.
A, B 6. Summarize in the workpapers the information needed to

46 | P a g e
procedures.
conditions.
CONCLUSION
objectives for accounts payable and other liabilities, and the
results of these procedures are adequately documented in the
accompanying workpapers. (If you are unable to conclude on
any objective, prepare a memo documenting your reason.)

47 | P a g e
AUDIT OF LONG-TERM LIABILITIES
Introduction
Long-term liabilities is defined as obligations existing at the balance sheet date
which are not reasonably expected to be liquidated during the next operating cycle but
are to be liquidated at some later date. Long-term liabilities are usually substantial in
amount.
Long-term liabilities include obligations such as:
 Bonds payable of all types
 Real property mortgage
 Chattel mortgage
 Long-term notes payable
 Pension plan obligations
 Loans payable
 Obligations under capital leases
The formal document creating bond indebtedness is called indenture. When
creditors supply capital on a long-term basis, they often insist upon placing certain
restrictions on the borrowing party.
Internal Controls Over Long-term Liabilities
1. Effective internal control over long-term liabilities begins with the authorization of
incurring the debt.
2. The auditor’s appraisal of internal controls relating to bonds and notes and loans
must extend to the handling of interest payments.
3. The management must maintain detailed records of the long-term liabilities which
includes the original and outstanding amounts, the interest and principal
payments, due dates and penalties and charges.
4. Periodic reconciliation must be made to monitor the balances.

48 | P a g e
Audit Program for Long-term Debt
the notes payable and long-term debt captions of the balance sheet:
Description or
Brief Purpose of the Account
Audit Program for Long-term Debt
Audit
Objectives
N/A
Performed
by
Workpaper
Index
allocation.
and disclosure.
AUDIT OBJECTIVES
A. Notes payable, long-term debt, and debt equivalents
represent a complete listing of authorized debt (assertions E/O,
C, R/O, and V/A).
B. Such debt is properly classified between current and

49 | P a g e
long-term portions, and required disclosures have been made
(assertions V/A and P/D).
BASIC PROCEDURES
A, B 1. Obtain or prepare an analysis of notes payable, long-
term debt, capitalized lease obligations, and other financing
transactions or arrangements, such as lines of credit.
a. For significant notes or financing arrangements that will
not be confirmed on the standard bank confirmation, have the
client prepare separate confirmation letters.
(1) Address the letter to an official at the financial
institution who is responsible for the client’s account or is
knowledgeable about such transactions or arrangements.
(2) Be sure that the confirmations are to be returned
directly to the auditor and contain a return envelope for this
purpose.
(3) Control the mailing of the letters.
(4) Send a second request approximately 10 days after the
first mailing. Determine the cause for confirmation requests
returned as undeliverable. If possible, obtain new addresses
and remail.
(5) Retain copies of all confirmations in the workpapers.
b. Compare debt terms and debt balances as of the
balance sheet date to amounts confirmed on the standard bank
confirmations or other confirmations. Investigate any
differences.
c. Test the reasonableness of interest expense and
accrued interest payable for the year.
d. Consider the need to impute interest on noninterest-
bearing notes.
B 2. Summarize in the workpapers the information needed to

50 | P a g e
a. Review loan and debt agreements and determine if
assets are pledged and if there are any restrictive covenants.
Make financial statement disclosure points for pledged assets
and loan restrictions. Determine if the company is in compliance
with restrictive covenants.
b. Examine lease agreements and determine if any leases
should be capitalized. Summarize in the workpapers the
financial statement disclosures for both capital and operating
leases.
c. Determine the current portion of long-term debt.
Summarize in the workpapers the disclosures for note terms,
interest rates, and maturities over the next five years.
procedures.
conditions.
. CONCLUSION
objectives for notes payable and long-term debt, and the results
of these procedures are adequately documented in the
accompanying workpapers. (If you are unable to conclude on
any objective, prepare a memo documenting your reason.)

51 | P a g e
AUDIT OF INCOME STATEMENT ACCOUNTS
Sales of Rejected Broilers are made whenever broiler chickens bred in the
poultry farm have not met the standards of the contracting parties. The grower is to be
charged with penalties and charges but gets to keep the rejects to resell them.
Disposal Costs are equivalent to Cost of Goods Sold and is used to reflect the
expenses relating to the sales of rejected broilers incurred by the poultry farm.
Expenditures concerning the farm’s properties and equipment are normal
following their acquisition. A major audit consideration is whether such expenses should
be accounted for in the current period in the income statement or in the balance sheet
as an addition or reduction. As a general rule, expenditures should be capitalized if the
benefits extend to future periods through the extension of useful life of the asset.
The subject enterprise’s major business activities are bound by the contract
between the management and Bounty Agro Ventures Inc. and breaches of contract are
subject to penalties.
Other expense accounts such as utilities expense, salaries expense, et cetera
are all incurred by the management for the current operations of the farm and are
included in the income statement.

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Audit Program for the Income Statement
The company has the following general ledger account groupings classified in the
following captions in the income statement.
General
Ledger Number
Account
Description
Income Statement
Component
Audit Program for the Income Statement
Audit
Objectives
N/A
Performed
by
Workpaper
Index

53 | P a g e
allocation.
and disclosure.
AUDIT OBJECTIVES
A. Revenue is for valid transactions in the ordinary course
of business that are recorded correctly as to account, amount,
and period, and uncollectible amounts, returns, or allowances
are adequately provided for (assertions E/O, R/O, V/A, and
P/D).
B. Recorded revenue includes billings at the correct
amount for products shipped or services provided (assertion C).
C. Costs of products or services are valid, complete, and
recorded correctly as to account, amount, and period
(assertions E/O, C, R/O, V/A, and P/D).
D. Expenses are valid, complete, and recorded correctly
as to account, amount, and period (assertions E/O, C, R/O, V/A,
and P/D).
E. Revenues, cost of products or services, expenses, and
extraordinary, unusual, or infrequent items are properly
described and disclosed in the income statement (assertion
P/D).
BASIC AUDIT PROCEDURES
* 1. Inquire of management or review documentation
obtained previously on the nature of the client’s business and
industry and the factors that affect operations. Inquire about any
major changes during the period. Obtain an understanding of
the client’s revenue recognition policies and determine that they
are in accordance with GAAP. Inquire of management about,
and evaluate, changes in revenue recognition policies and
significant, unusual, and complex transactions occurring at or

54 | P a g e
near year end.
¯ It is important that the auditor understand the business and
how it makes money. Discussion with the owner/manager may
provide insight on how management views its approach to
making a bottom-line profit. The auditor’s understanding
normally should include:
¯ ¯ The types of products and services sold.
¯ ¯ Whether the client’s business is seasonal or cyclical.
¯ ¯ The client’s and the industry’s marketing and sales
policies.
¯ ¯ Whether the client’s compensation arrangements depend
on recording of revenue (for example, whether sales
commissions are based on invoiced or collected amounts,
frequency for paying sales commissions, etc.).
¯ ¯ Client policies related to sales returns, discounts,
extension of credit, delivery, and payment terms.
¯ ¯ What personnel are involved in processes affecting
revenues (such as order entry, extension of credit, and
shipping).
A, B 2. Perform an analytical test of sales by obtaining for the
workpapers a schedule summarizing sales by major product line
and geographic location for the year compared to prior year
amounts, budgets, or other expectations. Analyze this schedule
and critically evaluate and document explanations for significant
differences that are unusual in amount or nature.
C 3. Obtain or prepare for the workpapers an analysis of
sales, cost of sales, and gross revenue summarized by product
line, department, location, or other meaningful division, in total
and by meaningful interim period (monthly, quarterly, etc.).
Perform the following procedures:
a. Test the analysis by selecting a few categories and
compare the amounts shown with those recorded in the sales
journal. Trace the sales journal balances to the general ledger.
b. Review the analysis and identify any unusual trends or
variations within the period or compared to the prior period.
c. Determine the average or standard mark-up percentage
for goods sold, if such percentage exists. Calculate the gross
profit using the normal percentage (with an allowance for

55 | P a g e
spoilage or waste) and compare it to the actual percentage
realized during the period. Document the comparison.
d. Obtain and document sound business reasons for large
or unusual differences in interim or total amounts included in the
analysis.
D 4. For specific selected expense accounts that are
sensitive or subject to unusual risk, select specific individual
large disbursements and examine the documents supporting
such transactions. This should be considered for repairs and
maintenance, legal fees, consulting fees, and similar accounts,
and any other expenses that should be vouched because the
auditor, or his firm, has tax return preparation responsibility.
a. Explain the nature and reason for any expense amounts
that lack the proper support.
b. Determine that the amounts tested are properly
classified and recorded in the correct general ledger account.
c. Document the items tested.
¯ Note: A common form of fraudulent financial reporting in
small businesses is to charge fixed asset additions to repairs
and maintenance or some other expense account to reduce
income taxes. If the auditor has identified risk factors that
indicate management may be inclined to understate income for
tax reasons through inappropriate means, consideration should
be given to testing material repair and maintenance transactions
to determine if amounts should be capitalized as fixed assets.
D 5. Review and document the large or unusual differences
in specific expense accounts compared to the prior period actual
amounts and, if available, the current period budget. From
discussions with management and analysis of evidence from
other audit areas, obtain and document explanations for the
variations noted.
¯ It is important to obtain sound business reasons for
significant differences, (not just excuses) and to corroborate
those explanations.
¯ The explanations should be consistent with changes noted
and tested in balance sheet areas.
D 6. Review the payroll procedures with management and
determine the key factors related to payroll (if it is significant).
Determine the total employees by type or class from a review of
the payroll records. Also identify the normal rate of pay for
employees at various levels. Design and document a predictive

56 | P a g e
test of the total compensation expense recorded and compare
the results with the salary expense in the general ledger.
Document explanations for significant or unusual differences.
¯ In most small business audits, payroll can be effectively
tested by a well-designed analytic test. In some engagements,
however, payroll transactions may need to be tested, and audit
sampling may be necessary.
¯ The auditor may find it necessary to test a few individual
compensation amounts to supporting documents to obtain
satisfaction about the validity of the data used.
E 7. Scan the accounting records for large and unusual
transactions and review evidence obtained in other audit areas
to determine any matters that should be disclosed in the
financial statements. Cross-reference work done in balance
sheet areas to the related revenue and expense accounts. It is
important to relate information from balance sheet audit areas to
disclosure requirements for the income statement. Typical areas
of concern are property and equipment, inventory, liabilities
(leases), and income taxes.
¯ When scanning for large and unusual transactions, auditors
should pay particular attention to nonstandard journal entries,
especially those made at or near the end of the reporting period.
¯ Auditors should consider the business purpose of significant
or unusual transactions.
procedures.
conditions.

57 | P a g e
CONCLUSION
objectives for the income statement, and the results of these
procedures are adequately documented in the accompanying
workpapers. (If you are unable to conclude on any objective,
prepare a memo documenting your reason.)
Additional Audit Procedures for the Income Statement
Instructions: Additional procedures will occasionally be necessary on some small
business engagements. The following listing, although not all-inclusive, represents
common additional procedures and their related objectives.
Completeness of Sales
B Perform a test of sales completeness by applying the
following procedures:
a. Select a sample of original shipping documents.
Document the items selected.
b. Trace the information on the documents to the
related sales invoices. Determine that details are
appropriately reflected on the invoice.
c. Determine that the total amount of sales reported on
the invoice is properly computed and approved.
d. Trace the amounts on sales invoices to proper
recording in the sales journal or general ledger, as
appropriate.
e. Determine that proper accounting treatment has
been applied to these sales transactions.
Revenue Recognition
A a. If the company had sales for which the earnings
process was not complete, consider whether revenue was
appropriately deferred.
¯ Generally, the earnings process is not complete unless

58 | P a g e
all of the following criteria are met:
¯ ¯ evidence of the final understanding between the parties
to the exchange transaction exists,
¯ ¯ delivery has occurred or services have been performed,
¯ ¯ the sales price is fixed or determinable, and
¯ ¯ collectibility is reasonably assured.
b. If the auditor, based on his or her understanding of
the client’s business or consideration of fraud risk factors,
decides to modify procedures related to revenue recognition,
consider confirming additional information with customers in
conjunction with accounts receivable confirmation
procedures.
A If the auditor, based on his or her understanding of the
client’s business or consideration of fraud risk factors,
decides to perform additional procedures related to sales
cutoff, perform the following procedures:
a. Analyze the ratio of sales in the last month or week
of the period to total sales for the period.
b. Compare revenues recorded daily for the periods
shortly before and after year end for unusual fluctuations.
c. Compare sales credits for returns subsequent to year
end with monthly sales credits during the year to determine if
there is an unusual increase that may indicate contingent
sales or special concessions to customers.
d. Compare monthly cash receipts during the year to
cash receipts subsequent to year end to determine if receipts
subsequent to year end are unusually low compared to the
collection history during the months under audit.
e. Vouch large or unusual sales made at year end to
original source documents.

59 | P a g e
Cash Disbursements
C, D Determine whether the company records expense amounts
using a voucher system or as they are actually paid. Based
on the method used by the company, select a sample of
vouchers or cash disbursements incurred during the year
charged to expense categories. Document the items selected
and perform the following procedures:
a. Compare the amount, payee or vendor, date, and
description to the vendor’s invoice and canceled checks, if
appropriate.
b. Determine that the transaction was properly
authorized.
c. Determine that the expense is an appropriate
transaction for the company.
d. Trace the expense amount to determine that it was
properly classified in the general ledger.
e. Summarize exceptions and determine the results of
the overall test.
Additional Procedures in Response to Fraud Risk
Assessment Related to Accounts Payable and Cash
Disbursements
C, D If the auditor, based on his or her consideration of fraud risk
factors, decides to modify procedures related to accounts
payable or disbursements, the following procedures should
be considered:
a. Review the vendor list for any unusual patterns, such
as names that may be similar but not identical to names of
approved vendors and vendors that have multiple addresses.
Review vendor files for unusual items, such as vendor
invoices that appear different from the norm, consecutive
vendor invoice numbers, preprinted and not customized
forms, different delivery addresses, different telephone
numbers, and other unusual patterns.
b. Examine disbursement records for payments of the
following types:
(1) Payments charged to expense accounts in which it
is suspected that fraudulent payments are being hidden.
(2) Payments for services that do not require delivery of
goods or significant documentation to obtain payment (for
example, payment of sales commissions, consulting fees,
repair and maintenance, etc.).
(3) Voided checks. Cash may be embezzled by
charging an expense account, crediting accounts payable,

60 | P a g e
and voiding the check written to pay the payable and
removing it from the mail.
(4) Checks other than payroll checks made out to
employees, or checks with a vendor address or phone
number that is the same as an employee’s.
(5) Checks with a vendor name that is similar in sound
or appearance to a legitimate vendor’s name.
(6) Payments for amounts just below the threshold for
approval.
c. Examine original canceled checks (both front and
back) for the following:
(1) The identity of the endorsees. Compare to the
payee, date, and amount and review the signature.
(2) Discrepancies between related documents, such as
the amount or name on the check differing from the invoice
or discrepancies between documents, the checks, and the
cash disbursements journal.
(3) A second endorsement, for example, a check
payable to a business that is first endorsed by the business
name and then by an individual or then endorsed over to the
issuer of the check. (These are typical indications of fictitious
payables.)
(4) Any check that was cashed rather than deposited.
(5) Checks exhibiting any other unusual patterns.
Additional Procedures in Response to Fraud Risk Assessment
Related to Payroll Expense
D a. If the auditor, based on his or her consideration of fraud
risk factors, decides to modify procedures related to payroll
expense, the extent of the preceding procedures may be
expanded. In addition, the following procedures may also be
performed:
(1) Obtain a list of current and former employees from
personnel files and compare to the payroll list suspected of
including fictitious employees. Note any discrepancies.
(2) Look for employees who have no tax withholding
forms, insurance elections, or other employee benefit elections
or deduction forms.
(3) Determine whether any social security numbers may
be fictitious or are the same for two different people.
(4) Determine whether two different employees have the
same address.
(5) For suspected fictitious employees, examine canceled
payroll checks. If the canceled checks are missing, request

61 | P a g e
copies from the bank.
b. If the auditor, based on his or her consideration of fraud
risk factors, decides to modify procedures related to payroll
expense, the payroll register and payroll check register may be
reviewed for:
(1) Duplicate names or addresses.
(2) Names of former employees.
(3) Math errors.
(4) Unusual pay rates or number of hours worked.
(5) Factors that might indicate ghost employees.

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BIBLIOGRAPHY
Salosagcol, J., Tiu, M. & Hermosilla, R. (2014). Auditing Theory: A guide in
understanding PSA. Manila: GIC Enterprises &Co.
http://content2.ppcnet.com/NXT/gateway.dll?f=id$id=ASBAP_6.pdf$t=document-
frame.htm$3.0$p=
frame.htm$3.0$p=
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frame.htm$3.0$p=
frame.htm$3.0$p=
Guda, Jeriza. et al (2013). Auditing Theory Project. Naga: Ateneo de Naga University

63 | P a g e
FLORES POULTRY FARM
P-2 Brgy. Laniton, San Lorenzo Ruiz, Camarines Norte
Pertinent Licenses and Permits:
Business Permit No. 012-2014
Community Tax Certificate No. 16572684
(Effective Dates: Feb. 24, 2014-Dec. 31,2014)
Sanitary Permit No. 004-2014
(Effective Dates: Jan. 10, 2014- Dec. 31, 2014)
DTI Permit No. 02044932
(Effective Dates: April 30, 2014- April 30, 2018)
Brgy. Clearance O.R. No. 0273874
Environmental Management Bureau Cert. of Non-coverage No. CNC-R05-1302-0047
(Effective Date: Feb. 15, 2013)
SSS Employer ID No. 05-077281

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