Test of Controls, Test of Cash Receipts, Payable and Cash Disbursements

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Introduction

The creation of an effective auditing system assists by ensuring that companies release reliable documents reporting about their proceedings to the investors. The federal law directed that each company should produce publications informing about the internal controls in a sufficient manner. The Sarbanes-Oxley Act of the year 2002 directs that the companies must present annual report depicting the effectiveness of these controls. In fact, large companies demand external and independent auditors to assess the management. Essentially, the internal controls audit ought to be combined with the financial statements. However, each of these audits has distinct objectives which imply that they should be addressed differently. Eventually, the audit provides opinions on the statements and controls depending on the results of the evaluation. In fact, the Foreign Corrupt Practices Act recommends this audit to maintain and make assurances on the transactions depending on conformity. Essentially, there are standards which are followed by auditors in order to determine the most significant issues. However, research indicates that deficiencies are being recorded prior to the implementation of the standards. The following list contains some of the most cited deficiencies.

The failure to note and test the controls in a sufficient manner that can avoid the effects of material misstatements
The partial testing of design and operation efficacy that assess their results
The failure to accrue adequate evidence reliable while updating the prevailing results of testing controls
The impartial testing of controls on data generated systematically to support vital controls
The failure to follow the procedures precisely while using work from other sources
The failure to assess the deficiencies identified from the controls

In this regard, this assessment creates a strategic framework on the test of controls while providing procedural tactics applicable when auditing.

Identifying Significant Accounts

The identification tactics include evaluating the risk through the top-down approach for all relevant accounts. This approach does not lay emphasis on the risks of material misstatement regarding the significant accounts.

Identifying Significant

The conceptual framework identifies some accounting concepts and principles that ought to be followed in order to ensure that the preparation of the financial statements is conducted in an effective manner (“ASC” par. 3). The concepts also ensure that there is uniformity in the reporting procedures from one period to another. The DBS Bank has indeed followed the accrual concept since the revenues and expenses are reported in such a way, that all the accruals and prepayments have been well reported. In addition, the revenues and expenses have also been reported using the matching concept. The concept has been well addressed through ensuring that expense items have their own ledger accounts in order to identify the final net amount of each expense (“DBS Bank” par. 6). In addition, incomes have also been calculated in separate ledger accounts before bringing in the final the net amount to the income statement. This way, the company was able to adjust the gross amounts for the prepayments and accruals. For instance, the interest income ledger is separately reported, net and commission incomes have also been calculated separately taking into account the accrual and matching concepts.

Not Significant

The accounts have also taken care of the assumption of the monetary unit. This concept assumes that all the items in the financial statements are measurable in monetary terms (“MissCPA” par. 8). DBS Bank has also ensured that all the items reported in its financial statements are measurable in monetary terms. For instance, items such as Assets, Singapore Government Securities and treasury bills, Bills payable and debt securities are all measurable in monetary terms (“DBS Bank” par. 14).

Insignificant Accounts

The attributes of understanding, relevance, reliability and comparability have also been well recognized in reporting all the items in the financial statements (“PWC” par. 13). The financial information has been broken down in such a way that any reader of the financial statements can understand the information that is intended to be delivered. On the other hand, the information reported is indeed relevant since it helps the users of the financial statements to identify the financial position of the Bank through analyzing the reported financial statements. In this regard, the financial statements of DBS Bank perform the duty, which they are intended to perform. They have helped the users of the financial information and the stakeholders of the bank to make the right decisions concerning the performance of the bank (“DBS Bank” par. 14). Consequently, it is clear that the financial statements consist of these qualitative characteristics.

Identifying (Scots) to Be Tested for Controls

The conceptual framework followed by all companies in Singapore also asserts that all companies should ensure that they have certain elements in their financial statements. This aspect implies financial statements reported without some items will be judged as incomplete, and thus, qualified by the auditors. In this regard, the conceptual framework asserts that all financial statements should contain Assets, Liabilities and Equity, which define the financial position of the company (“ASC” par. 3). On the other hand, every company must also ensure that its income statements consist of revenues and expenses, which define the financial performance of the company.

Identify Significant Classes of Transactions

From the financial statements of DBS Bank, it is clear that the bank has a balance sheet, which consists of both assets and liabilities (“DBS Bank” par. 8). Both assets and liabilities have also been itemized to ensure clarity and precision. Financial assets and liabilities have also been recognized at fair value through the income statement, as required by the conceptual framework. All disclosures regarding the offsetting financial assets and liabilities have also been made duly as required by the Conceptual Framework and the FRS 107 of Singapore. In this regard, all quantitative information about the recognized financial instruments that have been offset in the balance sheet has been provided (“DBS Bank” par. 4).

Determining Classes of Transaction

The framework provides certain basis, which ought to be followed when measuring items in the financial statements. The concept of Historical Cost asserts that all business assets ought to be valued and recorded at their original cost, as opposed to the prevailing market value (Koh and Chia 193). DBS Bank has fulfilled this concept by ensuring that assets in the financial statements are measured at their initial costs, as opposed to their market value. On the other hand, liabilities have also been recognized at their initial value as opposed to the value, which they would attract in the market currently.

Determine Significant Classes of Transactions

Analytical procedures are the comparison of actual figures with the standard expectation that the auditor has developed. The two fundamental concepts that are applied is the ability to indicate potential misstatement and avail substantive evidence. Specific tests include computing the gross margin in the planning and completing stage and predicting the ending balance and making a comparison with the actual balance.

The trial involving the information of balances is a procedure that focuses on final universal ledger balances for both financial performance statement and financial position. However, the main stress is directed to the balance sheet of a company. As such, these procedures are essential in establishing the monitory correctness of the account that they refer. However, the extent to which this procedure is applied depends on the results of the other tests since it is mainly focused on the closing balances. In the event, the other audit tests suggest that the standards of accounting have been highly violated then the test will be applicable to a large extent. The specific test includes confirming the customer balance for the firm debtors and making physical counts of the company inventory.

Understanding of Significant Classes of Transactions

Substantive test of transaction refers to the procedures that are aimed at testing dollar misstatement with a direct effect on financial statement balance correctness. As such, the substantive procedures are applied when evaluating whether the 6 transaction-associated audit intentions have been met for each class of item that is audited. Specific tests that can be applied include verification of records and summering the cash transaction receipts and sales value. Also, ensuring that sales transaction exists, and sales records for existing sales are recorded.

Performing Walkthroughs

The five audit tests that can be used are risk assessment, a test of controls, substantive tests of the transaction, analytical procedures and test of details of balances. Risk assessment procedure refers to procedures that are performed collectively in order to have an understanding of the firm and their environments, including the internal controls, represent the auditor’s risk assessment procedure. The test is a procedure to evaluate the risk that may be caused by material misstatement in the financial statement. However, most of the procedures that are applied mainly concentrate on the internal control since it a predicting factor that will guide the auditor regarding the amount risk that may be associated with financial statements.

Selecting Controls to Test

The auditor carries out a preliminary review of the company. The procedure will involve obtaining significant understanding of the nature of the company business. The understanding can be achieved through the following ways:

Previous experience with the entity for the case of continuing auditor
Previous experience with similar entities within the same industry
Constructive discussion with members of staff within the firm being audited
Discussion with fellow auditors that have offered the services to the firm that is being audited
Reviewing journals and publications that relates to the industry where the firm operates
Physical visiting the firm place of business
Reviewing documentation such as annual financial reports, operation system manual and budgets

The auditor ensures that there is a clear understanding of the management structure, the general feel of the company operating circumstances, and the factors that affect the company internal control, financial reporting, and accounting systems.

The concept of corporate governance has developed as one of the defining tools that can be used to protect the interest of the shareholders including the minority shareholders of a company. The development of this concept leads to the question whether monitoring of the board is equally important as all other functions of the organization. Various studies have come up with varying reasons. However, the bottom line in all this reason is the need for effective corporate governance to protect the interest of the shareholders through, among other things, high-audit quality services.

Furthermore, Notable studies argue that effective corporate governance is achieved when an organization aligns its interdependent environmental and organizational characteristic (Filatotchev, Steve and Wright 262; Aguilera et al. 480). The two studies define the concept of corporate governance that is a structure of linked practices with tactical and institutional relevancies. Also, the two studies do note that the combination of various institutional and strategic elements will have deferent patterns in relation to corporate governance practices. Sundaramurthy, Mahoney and Mahoney advanced the argument that monitoring the effectiveness of the board can only be achieved through application of various elements but no specific mechanism is efficient enough to conduct the monitoring process effectively (232). So, when a single mechanism is used to conduct the evaluation, the evaluation will then overlook numerous other linkages that determine the effectiveness of the board. As such, this gives rise to the concept of the characteristic of the board.

Designing Test of Controls

The auditor reaches out to the previous auditors to obtain as much details as possible that will allow the new auditor to effectively audit the company and have adequate understanding of the risk and materiality elements in the new companies. The complexity of a corporate has led to the emergence of the agency relationship between the shareholders and the management. The shareholders are the principal while the boards of directors are the agent. In various situations, an agency problem has always emerged with the agent failing to meet the expectation of the principle. As such, in order to protect the principal from the maneuvers that the agent may employ, the concept of corporate governance has been developed with one of its focal point being stressing the importance of high-quality audit work both internal and external that meet the legal and professional standards.

Design the Nature of the Tests of Controls

The design takes into consideration matters that relate to risk and materiality concepts. A plan is essential to the audit process since it is used to improve the efficiency of carrying out the audit process, hence ensuring that the process is concluded in a timely manner. However, the form and the nature of the audit process are highly dependent on the size and the complexity of the organization, the commercial environment that the firm is in, and the method that the organization applies to report its transaction and to report to the relevant centres of authorities.

The purpose of comparing data is to ensure that the form is benchmarked to standard data that can only be available for the industrial average since all factors will have cancelled out. As a result, it will mean that the firm trend will be compared against the industrial average. Consequently, areas that show adverse variation with the industrial trends will arouse the highest level of suspicion hence warranting for the increased level of scrutiny. As a result, this implies that the variations will be used to derive acceptable audit risks and inherent audit risks.

Assessing the acceptable audit risks and inherent risks are almost as important as the audit planning. Therefore, comparing the individual firm data to the industrial average means benchmarking the firm to the industry it exists. Consequently, this will imply that this will form the basis that will be used to define and determine the amount of evidence that will be collected to ensure that the auditor exercises due diligence and is not held liable for misinforming financial statement users.

The technological ability to automate data entry and aggregation of work, and also commoditizing lower margin services such as preparation of taxes will help boost the standing of accounting among other business professions. This factor is attributed to the fact that accountants advance to higher levels of knowledge-based jobs that include information analysis, CFO, consulting and consultancy both as employees in a business entity and as outsourced professionals. As a result, this will lead to increased start-up business which leads to increased company basis and job opportunities for accountants. This creates additional opportunities for accountants to perform attest activities such as service organization control reports.

As the technology takes the centre stage in the accounting profession, trust between the accountants and the clients that they render their services to, will remain an integral part of the profession. Therefore, regardless of demographic shifts, globalization and increased competition among firms, the trust shall always be a defining factor in all the accounting duties and operations. This is because the financial soundness and viability of the advice that they render to organization are based on true and fair value of the financial position of any organization. Consequently, in the event when trust diminishes in the future, it implies that technological advances, that have been made, will have little to no meaning since the clients will have no faith in the work of the profession. Therefore, this makes accountants to maintain a high level of ethical standards in order to safeguard the reputation they have earned over the years and make it serve as a stepping stone in facing the challenges that will arise in the future.

Intuit 2020 Report dabbed Future of the Accounting Profession reveals that accounting firms and professionals, just like consumers who use the websites to compare products, will be required to have an online presence. This is based on the finding that clients have already started relying on online information to evaluate the accounting service providers. The report goes ahead and notes that accounting firms and professionals that will utilize the online platform to develop their brand through demonstrating domain knowledge, experience and thought leadership will develop a competitive advantage in the future accounting market. This will result in the development of virtual accounting services that are likely to be the next face of accounting.

Virtual accounting services will ensure that the company will have a real-time support in the manner in which they want to have that support. Furthermore, it is expected that online customer relationship management will gain increased importance and so will the support system. However, this does not mean that face to face company will be eliminated but it will be augmented by collaboration and virtual support. This attribute implies that accounting companies will automate simpler support tasks and provide the company with self-serve options.

With the development of accounting fields current procedure will evolve to integrate the development of technology. This implies that the traditional duties and responsibilities will still remain relevant even with the technological advancement in this field. This is because technology will facilitate additional efficiency in the manner in which these duties and responsibilities are carried out. Consequently, better tools and systems will replace the current ones.

Design the Timing of the Tests of Controls

The auditor in charge will evaluate the nature and the timing of the communication, for instance, the date of the AGM and Stock becomes very detailed and integrated with the audit plan.

The auditor in charge should selectively determine the audit staff that will be required in order to offer quality service to the company, their experience and any special skills that may be required to effectively offer high quality audit.

The auditor must prepare an audit planning memorandum that summarizes the scope of work under the strategy and engagement that will be used to attend to the company needs.

Design the Extent of the Tests of Controls

Audit planning covers the entire plan that will be used to map out the coverage and the conduct of the audit process. The plan is usually recorded in the planning memorandum. It is followed by the development of the audit program that will facilitate the application of the audit procedures at every level of testing. As such, the auditor of the company will understand business, internal controls, and industry, and management strategies (Russell 232). The understanding is necessary since it allows the auditor to appreciate the transaction that has a large impact on the financial statement. Empirical studies have shown that non-audit fees are viewed as a threat to auditor independence. The main reason is that the auditor may fail to critique the company on the basis that they will lose the lucrative consultancy services that they offer the company. As such, this will lead to loss of business by the firm (Gupta 124). An increase in the fees that is charged to the company as non-audit fees will imply that the auditor has increased the amount of services that are being offered. Better yet, this may be viewed as an attempt by the company management to interfere with the auditor independence as concluded by numerous reports. According to APES 110 (120.2), the auditor is expected to show high objectivity (Russell 212). Therefore, the reputation will have a negative image since it will mean that objectivity requirement is contravened as the increase in non-audit services may be interpreted to mean that the auditor’s independence has been interfering on the basis of monetary incentives that are given to the auditor through non-audit fees.

Executing Test of Controls

According to ISA230, the auditor is obliged to document all the information that is gathered as evidence that will be relied upon during the formulation of the audit opinion. The evidence that is obtained is stored in terms of working papers that are prepared and retained by the auditor. The papers should be sufficiently detailed and complete so that an inexperienced assistant can use them to ascertain the work that was carried out by the audit team. In the papers, the auditor must record all the evidence that is available to him at that time, the management view and the conclusion that is reached. However, standard working papers have been developed to improve the accuracy of keeping audit evidence. The papers have been developed in a manner that each audit firm has its specification of reporting the found information.

The responsibility to issue an audit opinion is based on the results of the audit. We conducted the audit as per the specification of the acceptable and approved audit standards. The standards require that the auditor should ensure that ethical requirement are met; he should plan and perform the audit to gather adequate guarantee regarding financial declaration on whether they do not have any false or non-fraudulent material misstatement (Gupta 40).

An audit incorporates carrying out various measures in order to collect audit approval on the discoveries and quantities in the monetary statement. The measures are determined by personal judging of an auditor depending on the evaluation in regard to the peril of material misstatements in the financial statement. In conducting a risk assessment, we considered the internal controls that are relevant to the firm preparation of the financial statement that capture a true and fair value in order to generate the suitable audit procedures that are relevant to the prevailing circumstances (Gupta 53). However, the evaluation is not conducted to issue an opinion on the effectiveness of the internal controls. Also, the audit process assessed the suitability of the accounting guidelines, the rationality of accounting approximations and overall presentation of the financial statements (Gupta 13). Therefore, we are convinced that the audit evidence that was obtained is sufficient to form the base of our audit opinion.

Changes to the Relevant Controls

Extensive researches have been conducted in relation to corporate governance and have found the insufficient presence of independent directors to be one of the primary causes of low-quality audits. In fact, Johnson asserts that the main solution to agency problems for the board of directors to have a higher number of independent directors (411). Also, Finkelstein and Hambrick argue that the duality of the board structure such that the CEO takes the role of both the chairman of the board and the responsibility of running the organization has a direct effect on the board and consequently the effect on the audit quality (112).

A stream of other studies has also been conducted focusing on the characteristic of the board. These studies have asserted that there is the relationship between the board characteristic and the earning management. However, they have applied various approaches to arrive at their conclusion. In some studies, such as Deutsch, the research asserted that the board activities have a direct effect on the organization strategic decision and has an indirect effect on the firm financial performance (425). Therefore, since the characteristic of the board will have an indirect effect on the firm performance, this may be a cause for application of earning management technique which will intern compel the board to seek low-quality audit in order to minimize the chances of being discovered. In such a juncture, the role of women inclusion in the board is examined.

Evaluate the Results of our Tests of Controls

According to Kosnik, the financial performance of an organization is affected by various exogenous and endogenous factors that are beyond the control of the board of directors (164). Therefore, as opposed to evaluating the board performance based on its ability to enhance financial performance of the firm, the study advised that the evaluation should be done on the basis of analyzing discrete decision that the board takes, and the board factors that may have led the board to take a decision. Therefore, it implies that the characteristics of the board will be accessed in general and the presence of women directors on the board will be evaluated to understand whether women directors have an influence on the functioning of the board (Bohinc and Bainbridge 78). Another point important foe this study is the decision regarding the choice of the auditor and the board commitment to guarantee that quality audit is conducted. In other words, the evaluation will be concerned with the board commitment to sourcing quality audit services. Also, the effect of having women directors, and the effect they will have in relation to quality audit services, is necessary.

The audit fee is a main indictor of the quality of audit since the fees are developed through working models that are derived from the scope of work and the risk factor that the auditor is exposed. Therefore, in most cases, the audit fees represent the scope and the risk factor with a high-audit fee representing either high scope of the audit or high-risk factor. In some cases, a high fee will represent the two parameters. On the other hand, high-audit fees can be used as a measure of audit quality. According to Barca and Becht, higher audit fees are usually associated with a high-risk factor, large scope or both (96). As such, it means that each can be used as a measure of the amount of quality that will be in the audit services since the larger scope means a vigorous evaluation of the company and higher risk means application of proportional professional doubt.

References

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ASC 2014. Web.

Barca Fabrizio, and Marco Becht. The control of corporate Europe, New York: Oxford University Press, 2001. Print.

Bohinc, Rado, and Stephen Bainbridge. “Corporate governance in post-privatized Slovenia.” The American Journal of Comparative Law 49.1 (2001): 49-77. Print

DBS Bank 2012. Web.

Deutsch Yuval. “The implication of board composition on firms critical decisions. A Meta analytic review”. Journal of management. 31.8 (2008): 424-444. Print.

Filatotchev, Ilias, Steve Toms, and Mike Wright. “The Firm’s Strategic Dynamics and Corporate Governance Life-cycle.” International Journal of Managerial Finance 2.4 (2006): 256-79. Print.

Finkelstein, Sydney and Donald Hambrick. Strategic Leadership: Top Executives and Their Effects on Organizations, Minneapolis/St. Paul: West Publishers, 1996. Print.

Gupta, Kamal. Contemporary Auditing, New Delhi: Tata McGraw-Hill, 2005. Print.

Johnson, Jonathan. “Boards of Directors: A Review and Research Agenda.” Journal of Management 22.3 (1996): 409-38. Print.

Koh, Hian and Yew Chia. “Organizational Culture and the Adoption of Management Accounting Practices in the Public Sector: A Singapore Study.” Financial Accountability amp; Management 6.12 (1996): 189-213. Print.

Kosnik, Rita. “Greenmail: A Study of Board Performance in Corporate Governance.” Administrative Science Quarterly 32.2 (1987): 163-85. Print.

Miss CPA 2014. Web.

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Russell, John. The ASQ auditing handbook: principles, implementation, and use, Milwaukee, Wis.: ASQ Quality Press, 2013. Print.

Sundaramurthy, Chamu, Mahoney James and Joseph Mahoney. “Board Structure, Antitakeover Provisions, and Stockholder Wealth.” Strategic Management Journal 18.3 (1997): 231-45. Print.

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