Saturday, July 25, 2009

#83 - Auditing Body: PCAOB

In audit career, it is always useful to know what can be improved further in order to deliver an efficient, effective and satisfactory audit.

The Public Company Accounting Oversight Board ("PCAOB")is a non-profit corporation, created by Sarbanes-Oxley Act 2002. PCAOB oversee the auditors of public companies in order to protect overall public interest. PCAOB has a unit, called "Inspection unit". This unit is responsible in inpecting the audit works of registered public accouting firms who met certain criterias.

There's one particular section you might find interesting: PCAOB prepare and release inspection report on their website. The report written would briefly describe the audit deficiencies, departures from accounting/ auditing standard they have identified after conducting review. Audit works of Big 4 (PWC, E&Y, KPMG, Deloitte) are inspected too!

The reports are resourceful and provide a guide on what can be done further to improve our audit.

The website of Public Company Accounting Oversight Board ("PCAOB")is as follows:

You can view the inspection report by:
> Go to "Inspection" section
> Click on "Inspection Reports"

Friday, July 24, 2009

#82- Auditing: Annual Budget vs Actual Results

Company prepare budget and use budget as a performance benchmark and monitoring tools. For instance, senior management can question sales department if their actual yeat-to-date entertainment has exceeded the budget before the end of the year. Budget is , usually, prepared and approved at the beginning of the year or before that.

Budget has incorporated management's forecast, estimation and outlook of the business in the coming times.

Is management's budget useful to auditor?

The answer is yes. Budget, which represents management's expectation, should be compared against the actual results. Significant variances should be investigated. Apparently, management would have to explain the variances. It's important for auditor to find out the reason of the variances to identify potential changes in business operation, significant developments during the year.

Understanding how management view the business (by looking at the budget) is a crucial stage in audit planning, it enhance our knowledge and understanding on the business, the industry and the overall economy as a whole.

Tuesday, July 21, 2009

#81- Auditing FIFO Costing Method

We received a query from our loyal reader in respect of the auditing procedures on inventory costing method. Our reader specifically points to auditing procedures of First-in First-out ("FIFO") inventory method.

In FIFO inventory method, inventory acquired first acquired / purchased will be the first items sold. To illustrate with an example, Mobilephone retailer purchased one iPhone 3GS in Jun for a cost of US$500. Subseuquently, in end of June, the retailer acquired another iPhone 3GS for a total cost of US$550. What will be the COGS while the retailer sell one iPhone in July?

In FIFO method, it will be US$500. Items stocked first will be sold first.

Auditing Procedures:

In auditing FIFO valuation method, following procedures can be adopted:
- Obtain full stock listing as at balance sheet date, and select certain number of samples
- Obtain stock movement listing of respective sample, where we are able to see the stock-in and stock-out from time to time
- Obtain the stock-in costs for each purchase ( i.e. Jan: Purchase 10 items at US$10 each, Feb: Purchase 20 items at US12 each)
- Test compute the COGS for each deliveries to check that COGS amounts are recorded correctly.

To illustrate with the example above, when the retailer sold the iPhone in July. We can check to profit & loss statement in July, to verify that COGS reflects US$500. (i.e. first in first out basis).

Saturday, July 4, 2009

#80 Bank Reconciliation Review- Unpresented Cheque

One of the audit procedure we perform while auditing cash account is review of bank reconciliations for year, especially at month end. Auditor need to excel higher level of cautiouness while reviewing year-end bank reconciliation.

In this thread, we would like to highlight to our readers on the potential distortions ( on cash balance) resulted from unpresented cheque. To illustrate with an example:

Susan is the accountant of Company ABC, who has a December year-end. On 31 December 2008, Susan has approved a few cheques payable to their creditors, amounted to US$200k. Account executive has input the payments into the systems after Susan has approved the cheques. However, the cheques payable to their creditors are not delivered to their creditors until after year-end.

Is there any financial impact to the financial of the Company? Yes or No? If yes, what would be the impact then ?