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Sarbanes Oxley Act -
Auditing Standards |
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Public
Company Accounting Oversight
Board
Bylaws
and Rules – Standards – AS2
Auditing
Standard No. 2: An Audit of Internal Control
Over Financial Reporting Performed in
Conjunction With an Audit of Financial
Statements
Example B-2 –
Monthly Manual
Reconciliation
The auditor
determined that accounts receivable is a
significant account to the audit
of
XYZ Company's
internal control over financial reporting.
Through discussions with
company personnel
and review of company documentation, the auditor
learned that
company personnel
reconcile the accounts receivable subsidiary
ledger to the general
ledger on a
monthly basis.
To determine
whether misstatements in accounts receivable
(existence, valuation, and
completeness)
would be detected on a timely basis, the auditor
decided to test the control
provided by the
monthly reconciliation
process.
Nature, Timing, and Extent of
Procedures. The auditor tested
the company's
reconciliation
control by selecting a sample of reconciliations
based upon the number of
accounts, the
dollar value of the accounts, and the volume of
transactions affecting the
account. Because
the auditor considered all other receivable
accounts immaterial, and
because such
accounts had only minimal transactions flowing
through them, the auditor
decided to test
only the reconciliation for the trade accounts
receivable account. The
auditor elected to
perform the tests of controls over the
reconciliation process in
conjunction with
the auditor's substantive procedures over the
accounts receivable
confirmation
procedures, which were performed in
July.
To test the
reconciliation process, the
auditor:
a. Made inquiries
of personnel performing the control. The auditor
asked the
employee
performing the reconciliation a number of
questions, including the
following:
�� What
documentation describes the account
reconciliation process?
�� How long have
you been performing the reconciliation
work?
�� What is the
reconciliation process for resolving reconciling
items?
�� How often are
the reconciliations formally reviewed and signed
off?
�� If significant
issues or reconciliation problems are noticed,
to whose attention
do you bring
them?
�� On average, how
many reconciling items are
there?
�� How are old
reconciling items treated?
�� If need be, how
is the system corrected for reconciling
items?
�� What is the
general nature of these reconciling
items?
b. Observed the
employee performing the control. The auditor
observed the
employee
performing the reconciliation procedures. For
nonrecurring reconciling
items, the auditor
observed whether each item included a clear
explanation as to
its nature, the
action that had been taken to resolve it, and
whether it had been
resolved on a
timely basis.
c. Reperformed the
control. Finally, the auditor inspected the
reconciliations and
reperfomed the
reconciliation procedures. For the May and July
reconciliations,
the auditor traced
the reconciling amounts to the source documents
on a test
basis.
The only
reconciling item that appeared on these
reconciliations was cash
received in the
lockbox the previous day that had not been
applied yet to the
customer's
account. The auditor pursued the items in each
month's reconciliation
to determine that
the reconciling item cleared the following
business day. The
auditor also
scanned through the file of all reconciliations
prepared during the year
and noted that
they had been performed on a timely basis. To
determine that the
company had not
made significant changes in its reconciliation
control procedures
from interim to
year-end, the auditor made inquiries of company
personnel and
determined that
such procedures had not changed from interim to
year-end.
Therefore, the
auditor verified that controls were still in
place by scanning the
monthly account
reconciliations to determine that the control
was performed on a
timely basis
during the interim to year-end
period.
Based on the
auditor's procedures, the auditor concluded that
the reconciliation control
was operating
effectively as of
year-end.
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