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Chapter III. SOME REMARKS AND PROPOSALS FOR ESTABLISHING WORKING PAPERS LIBRARY OF COMPANY ACCOUNTING AND AUDIT AAC.

Chapter III. SOME REMARKS AND PROPOSALS FOR ESTABLISHING WORKING PAPERS LIBRARY OF COMPANY ACCOUNTING AND AUDIT AAC.

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MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



order, common reference symbols help auditor work and control quality easily. It is

also more convenient for the training, guidance and check. In addition the application

also helps reduce the possibility of omitting the audit procedures. the program is

designed in a modern model, following the business cycle, especially they assess very

carefully the internal control system of the enterprise.

+ Third, the organizational model of working paper in AAC increases the

autonomy of the auditor. Depend on the audit, auditor can choose the procedures that

best fit to the situation. The working papers are made flexibility depend on the

judgment ability of auditors about the characteristic of the client. Working Papers are

not necessarily sufficient as in the form prescribed. They just do the necessary paper

work. This saves a lot of time and effort of auditor.

With the experienced auditor, have a deep knowledge with the client, they can

make a profession judgment very quickly and accurately

+ Finally, the new system of working paper is the good one. The design is

clearly stated and separate with the other working papers optimizes the working time

of the auditors. Besides, the new system combine with the working in the computerize

systems will help AAC reduce the using of voluminous reference system, outdate and

then increase the productivity of the review work

3.1.2 Disadvantages

Besides these advantages, there are some limitations as follows:

+First the changing from the old to the new working paper system is the success

of company. However, this is the first year AAC using the new system so that is

patently occur the undone designed procedure which create some difficulties and

inconsistences when carry out the audit.

+ Second, the procedure builds on the working paper cannot cover all the

requirements of a standard library working paper. Companies need to build the

additional procedures to finalize the library his working paper .

3.2 Recommendations in order to improve working papers libraries AAC

Company

Today, for each audit firm, develop a complete working paper offers many

benefits to the company. So the direction of improving working paper of AAC is

+ Design of each working paper must simpler, easier to implement and focus on the

objective of procedures, avoid rambling

+ Eliminate unnecessary procedures

+ Design necessary additional procedures to ensure that the working paper can be used

in any type of company

+ Shorten the procedure, each working paper can design two or more procedures

without losing the functionality of each procedure

I hope my article is helpful for AAC to building their working paper system



Student: Nguyễn Quang Trung



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MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



Completing the design unfinished procedure in the paper work

3.2.1.1 Account cash an equivalent cash

* Design checking confirmation of bank deposits balance procedure.

The use of a tracking table for both mailing confirmation procedures and

alternative procedures in a shared spreadsheet has a lot of advantages in most cases.

However, the additional test is not always performed. So the tracking tables will create

a cumbersome in the shared paper. Besides, the additional test shouldn’t be worked for

all objects

Paper work is designed alternative that is

+The tracking board of confirmation

+The tracking board of bank balance deposit by additional procedure.

3.2.1.2 Account receivables.

* Confirmation procedures

Each sampling method has its own advantages. The method that separated the

receivable into 2 group’s liabilities heading a large group and small group help

auditors control liabilities which play an essential part in the whole group of the

company's debt. Methods of sample splitting into 2 groups liabilities: Prepaid

liabilities and customer receivables group helps auditor easily tracks the characteristic

of the account receivable.

In each case, each sample selecting brought a particular favorable. Considering

the major customers in AAC, we found that the majority of customers are small and

medium-sized companies So make up the track in two groups: advance liabilities and

customer receivables can be achieved more advantages. Thus my propose for this

working paper is AAC should create two form of this procedure in the working paper.

Depending on the specific size of customer units, the auditors will deleting the

inappropriate form and continue done working paper. For companies with company

have over 200 debtors samples, capital of over 500 billion and has over 100

employees, auditors will rating this customer as large company and use the sample in

the form of paper work selected CMA and for just and small companies, auditors will

use form 2.

* Working paper D343 : For the aging receivable board which established by

customer, the auditors must perform reassess the accuracy of estimations, calculations

and accounting records of the customer accountant and checking the specific

documents related to receivable provision such as the inspection decision record of the

company setting up ...

However, auditors must leave the audit trail showing their checks on the client

workbook and do not change the contents of the workbook or they can transfer the

information to the AAC common form and do audit at this sheet. Table debt-old track

in the form of AAC is done in paper work D343_1

3.2.1



Student: Nguyễn Quang Trung



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MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



3.2.1.3Account payable

* * Paper work E241: I propose a new working paper E241.



*Paper work E242: skim ledger to detect abnormal transactions.



Not only for the account payable, for every account, the auditors should carry

out the summary of frequent transaction occur relate to this accounts. This work can

help the auditor easily understand the account stream generated thereby capture those

mistakes can occur for this accounts.



3.3 Completing unfinished procedures in the main working paper

Today, for each audit firm, develop a complete working paper offers many

benefits to the company. So the direction of improving working paper of AAC is

+ Design of each working paper must simpler, easier to implement and focus on the

objective of procedures, avoid rambling

+ Eliminate unnecessary procedures

+ Design necessary additional procedures to ensure that the working paper can be used

in any type of company

+ Shorten the procedure, each working paper can design two or more procedures

without losing the functionality of each procedure

I hope my article is helpful for AAC to building their working paper system



Student: Nguyễn Quang Trung



Page 35



MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



Library of AAC paper work cannot cover all the objectives given in the audit

program. To create the an excellent content library on paper work of AAC, I would

suggest number of working papers for the main account

3.3.1 Account cash and equivalent cash

A. With the work compare the number of company’s general ledger and the

bank statement, I think AAC should add the following additional procedure. If the

sending the confirmation procedure did not work, AAC should does the bank

reconciling test to confirm the balance of bank account.

When the company receives its bank statement, the company should verify that

the amounts on the bank statement are consistent or compatible with the amounts in

the company's Cash account in its general ledger and vice versa. The benefit of

reconciling the bank statement knows that the amount of Cash reported by the

company (company's books) is consistent with the amount of cash shown in the bank's

records…

Because most companies write hundreds of checks each month and make many

deposits, reconciling the amounts on the company's books with the amounts on the

bank statement can be time consuming. The process is complicated because some

items appear in the company's Cash account in one month, but appear on the bank

statement in a different month.

+For example, checks written near the end of August are deducted immediately

on the company's books, but those checks will likely clear the bank account in early

September.

Sometimes the bank decreases the company's bank account without informing

the company of the amount.

+For example, a bank service charge might be deducted on the bank statement

on August 31, but the company will not learn of the amount until the company receives

the bank statement in early September.

From these two examples, you can understand why there will likely be a

difference in the balance on the bank statement vs. the balance in the Cash account on

the company's books. It is also possible (perhaps likely) that neither balance is the true

balance. Both balances may need adjustment in order to report the true amount of cash.

So, I propose the following working paper for reconciling bank statement,



Student: Nguyễn Quang Trung



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MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



Some instruction for that working paper.

+ The sources of information: the auditor may use the cut off bank statement,

general ledger book, combined with interviewing the client’s accountant to have a

suitable explained for the difference

*Adjusting the Balance per Bank



+ Deposits in transit are amounts already received and recorded by

the company, but are not yet recorded by the bank. For example, a retail store deposits

its cash receipts of August 31 into the bank's night depository at 10:00 p.m. on August

31. The bank will process this deposit on the morning of September 1. As of August 31

(the bank statement date) this is a deposit in transit.

Because deposits in transit are already included in the company's Cash account,

there is no need to adjust the company's records. However, deposits in transit are not

yet on the bank statement. Therefore, they need to be listed on the bank reconciliation

as an increase to the balance per bank in order to report the true amount of cash.

+Outstanding checks are checks that have been written and recorded in the

company's Cash account, but have not yet cleared the bank account. Checks written



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MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



during the last few days of the month plus a few older checks are likely to be among

the outstanding checks.

Because all checks that have been written are immediately recorded in the

company's Cash account, there is no need to adjust the company's records for the

outstanding checks. However, the outstanding checks have not yet reached the bank

and the bank statement. Therefore, outstanding checks are listed on the bank

reconciliation as a decrease in the balance per bank.

+Bank errors are mistakes made by the bank. Depending on the error, the

correction could increase or decrease the balance shown on the bank statement

*Adjusting the Balance per Books



+Bank service charges are fees deducted from the bank statement for the bank's

processing of the checking account activity (accepting deposits, posting checks,

mailing the bank statement, etc.) Other types of bank service charges include the fee

charged when a company overdraws its checking account and the bank fee for

processing a stop payment order on a company's check. The bank might deduct these

charges or fees on the bank statement without notifying the company. When that

occurs the company usually learns of the amounts only after receiving its bank

statement.

Because the bank service charges have already been deducted on the bank

statement, there is no adjustment to the balance per bank. However, the service charges

will have to be entered as an adjustment to the company's books. The company's Cash

account will need to be decreased by the amount of the service charges.

+ An NSF check is a check that was not honored by the bank of the person or

company writing the check because that account did not have a sufficient balance. As a

result, the check is returned without being honored or paid. (NSF is the acronym for

not sufficient funds. Often the bank describes the returned check as a return item.

Others refer to the NSF check as a "rubber check" because the check "bounced" back

from the bank on which it was written.) When the NSF check comes back to the bank

in which it was deposited, the bank will decrease the checking account of the company

that had deposited the check. The amount charged will be the amount of the check plus

a bank fee.

Because the NSF check and the related bank fee have already been deducted on

the bank statement, there is no need to adjust the balance per the bank. However, if the

company has not yet decreased its Cash account balance for the returned check and the

bank fee, the company must decrease the balance per books in order to reconcile.

Check printing charges occur when a company arranges for its bank to handle

the reordering of its checks. The cost of the printed checks will automatically be

deducted from the company's checking account.

Because the check printing charges have already been deducted on the bank

statement, there is no adjustment to the balance per bank. However, the check printing

Student: Nguyễn Quang Trung



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MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



charges need to be an adjustment on the company's books. They will be a deduction to

the company's Cash account.

+Interest earned will appear on the bank statement when a bank gives a

company interest on its account balances. The amount is added to the checking

account balance and is automatically on the bank statement. Hence there is no need to

adjust the balance per the bank statement. However, the amount of interest earned will

increase the balance in the company's Cash account on its books.

+Notes Receivable are assets of a company. When notes come due, the

company might ask its bank to collect the notes receivable. For this service the bank

will charge a fee. The bank will increase the company's checking account for the

amount it collected (principal and interest) and will decrease the account by the

collection fee it charges. Since these amounts are already on the bank statement, the

company must be certain that the amounts appear on the company's books in its Cash

account.

+Errors in the company's Cash account result from the company entering an

incorrect amount, entering a transaction that does not belong in the account, or

omitting a transaction that should be in the account. Since the company made these

errors, the correction of the error will be either an increase or a decrease to the balance

in the Cash account on the company's books.

* With the experience auditors, they can complete all the work without this

working paper, but to improving the quality of the cash working papers, AAC

should add this working paper to their system.

B. Beside checking the mathematical accuracy, auditor must also check the

existence of the “deposit in transit” and “outstanding checks”

I propose the following working paper to achieve this purpose. This working

paper is basically the sampling of item and test the relative information about these

chosen items.



Student: Nguyễn Quang Trung



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MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



3.3.2 Account receivable working papers system



A. The receivable reconciliation

Similar with the cash reconciliation, the client must do the receivable

reconciliation to explain the differences between the general ledger and the confirmation.

When the reconciliation is conducted, there may be differences between

the two amounts for the following reasons:

+A journal entry was made to the general ledger account that bypassed the

subsidiary sales ledger. This is the most common reason for a difference.

+A billing was accidentally posted to an account other than the trade

receivables account. This is the least common reason for a difference, since the billing

module is set to automatically record all billings to the correct account.

+The aged receivables report was run as of a different date than the date used to

obtain the general ledger balance.

This reconciliation process is typically conducted as part of the month-end

closing activities prior to issuance of the financial statements. If the reconciliation is

not conducted and there turns out to be an error in the general ledger, this means there

could be a material inaccuracy in the financial statements.

At a minimum, there should be a reconciliation of accounts receivable at the

end of the fiscal year, so that any inaccuracies related to receivables will have been

removed from the financial statements prior to their examination by the company's

external auditors.

For the External auditors, the suitable working papers for that work is



Student: Nguyễn Quang Trung



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MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



The procedure is designed by combining the confirmation letters procedure and

the summary reconciling receivable procedure. If auditors find out the different

between the confirmed balance and the balance in subsidiary ledger, they can do the

reconciling receivable to find the problem and write the result in this table. The

reference will lead the auditor to the evidence working paper in which auditor exam

the difference. The evidence working papers can be designed similarly with the format

of reconciling cash working paper. The sources to exam the difference above are

general ledger and receivable detail, the aged accounts receivable report

Receivable detail: The detailed listing of unpaid customer billings that should

match the ending balance in the general ledger is usually recorded in a subsidiary sales

ledger. To extract this information for reconciliation purposes, print the aged accounts

receivable report as of the final day of the reporting period. The totals on this report

are then compared to the receivable total in the general ledger.

B. Verify the existence of account receivable.

That is the additional audit procedures which help auditors verify the existence

of account receivables. That is when customers do not respond to confirmation;

auditors must find another way to assure that the customers and their account balance

are right. Auditor can examine supporting documents to verify the shipment of the

goods and evidence of subsequent cash receipts to determine if accounts were

collected. In contrast, if the customers respond to confirmations, these additional audit

procedures are not imperative.

C. Account receivable roll forward

The procedure again is the additional tests which help the auditors ensure the

balance of the account at the end of fiscal year is true. This work is developing an

expectation of the period-end balance based on the knowledge gained as a result of



Student: Nguyễn Quang Trung



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MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



interim tests. Confirm or adjust the expectation at period end based on a review for

significant unusual reconciling items and inquiries as to changes since the Interim

Date, including both anticipated and unexpected changes and corroborate such

changes.

The auditors believe that the information’s of the interim audit or the prior audit

are right and base on it, they perform all transactions occur until the year end. If the

calculated numbers are the same with the number in the general ledger, the work could

be evidence prove the trueness of account. In many way else, the differences occur,

auditor must perform some another test to handle the difference

If auditors do the substantive analytical procedures, they must compare the

difference between the expectation and the recorded period-end balance to an

appropriate threshold. If differences are less than threshold, auditors may accept the

period-end balance. If differences exceed the threshold, auditors must obtain

explanations for the full amount for differences exceeding threshold, not just that part

that exceeds the threshold. Explanations often arise from the review of significant

noroutine, nonsystematic adjustments made between the Interim Date and the balancesheet date.

If they do the test of detail, they must exam the sales journal as well as the cash

receipt journal to find out the difference.



Substantive analytical procedure: working paper sample.



Student: Nguyễn Quang Trung



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MAJOR THESIS



Supervisor: Phạm Kim Ngọc,M.A



3.3.3 Account payable working paper system

A. The payables reconciliation

Similar with receivable accounts and cash account. I propose two supplemental

tests for the account payable working paper system. Those are the Payable

reconciliation and the payable roll forward.



Student: Nguyễn Quang Trung



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Chapter III. SOME REMARKS AND PROPOSALS FOR ESTABLISHING WORKING PAPERS LIBRARY OF COMPANY ACCOUNTING AND AUDIT AAC.

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