WP Ref.

ACCOUNTING ACCRUAL AUDIT PROGRAM

Done By

Date

AUDIT STEPS 1. Review previous audit files and reports (if any) for this area to familiarize yourself with previous errors of concern. 2. As the audit is progressing, review material exceptions or discuss with management areas that internal audit is uncovering during the audit. 3. Conduct an informal pre-exit conference once all audit steps have been completed to ensure that management knows what to expect in the upcoming draft audit report. Assure management that the files and suggested audit report still need to be reviewed by the head of Internal Audit and that some of the findings may not make their way to the final draft report. 4. Finalize all files and draft audit report for review by the head of Internal Audit. AUDIT OBJECTIVES: To determine whether: 1. Accrued liabilities represent all obligations for resources and services acquired through the balance sheet date and have been properly recorded. 2. Accrued liabilities are properly described and classified and adequate disclosures with respect to these amounts have been made.

AUDIT PROCEDURES: 1) AUDIT PROCEDURESGAINING AN UNDERSTANDING OF ACCRUALS

a) Review written procedures (if any) for accruals to determine if there are adequate
controls. Place copy of written procedures in workpaper and provide a conclusion as to the adequacy of the procedures and ensuring compliance with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) model. b) Review procedures for end of the month accruals with the accounting manager and accounting staff. c) Complete the internal control questionnaire (ICQ). Note all exceptions on the ICQ. 2) ANALYTICAL PROCEDURESGENERAL

d) Compare the balance of each significant accrued liabilities account with the
comparable balance for the preceding period (Prior month and prior year period). Investigate and document significant or unusual fluctuations. e) Gain an understanding of how each major expense category is recorded (e.g., through receipt of an invoice, cash disbursement or monthly accrual). Determine whether an accrual is appropriate for each major expense category and relate to the accrued liabilities accounts.

3) DETAIL TESTS OF ACCRUED COMPENSATION f) Predict the balance of accrued compensation by multiplying the number of days requiring accrual at period-end by the average daily payroll for the pay period immediately following the period-end. Compare the predicted amount with the recorded amount and investigate significant differences.

g) Obtain the subsidiary ledger or supporting detail of the accrued compensation accounts by employee or by employee groups as of the balance sheet date. Test the detail for clerical accuracy and perform the following: 1. 2. 3. Determine whether the detail agrees in total to the general ledger control account. Investigate significant or unusual reconciling items. Recompute the accruals for selected employees or employee groups by reference to subsequent disbursements or payroll records. Review the supporting detail for unusual items or amounts and examine payroll records (e.g., time sheets, employment contracts, etc.) which support amounts accrued.

WP Ref. c)

ACCOUNTING ACCRUAL AUDIT PROGRAM Obtain the subsidiary ledger or supporting detail of accrued compensation for commissions or bonuses by employee or by employee groups as of the balance sheet date. Test the detail for clerical accuracy and perform the following: 1. 2. Determine whether the detail agrees in total to the general ledger control account. Investigate significant or unusual reconciling items. Review contracts or other authoritative support for commissions or bonuses accrued and recompute entries in the commission or bonus accounts based upon approved terms and verified data. Scope: All management employees and 10 percent of all other employees. Compare the amounts accrued by employee or employee groups with amounts actually paid subsequent to the balance sheet date. Investigate significant differences. Scope: 10 percent of all employees. Review the supporting detail for unusual items or amounts and examine contracts or other authoritative support, which support amounts accrued. Confirm significant accrued commission or bonus amounts or the related terms directly with the recipients. Scope: Review all commissioned employees.

Done By

Date

3.

4. 5.

6. Review minutes of meetings of the governing board or other authoritative committee for approval of commissions or discretionary bonuses accrued as of the balance sheet date. 4) DETAIL TESTS OF ACCRUED PAYROLL TAXES a. Predict the balance of accrued payroll taxes by multiplying the number of days requiring accrual at period-end by the average daily payroll tax for the pay period immediately following the period-end. Compare the predicted amount with the recorded amount and investigate significant differences. Obtain the subsidiary ledger or supporting detail of accrued payroll taxes by employee or by employee groups as of the balance sheet date. Test the detail for clerical accuracy and perform the following: 1. 2. Determine whether the detail agrees in total to the general ledger control account. Investigate significant or unusual reconciling items. Recompute the accruals for selected employees or employee groups by reference to subsequent disbursements or payroll records. Scope: Review 20 employees. Review the supporting detail for unusual items or amounts and examine payroll records which support amounts accrued. Compare recorded amounts with payroll tax returns prepared for the related period. Investigate significant differences.

b.

3. 4.

5) DETAIL TESTS OF ACCRUED FRINGE BENEFITS a. b. Obtain an understanding of the client's vacation and holiday pay policies. Review written policies and discuss with management compliance with the policies. Predict the accruals for vacation and holiday pay by calculating the average number of vacation days and holidays accrued, based on the average number of employees and an average salary. Compare with similar calculations for the preceding period. Investigate significant differences. Obtain the subsidiary ledger or supporting detail of accrued vacation and holiday pay by employee or by employee groups as of the balance sheet date. Test the detail for clerical accuracy and perform the following: 1. 2. Determine whether the detail agrees in total to the general ledger control account. Investigate significant or unusual reconciling items. Recompute the accruals for selected employees or employee groups by reference to terms of the applicable fringe benefits, personnel records, and employee earnings records. Scope: 20 employees. Review the supporting detail for unusual items or amounts and examine payroll

c.

3.

WP Ref.

ACCOUNTING ACCRUAL AUDIT PROGRAM records, which support amounts accrued. d. Obtain the subsidiary ledger or supporting detail of accruals for group insurance plans as of the balance sheet date. Test the detail for clerical accuracy and perform the following: 1. 2. Determine whether the detail agrees in total to the general ledger control account. Investigate significant or unusual reconciling items. Recompute the accruals by reference to documentary support (e.g., insurance policies or premium notices) or compare the amounts accrued to subsequent disbursements. Scope: 20 employees. Confirm significant accruals for group insurance directly with the insurance carriers. Scope: 20 employees.

Done By

Date

3. e.

Have the client prepare a roll forward schedule of accrued fringe benefits (e.g., vacation and holiday pay, group insurance, etc.) for the current period. Verify the clerical accuracy of the roll forward and test it as follows: 1. Determine whether the ending accrual balance agrees in total to the subsidiary ledger or supporting detail of accrued fringe benefits. Investigate significant or unusual reconciling items. Cross-reference increases in the accrual accounts during the period to the appropriate expense lead schedule. Test reductions in the accrual accounts by reference to appropriate supporting documentation. Scope: 20 employees.

2. 3.

6) DETAIL TESTS OF ACCRUED INTEREST PAYABLE (If applicable) a. Have the client prepare a summary analysis of all interest bearing debt or other obligations outstanding as of the balance sheet date, including interest rates, payment terms and accrued interest payable. Verify the clerical accuracy of the analysis and test it as follows: 1. Determine whether the ending accrued interest payable balance agrees in total to general ledger control account. Investigate significant or unusual reconciling items. Recompute the accrued interest payable based upon the applicable accrual period, the average outstanding balance during the accrual period and the average interest rate during the accrual period. Scope: Most recent 3 months of activity. Compare the amounts accrued with amounts actually paid subsequent to the balance sheet date. Investigate significant differences.

2.

3.

7) DETAIL TESTS OF OTHER ACCRUED LIABILITIES a. For each remaining material accrued liability (e.g., taxes other than income taxes, professional fees, rent under operating leases, royalties, etc.), obtain a summary analysis for the period and a copy of the client's calculation of the required balance as of the balance sheet date. Verify the clerical accuracy of each analysis and test them as follows: 1. Determine whether the ending accrual balances agree in total to the general ledger control accounts for such accrued liabilities. Investigate significant or unusual reconciling items. Where appropriate, predict the accrual required based on other known factors. Compare the predicted amounts with the recorded amounts and investigate significant differences. For accruals that cannot be readily predicted, perform the following:

2.

3.

(1) Verify the clerical accuracy of the client's calculations and determine whether they appear reasonable in relation to (a) the external environment in which the entity operates and (b) any relevant data that might be obtained as a result of other auditing procedures. (2) Examine critical forms and documents to support the basis used to calculate

WP Ref. the accruals.

ACCOUNTING ACCRUAL AUDIT PROGRAM

Done By

Date

4. Have the client reconcile the charges or credits shown in each analysis with the applicable income statement accounts. Cross-reference to the appropriate lead schedules. Examine supporting documentation for significant reconciling items.