Wiley Practitioner's Guide to GAAS 2020. Joanne M. Flood

Wiley Practitioner's Guide to GAAS 2020

Tests of year-end sales and shipping cutoff procedures Not applicable Discussions with engineers regarding percentage of completion of long-term projects Terms of documents supporting revenue transactions, including long-term contracts Review of controls over shipping and billing activities Review of subsequent transactions Recalculations of percentage of completion computations Documents in support of selected expense transactions, including purchase orders, contracts, check requests, and so on Review of controls over shipping and billing activities History of sales returns and allowances Review of controls over recording long-term contract activity Industry experience and trends Subsequent credit memos NOTE: Revenue recognition continues to pose significant audit risk to auditors. Therefore, auditors should be aware that the AICPA’s Audit and Accounting Guide, Auditing Revenue in Certain Industries, available through an online subscription, summarizes key accounting guidance regarding identifying circumstances and transactions that may signal improper revenue recognition, and provides guidance on auditing revenue transactions in selected industries not covered by existing AICPA Audit and Accounting Guides. The SEC has issued Staff Accounting Bulletin 104, Revenue Recognition, which summarized certain of the SEC staff’s views in applying GAAP to revenue recognition in financial statements. These two publications may be useful to auditors in evaluating revenue recognition issues. In addition, the Wiley publication Revenue Recognition has detailed and clear implementation guidance for the new revenue recognition standard. Expense Documents in support of selected expense transactions, including purchase orders, contracts, check requests, and so on Test of year-end purchasing cutoff procedures Not applicable Recomputation of depreciation and amortization Terms of documents supporting selected expense transactions, including large and unusual purchases Confirmation of large and unusual purchases with suppliers Review of subsequent transactions Recomputation of amortization of prepaid and accrued expense and deferred charges Review of controls over accounts payable and cash disbursements Comparison of account balances between years Analytical relationship of balances to total revenue Review of controls over accounts payable and cash disbursements

13 AU-C 402 Audit Considerations Relating to an Entity Using a Service Organization

Scope

Definitions of Terms

Objective of AU-C Section 402

Requirements

Types of Service Auditor’s Reports

Considerations in Using a Service Auditor’s Report

AU-C 402 Illustration—Audit Program for an Auditor’s Review of a Service Auditor’s Report

SCOPE

More and more entities are outsourcing activities to service organizations. There is often a belief by the user organization that the service organization can be totally relied upon and that the user organization needs only to have limited, if any, controls.

AU-C 402 is intended to help auditors determine what additional information they might need when auditing an entity that uses a service organization. It expands on the application of AU-C 315 and 330 in obtaining an understanding of the user entity, including internal control. (AU-C 402.01) AU-C 402 also makes it clear that the guidance applies if an entity obtains services from another organization that is part of the entity’s information system. Also, it clarifies the factors that an auditor should use in determining the significance of a service organization’s controls to the user organization’s controls. In other words, the audit procedures that are appropriate when a service organization’s procedures are significant to the audited entity are not optional. The auditor must evaluate the interaction between the audited entity and all service organizations used by that entity. (AU-C 402.02)

A service organization’s services are part of an entity’s information system if they affect any of the following:

Significant classes of transactions

Transaction initiation, authorization, recording, processing, correction, and reporting

Accounting records, supplemental detail, and specific accounts used to initiate, authorize, record, process, correct, transfer to the general ledger, and report

Processing of significant accounting information other than transactions

Financial reporting and journal entry processes

Journal entry controls

(AU-C 402.03)

For example, bank trust departments are service organizations because they invest and service assets for others. An example of a user organization for a bank trust department is an employee benefit plan. Data processing service centers are service organizations because they process transactions and related data for others. Similarly, mortgage bankers that service mortgages for other entities are service organizations.

A bank that processes checking account transactions or a broker who executes securities transactions is not included under the Section’s definition of service organizations. That is because when services are limited to executing transactions specifically authorized by the client, Section 402 is not applicable. The Section also is not applicable to the audit of transactions arising from financial interest in partnerships, corporations, and joint ventures. (AU-C 402.05)

Wiley Practitioner's Guide to GAAS 2020. Joanne M. Flood