Auditing
Audit Procedures
Using a three-way match (invoice, PO, packing slip) and performing analytical procedures.
Questions use accounts payable, payroll, accounts receivable, and inventory scenarios. Three-way match questions present payment approval scenarios. Analytical procedure questions compare ratios and percentages across periods. Assertion mapping questions pair a procedure description with the assertion it is most effective at testing.
What the exam tests
Component Identification (Three-Way Match)
Identify the three documents that must be matched before payment is made: Vendor Invoice, Purchase Order, and Packing Slip (goods receipt).
Procedure Classification
Identify which audit actions qualify as Analytical Procedures (e.g., comparing current-year gross margin percentage against the prior year's percentage).
Audit Assertion Application
Match the correct procedure to the assertion it tests: A/R confirmations → Existence; A/R turnover ratio → Valuation.
Misstatement Measurement
Identify what a procedure is designed to detect: year-over-year margin comparison detects potential overstatements or understatements of Inventory and COGS.
Procedural Logic for Verification
Identify the correct verification sequence: to test asset existence, tie accounting records to supporting evidence.
Structural Recognition (Three-Way Match)
Key rules
- ›The three-way match requires: (1) Purchase Order (authorization to buy), (2) Packing Slip/Goods Receipt (confirmation goods arrived), (3) Vendor Invoice (payment request).
- ›All three must agree on quantity, description, and price before payment is approved.
- ›Purpose: prevent payment for goods not ordered, not received, or at the wrong price.
Common traps
- !Treating the receiving report and packing slip as interchangeable. The packing slip comes from the vendor with the shipment, while the receiving report is prepared internally to record what was actually received.
Analytical Discrimination (Analytical Procedures)
Key rules
- ›Analytical Procedures evaluate financial information by studying plausible relationships such as ratios, trends, year-to-year comparisons, and industry benchmarks.
- ›Examples: gross margin % vs. prior year, A/R turnover ratio, days sales outstanding.
- ›They identify areas of unexpected change that warrant further testing. They are not proof of an error by themselves.
Common traps
- !Classifying document inspection or physical observation as an analytical procedure. Those are substantive tests.
Strategic Auditing Logic (Procedure-to-Assertion Mapping)
Key rules
- ›Existence: does the item actually exist? → Confirmations, physical inspection, tracing records to source documents.
- ›Completeness: is everything that should be recorded actually recorded? → Search for unrecorded liabilities, review subsequent payments.
- ›Valuation: is the recorded amount correct? → Recalculation, ratio analysis, comparison to market value.
Common traps
- !Using a Completeness procedure (looking for missing items) to answer an Existence question (confirming items are real).
Data Verification Proficiency
Key rules
- ›To verify employment status: trace payroll records to personnel department records.
- ›To verify asset existence: physically inspect the asset and agree to the asset register.
- ›To verify A/R existence: send confirmations directly to customers.
Common traps
- !Verifying data only against internal records. Independent external evidence is required for strong Existence support.
Try one
If an auditor finds that a company failed to record several purchases in their system, but the physical inventory count is correct, what is the impact on the recorded inventory balance?
If purchases are not recorded, the inventory in the system is lower than what actually exists. The physical count will show more inventory than the books, indicating the purchases were missed.
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