640 Milestone One- Audit Procedures

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Southern New Hampshire University *

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640

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Accounting

Date

Jan 9, 2024

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For this course I’ve chosen Target Corporation. It is the seventh-largest retailer in the United States, and one of the largest American-owned private employers in the United States and is headquartered in Minneapolis, Minnesota. As of 2023, Target operates 1,948 stores throughout the United States, and is ranked No. 32 on the 2022 Fortune 500 list of the largest U.S. corporations by total revenue. Planning Procedures: A detailed plan needs to be completed in order to have an effective audit. There is much planning that goes into an audit whether it is conducted internally or by independent auditor. The auditor should develop and document a preliminary audit strategy that sets the scope, timing, and direction of the audit. (Arens, Elder, Beasley & Hogan, 2020) The initial phase of developing an audit plan entails reviewing the organization’s internal controls and procedures. Moreover, during the initial stages of the internal audit, it is important to accomplish the following list of tasks. 1. Notification to department management: a. The auditor is required to provide a memo to be forwarded to the departments at the company that engage in cash and revenue transactions. This communication should encompass the specific departments that will undergo the audit, along with detailed information regarding the timeframe and scope of the audit. 2. Review Policies and Procedures: a. The audit team is responsible for acquiring copies of policies and procedures from every department that deals with cash and revenue transactions. It is crucial for auditors to have a thorough understanding of these policies and procedures in

order to evaluate the process through which cash and revenue transactions are recognized and recorded. 3. Conduct a pre-audit meeting: a. The internal audit team needs to schedule a meeting with the management of the departments that bear direct responsibility for cash and revenue transactions. b. The purpose of the meeting is to resolve any concerns that management may have regarding the audit. The meeting will address the time frame and scope of the audit. 4. Interview all key personnel: a. The auditor should engage in in-person conversations with the essential staff members involved in cash and revenue transactions. When conducting these interviews, the auditor must ensure that they thoroughly walk through the entire process involved in a particular transaction. 5. Document the business process: a. After conducting the interviews, the auditors should carefully document the procedures for every transaction that has an impact on cash and revenue. Moreover, it is crucial to develop flowcharts to ensure accurate documentation of the entire process. 6. Perform Risk Assessment: a. The risk assessment procedures should include the following: i. Gathering information from management and key staff members who can potentially aid in identifying risks of significant errors and fraudulent activities causing incorrect financial reporting.

ii. Analytical procedures are required to be performed by auditors as part of risk assessment procedures to better understand the client’s business and industry and to assess client business risk. (Arens, et al, 2020) Auditors should utilize and analyze financial information from both internal and external sources for their audited clients. By conducting benchmarking analysis to compare the company with its industry competitors, auditors can identify possible inaccuracies or misstatements. Field Work Procedures: Once the planning stage reaches its conclusion, auditors should initiate the fieldwork phase of the audit. In this phase, the audit team will physically be present at the location to conduct transaction testing. Their main objective will be to assess whether the identified policies and procedures are being diligently adhered to. 1. Cash audit testing: a. Auditors would look at cash transaction testing which includes the following: i. Cash balances on bank reconciliations are correctly tied into the general ledger accounts and trial balances. ii. Cash receipts and payment are recorded in the proper timeframe and period. iii. Cash transactions are accurate with ledger and bank statements. b. Test of Details for cash balances: i. Tracing of balances from the bank statements to trial balances and/or the general ledger. ii. Confirm receipts and test of bank confirmation. iii. Proof that cash exists.

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2. Revenue Audit Testing: a. Occurrence tests to determine existence of the revenue transactions that have been recorded in accounts. b. Completeness tests to determine if all revenues have been recorded in the appropriate accounts. c. Accuracy tests to see whether the revenue transactions recorded are free from errors. d. Cutoff tests to determine if the revenue transactions are recorded in the correct accounting period. 3. Test for high-risk transactions. The focus of auditors should then be directed towards the internal controls, accounting estimates, and calculations related to revenue recognition. Examples of possible high-risk transactions for Target specifically include returns vs. returns accrual reserves, breakage on gift cards, and their store credit card transactions. a. To asses appropriate assertions for high-risk business transactions the auditor would need to consider all transactions based on the assertions listed below: i. Occurrence: did the transaction occur in the organization? ii. Completeness: is the transaction recorded in the financial statement and are the actual revenue sales recorded accurately? iii. Accuracy: is the transaction recorded in the appropriate amounts? iv. Classification: are all the revenue transactions recorded according to the proper accounts? This will highlight any hidden revenue transactions. v. Cut off: is the transaction recorded in the appropriate accounting period and is the cash and revenue recorded in the appropriate year? vi. Existence: t he actual cash must exist.