M2 AUDIT WORKING PAPER

M2 ASSIGNEMNT (ESSAY)

For each of the following ledger accounts, give an

example of substance underlying the account balance that
will form part of your working paper and explain:

1. Cash in bank

2. Sales revenue
3. Inventories
4. Accounts payable
5. Notes payable
6. Capital stock
7. Marketable securities
8. Operating expenses
9. Wages and salaries expense
10.Property, plant, and equipment
M2 ASSIGNMENT SOLUTION:

1. Bank statement, canceled checks, deposit tickets

 Bank statement- A bank statement is a document (also

known as an account statement) that is typically
sent by the bank to the account holder every month,
summarizing all the transactions of an account
during the month. Bank statements contain bank
account information, such as account numbers and a
detailed list of deposits and withdrawals.

 Canceled checks- A canceled check is a check that

has been paid or cleared by the bank it was drawn on
after it has been deposited or cashed. The check is
"canceled" after it's been used or paid so that the
check cannot be used again.

 Deposit tickets- A deposit slip is a small paper

form that a bank customer includes when depositing
funds into a bank account. A deposit slip, by
definition, contains the date, the name of the
depositor, the depositor's account number, and the
amounts being deposited.

2. Sales invoices, shipping documents, cash register

tapes

 Sales invoices- A sales invoice is a document issued

by a business to outline the goods and services
provided to a client.

 shipping documents- Shipping documents are forms

that accompany a shipment listing the date shipped,
the customer, the method of shipment, and the
quantities and specifications of goods shipped.

 cash register tapes- Cash register tapes contain

information that clearly identifies the merchant.

3. Goods in warehouses, goods out on consignment

 Goods in warehouses- This is the place where the

goods are deposited and is one of the most complex
areas of the warehouse. It is important to know the
rotation needs of the items in the warehouse and the
type of goods.

 goods out on consignment- Selling goods on

consignment is described as a situation whereby
 goods are shipped to a dealer who pays you, the
consignor, only for the merchandise which sells. The
dealer, referred to as the consignee, has the right
to return to you the merchandise which does not sell
and without obligation.

4. Vendors’ records of accounts receivable, vendors’

Invoices

 Vendors’ records of accounts receivable- Vendor

Receivables are payments to be received from
vendors. These could be in the form of volume
rebates, purchase discounts or over payments.

 vendors’ invoices- A vendor invoice is a document

listing the amounts owed to a supplier by the
recipient. When a customer orders goods and services
on credit, the supplier prepares an invoice and
issues it to the customer.

5. Payees’ confirmation of amounts owed to them, copy

of
note in client’s files

 Confirmation of Payee is a new way of checking

account details to give customers and businesses
greater assurance that they are sending payments to
the intended recipient, helping to avoid misdirected
payments being sent to the wrong account, and
offering another important tool to help in the fight
against fraud.

 Copy of Note in Client's Files - The purpose of this

procedure is to ensure that members comply with
their regulatory and ethical obligations in terms of
record keeping and notes on discussions,
conversations, and advice provided to insureds, as
well as all actions taken in a file, in a
professional manner. Notes in the record are
critical for proper follow-up.

6. Records maintained by registrar and transfer agent

 Registrar's records - The registrar verifies the

shareholders who own the stock on the record date,
as well as the number of shares owned as of that
date. The registrar's list of shareholders is used
to calculate both cash and stock dividends. This
shareholder data is updated by the registrar based
on current buy-and-sell transactions.
 Transfer agents keep records of who owns a company's
stocks and bonds, as well as how those stocks and
bonds are held—whether by the owner in certificate
form, the company in book-entry form, or the
investor's brokerage firm in street name. They also
keep track of the number of shares or bonds that
each investor owns.

7. Securities in vault or in safekeeping, brokers’

advices, brokers’ confirmations

 Securities in vault or safekeeping – Securities

safekeeping operations include clearing securities
trade settlements as well as acting as a trustee and
custodian for securities pledged as collateral for
advances or derivative transactions.

 Broker recommendations – A broker is a person or

company who acts as an intermediary between an
investor and a securities exchange. A broker is also
a firm that acts as an agent for a customer and
charges the customer a commission for its services.

 Brokers' confirmation - A brokerage trade

confirmation is a financial document that reports
the specifics of a trade that was completed through
your account. It is a separate document from your
account statements that is issued by your brokerage
after each trade. It can be used to detect broker
fraud, resolve account discrepancies, and aid in tax
preparation.

8. Vendors’ invoices, canceled checks, client’s

workpapers supporting such charges as depreciation,
amortization, and product warranty

 Vendors’ invoices. When a customer places order for

goods and services on credit, a supplier prepares an
invoice and issues it to the customer. This invoice
is called the vendor’s invoice which is a document
that lists the total amount owed to a supplier. It
also includes necessary information such as freight
or delivery charges, applicable taxes, date of the
payment, and payment methods.

 Cancelled check. A cancelled check refers to a check

that has been paid or drawn by the bank. The check
is cancelled after the stated amount of cash has
been paid so that it can no longer be used.
  Client’s workpapers supporting such charges as
depreciation. Depreciation refers to the expensing
of a fixed asset over its useful life. The
depreciation of fixed assets is regularly accounted
for so that the company can move the cost of the
asset from the balance sheet to the income
statement. The working papers regarding such
depreciation shall include a description of the
different methods and procedures followed in
depreciating the assets.

 Amortization. The accounting process or technique of

writing down the value of a loan or an intangible
asset over a set period is referred to as
amortization. In regard to loans, amortization is
concerned with the outspread of a loan into a series
of fixed payments over time. Furthermore, a schedule
that lists the monthly payment of loan is called an
amortization table that also shows the breakdown of
each payment to the portion of the interest and the
portion of the principal.

 Product warranty. A product warranty is a type of

guarantee given by a seller to a buyer regarding the
condition of its product. The buyer can avail
replacement or repair if the product is defective or
does not meet the specifications guaranteed. The
terms and conditions of the warranty covering the
product depend on the type of such warranty.

9. Payroll summaries, time cards, clock cards,

canceled
checks, human resources records

 Payroll summaries. A payroll summary presents an

overview of the payroll activity of a company. It
includes information regarding gross pay, net pay,
employer payroll taxes and contributions, etc. This
is an easy way to see the total amount of payroll by
each employee for a specific period.

 Time card or clock card. A time card, also called a

clock card or a timesheet, is a document that
records and tracks the amount of time an employee
spent on each specific job. It is used to record the
duration of a task, specifically the start and end
time of tasks, accomplished by an employee. The
information gathered can be used for job estimation,
project costing, and preparation of payroll.
  Cancelled check. A cancelled check refers to a check
that has been paid or drawn by the bank. The check
is cancelled after the stated amount of cash has
been paid so that it can no longer be used.

 Human resource records. The documents that represent

the memory of an organization. Human resource
records are gathered and prepared from various
reports, orders, minutes of the meetings, and such.
These records provide information regarding
employees, employee benefits, salaries and wages,
etc

10. Plant assets at various locations, vendors’

invoices

 Plant assets at various locations. A plant asset,

also known as fixed asset, refers to an asset with a
useful life of more than one year. Plant assets are
recorded at their cost and depreciated over their
useful lives. Moreover, they usually represent a
large portion of a company's total assets and the
cost to maintain and depreciate the assets can also
be a big line-item expense on the income statement.
Concerning audit, auditors can choose different
locations and send audit teams to verify the assets
based on the output of various sampling method.

 Vendors’ invoices. When a customer places order for

goods and services on credit, a supplier prepares an
invoice and issues it to the customer. This invoice
is called the vendor’s invoice which is a document
that lists the total amount owed to a supplier. It
also includes necessary information such as freight
or delivery charges, applicable taxes, date of the
payment, and payment methods.