| Article 20 |
For the purpose of auditing and certifying financial statements, a CPA shall first check the balance in each account in the financial statements against that in the general ledger, and shall also check each account in the general ledger against the sum of account balances in the corresponding subsidiary or account ledger, and subsequently, where all accounts are reconciled, perform audit procedures as follows:
1. Cash and cash equivalents:
(1) Evaluate the system of internal controls over cash, perform a test count of cash on hand, and, if the date of counting does not fall on the balance sheet date, make reconciliation to see whether the figure agrees.
(2) With respect to cash on hand and petty cash, ascertain the existence of any non-cash items, such as employee IOUs, uncashed checks, and unreimbursed vouchers, and make appropriate adjustment if necessary.
(3) Ascertain expenses reported and reimbursements made through petty cash and revolving funds, determine the remaining balances of each, check unreimbursed vouchers, and make necessary adjustments.
(4) Check the amounts on bank statements against those in the ledger, and send a written confirmation request to the bank. If there is any discrepancy, obtain a bank reconciliation statement prepared by the audited entity and perform a test audit of the reconciliation items.
(5) Perform a test audit of stubs from cash receipt books and check stubs and verify against cash book entries. Take note of whether any check has been issued for use by other parties or affiliated enterprises without being recorded on the books, and if so, make an adjusting entry or footnote disclosure.
(6) Ascertain whether bank deposits designated for specific purposes or otherwise restricted have been reported in a footnote or reclassified to an appropriate account.
(7) Perform an inventory count of certificates of deposit and audit the estimation and recording of the interest receivable.
(8) Where bank deposits increase due to a capital increase, ascertain the source of the capital and how it has been utilized, and whether the amount has been overstated or understated.
(9) For any matured note receivable that has not been deposited into the bank by the balance sheet date, ascertain whether such note has been deposited by the beginning of the ensuing period. Also note why such deposit has not been made.
(10) Perform a test audit of the supporting source documents for large inflows and outflows of cash and bank deposits, paying attention to changes in cash and bank deposits immediately prior to and after the balance sheet date. If there is a large or irregular fluctuation, ascertain the cause.
(11) Select two time periods, one before and one after the balance sheet date, and check all supporting source documents for material cash transactions and interbank funds transfer transactions during each period, to ensure that there has been a proper cut-off of cash items.
(12) If there are any foreign currency deposits, ascertain whether such deposits have been adjusted to the spot exchange rate on the balance sheet date.
(13) If there are any cash equivalents, the audit procedures for short-term investments shall apply mutatis mutandis, and the appropriateness of their classification shall be ascertained.
2. Short-term investments:
(1) Ascertain the purchase and sale procedures for short-term investments and the supporting source documents.
(2) Conduct an on-site inventory of securities on hand jointly with the custodian, and check the amount against account book entries, to verify ownership and liquidity.
(3) With respect to securities held by a third party for custody or as security, send a written confirmation request or otherwise review the custodian's receipt or any other supporting source documents.
(4) Ascertain whether the accounting basis and ending valuation are appropriate.
(5) If a short-term investment is identified as having been used to secure an obligation or for any other purpose, ascertain whether the fact has been reported in a footnote or the investment has been reclassified to an appropriate account.
(6) Ascertain whether dividends or interest income from short-term investments have been properly recorded.
(7) If a short-term investment constitutes a cash equivalent or long-term investment, ascertain whether it has been reclassified to an appropriate account.
3. Notes receivable, accounts receivable, and operating revenues:
(1) Evaluate the system of internal controls over operating revenues, and check the transaction records and all supporting source documents, to verify whether revenue records are reliable and uniform invoices have been issued as required by law.
(2) Conduct a comparative analysis against the amounts from the prior period to determine whether the trend of the change has been reasonable. If there has been any material change, ascertain and analyze the cause.
(3) If consignment sales or distribution services have been provided, ascertain whether the accounting records have been maintained in compliance with relevant contractual agreements.
(4) Ascertain the appropriateness of accounting records with respect to principal operating revenues and their classification.
(5) Send written confirmation requests to debtors selected on a random basis.
(6) For any note receivable pledged as security, send a written confirmation request to the pledgee, and ascertain whether the fact has been reported in a footnote.
(7) Jointly conduct an inventory of notes on hand, and if any notes on hand are held by a third party or have been delivered to a bank for collection, send a written confirmation request to the holder or audit the supporting documents for such bank collection. If the inventory date is not the balance sheet date, reconcile the difference.
(8) If it is found that a note has been exchanged with another party, it shall be reported in a footnote or reclassified to an appropriate account.
(9) Prepare an aged analysis of accounts receivable, ascertain the collection of notes and accounts receivable during the subsequent period, and, if any such item remains uncollected after the due date, ascertain whether proper measures have been taken.
(10) Ascertain whether allowance for bad debts has been set aside in the appropriate manner and amount.
(11) Ascertain whether proper measures have been taken with respect to notes or accounts receivable under dispute or litigation.
(12) Ascertain whether bad debts have been properly written off.
(13) Select two time periods, one before and one after the balance sheet date, and check all supporting source documents for each period, to ensure that there has been a proper cut-off of sales and sales returns.
(14) Ascertain whether there have been any material sales returns or allowances in the current period and the subsequent period, and, if so, inquire about the reason therefor and find out whether the return(s) have been properly presented.
(15) If it is found that a note or account receivable has arisen from a non-operating activity, ascertain whether it has been reclassified to an appropriate account.
(16) Ascertain whether notes and accounts receivable are presented in such a manner as to distinguish between long-term and short-term items, and whether the long-term items have been recorded at present value.
(17) Ascertain whether any internal profit from internal transfer pricing has been offset.
(18) Ascertain whether the interest income and interest receivable arising from interest-bearing notes receivable have been recorded.
(19) For discounted notes receivable, if any, check the discount records, send a written confirmation request, and ascertain whether proper accounting treatment has been given.
(20) If there are any notes or accounts receivable denominated in foreign currency, ascertain whether they have been adjusted to the spot exchange rate on the balance sheet date.
(21) Ascertain whether notes and accounts receivable arising from transactions with related parties have been properly presented.
4. Other receivables:
(1) Note the nature of each line item under "other receivables" and, for those not constituting current assets, ascertain whether they have been reclassified to an appropriate account.
(2) Send written confirmation requests when necessary, and ascertain whether [receivables] have been collected during the subsequent period.
(3) Ascertain whether the balance of allowance for bad debts is reasonable.
(4) Ascertain whether "other receivables" that are material in amount have been separately presented.
5. Inventories and operating overhead:
(1) Evaluate the system of internal controls over operating overhead, and check the transaction records and all supporting source documents, to verify the reliability of the classification, calculation, and recording of operating overhead.
(2) Conduct a comparative analysis against the amounts from the prior period to determine whether the trend of the change has been reasonable. If there has been any material change, ascertain and analyze the cause.
(3) Ascertain the accounting basis and calculation method with respect to inventories, check whether they are consistent with those used in the preceding period, and, for any change therein, ascertain the reasonableness thereof and whether proper measures have been taken.
(4) Observe as the audited entity conducts an on-site inventory. While the inventory is in progress, [the CPA] may perform random testing of the inventory and check the on-site inventory and the results of inventory testing against the inventory summary and accounting records.
(5) If the book quantity of an inventory is materially at variance with the actual quantity counted during the on-site inventory, ascertain the reason.
(6) While the on-site inventory is being conducted, if there are items being sold on consignment or held for other parties, verify that they have been separately stored and labeled, and obtain the specifications, quantities, and other relevant information, to ensure that they are not included in the inventory of the audited entity.
(7) For any inventory stored off-site, send a written confirmation request to the custodian, and where necessary, perform other necessary audit procedures.
(8) Select two time periods, one before and one after the balance sheet date, and check all supporting source documents for each period, to ensure that there has been a proper cut-off of operating overhead.
(9) If the sales costs include any drawback of customs or excise duties on exportation, ascertain whether proper accounting treatment has been given.
(10) Ascertain whether any inventory has been provided as pledge or security or possessed in trust, and if so, whether the fact has been reported in a footnote.
(11) Ascertain whether inventories are covered by insurance, and the amount of coverage.
(12) Ascertain whether damaged, deteriorated, or long-term unmarketable inventory items, if any, have been valued at the lower of net realizable value or cost.
(13) Value ending inventories at the lower of cost or market.
(14) Ascertain the ownership of any inventory in transit, and, if it belongs to the audited entity, whether proper measures have been taken.
(15) Ascertain the appropriateness of the procedures for handling idle and obsolete materials.
6. Prepayments:
(1) Where a prepayment is required to be reclassified as an expense or to an appropriate account, ascertain whether such reclassification has been made and whether the amount is consistent.
(2) Ascertain whether any prepayment involves a contractual relationship, and, if so, the content of contract and the extent to which the counterparty has performed its contractual obligations. Where necessary, send a written confirmation request to the counterparty.
7. Other current assets:
Ascertain the nature of each item falling under the category of "other current assets," find out whether it has been appropriately classified and given proper accounting treatment, and if an item is unusual in nature, find out whether the fact has been stated in detail in a footnote.
8. Funds and long-term investments:
(1) Ascertain the basis for setting aside funds and whether such has been reported in a footnote.
(2) Conduct, jointly with the custodian, an on-site inventory of securities acquired through long-term investments, and inspect the supporting source documents. If any part or all of such securities are stored off-site, send a written confirmation request and review the custody receipt or perform other necessary audit procedures to verify the ownership.
(3) Ascertain whether the acquisition and disposal of long-term investments have been handled appropriately and given proper accounting treatment
(4) Ascertain whether an appropriate accounting basis was applied in recording long-term investments, and whether they have been properly classified.
(5) If any long-term investment has been provided as security, pledged, or otherwise subject to any restriction or limitation, ascertain whether the fact has reported in a footnote.
(6) In the case of a long-term equity investment that confers material influence over the investee company, ascertain whether the investment has been valued under the equity method. Where an investment confers control and the audited entity is a public company, ascertain whether consolidated financial statements have been prepared in accordance with applicable requirements.
(7) In the case of a long-term equity investment that confers no material influence over the investee company, ascertain whether the investment has been valued under the cost method or under the lower of cost or market method.
(8) When investment profits or losses from long-term equity investments are recognized under the equity method, ascertain whether CPA-audited financial statements have been obtained as required.
(9) Ascertain whether any unrealized profit or loss with respect to an affiliated company has been written off.
(10) Ascertain whether the difference between the cost of a long-term equity investment and the net equity value has been amortized or offset as required.
(11) If a long-term investment is subject to a permanent decline in value, ascertain whether the loss from such a permanent decline in value has been recognized.
(12) Ascertain whether any long-term investments have been reclassified as short-term investments, or vice versa, and, if so, verify the appropriateness of the accounting treatment.
(13) Ascertain whether long-term bond investments have been valued under the cost method and whether the premium or discount been amortized in a rational and systematic manner.
(14) Ascertain whether dividends or interest income from long-term investments have been properly recorded.
(15) Ascertain whether all companies invested are going concerns, and if any of them is not, whether proper adjustment or footnote disclosure has been made.
9. Fixed assets and intangible assets:
(1) Ascertain whether the title to all fixed assets is held by the audited entity, and when necessary, observe the on-site inventory or conduct a joint on-site inventory of representative fixed assets. If due to statutory restrictions the title to any such asset is not registered under the name of the audited entity for the time being, ascertain whether any safeguards are in place and whether a proper explanation has been provided in a footnote.
(2) Ascertain whether there is any fixed asset that is not intended for use in the operation of the business. If there is, reclassify it as a long-term investment or another asset, in keeping with its character.
(3) Ascertain whether any fixed asset has been provided as security, pledged, or otherwise subject to any restriction, and, if so, whether the fact has been reported in a footnote.
(4) Ascertain whether fixed assets are covered by insurance, and the amount of coverage.
(5) Ascertain the basis used in accounting for fixed and intangible assets. If a revaluation was made in accordance with statutory requirements, ascertain whether a footnote disclosure has been made as to the revaluation period and revaluation amount, and whether depreciation, depletion, or amortization has been duly carried out after the revaluation. Where land has been revalued, ascertain the appropriateness of the amount of revaluation increment and whether a reserve against land value increment tax has been duly set aside.
(6) Ascertain whether fixed assets other than land, or intangible assets, have been depreciated, depleted, or amortized in a rational and systematic manner in accordance with current statutory requirements, and ascertain the appropriateness of the amount.
(7) Ascertain whether capitalization policies and depreciation, depletion, and amortization methods and periods applied to fixed and tangible assets are consistent with those of the prior period. If a change has been made, ascertain the reasonableness and the appropriateness of the accounting treatment, whether the fact and effect of the change have been reported in a footnote, and whether the footnote indicates the nature of the change, i.e. change in accounting principle or change in accounting estimate, as the case may be.
(8) Ascertain whether there is any fixed asset sitting idle or having no value in use, and if so, whether such asset has been reclassified to an appropriate account, stated at the lower of net realizable value or carrying amount.
(9) Ascertain the nature of any fixed assets acquired in the current period, and all expense accounts relevant to fixed assets, to determine whether such items are capital expenditures or expenses, and ascertain whether they have been given proper accounting treatment.
Ascertain whether proper accounting treatment has been given to interest capitalization with respect to fixed assets currently in the process of acquisition or construction.
(11) Ascertain the reasonableness of any material change in prepayments for land or equipment.
(12) Ascertain any increase or decrease in fixed and intangible assets in the current period, and whether it has been given proper accounting treatment.
(13) Ascertain whether the house rentals, land rentals, and any other revenues arising from fixed assets have been properly recorded.
(14) Ascertain whether any fixed assets have been leased, and if so, whether such leases have been given proper accounting treatment.
(15) Ascertain the components of intangible assets, and whether they have been given proper accounting treatment.
(16) Check the supporting source documents, papers, and licenses relating to intangible assets.
(17) Ascertain whether intangible assets are still useful and whether their cost has been amortized over their expected useful life.
10. Deferred debits:
(1) Ascertain the nature and verify the appropriateness of the reported amounts.
(2) Ascertain whether the benefits extend to the following periods, and whether they have been reasonably amortized.
11. Other assets:
(1) Inspect all supporting source documents to confirm the reasonableness of the amounts recorded.
(2) If any item under "Other assets" is subject to amortization, ascertain whether it has been reasonably amortization method.
(3) For any long outstanding amount for which it is impossible to obtain confirmation from the debtor or which is not likely to be collected, ascertain whether such amount has been written off or sufficient allowance for bad debt has been set aside.
(4) Ascertain whether any item under "Other assets" that is material in amount has been separately presented.
(5) For items held in custody for other parties, conduct as necessary a joint on-site inventory with the custodian(s) and send written confirmation requests to such other parties.
(6) Ascertain the nature of any refundable deposit paid out as security, and the reasonableness and necessity thereof.
12. Borrowings:
(1) Ascertain whether a borrowing that is a bank overdraft, bank borrowing, commercial paper payable, banker's acceptance, or "other borrowing" has been separately presented.
(2) Identify any significant borrowing agreements and send written confirmation requests to confirm the borrowing balances, interest rates, repayment terms, amounts, material covenants, and the status of any guarantee thereof.
(3) Ascertain whether the bank overdraft balance is the balance after offsetting against the bank deposit, and if so, make appropriate adjustment.
(4) If there has been any borrowing from a shareholder, employee, or related party, ascertain whether the fact has been reported in a footnote.
(5) Ascertain repayment of principal and interest on borrowing in the subsequent period, and ensure that footnote disclosure has been made of any delay in repayment.
(6) Identify interest payments made in the current period and perform a check calculation to verify whether accrued or prepaid interest has been calculated and recorded appropriately at period-end.
(7) Ascertain whether there has been a breach of any material provision of a borrowing agreement, and if so, whether proper measures have been taken, and consider the effect thereof on the financial statements.
(8) If repayment in foreign currency is required under a borrowing agreement, ascertain whether such has been translated using the spot exchange rate on the balance sheet date.
(9) Ascertain whether long-term liabilities to be settled within one year or within one operating cycle have been reclassified as current liabilities. Note, however, that reclassification is not required where a sufficient sinking fund has been set aside.
(10) If the audited entity has set aside a sinking fund, ascertain whether it has been done in accordance with provisioning rules.
13. Notes payable, accounts payable, and purchases:
(1) Evaluate the system of internal controls over procurements, and check the transaction records and all supporting source documents, to verify the reliability of purchase records.
(2) Ascertain payments made in the subsequent period or relevant supporting source documents, and when necessary, send written confirmation requests to principal suppliers and creditors.
(3) If, as of the auditing date, the date of maturity for any note receivable falls beyond the statutory term of validity, ascertain the reason and whether a term extension has been made or such note receivable has been reclassified to an appropriate account.
(4) Ascertain whether any note receivable has been exchanged with another party, and if so, whether such note receivable has been reported in a footnote or reclassified to an appropriate account.
(5) Select two time periods, one before and one after the balance sheet date, and check all supporting source documents for each period, to ensure that there has been a proper cut-off of purchases and purchase returns.
(6) If it is found that a note or account payable has arisen from a non-operating activity, ascertain whether it has been reclassified to an appropriate account.
(7) Ascertain whether notes and accounts payable are presented in such a manner as to distinguish between long-term and short-term items, and whether the long-term items have been recorded at present value.
(8) If a creditor has been provided with collateral for a note or account payable, ascertain whether the nature and description of the collateral have been reported in a footnote.
(9) Ascertain whether notes payable are interest-bearing, and whether interest accrued in the current period has been recorded.
(10) If repayment in foreign currency is required under an agreement with respect to a note or account payable, ascertain whether such has been translated using the spot exchange rate on the balance sheet date.
14. Accrued expenses and other payables
(1) Select a period after the balance sheet date and check all supporting source documents for unpaid invoices, cash expenditures, and material liabilities falling within that period, to verify the existence of any unrecorded liabilities.
(2) For accrued expenses for which the amount is estimated or yet to be determined, ascertain whether the method of estimation is consistent with that employed in prior years, and whether any payments have been made in the subsequent period.
(3) Ascertain whether appropriate footnote disclosure has been made regarding negotiable instruments issued as installment payment for leased equipment.
(4) Identify any payments made in the subsequent period and all supporting source documents.
(5) If a creditor has been provided with collateral, ascertain whether the nature and description of the collateral have been reported in a footnote.
(6) Ascertain whether any items under "Other payables" that are material in amount have been separately presented.
15. Payments received in advance, and deferred credits:
(1) Ascertain the nature of each item within sales revenue received in advance, deposits received in advance, income received in advance, and deferred credits, and perform a test check of contracts, if any.
(2) Ascertain whether appropriate adjustment has been made to payments received in advance and deferred credits to reflect the accrual basis of accounting.
(3) Identify any change that has occurred in the subsequent period.
16. Corporate bonds payable:
(1) Obtain the issuance rules for corporate bonds and ascertain whether footnote disclosure has been made as to total authorized amount, interest rate, maturity, collateral or guarantee status, and other relevant covenants and restrictions. In the case of a convertible corporate bond, ascertain whether the method of conversion and conversion status have been reported in a footnote.
(2) If there is a trustee or guarantor, ascertain whether any special clause is contained in the executed guarantee or trust agreement, and send a written confirmation request to the guarantor or trustee inquiring about the total issued and unissued amounts and the repaid or cancelled amount.
(3) Identify any interest payments made in the current period and perform a check calculation to verify whether interest has been recorded appropriately, and whether any discounts or premiums have been properly amortized at period-end. If any convertible corporate bonds have been issued under a reverse repurchase agreement, ascertain whether an interest premium has been estimated and recorded, and whether an interest expense has been recognized, for each period in a rational and systematic manner.
(4) Ascertain whether corporate bonds repayable within one year have been reclassified as a current liabilities. Note, however, that reclassification is not required where a sufficient sinking fund has been set aside.
(5) Where a sinking fund has been established, ascertain the status of the provisioning rules, amounts set aside, and interest accrued.
(6) Ascertain the status of repayment of corporate bonds, and, in the case of convertible corporate bonds where capital increase or issuance of new shares is required by law, whether such has been duly carried out.
(7) Inspect relevant minutes of board meetings.
(8) Ascertain whether there has been a breach of any material provision in any agreement regarding the issuance of corporate bonds, and if so, whether proper measures have been taken, and consider the effect thereof on the financial statements.
17. Other liabilities:
(1) Ascertain whether any item under "Other liabilities" that is to be settled or reimbursed within one year has been reclassified as current liabilities.
(2) On the basis of contracts, company rules or by-laws, and meeting minutes, calculate and check the balance of liabilities.
(3) When necessary, send written confirmation requests to creditors or other relevant persons.
(4) For liabilities for which the amount is an estimated figure, ascertain whether the basis of the estimate is appropriate, and whether any payments have been made in the subsequent period.
(5) Ascertain whether any item under "Other liabilities " that is material in amount has been separately presented.
18. Owners' equity:
(1) Ascertain the amounts of registered capital and paid-in capital, and, where shares have been issued, whether footnote disclosure has been made as to type of capital stock, par value per share, number of authorized shares, number of issued shares, and any special terms and conditions.
(2) With respect to any capital increase or decrease, review relevant minutes of shareholders meetings and board meetings and documents of approval issued by the competent authority or application documents submitted by the company (audited entity), and further ascertain whether appropriate disclosure has been made as to the specific details of the change in capital.
(3) When necessary, send a written confirmation request to the certification institution or stock registrar and transfer agent to inquire about the total number of shares issued.
(4) Analyze current-period change in capital reserve and retained earnings and check against the articles of incorporation and minutes of shareholders meetings.
(5) Ascertain whether capital reserve, legal reserve, and special reserve have been separately presented and whether they have been set aside in accordance with the applicable requirements.
(6) Ascertain whether an explanation has been provided in a footnote on different types of capital reserves.
(7) In the case of any prior period adjustment, ascertain whether proper accounting treatment has been given.
(8) Ascertain whether earnings distributions have been properly recorded or given footnote disclosure.
(9) Ascertain whether any restrictions on the distribution of retained earnings or capital reserves, or of any preferred stock dividends in arrears, have been disclosed by footnote.
(10) If the company (audited entity) has posted a deficit equal to half or more of paid-in capital, perform all necessary audit procedures under Statement of Auditing Standards No. 16 to ascertain the reasonableness of the going-concern assumption and to provide an appropriate audit opinion.
(11) Take inventory of treasury stock, if any, and ascertain whether proper accounting treatment has been given.
19. Contingencies and commitments:
(1) When auditing contingencies and commitments, perform all necessary audit procedures under Statement of Auditing Standards No. 23 and provide an appropriate audit report.
(2) Identify and disclose by footnote any illegality that might have a material effect on the fair presentation of the operating and financial statements of the audited entity.
20. Operating expenses:
(1) Conduct a comparative analysis against the amounts from the prior period to determine whether the trend of the change has been reasonable. If there has been any material change, ascertain and analyze the cause.
(2) Analyze material expenses and audit all supporting source documents to verify whether any of them requires reclassification as a capital expenditure.
(3) Examine the nature and significance of individual expenses and verify, in light thereof, whether they have been classified under the appropriate account.
(4) Select two time periods, one before and one after the balance sheet date, and check all supporting source documents for each period, to ensure that there has been a proper cut-off of operating expenses.
21. Non-operating income and expenses and extraordinary gains and losses:
(1) Conduct a comparative analysis against the amounts from the prior period and ascertain the cause for material differences, if any.
(2) Analyze any income and expense items that are material in amount or unusual in nature and ascertain the status of all supporting source documents and how they have been recorded.
(3) Examine the nature and significance of individual items and ascertain, in light thereof, whether they have been classified under the appropriate account.
22. Income tax:
(1) Ascertain whether the audited entity has recognized current income tax expense or deferred income tax asset or liability in accordance with Statement of Financial Accounting Standards No. 22, made intraperiod tax allocation, and disclosed all relevant information.
(2) Ascertain whether there are any materially significant pending tax remedies, or any back taxes or tax refunds from prior years, and evaluate the effect thereof on current income tax and income tax payable.
23. Related party transactions:
(1) Ascertain the names of all related parties and their relationships with the audited entity.
(2) Ascertain whether there have been any transactions between the audited entity and any related party.
(3) For any known related party transaction, ascertain the purpose, price, and terms of the transaction.
(4) Obtain a written representation from the audited entity that it has made appropriate disclosure of all related party transactions.
14. Other matters:
If the audited entity has engaged in non-arm's length transactions, ascertain and assess the effect thereof on the financial statements and take proper measures. |