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AUD > 13 - III: Audit evidence: Specific audit areas > Flashcards

13 - III: Audit evidence: Specific audit areas Flashcards

1
Q

What are 4 assertions re: account balance?

A
  1. Existence.
  2. Completeness - re: omissions.
  3. Rights and obligations - restrictions re: assets/liability.
  4. Valuation and allocation - appropriateness of dollar measurement.
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2
Q

What are 3 procedures to use to support existence assertion?

A
  1. Confirmation (especially when concerned about overstatement) - cash, AR, inv/investment held by others.
  2. Observation.
  3. Inspect underlying doc.
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3
Q

What are 2 procedures for completeness assertion?

A
  1. Cutoff tests.

2. Analytical procedures - calculate ratios, comparison.

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4
Q

What are 2 procedures for rights/obligation?

A
  1. Inquiry.

2. Examine auth for transactions.

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5
Q

What are 4 procedures for valuation/allocation?

A
  1. Recalculate account balance - depr. prepaid.
  2. Trace to subsequent cash receipts/disbursements.
  3. Analytical procedures.
  4. Examine published price quotes for FV.
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6
Q

What are 6 procedures generally applicable to all audit areas?

A
  1. Assess RMM - consider the implication of I/C (SCARE) in planning nature, timing, and extent of the substantive procedures.
  2. Agree F/S info to underlying accounting record.
  3. Examine material JEs/adjustments.
  4. Scan the JEs/ledgers for unusual items.
  5. Make appropriate inquiries of management.
  6. Analytical procedures (not required) - consider historical trends within the industry.
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7
Q

What are ways to confirm balance per bank stmt?

A
  • Inspect bank stmt.
  • Have management sent an inquiry: Key - cash balance (existence), note payable (completeness).
  • Request “cutoff” bank stmt (10 days into the next period) - all deposit in transit cleared, O/S checks as able.
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8
Q

What is kiting?

A

An overstatement in the cash position by recording receipt part of transfer while not recording the disbursement part.

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9
Q

How to test the possible kiting?

A

Test the client’s produced schedule of inter-bank transfers to determine the recording of receipt/disbursement in the same period.

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10
Q

How to audit the restriction on available cash (compensating balance)? What must the auditor do about the result?

A

Ask management.

Include in the management representation letter.

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11
Q

How to audit petty cash?

A

Usually ignore due to immateriality.

Could perform analytical procedure (compare current and prior year balance).

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12
Q

What are auditing point about schedule of inter-bank transfers?

A
  1. Recording of receipt/disbursement in the books in the same year?
  2. Disbursement clear the bank in the same year as in the book? If not, is ck listed as OS?
  3. Deposit clear the bank in the same year as in the book? If not, listed as in-transit?
  4. Cks and deposit clear in timely fashion?
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13
Q

What is the first step in auditing receivables?

A

Verify mathematical accuracy of the subsidiary edger and agree total to general ledger account.

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14
Q

When sending confirmation of A/R to customers, which account should be selected?

A

All material accounts and others selected.

Investigate all exceptions received.

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15
Q

What should the auditor do after sending a few positive confirmation requests?

A

Perform alternate procedures.

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16
Q

What are 2 alternate procedures: preferred and other?

A

P: Confirm subsequent cash receipts.

Inspect underlying doc.

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17
Q

AR: What is the procedure to test completeness assertion?

A

Perform a sales cut-off test a few days before and after year end.

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18
Q

How should a cut-off evaluated?

A

By matching shipping doc with sales inv to verify sales are recorded in the proper period.

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19
Q

AR: What is the procedure to validate rights/obligation assertion?

A

Ask about any AR used as collateral, review loan doc for collateral (doc management response in representation letter).

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20
Q

AR: What is the procedure to validate valuation assertion?

A

Review aged rial balance of AR (apply analytical procedure based on estimated % uncollectible by aged category).
Ask about any large delinquent balances.
Review sales returns - sig receiving receipts after year-end.

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21
Q

What is dual purpose test re: inventory?

A

Auditor observe inventory for;

  1. I/C objectives - Control of SCARE.
  2. Substantive objectives: gathering evidence to evaluate the dollar balance reported for inv - test of details/substantive procedures.
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22
Q

Inventory: What does the auditor focus on re: existence assertion?

A

On count tags

- should be pre-numbered/sequence should be accounted for.

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23
Q

Inventory: What 3 tests does the auditor perform re: count tags?

A
  1. Qty: performs own test for accuracy.
  2. Price tests: verify reasonableness of client’s cost/unit.
  3. Extensions: test qty x cost/unit for accuracy.
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24
Q

Inventory: What must auditor test re: completeness assertion?

A

Cut-off test for sales (inspect shipments/compare with sales journal) and purchases (shipments receivers with purchase journal) a few days before and after year-end.

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25
Q

Inventory: What procedures auditor perform re: rights/obligations assertion?

A

Ask about inv used as collateral for debt (review debt agreement), inv on consignment.
Doc management response in representation letter.

26
Q

Inventory: What procedures auditor perform re: valuation assertion?

A

Analytical procedure to identify excess inv (inv turnover ratio - slow moving - possibly valued too high).
Ask about excess and obsolete inv.
Be attentive to dusty boxes during count.

27
Q

Investment/Derivatives: Objective?

A

To obtain sufficient appropriate audit evidence re: the valuation of investments (equity method investment addressed differently).

28
Q

Investment/Derivatives: what are procedures to obtain evidence re: investor’s financial results? What should the auditor do if unable to obtain evidence?

A

Obtain/read available F/S.
If the entity has different reporting periods, determine whether management has considered lack of comparability.

Determine the effect on audit report.

29
Q

Investment/Derivatives: measured at FV: procedures? When the estimates are from third-party based on valuation models? If management uses a valuation model?

A

Determine whether applicable framework identifies the method to be used to determine FV (if so, evaluate).

Obtain an understanding of the method used.

Obtain sufficient appropriate audit evidence about FV using the mode.

30
Q

What must the auditor consider when using broker-dealers provided quoted market price?

A

Whether it may require special knowledge about how that quote was determined.

31
Q

Investment/Derivatives: if quoted market price is not available, what should the auditor do?

A

Estimates of FV maybe obtained from broker-dealer or other sources using proprietary valuation models (based on estimated future CF or option-pricing models).

32
Q

When is it more appropriate to obtain estimates from multiple sources?

A

When the assumptions are highly subjective or the models are sensitive to changes in underlying assumptions.

33
Q

Investment/Derivatives: impairment losses: focus?

A

Evaluate management conclusion as to the need for recognition, and obtain evidence related to impairment identified.

34
Q

Investment/Derivatives: What are keys to consider in determining whether a decline in FV is other than temporary?

A

If FV is significantly below BV (has been for an extended time).
The security has been downgraded by a rating agency.
The financial condition of the issuer has gotten worse.
Div has been reduced or interest pmts have not been made.

35
Q

Investment/Derivatives: effectiveness of a hedge: what must be determined?

A
  • Obtain sufficient appropriate audit evidence about any amounts attributed to the ineffectiveness of a hedge.
  • Need to understand the methods used to determine whether a hedge is effective and how the ineffective portion was measured.
36
Q

Fixed assets: Procedures to validate existence assertion?

A

Emphasize “test of transactions” (verify the debits/credits that caused the balance to change from prior year).
Use substantive procedures: test of details.

37
Q

Fixed assets: what can the auditor test to validate additions and disposals?

A

A: Inspect underlying doc.
D: Trace proceeds to cash receipts journal and to bank stmts.

38
Q

Fixed assets: Procedures to validate completeness assertion?

A

Review “repairs and maintenance exp” for anything that should be capitalized instead of expensed.
Review lease agreements for anything that should be capitalized.

39
Q

Fixed assets: Procedures to validate rights/obligation assertion?

A

Ask management about use as collateral for debts.

Read agreements.

40
Q

Fixed assets: Procedures to validate valuation assertion?

A

Recalculate depr. exp.

Ask about any impairments of long-lived assets - doc management response to management representation letter.

41
Q

Liabilities: what is the auditor’s primary concern? what’s the procedures?

A

Completeness.
Search for unrecorded liabilities.
Tests of transactions.

42
Q

Does auditor usually confirm AP? Why?

A

No. because it addresses existence assertion, which is not the primary concern and usually other reliable evidence is available.

43
Q

Current liabilities: how does the auditor perform search for unrecorded liabilities?

A

*Review cash disbursements subsequent to the BS date.
(Inspect supporting doc for pmts exceeding a specified dollar amount and determine whether the pmt should have been included among the year-end payables).
*Inspect open (unpaid) invoices on hand.
*Ask management as to any other unpaid items.

44
Q

Current liabilities: Procedures to validate existence assertion?

A

Inspect underlying doc (supplier invoices, etc), supporting recorded payables - compare to cash disbursements after year-end.

45
Q

Current liabilities: Procedures to validate rights/obligation assertion? How should other liabilities such as wages, dividend payables, interest payables be addressed?

A

Read doc - look for anything unusual.
Ask about related party transactions that may need separate disclosures.

By analytical procedures.

46
Q

LT liabilities: How should decrease/increase be verified?

A

D: Verify scheduled pmt date in loan doc. Trace cash disbursement to bank stmt - examine canceled notes if paid in-full.
I: Read new loan agreements (obtain copies for working papers), verify auth in minutes, trace cash receipts to bank stmts.

47
Q

LT liabilities: procedures to validate existence assertion?

A

Inspect supporting doc such as loan agreement.

48
Q

LT liabilities: requirements for rights/obligation assertion?

A

Disclose restrictive debt covenants.
Disclose assets used as collateral for the debt.
Reclassify any portion scheduled for pmt within the next year as CL.

49
Q

LT liabilities: procedures to validate valuation assertion?

A

Read underlying loan agreements for terms.
Recalculate any discount/premium (effective interest method).
Analytical procedures to evaluate reasonableness of interest exp.

50
Q

Stockholder’s equity: procedures to validate existence assertion?

A

If there is an external registrar - confirm O/S shares.

Verify any issuance were consistent w/ the article of incorporation and approved in the minutes.

51
Q

Stockholder’s equity: procedures to validate completeness assertion?

A

Read minutes for auth for issuance.

Account for the numerical sequence of stock certificate.

52
Q

Stockholder’s equity: procedures to validate rights/obligation assertion?

A

Verify par/stated value by inspecting the certificates or reading applicable minutes (articles of incorporation) where it was established.
Review contracts w/ employee stock option plans for compliance.
Ask management re: restrictions on dividends.

53
Q

Stockholder’s equity: procedures to validate valuation assertion?

A

Trace cash receipts and disbursements to accounting records and to bank stmts.
Read the minutes for auth.
Verify par/stated value value (by examining certificates, minutes, articles of incorporation).

54
Q

What is the primary procedure for IS elements?

A

Analytical procedures and recalculation.

55
Q

IS: if analytical procedures result suggest a RMM, what procedures is used?

A

Test of details.

56
Q

What are 5 IS related assertion?

A
  1. Occurence.
  2. Completeness.
  3. Cutoff.
  4. Accuracy.
  5. Classification.
57
Q

IS: payroll (as an example): procedures to validate occurrence and accuracy assertions?

A

Examine personal records on test basis.
Trace selected transactions from the payroll register to the general ledge and bank account.
Recalculate selected entries on the payroll register.

58
Q

IS: payroll (as an example): procedures to validate completeness assertion?

A

Review time reports/cards.

Analytical procedures to evaluate reasonableness of year end accruals for payrolls.

59
Q

IS: payroll (as an example): procedures to validate cutoff assertion?

A

Not necessary to test separately - cutoff is established when occurrence/completeness have been addressed.

60
Q

IS: payroll (as an example): procedures to validate classification assertion?

A

Verify payroll deductions/taxes - inspect personal records.
Trace cash disbursements for withholdings to appropriate agencies.
Review outside reports re: pensions, other post retirement benefits/profit sharing plans.

AUD (24 decks)

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