2nd Half of Aud Flashcards
Revenue Cycle segregation of duties: Sales
Authorization: Sales order and credit, Treasurer
Record keeping: Billing/AR and Accounting
Custody: Warehouse and shipping
Revenue Cycle segregation of duties: Cash Receipts
Record keeping: AR and Accounting
Custody: Mailroom and cashier, Treasurer
Expenditure Cycle segregation of duties
Authorization: Purchasing dept
Record keeping: AP/Accounting
Custody: Receiving dept
Lapping
Today’s cash receipts cover yesterday’s theft
Kiting
Cash recorded in two places at once
To detect:
- A bank transfer schedule should be prepared
- Take a look at bank cutoff statement
Reason for reviewing the repairs and maintenance account
In order to locate items that should have been capitalized
Role of the payroll department
Record keeping department
They should NOT:
- Initiate changes in hours or rates
- Sign checks
Purpose of letter of audit inquiry to attorney
Simply a means of corroborating information provided by management as they are the primary source of information regarding contigencies
Required wording for a going concern
“going concern”
“substantial doubt”
Communication of deficiencies in internal control: Nonissuer
Control deficiency: Communicate to management only orally or in writing within 60 days of the report release date
Significant deficiency & Material weakness: Communicate to management in writing and those charged with governance in writing within 60 days of the report release date
Test of Controls
1) Evaluate design effectiveness of controls to determine if they can effectively prevent or detect material misstatements
- Walkthroughs are often used to evaluate effectiveness
2) Test and evaluate the operating effectiveness of the controls
- Inquiry, inspection of documentation, observation, recalculation and reperformance are commonly used
- Inquiry alone is not sufficient to support a conclusion about operating effectiveness
Communication of deficiencies in internal control: Issuer
Control deficiency: Communicate the deficiency to management in writing and inform the audit committee that this communication has been made prior to the issuance of the auditors report
Significant deficiency & Material weakness: Communicate the deficiency to management in writing and inform the audit committee that this communication has been made while also communicating the deficiency to the audit committee in writing prior to the issuance of the auditors report
Report on Internal Controls: Inherent Limitations paragraph
Because of inherent limitations, internal control over financial reporting may not prevent or detect and correct misstatements. Also, projections of any assessment of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate
Material Weakness in Internal Control warrants what type of opinion
Adverse opinion
Attestation Services and what type of report is allowed
1) Agreed-upon procedures (AUP)
2) Prospective financial statements (E or AUP)
3) Pro forma financial statements (E or R)
4) Compliance (E or AUP)
5) MD&A (E or R)
6) Service organizations (E only)
*SSAE are the applicable standards
How do Attestation standards differ from GAAS
1) No reference is made to the historical FS
2) No reference is made to GAAP
Conditions for agreed upon procedures attestation engagements (I AM SURE)
I - Independence
A - Agreement of the parties
M - Measurability and consistency
S - Sufficiency of the procedures
U - Use of the report is RESTRICTED
R - Responsibility for the subject matter is taken by client
E - Engagements to perform AUP on prospective financial statements
Types of Prospective FS and their uses
1) Financial forecast - The expected results (General or Limited Use)
2) Financial projection - Hypothetical results (Limited Use only)
Pro Forma Financial Statements
Demonstrate the effect of a future or hypothetical event by showing how it might have affected the historical financial statements
Type 1 vs Type 2 reports a service auditor may provide
Type 1 - a report on the design and implementation of controls
Type 2 - a report on the design, implementation AND operating effectiveness of controls
Compliance reports in connection with audited financial statements
The auditor must have audited the clients FS and may only issue negative assurance on compliance.
3 instances reporting on compliance will occur
1) In connection with a FS audit
2) An Attestation engagement (AUP or E)
3) Single Audit engagement
Reporting: Internal Control under GAGAS
Like GAAS:
-Obtain an understanding of the design
-Communicate all significant deficiencies
Unique to GAGAS:
-Requires a written report on the auditor’s understanding of internal control
Content of GAGAS written internal control report
1) The assertion that evaluating compliance with laws with a direct material effect on the FS is part of developing an opinion on FS
2) The assertion that specific controls relating to the financial reporting are considered
3) An indication that either no weaknesses were found or that significant deficiencies were found and an indication whether those deficiencies were material
Entities subject to the single audit act
Entities that expend total federal assistance greater than or equal to $750,000
Materiality determination in a single audit
Considered separately in relation to each major program.
Major program:
- 750,000+ in assistance
- Classified as high risk
Report submission requirements of a single audit
The earlier of:
1) within 30 days of receipt of the auditors report
2) 9 months after the end of the audit period
Single audit 5 reports
1) FS report (GAAS)
2) SEFA Report
3) GAGAS (Yellow Book) Report
4) Single Audit Report
5) Schedule of findings and questioned costs
Preparation
No assurance, non attest, no independence required
Compilation
No assurance, attest, independence not required but need to disclose if so
Review
Limited assurance, attest, independence required
Review requirements (ULIARCPA)
U - Understanding with the client (engagement letter)
L - Learn and obtain sufficient knowledge of the entity’s business
I - Inquiries (inside company, not outside)
A - Analytical Procedures
R - Review - other procedures
C - Client rep letter
P - Professional judgment used to evaluate results
A - Accountants report
In a review, the accountant is NOT required to
- Test internal control
- Perform audit tests
- assess fraud risk
- communicate with the predecessor accountant
Exceptions to the confidential client information rule
1) To comply with a court subpoena or summons
2) Quality/Peer review
3) Trial board of the AICPA requests
4) Your own legal defense team (when client is suing you)
PCAOB inspection requirements
1) Annual if firm is regularly providing audit reports for more than 100 issuers
2) Every 3 years if less than 100
Public firm partner rotations
Partner rotation:
- Lead partner: 5 years
- Other audit partners: 7 years
Accounting principal vs estimate opinion
A change in accounting principle that is inseparable from a change in estimate should be accounted for as change in estimate, not a change in principle. Departure from GAAP if otherwise
If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an other-matter (explanatory) paragraph of the audit report
(1) that the financial statements of the prior period were audited by a predecessor auditor,
(2) the type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons for the modification,
(3) the nature of any emphasis-of-matter or other-matter (explanatory) paragraph included in the predecessor auditor’s report, and
(4) the date of the predecessor auditor’s report.
Use of a specialist who is related to the client is acceptable, but
the auditor must consider the risk that the specialist’s objectivity might be impaired, in which case the auditor may need to perform additional procedures.
Can you compare complied FS if the prior year omits all required disclosures?
No. Compiled financial statements that omit substantially all GAAP disclosures are not comparable to financial statements including such disclosures. The accountant should not issue a report in this situation
