A4 Flashcards
Where does support for the audit opinion come from?
audit evidence
What is the purpose of substantive procedures?
*to detect material misstatements in the F/S
Types of Audit Evidence
- accounting records
- corroborating evidence
- evidence in electronic form
Two key qualities for audit evidence
sufficient and appropriate
Two key qualities for sufficiency of audit evidence
valid and relevant
Influences on the sufficiency of audit evidence
- RMM; increases mean more work
2. quality of audit evidence
Two key factors for appropriateness of audit evidence
- reliability
2. relevance
Audit objectives from evaluation of audit evidence
- evaluate management assertions
2. detect material misstatements
Types of Substantive Procedures
- test of detail (transaction or ending balances)
2. analytical procedures (financial and nonfinancial data)
key to designing and performing substantive analytical procedures
developing an expectation
What types of accounts should be analyzed using analytical procedures?
- I/S accounts are more predictable
2. accounts with management discretion are less predictable
Difference between confirmation and inquiry
confirmation is written whereas inquiry is oral
Audit Procedures used in Substantive Procedures
F ooting, crossfooting, and recalculation I nquiry V ouching E xamination/inspection C onfirmation A nalytical Procedures R eperformance R econciliation O bservation T racing C utoff review A uditing related accounts simultaneously R epresentation letter S ubsequent events review
Transaction Assertions
Occurence Completeness Cutoff Classification Accuracy Authorization
Account Balance Assertions
Existence
Completeness
Rights/Obligations
Valuation/Allocation
Disclosures Assertions
Completeness
Understandability & classification
Rights & obligations & occurrence
Accuracy and valuation
PCAOB Financial Statement Assertions
C ompleteness
E xistence
O ccurence
A llocation P resentation R ights O bligations V aluation E D isclosure
Two ways to override segregation of duties
- collusion
2. management override of controls
Credit approval influences which assertion
VALUATION
Two actions auditor can do for understanding and testing I/C
observation and inquiry
Best instances to use positive confirmations
- large amounts
- expect errors/disputes
- weak I/C
Best instances for negative confirmations
- low risk
- small balances
- expect customer attention
What to do if you do not receive a confirmation
ask a second and a third time
*you CAN ask the client to ask the customer to return the confirmation
What to do if you receive a confirmation by fax or email
call and confirm the identity of the customer
Accounts Payable has Three Functions
- record the payable
- approve the invoice for payment
- record the payment after it is paid by the treasurer
Debit Memo vs Credit Memo
- debit is for returning inventory
* credit is for customer returning merchandise
Who controls cash disbursements in the expenditure cycle?
the treasurer
Best step for testing completeness in expenditure cycle
- the search for unrecorded liabilities
* focuses on COMPLETENESS, NOT CUTOFF
How to detect lapping
*inspect date checks are deposited vs. when the receivable was credited
How to detect kiting
*look to see if there are receipts per bank records before being disbursed per the books
When can you do physical count checks with perpetual inventory systems?
*you can do them before, during, or after the end of the audit period if they have well-kept perpetual inventories and do physical counts throughout the year
Inventory observation is not equal to
the auditor actually counting the client’s inventory
Assertion tested by comparing company pre-numbered inventory tags to the CPA test counts
accuracy
Are consigned goods part of inventory?
no
How can you check the accuracy of dividend income?
*access it electronically or from an investment advisory service
Ways to test existence of PPE
- company does not/cannot insure an asset they don’t have
- company does not pay taxes on unowned property
- tour plant/inquire
Primary assertion tested in reviewing the related repair and maintenance expense accounts
completeness of asset additions
HR fills which function in A R C
authorization
Audit risk with related party transactions
valuation, allocation, and accuracy
Indicators of related party transactions
- compensating balance arrangements
- loan guarantees
- unusual, nonrecurring transactions near year-end
- transactions based on terms that differ significantly from market terms
- nonmonetary exchanges
One of the first steps to do when the team has identified a previously unidentified or undisclosed related party
communicate the information to the other members of the team and do more work with inquiry and understanding of controls
Two key components regarding accounting estimates for management
- responsible for estimates
2. subjective = risk
What to do when the estimate is unreasonable per PCAOB?
treat it as a misstatement and give management a new estimate
Auditing Fair Values Consideration
- consistent method with prior period
- past track record is accurate
- justify any changes in approach
- appropriate in relation to industry
Primary goal of the auditor in testing fair value measurements and disclosures
determine whether management’s significant assumptions provide a reasonable basis for fair value measurements
Who’s responsibility is it to identify and account for contingent liabilities?
management’s responsibility
Who must ask permission to speak to client’s lawyers?
management first must send the counsel a letter to okay it
Refusal to Respond to Attorney Inquiry results in a
Qualified or Disclaimer
Refusal to Permit Inquiry of Attorney results in
Disclaimer or Withdrawal
When evaluating audit findings, which two criteria are used in assessing materiality?
Qualitative and quantitative
*PROFESSIONAL JUDGMENT
Are engagement quality reviews/concurring approvals required?
they are mandatory under PCAOB but many firms require them
Liquidity Ratios
Working Capital
Current Ratio
Acid-test ratio
Cash ratio
Activity Ratios
A/R turnover Days in A/R Inventory Turnover Days in Inventory Operating Cycle (A/R days + Inventory days) Working capital turnover (sales/average working capital) Total asset turnover A/P turnover Days in A/P
Profitability Ratios
Net profit margin Return on total assets Return on assets Return on investment Return on common equity Net operating margin percentage Gross profit margin percentage Operating cash flow per share (operating/common outstanding)
Investor Ratios
Degree of financial leverage (EBIT/EBT) Earnings per share P/E Dividend payout ratio Dividend yield Book value per share (S/E - preferred / common outstanding)
Long-Term Debt-Paying Ability Ratios
- debt/equity
- debt ratio (debt/assets)
- times interest earned
- operating cash flow/total debt
