A4 Flashcards by Matthew Philipps

Where does support for the audit opinion come from?

audit evidence

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What is the purpose of substantive procedures?

*to detect material misstatements in the F/S

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Types of Audit Evidence

accounting records
corroborating evidence
evidence in electronic form

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Two key qualities for audit evidence

sufficient and appropriate

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Two key qualities for sufficiency of audit evidence

valid and relevant

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Influences on the sufficiency of audit evidence

RMM; increases mean more work

2. quality of audit evidence

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Two key factors for appropriateness of audit evidence

reliability

2. relevance

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Audit objectives from evaluation of audit evidence

evaluate management assertions

2. detect material misstatements

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Types of Substantive Procedures

test of detail (transaction or ending balances)

2. analytical procedures (financial and nonfinancial data)

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key to designing and performing substantive analytical procedures

developing an expectation

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What types of accounts should be analyzed using analytical procedures?

I/S accounts are more predictable

2. accounts with management discretion are less predictable

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Difference between confirmation and inquiry

confirmation is written whereas inquiry is oral

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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

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Transaction Assertions

Occurence
Completeness
Cutoff
Classification
Accuracy
Authorization

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Account Balance Assertions

Existence
Completeness
Rights/Obligations
Valuation/Allocation

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Disclosures Assertions

Completeness
Understandability & classification
Rights & obligations & occurrence
Accuracy and valuation

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PCAOB Financial Statement Assertions

C ompleteness
E xistence
O ccurence

A llocation 
P resentation
R ights 
O bligations
V aluation 
E
D isclosure

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Two ways to override segregation of duties

collusion

2. management override of controls

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Credit approval influences which assertion

VALUATION

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Two actions auditor can do for understanding and testing I/C

observation and inquiry

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Best instances to use positive confirmations

large amounts
expect errors/disputes
weak I/C

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Best instances for negative confirmations

low risk
small balances
expect customer attention

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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?

How can you check the accuracy of dividend income?

*access it electronically or from an investment advisory service

Ways to test existence of PPE

1. company does not/cannot insure an asset they don't have 2. company does not pay taxes on unowned property 3. 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

1. compensating balance arrangements 2. loan guarantees 3. unusual, nonrecurring transactions near year-end 4. transactions based on terms that differ significantly from market terms 5. 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

1. 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

1. consistent method with prior period 2. past track record is accurate 3. justify any changes in approach 4. 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

1. debt/equity 2. debt ratio (debt/assets) 3. times interest earned 4. operating cash flow/total debt