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AUDIT > A4 > Flashcards

A4 Flashcards

1
Q

What is audit evidence?

A

Is all the info the auditor uses to arrive at the conclusions on which the audit opinion is based. It includes info in written or electronic form as well as observable assets or activities, and it must be obtained to support auditor conclusions

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2
Q

How is audit evidence gathered?

A
  • Risk assessment procedures
  • Test of controls
  • Substantive procedures
  • Other Audit procedures
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3
Q

How does the auditor test accounting records?

A

Through analytical procedures and substantive procedures

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4
Q

What does corroborating evidence include?

A

Minutes of meetings, confirmations, industry analysts’ reports, data about competitors, and info obtained through observation, inquiry and inspection.

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5
Q

What is not a valid basis for omitting a procedure for which there is no appropriate alternative

A

Note that while the cost-benefit relationship may be valid reason for performing only certain procedures, cost alone or difficulty in obtaining evidence is not valid basis

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6
Q

The auditor’s decision regarding the sufficiency of evidence is influenced by:

A
  • The risk of material misstatement: greater risk implies more evidence will be required
  • The quality of audit evidence: less audit evidence may be required when that evidence is of higher quality
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7
Q

What is the hierarchy of audit evidence (from most reliable to least reliable)?

A
  1. Auditor’s direct personal knowledge & observation
  2. External evidence
  3. Internal evidence
  4. Oral evidence
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8
Q

What does the test of details consist of?

A

Audit procedures used to gather evidence to support the account balances as reflected in the FS. Test of details are performed on ending balances, the details of transactions, or a combination of the two

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9
Q

What is the purpose of using analytical procedures during the planning stage and is it required?

A

To assist the auditor in understanding the entity

Required

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10
Q

What is the purpose of using analytical procedures during the substantive procedures stage and is it required?

A

Not Required

-Obtain audit evidence about specific management assertions related to account balances and transactions

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11
Q

What is the purpose of using analytical procedures during the final review stage and is it required?

A

Required

-To assist the auditor in the final review of the overall reasonableness of account balances

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12
Q

What are some Analytical Procedures?

A
  • Comparisons of Fin Data - Current and prior year’s FS and the current year budget
  • Ratio Analysis - compare ratios developed from recorded amount to expected ratios developed by the auditor
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13
Q

When designing and performing analytical procedures as substantive procedures, the auditor should do the following?

A
  • Determine the analytical procedures that are suitable for testing the assertions
  • Evaluate the reliability of the data from which the auditor’s expectation is to be developed
  • Develop an expectation
  • Perform the analytical procedures and compare the results
  • Investigate any significant differences by:
    - inquiring management
    - performing other audit procedures
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14
Q

Analytical procedures are most effective and efficient for …

A

assertions in which potential misstatements are not apparent from an examination of the detailed evidence or when such detail is unavailable

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15
Q

What should analytical procedures be based on in order to provide an appropriate level of assurance?

A

Predictable relationships

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16
Q

When an analytical procedure is used as the principal substantive test of a significant FS assertion, the auditor is required to document the:

A
  • Auditor’s expectation
  • Factors considered in the development of expectation
  • Results
  • Additional audit procedures performed
  • Results of such additional procedures
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17
Q

What is external confirmation?

A

Is a form of audit evidence obtained as a direct written response to the auditor from a third party

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18
Q

What is positive confirmation?

A

Is a request that the confirming party respond directly to the auditor by providing the requested information or by stating that the party agrees or disagrees with the info in the request

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19
Q

What is negative confirmation?

A

Is a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the info in the request

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20
Q

The auditor should maintain control over external confirmation requests, including:

A
  • Determining the info to be confirmed
  • Selecting the appropriate confirming party
  • Designing the confirmation requests
  • Sending requests, including follow-up requests
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21
Q

If management refuses to allow the auditor to perform external confirmation procedures, the auditor should…

A

Evaluate the validity and reasonableness of management’s refusal, evaluate the effect of the refusal on the risks of material misstatement, including the risk of fraud, and on the nature, extent, and timing of other audit procedures, and perform alternative procedures

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22
Q

What is footing, crossfooting and recalculation?

A

An auditor may verify the mathematical accuracy of statements and schedules by adding down (footing), adding across (crossfooting), or recomputing amounts.

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23
Q

What does inquiry consist of?

A

Requesting info from knowledgeable parties both internally and externally.

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24
Q

What is vouching?

A

Is directional testing in which the auditor examines support for what has been recorded in the records and statements

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25
Q

What does inspection or examination generally provide?

A

Evidence about the evidence assertion, rather than about ownership, rights, obligations or valuation

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26
Q

What is confirmation?

A

Is a specific type of inquiry that involves obtaining representations from independent external third parties about account balances and transactions or events

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27
Q

What does analytical procedures consist?

A

Evaluations of fin info made by a study of meaningful relationships among data, to help highlight unusual fluctuations that could be the result of errors or fraudulent omissions or overstatements

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28
Q

When does reperformance occur?

A

When an auditor independently performs procedures or controls that were originally performed as part of an entity’s IC

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29
Q

What does reconciliation do?

A

Substantiates the existences and valuation of accounts

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30
Q

What is observation?

A

Observation occurs when an auditor looks at a process of procedure performed by others

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31
Q

What is tracing?

A

Is directional testing. Tracing is looking for coverage in the opposite direction of vouching

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32
Q

Cutoff Review?

A

The auditor should perform a cutoff review of year-end transactions, especially inventory, cash, purchases, sales and accurals

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33
Q

What is auditing related accounts simultaneously?

A

Certain accounts can be audited simultaneously, such as:

  • Long-term liabilities and interest expense
  • Capital additions to plant and equipment and repairs and maintenance expense
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34
Q

What is subsequent events review?

A

The auditor is required to perform certain procedures for the period after the BS date up to the date of the auditor’s report. Evidence becoming available after the BS date should be used in making judgments about the valuation of assets and liabilities on the BS date

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35
Q

When audit procedures relate to asset, liability and equity account balances, the most relevant assertions are:

A 
CVER
Completeness
Valuation, Allocation and accuracy
Existence and Occurence
Rights and obligations

When auditing asset bal -testing on existence (rather than completeness) - more likely to be overstated than understated
when auditing liability bal - testing for completeness - more likely to be understated than overstated

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36
Q

When testing transactions, the most relevant assertions are:

A 
COVEU
Completeness
CutOFF
Valuation, Allocation and Accuracy
Existence and Occurrence
Understandability and Classification
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37
Q

When testing FS presentation and disclosures, the most relevant assertions are:

A 
CVRU
Completeness
Valuation Allocation and Accuracy
Rights and Obligations and Occurrence
Understandability and Classification
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38
Q

What are the methods for selecting items for testing?

A

Selecting all items - population consists of a small number of high dollar value items

Selecting specific items - have a specific charateristics

Audit sampling - less than 100 percent

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39
Q

What are audit procedures are involved with the assertion of completeness?

A

Tracing
Analytical Review
Observation

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40
Q

What are audit procedures are involved with the assertion of CutOff?

A

Cutoff procedures

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41
Q

What are audit procedures are involved with the assertion of valuation, allocation and accuracy?

A

Inspection
Footing
Independent recalculation
Reconciliation

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42
Q

What are audit procedures are involved with the assertion of Existence and occurrence?

A

Confirmation
Observation, inspection and examination
vouching

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43
Q

What are audit procedures are involved with the assertion of Rights and obligations?

A

Inspection

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44
Q

What are audit procedures are involved with the assertion of Understandability and classification?

A

Inspection
Review
Inquiry of management

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45
Q

Revenue Cycle: Under strong IC, segregation of the functions in sales transactions should exist as follows:

A
  1. Preparation of the sales order- a serially numbered sales order is prepared and sent to the credit department for approval
  2. Credit Approval = valuation
  3. Shipment - a serially numbered bill of lading is prepared
  4. Billing - prepares a serially numbered sales invoice. Shipping docs, sales orders and invoices are compared to assure that all shipments were based on valid customer orders and were properly billed. Prices and discounts are applied to the invoice and necessary extensions and footings are computed. the invoice is then sent to the customer and the to the AR dept
  5. Accounting - sale is entered into the sales journal, and a receivable is recorded
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46
Q

Revenue Cycle: IC for Accounts receivable?

A
  • Sales
  • Collection of cash receipts
  • Uncollectible receivables - aging schedule is prepared and sent to the credit department for use of carrying out its collection program
  • Sales Returns - A serially numbered receiving report may be used as a sales return slip. Once the return is approved, the related outstanding receivable is eliminated.
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47
Q

Revenue Cycle: IC for Cash Receipts?

A

Incoming mail must be opened by a person who does not have access to the AR ledger. The receipts should be listed in detail with one copy and the actual receipts sent to the cashier to prepare bank deposit, another copy sent to the AR department for entry in the AR subsidiary records, and a third copy sent to the accounting department for entry in the general ledger AR control account

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48
Q

Revenue Cycle: Substantive Procedures related to the revenue cycle - auditing AR (Balances)

A
  • Completeness
  • Valuation, allocation, and accuracy
  • Existence and occurrence
  • Rights and Obligations
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49
Q

Revenue Cycle: Substantive Procedures related to the revenue cycle - Auditing sales transactions

A
  • Completeness
  • CutOff
  • Valuation, Allocation and Accuracy
  • Existence and Occurrence
  • Understandability and classifcation
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50
Q

Revenue Cycle: Substantive Procedures related to the revenue cycle- auditing presentation and disclosure

A
  • Completeness
  • Valuation, allocation and accuracy
  • Rights and obligations and occurrence
  • Understandibility and classification
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51
Q

Revenue Cycle: What does a blank positive confirmation form mean?

A

That the recipient is requested to fill in the balance. Blank form provide a greater degree of assurance but may also result in a lower response rates because a great effort is required for response.

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52
Q

Revenue Cycle: Why are negative confirmations less effective than positive confirmations?

A

Lack of a response does not provide explicit verification of the existence of the receivable

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53
Q

Expenditure Cycle: IC - Purchases: the following functions should be segregated?

A
  1. Purchase requisition - starts the purchasing cycle. Dept in need of the asset or services sends a properly approved, serially numbered requisition to the purchasing department
  2. Purchase Orders - purchasing dept should obtain competitive bids for best price. It is best that prenumbered purchase orders be used
  3. Receipt of goods or services - Copy not indicate the quantity ordered. Thus, the receiving dept is forced to count the goods upon arrival
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54
Q

Expenditure Cycle: IC - Accounts Payable

A

The accounting dept has 3 functions: (i) record the payable, (ii) to approve the invoice for payment and (iii) to record the payment after it is paid by the Treasurer

  • Recording the payable
  • Approving invoice for payment and recording payment - when the invoice arrives, the accounting dept approves it by matching the invoice, purchase order, receiving report and (sometimes) the requisition
55
Q

Expenditure Cycle: IC Cash Disbursements

A

“Treasury pays the bill”

-The functions of approving the payment and signing the checks should be segregated. Treasurer, who prepares, signs, and mails the checks and cancels all supporting docs after payment. Paid vouchers are returned to the accounting dept for posting of the payment and filing of the docs

56
Q

Expenditure Cycle: Substantive Procedures: Auditing Accounts Payable- what assertions?

A
  • Completeness
    - Perform a search for unrecorded liabilities - the auditor should select cash disbursements made subsequent to year-end and examine supporting docs. The auditor looks for items that should have been recorded at the BS date, but were not.
  • Valuation, Allocation and Accuracy
  • Existence and Occurrence
  • Rights and Obligations
57
Q

Expenditure Cycle: Substantive Procedures: Auditing Purchase Transactions- what assertions?

A
  • Completeness
  • CutOff
  • Valuation, Allocation, and accuracy
  • Existence And Occurrence
  • Understandability and Classification
58
Q

Expenditure Cycle: Substantive Procedures: Auditing Presentation and Disclosures what assertions:

A
  • Completeness
  • Valuation. Allocation, and accuracy
  • Rights and obligations and occurrence
  • Understandability and classification
59
Q

What is lapping?

A

The theft of cash is often concealed by failing to account for cash receipts. Lapping is the most common of these. Lapping involves withholding and not recording current receipts of cash or checks.

60
Q

How to prevent lapping?

A

Use of a “lock box” system. In this system, customers send their payments directly to the bank, which prevents company employees from having access to payments received.

61
Q

What is kiting?

A

Kiting occurs when a check drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank.

62
Q

How to detect kiting?

A

A bank transfer schedule compares the dates checks are drawn (on the disbursing bank account) to the date checks are deposited (in the receiving bank account)

63
Q

Cash cycle: Substantive procedures: auditing the ending cash balance:

A

Completeness, Valuation and allocation, existence

  - Bank confirmation-should be sent to all banks when whom the client has done business during the year, regardless of whether there is a year-end balance to confirm
  - Bank reconciliation
64
Q

Expenditure Cycle: Substantive Procedures: Auditing cash receipts and cash disbursements

A
  • Completeness
  • CutOff
  • Valuation, Allocation, and accuracy
  • Existence and Occurrence
  • Understandability and Classification
65
Q

Expenditure Cycle: Substantive Procedures: Auditing Presentation and Disclosure

A
  • Completeness
  • Valuation, Allocation, and accuracy
  • Rights and obligations and occurrence
  • understandability and Classification
66
Q

Inventory Cycle - IC - The following duties should be segregated

A
  • Purchasing
  • Receiving
  • Warehouse
  • Shipping
67
Q

Attendance at the physical inventory count involves the following dual-purpose tests:

A

(i) Inspecting the inventory to ascertain its existence and condition
(ii) Performing test counts
(iii) Evaluating management’s instructions and procedures for the inventory count; and
(iv) observing the performance of management’s count procedures

68
Q

What happens if the auditor is not present to observe the physical inventory?

A

The auditor must use alternative procedures to justify any opinion expressed. This is acceptable when it is impractical or impossible to observe physical inventory, or when inventories are not material

69
Q

What happens with inventory in a warehouse?

A

The auditor should observe the physical inventory count of goods held in public warehouses if the inventory held therein is significant; otherwise, confirmation of such inventory is sufficient

70
Q

Inventory Cycle- Completeness?

A

The auditor should test the physical inventory report by tracing test counts to the report, thereby verifying its completeness. The auditor should also trace from a sample of prenumbered inventory tags to the physical inventory report sheets to test the completeness of the inventory report sheets.

71
Q

Inventory Cycle - Valuation, Allocation and Accuracy - The auditor should perform the following procedures?

A
  • Test the mathematical accuracy of the inventory report
  • Inquire about obsolete or damaged goods
  • Examine vendor invoices
  • Perform inventory price tests
72
Q

How to do establish existence of the client’s inventory?

A

Observation. During observation - the auditor should verify the existence of a sample of items in the physical inventory report by locating and performing test counts of the items. The auditor should also test the existence of the items on the client’s inventory report sheets by vouching a sample of items from the inventory report sheet to the corresponding prenumbered inventory tags.

73
Q

Inventory Cycle: Substantive procedures: Auditing presentation and disclosure

A
  • Completeness - Consigned inventory, pledged or assigned inventory
  • Valuation, allocation and accuracy
  • Rights and obligations and occurrence
  • Understandability and Classification
74
Q

Investment Cycle: Substantive procedures: Auditing the End Investment Balances

A
  • Completeness-
  • Valuation and Allocation
    - Obtain evidence corroborating the quoted year-end FV by comparing assigned value to prices published by various sources or obtained from a third party, such as an independent broker-dealer or appraiser
    - Determine whether there has been any permanent impairment
  • Existence - Confirmation: Should be requested from the custodian for securities that are in the possession of third parties
  • Rights and Obligations
75
Q

Investment Cycle: Substantive Procedures: Auditing Investment Transactions

A
  • Completeness
  • CutOff
  • Valuation, Allocation, and Accuracy - Independent calculations should be made to determine the validity of recorded g/l from security sales and of discount and premium amortization. In addition, a recalculation should be made to determine the accuracy of recorded dividend and interest income. Investment income from dividends may be recalculated by comparing recorded income with dividend records produced by investment advisory services such as Moody’s
  • Existence and Occurrence
  • Understandability and Classification
76
Q

Investment Cycle: Substantive Procedures - Auditing presentation and disclosure

A
  • Completeness
  • Valuation, Allocation Accuracy
  • Rights and Obligations and Occurrence
  • Understandability and Classification
    • Marketable securities - trading and AFS sec
    • Equity Method Investments - for investments using the equity method, the auditor should examine the audited FS of the investee
    • Derivatives
77
Q

When investments in sec are valued based on an investee’s FS, the auditor should perform the following procedures to obtain sufficient appropriate audit evidence in support of the investee’s financial results:

A
  1. Obtain and read the FS and audit report of the investee
  2. Request that the entity arrange with the investee to have the FS audited
  3. FV that are materially different from the investee’s carrying amts, obtain sufficient appropriate evidence in support of such amts
  4. Difference b/n FS periods - determine whether management has considered the lack of comparability and determine the effect, if any, on the auditor’s report
78
Q

When the auditing investments in derivatives and other sec measured or disclosed at FV, the auditor should:

A
  1. Determine whether the applicable fin reporting framework specifies the method to be used to determine fV
  2. Evaluate whether the determination of FV is consistent with the specified valuation method; and
  3. If the FV estimate is obtained from broker-dealers or other third party sources, obtain an understanding of the method used to develop their FV estimate
79
Q

What are the guidelines of IC over property plant and equipment dealing with Acquisition? What should the auditor do?

A
  • A special requisition form is generated for acquisitions
  • Acquisitions are tied to the capital budget
  • Board of directors should alss approve acquisitions of assets over a certain amount
  • The auditor should ascertain that company policy was followed and that fixed assets purchases were properly authorized
80
Q

Where is the detailed information concerning each asset kept?

A

Subsidiary Ledger

81
Q

What is the physical security of IC on fixed assets?

A

FA should have id plates. The serial number on the plate should be listed in the control account. Physical controls to safeguard assets from theft, destruction, or unauthorized disposition should be in place, including period physical inspection of the plant and equipment

82
Q

What are included in the Written policies of FA IC?

A

Written dep policies and records should be maintained. Specific capitalization policies are also necessary to prevent misstatement of rev and exp

83
Q

How should the disposition of assets be documented?

A

On a sequentially numbered work order

84
Q

PPE: Substantive Procedures on Auditing the ending PPE bal

A
  • Completeness
  • Valuation and Allocation - Recalculate accum dep, evaluate FA for impairment, - Auditor should verify the reasonableness of any FA revaluations
  • Existence: Vouch additions to the FA accts by examing internal docs, by examining external docs, and by inspecting the actual assets, test for unrecorded retirements
  • Rights and Obligations
85
Q

PPE: Substantive Procedures on Auditing PPE transactions

A
  • Completeness- Review the related repair and maintenance exp acct to test for completeness of asset additions
  • CutOff
  • Valuation, Allocation and Accuracy
  • Existence and Occurrence
  • Understanability and Classification
86
Q

PPE: Substantive Procedures on Auditing PPE Presentation and disclosures

A
  • Completeness -Liens and mortgages
  • Valuation, allocation and accuracy
  • Rights and Obligations and Occurrence - inquire of management and review loan agreements, minutes and other docs to determine whether FA have been pledged as collateral
  • Understandability and classifcations
87
Q

Payroll and Personnel Cycle: Segregation of Duties

A
  • Authorization to employ and Pay
  • Supervision
  • Timekeeping and Cost Accounting
  • Payroll Check Preparation
  • Check Distribution
88
Q

Payroll and Personnel Cycle: What is authorization to employ and pay

A

It is the function of the human resources dept to hire new employees

89
Q

Payroll and Personnel Cycle: What is supervision?

A

All pay base data (hours, absences, time off, etc.) should be approved by an employee’s immediate supervisor

90
Q

Payroll and Personnel Cycle: What is Timekeeping and Cost Accounting?

A

Data on which pay is based, such as hours worked or jobs completed, should be accum independent of any other function.

Where there are employees who are paid by the hour, it is advisable to use time clocks

91
Q

Payroll and Personnel Cycle: What is payroll Check Preparation?

A

The payroll dept computes salary based on info received, for example, total hours worked for hourly employees. If a service organization is not used, this dept is responsible for issuing the unsigned payroll checks that are later signed by the treasurer or the CFO. If a check signature plate is used to sign payroll checks, the treasurer or CFO should supervise this process. There should be controls over access to blank checks and check signature plates.

92
Q

Payroll and Personnel Cycle: What procedures should be performed under IC evaluation?

A
  • Observe segregation of duties
  • Compare the personnel records for each dept with actual time cards
  • Observe payroll distribution
  • Observe the use of the time clocks
  • Test transfers and underlying employee authorizations if direct deposit is used
93
Q

Payroll and Personnel Cycle: Substantive Procedures with Auditing the Payroll Accrual

A
  • Completeness
  • Valuation and Allocation
  • Existence
  • Rights and obligations
94
Q

Payroll and Personnel Cycle: Substantive procedures with auditing payroll transactions

A
  • Completeness
  • CutOff
  • Valuation, Allocation, accuracy
  • Existence and Occurrence
  • Understandability and Classification
95
Q

Payroll and Personnel Cycle: Substantive procedures with auditing presentations and disclosures

A
  • Completeness
  • Valuation Allocation, Accuracy
  • Rights and Obligations and Occurrence
  • Understandability and Classification
96
Q

What does a financing cycle include?

A

The entity’s debt and equity

97
Q

Entity’s IC over debt should include?

A

Authorization of new debt financing, adequate documentation, and detailed records of LT debt

98
Q

What is the IC over equity?

A

All stock issuances, dividend declarations, and treasury stock purchases must be authorized by the board of directors

99
Q

Financing Cycle: Substantive Procedures with Auditing the end debt balance

A
  • Completeness - review board min for evidence of new debt, auditor should obtain a listing of all debt and agree the total to the general ledger
  • Valuation and Allocation: Auditor should recompute any interest payable and recompute the amort of prem or discounts
  • Existence
  • Rights and obligations
100
Q

Financing Cycle: Substantive Procedures with auditing debt transactions

A
  • Completeness - auditor should review interest exp for payments to debt holders not included in the debt listing. The auditor should examine lease agreements for proper classification as operating or capital
  • CutOfff
  • Valuation, Allocation and accuracy
  • Existence and occurrence
  • Understandability and classification
101
Q

Financing Cycle: Substantive Procedures with auditing presentation and disclosure

A
  • Completeness
  • Valuation, Allocation, and accuracy
  • Rights and obligations and occurrence
  • understandability and classification
102
Q

Financing Cycle: Substantive Procedures Related to SE and Treasury stock

A
  • Completeness
  • Valuation - review the propriety of any direct entries to RE
  • Existence and Occurrence - can be tested by vouching transactions recorded during the current period to board mins
  • Understandabilityy and Classification - auditor should determine whether there are restrictions on RE resulting from loans, agreements or state laws
103
Q

Financing Cycle: Substantive Procedures with SE and Treasury stock — Completeness

  1. If the client uses a stock transfer agent
  2. If the client does not use a stock transfer agent
A
  1. Third-party confirmations should be used to provide evidence of the completeness of shares authorized, issued, and outstanding, as well as provide evidence of the individual transactions
  2. The primary source of evidence of completeness is the stock certificate book
104
Q

Related party may include:

A

the reporting entity’s affiliates, principal owners, management, and members of their immediate family

105
Q

The auditor should obtain an understanding of related party transactions sufficient to:

A
  1. recognize fraud risk factors
  2. Conclude whether the FS achieve fair presentation
  3. Obtain sufficient appropriate audit evidence about whether related party transactions and relationships have been appropriately identified, accounted for, and disclosed
106
Q

Application of specific procedures regarding material transactions with related parties may include:

A
  1. Evaluating the company’s controls related to the authorization and approval of significant related party transactions and the procedures for identifying, accounting for, and disclosing related party transactions
  2. Asking management for the names of all related parties
  3. Reviewing the reporting entity’s fillings with SEC
  4. Reviewing material transactions (especially investment transactions) for related party evidence, including bank and legal confirmations, minutes, and other appropriate records and docs
  5. Reviewing prior years’ audit documentation or inquiring of the predecessor auditor
107
Q

Identify Related Party Transactions: The auditor should discuss the entity’s relationships and transactions with related parties with the engagement team and provide the names known related parties to the audit staff. The auditor should remain alert for the following items:

A
  • Compensating balance arrangements
  • Loan guarantees
  • Unusual, nonrecurring transactions near year-end
  • Transactions based on terms that differ significantly from market terms
  • Nonmonetary exchanges
108
Q

When the auditor identifies significant related party transactions outside of the normal course of the entity’s business, the auditor should:

A

Inspect the underlying contracts or agreements, if any, and evaluate whether:

  1. The business rationale of the transaction
  2. The terms of the transactions
  3. The transactions have been appropriately accounted for and disclosed
109
Q

If the auditor identifies related parties or significant related party transactions that management has not previously identified or disclosed to the auditor, the auditor should:

A
  1. Communicate the info to the other members of the engagement team
  2. Request management to identify all transactions with the newly identified related parties
  3. Inquire why the entity’s controls failed to enable the identification and disclosure of the related party transactions
  4. Perform appropriate substantive procedures
  5. Reconsider the risk that other related parties or related party transactions may not have been identified or disclosed
  6. Evaluate the audit implications if management’s nondisclosure appears intentional
110
Q

The auditor has the following responsibilities when evaluating estimates:

A
  1. Evaluate the degree of estimation uncertainty
    - Estimation uncertainity is the susceptibility of an accounting est to an inherent to an inherent lack of precision in its measurement
    - The auditor should determine whether accounting est with high estimation uncertainity give rise to significant risks
  2. Assess management’s written policies and practices regarding the development and use of est
  3. Verify that all material est have been developed
  4. Determine that the accounting est are reasonable
  5. Ensure that the accounting est are properly presented and disclosed in conformity with GAAP.
111
Q

What does an auditor do to audit statement of cash flows?

A

The auditor reconciles the amts on the statement to amts on other FS

112
Q

PCAOB standard state that the relevance of audit evidence depends on:

A
  • The design of the audit procedure, in particular whether it is designed to test the assertions directly and whether it is designed to test for understatement or overstatement; and
  • the timing of the audit procedures
113
Q

What is included when the auditor evaluates the materiality of all misstatements found during the audit

A
  • Size of misstatement
  • Auditor must consider the effects, both individually and in the aggregate
  • Aggregate of known and likely misstatements approaches the materiality level
  • Prior period misstatements
  • Qualitative considerations
114
Q

Misstatements are more likely to be considered material if they:

A
  • Affect trends in profitability
  • Compliance with loan covenants
  • Increase management compensation
  • affect significant FS elements
  • Can be objectively determine
115
Q

Frequent kiting may result in

A

A high level of deposits coupled with a low average balance

116
Q

The standard AICPA bank confirmation form includes spaces for the bank to

A

Confirm both cash balances on deposit at the bank and collateral pledged on loans originating from the bank

117
Q

The usefulness of the standards bank confirmation request may be limited b/c the bank employee who completes the form may:

A

Be unaware of all the financial relationships that the bank has with the client

118
Q

By stamping the voucher “paid”- what does this do

A

The check signer cancels the voucher so it cannot be resubmitted for payment

119
Q

The objective of auditing procedures applied to segment info is to provide the auditor with a reasonable basis for concluding whether:

A

The info is presented in conformity with the GAAP rules on segment info

120
Q

Who should issue the purchase orders?

A

Purchase orders should be issued by the purchasing department, not the accounts payable department

121
Q

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to:

A

Determine whether IC activities are operating effectively

122
Q

How are investment income from dividend generally recalculated?

A

By comparing recorded income with dividend income record books produced by investment advisory services

123
Q

What should the auditor do involving derivatives?

A

The auditor would therefore need to examine the contracts to evaluate the character of the hedge and the degree to which losses should be recognized in the determination of income, as well as the character of any disclosures

124
Q

What would improve the response rate of the confirmations of accounts receivable?

A

Include a list of items or invoices that constitute the customers acct balances

125
Q

What is an efficient means of verifying dividend rates for multiple investments in a short amount of time?

A

-Electronically accessing the details of dividend records on the internet

126
Q

What is a reasonableness test?

A

Data in two or more fields are checked for consistency. Comparing overtime hours in the current period to a prior period is one type of reasonableness test.

127
Q

What is a range test?

A

Identifies amounts that fall outside a predetermined range

128
Q

What is test of details?

A

Is one in which specific details are evaluated, whereas in a reasonableness test, two different fields are compared. A test of details with respect to overtime hours might involve looking at time sheets for that week, for example.

129
Q

When does lapping occur?

A

When lapping occurs, an employee uses current remittances to conceal remittances that have been stolen previously. Thus, a lag will exist from the time that this current payment is deposited until the current customer’s account is actually credited.

130
Q

How do you restrict the risks associated with fax confirmations?

A

The auditor should consider taking certain precautions, such as verifying the source and contents of a fax response in a telephone call to the purported sender

131
Q

In evaluating the reasonableness of an estimate, the auditor may perform one or a combination of the following procedures:

A
  • Review and test management’s procedures
  • Develop an independent estimate for comparative purposes
  • Review subsequent events and transactions (occurring prior to the completion of fieldwork) for corroborative purposes
132
Q

What is a likely misstatement?

A

Is one that has not been specifically identified, but which is likely to exist based on the auditor’s judgment

133
Q

If not already performed during the overall review stage of the audit, the auditor should perform analytical review procedures relating to the…

A

Revenue Cycle because there is the presumption of revenue fraud in all audits

134
Q

What is the acid-test ratio?

A

Cash equivalents + marketable securities + accounts receivable / current liabilities

AUDIT (7 decks)

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