A4 Flashcards
Which departments are responsible for preparing the sales order, approving the sales order, preparing the bill of lading, and preparing the invoice
Sales department: prepares the sales order
Credit department- Approves the sales order
Shipping Department- prepares the bill of lading
Billing department- prepares the invoice
Which department should approve write-offs of uncollectible accounts
the treasuers department should approve write-offs of uncollectible accounts
A list of cash receipts should be sent to which three departments
The cashier, accounts receivable, and general accounting departments should each receive a copy of the cash receipts listing
What are some common audit procedures related to the revenue cycle
- trace a sample of shipping documents to sales invoices and the sales journal (completeness)
- Vouch a sample of sales transactions from the sales journal to the shipping documents (existence)
- Examine sales transactions from shortly before and after year-end for recording in the proper period (cutoff)
- Confirmation of a sample of accounts receivable (existence)
- Testing of the allowance for uncollectible accounts (valuation)
compare and contract positive, negative, and blank confirmations
positive confirmation - customer is requested to return confirmation to the auditor
Should be used when- accounts are large, errors are expected, or items are disputed
Negative confirmations - customer is requested to reply only if amount stated by auditor is incorrect.
Should be used when: Combined assessed level of inherent and control risk is low, a large number of small balances are being confirmed, and recipients are not expected to disregard the confirmations
Blank confirmations- a positive confirmation that does not include the balance, instead requesting the recipient to provide this information. Blank confirmations provide greater assurance but may result in lower response rate
In a purchase transaction, which departments are responsible for preparing the purchase order, preparing the receiving report, recording the payable, approving the invoice, singing the check, and mailing the check
Purchasing department: Prepares the purchase order
Receiving department: Prepares the receiving report
Accounts payable department: Records the payable and approves the invoice
Treasurer’s department: signs and mails the check
What documents should be compared before an invoice is approved for payment, and why?
The purchase order, receiving report and venor invoice should be compared before an invoice is approved for payment. This is to ensure that the company does not pay for goods that were not ordered or that were ordered but not received.
What are some common audit procedures related to the expenditure cycle?
Audit procedures related to the expenditure cycle might include:
- performing a search for unrecorded liabilities (completeness)
- Accounts payable confirmations (Existence)
- Examination of purchases before and after year-end for recording in the proper period (cutoff)
Describe the procedure performed when an auditor is searching for unrecorded accounts payable
the auditor should select cash disbursements made subsequent to year-end and examine supporting documentation (e.g., reciving reports, vendor invoices etc.)
- the auditor is looking for items that should have been recorded at the balance sheet date, but were note.
Note: cash discbursements made subsequent to year-end may be identified by reviewing the cash disbursements journal, subsequent bank statements, or the voucher register
When might accounts payable confirmations be used, and to whom would they be sent?
Account payable confirmations might be used when:
- internal control is weak
- there are disputed amounts
- monthly vendor statements are not available
They would be sent to vendors with small or zero balances, becuase errors often invoice unrecorded liabilities
Note: Confirmation of recorded accounts payable will not provide evidence regarding unrecorded liabilities, but confirmations sent to vendors with zero of small balances might provide such evidence
Define lapping
delaying the recording of cash receipts to conceal the theft of cash
Define kitting. describe the auditing procedure that would detect kiting.
Kiting is an overstatement of bank balances by transferring cash between banks and reporting the amount in both bank balances simultaneously.
The auditor may detect kiting by reviewing each transfer of the bank transfer schedule. The auditor is looking for a disbursement date per books after year-end and a receipt date before year-end
What are the primary audit procedures used to test the existence, completeness and valuation of cash
primary audit procedures include:
1) standard bank confirmations sent to all banks with which the client has done business during the year
2) testing of the year-end bank reconcilaition
What are some common audit procedures related to the inventory cycle
1) observing the physical inventory acount
2) performing test counts and tracing into the inventory reprot
3) Performing cutoff testing of purchases and sales
4) Verifying appropriate presentation and disclosure
5) Inquiring about obsolete or damaged goods
What are some common audit procedures related to the investment cycle
related to the long-term investement cycle:
1) Confirmation of securities held and unsettled transactions (existence)
2) Physical inspection an dcount of securities (existence)
3) evaluation of presentation and disclosure in the FS
4) Recomputation of gians, losses, amortization, dividend income, and interest income (valuation)
5) Review of the minutes of board of director’s meetings
6) Inquiry of management (supplemented by a rep letter) regarding intent and ability to hold versus sell securities (classfication)
Explain the auditor’s responsibility when auditing fair values?
The auditor should obtain sufficient appropriate evidence to provide reasonable assurance that the fair value measures disclosed by the client are in conformity with the applicable financial reporting framework.
The auditor is not responsible for predicting future conditions but must base his or her evaluation on information available at the time of the audit
What are some audit procedures related to the PPE cycle
1) Vouching additions and reviewing retirements (existence)
2) Reviewing repair and maintenance expense (completeness and classification)
3) performing cutoff tests (cutoff)
4) Recalculating depreciation and gain or loss on disposals (valuation)
What functions should be segregated related to payroll and personnel
ARC
Authorization (HR, supervisory staff, timekeeping, and cost accounting)
Record keeping (payroll department)
Custody of assets (treasurer)
List some common audit procedures for payroll
1) evaluate segregation of duties
2) observe payroll distribution, use of time cards, etc.
3) test direct deposit transfers and underlying employee authorizations
4) Vouch time on payroll summaries to time cards and approved time reports
5) Recalculate gross and net pay on a test basis
6) Compare total recorded payroll with total payroll checks issued
7) Test extensions and foot of payroll
8) Verify pay rates and payroll deductions with employee records from personnel
9) Recalculate any year-end accruals
10) compare payroll costs with standards or budgets
What are some common audit procedures related to the debt (financing cycle)
1) Obtain a listing of all debt outstnading and agree to general ledger
2) Confirm notes and bonds directly with creditors
3) Recompute amortization of bond premiums or discounts
4) Test a sample of debt receipts and payments and compare interest expense to debt balance fo reasonableness
5) Review debt activity shortly before and after year-end to ensure that transactions are reported in the proper period
6) Review board minutes for evidence of new debt
7) Trace all new debt contracts to the financial statements
8) compare debt disclosures to other audit evidence to ensure that all disclosed information related to debt has occurred
What are some common audit procedures related to stockholder’s equity and treasury stock?
1) Vouch stock transactions to support documentation
2) review minutes from the board of directors meetings for authorization of stock transactions
3) Review the articles of incorporation
4) analyze the retained earnings account since the last audit
5) Verify authorized, issue, and outstanding shares of stock by confirming with the stock transfer agent or reviewing the stock certificate book
What is the effect on the auditor’s opinion if a client refuses to permit inquiry of its attorney or if the attorney refuses to respond?
If a client does not permit inquiry of its attroney the auditor would generally disclaim an opinion or withdraw from the audit
If a lawyer has devoted substantial attention to litigation but refuses to respond to the auditor’s letter of inquiry, a scope limitation sufficient to preclude an unmodified opinion exists (i.e., a qualified opinion on disclaimer of opinion would be issued, depending on materiality)
What is the going concern period for financial statements where the applicable financial reporting framework is under the guidance of the following standard-setting bodies:
1) FASB
2) GASB
FASB: one year after the date of the financial statements are issued (or available to be issued, as applicable)
GASB: one year beyond the date of the financial statements. GASB further requires that if a governmental entity currently knows information that may raise substantial doubt shortly thereafter such information should also be considered
Evidence from what auditing procedures may lead the auditor to conclude that there is significant doubt about an entity’s ability to continue as a going concern?
ADMITS A- analytical procedures D- debt compliance (review compliance M - minutes (review from board meetings) I- Inquiry of client's legal counsel T- Third parties (review financial support arrangements) S- Subsequent event review
What conditions and events may indicate substantial doubt about an entity’s ability to continue as a going concern
FINE
F - financial difficulties
I- internal maters, such as labor difficulties, substantial dependencies on a particular project
N- negative trends
E- external matters such as legal proceedings, new legislation, loss of principal customer, natural disasters
What phrases must be included in a going concern emphasis of matter paragraph
“substantial doubt” and “going concern”
What are the auditor’s responsibilities when evaluating estimates
1) Assess managements written policies and practices
2) Evlauate the degree of estimation uncertainty with the accounting estimate
3) Verify that all material estimates have been developed
4) Determine that accounting estimates are reasonable
5) Ensure the accounting estimates are properly disclosed in conformity with GAAP
What procedures might an auditor use to evaluate an estimate?
1) Reviewing and testing management procedures
2) Developing an independent estimate for comparative purposes
3) Reviewing subsequent events and transactions that corroborate the estimate value
What circumstances would increase the likelihood of a misstatement being considered material
the misstatement
1) Affects trends in profitability, masks trends, or changes a loss in income
2) Affects compliance with loan covenants, contracts, or regulatory provisions
3) increases management compensation
4) Affects significant financial statement elements
5) Can be determined objectively
Give examples of management bias
- selective correction of misstatements brought to management’s attention during the audit
- the identification by management of additional adjusting entries that offset misstatements accumulated by the auditor
- bias in the selection and application of accounting principles
- bias in accounting estimates
What are the three primary purposes for obtaining written representations from management?
1) to confirm representations explicitly or implicitly given to the auditor
2) to indicate and document the continuing appropriateness of such representations
3) To reduce the possibility of misunderstanding concerning matters that are the subject of the representations
What general types of items are included in a management representation letter and who should sign it
include information related to:
- the financial statements
- the completeness of information
- fraud
- related party transactions
- recognition, measurement, and disclosure
- subsequent events
- issues specific to a particular entity
The management representation letter should be signed by the CEO, CFO, and any other members of management who are responsible for and knowledgeable about the items contained in the letter
What are the functions of the audit committee
- selects and appoints the independent auditor and sets the audit fee
- reviews the nature and details of the audit engagement
- reviews the quality of the auditor’s work
- Reviews the scope of the audit
- determines that any recommendations made by the auditor are given proper attention
- maintains lines of communication between the auditor and the board of directors
- helps solve and disagreements related to the accounting treatment of material items in the FS
- evaluates the internal control of the company with the help of the independent auditor
- Makes reports to the board of directors and the stockholders when necessary
- assures that the auditor is independent of the company
Note: the audit committee has additional responsibilities under SOX
list the items that an auditor is required to communicate to those charged with governance
required to communicate:
1) the auditor’s responsibilities under gaas
2) the planned scope and timing of the audit
3) significant audit findings including:
- sig. accounting policies
- management judgements and accounting estimates
- the auditor’s judgement about the quality of the entity’s accounting principles
- difficulties encountered in performing the audit; disagreements with management
- uncorrected misstatements
- management issues discussed prior to retention
- audit adjustements
- consultation (by management) with other accountants
- other items required by aicpa standards or the SOX act
Note: the communication be be oral or written but must be documented in the audit documentation (working papers)
What is an integrated audit? when is an integrated audit required?
an integrated audit requires the auditor to audit both the financial statements and internal control over financial reporting. The two audits must be performed together and two opinions (one on FS and one on control) will be rendered. An integrated audit is required:
- for all audits of issuers
- when an auditor is engaged to examine the internal control of a nonissuer
What is control deficiency?
a control deficiency exists when the design or operation of a control does not allow management or employees in the normal course of performing their assigned functions to prevent or detect / correct misstatements on a timely basis
What is a sig. deficiency
A deficiency or a combination of deficiencies in internal control over financial reporting is less severe than a material weakness yet important enough to merit attention by those charged with governance (responsible for oversight of the company’s financial reporting)
what is a material weakness?
a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected / corrected on a timely basis
What is the auditors responsibility with respect to control deficiencies identified during a financial statement audit of a nonissuer
- the auditor has a responsibility to evaluate control deficiencies identified during the audit to determine whether they represent significant deficiencies or material weaknesses
- sg deficiencies and mw should be communicated in writing to management and those charged with governance within 60 days of the report released ate
- the communication with management and those charged with governance should be restricted use
How would an auditor report noncompliance of a law or regulation assuming 1) it has a material effect on the financial statements 2) there is insufficient evidence or 3) the client refuses to accept a modified report
1) if not adequately reflected in the FS, a qualified opinion or adverse opinion should be issued
2) if unable to obtain sufficient evidence of a suspected noncompliance a qualified opinion or disclaimer of opinion should be issued
3) if the client refuses to accept a modified report the auditor should withdraw from the engagement and contact, in writing those charged with governance
