A4 N Flashcards
EXAMPLE when credit sales transactions are not recorded (unrecorded sales) :
Shipping documents without corresponding sales journal entries might indicate unrecorded sales
Tracing from invoices to shipping documents would provide evidence that
sales billed to customers were actually shipped
fictitious sales example
An invoice for which the corresponding shipping documents could not be located
(i.e., sales that were recorded but never actually shipped).
Tracing from a sample of shipping documents to matching sales invoices… would provide evidence that
goods shipped are properly billed
(completeness assertion for billing)
Shipping documents provide evidence that:
sale occurred
I.e. to test failure to prepare sales invoice selecting from shipping documents allows the auditor to test whether corresponding invoices exist for each sale.
EXAMPLE of inappropriate segregation of duties
The cash receipts clerk credits customer accounts when payment is received.
The cash receipts clerk should not have both recordkeeping responsibilities and custody of assets.
Tracing shipping documents to prenumbered sales invoices provides evidence that:
Shipments to customers were properly invoiced.
Tracing bills of lading to sales invoices provides evidence that:
Shipments to customers were invoiced.
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement assertion of:
Valuation and allocation.
Which of the following management assertion is most closely related to the audit objective that verifies all sales have been recorded?
Completeness.
Existence assertion during an audit of accounts receivable
Send confirmations to customers.
detect the overstatement of sales, the auditor should trace transactions from the:
Sales journal to the shipping documents.
Negative & Positive Confirmations
Positive confirmation
The recipient is requested to respond with confirmation or reply to the stated information, regardless of whether it is correct.
(because the auditor cannot infer that all nonrespondents have verified their account information.)
Negative confirmation
The recipient is only requested to respond if they disagree with the stated information.
Two assertions for which confirmation of accounts receivable balances provides primary evidence are:
Rights and obligations and existence.
rights and obligations (does the client have a right to the receivable?) and existence (does the receivable really exist?).
Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations?
Recipients are likely to sign other types of positive confirmations without careful investigation.
Como las positivas las firmas sin revisar. Entonces las mandan negativas para que solo respondan si no estan deacuerdo y x lo menos la leen
The auditor should be aware that the blank form of positive confirmation may be ineffective because:
Few responses may occur because more effort is required of recipients.
Sending positive confirmations to all of the client’s customers with balances on December 31. is an example of?
To identify the fraud in accounts receivables related to fictitious customers.
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would:
Ask the client to contact the customers to request that the confirmations be returned.
Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity’s financial statements?
Accounts receivable confirmation requests yield significantly fewer responses than expected.
A lower than expected response rate could be indicative of fictitious customer accounts.
An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should:
Verify the account balance by inspecting the client’s bank statements and cash receipt records.
OJO: no es como en la vida real que tenemos que consultar y que lo tiene que poner en el MNGMT letter. SEGUN guidance An acceptable alternative procedure for accounts receivable confirmations is verifying account balance by inspecting the client’s bank statements and cash receipt records.
Weakness in AP Procedures
Purchase orders should be issued by the purchasing department, not the accounts payable department.
AP/EXPENSE process flow:
Responsible for preparing:
> purchase order - Purchasing DPT
> Matching the receiving report and invoice with the purchase order= AP DPT
> paying for the related purchase= Treasury DPT
AP department generally should:
Establish the agreement of the vendor’s invoice with the receiving report and purchase order.
In other words: ensure that supporting documents (invoice, receiving report, and purchase order) are in agreement before the voucher is submitted for payment.
To provide assurance that each voucher is submitted and paid only once
Stamped “paid” by the check signer.
stamping the voucher “paid,” the check signer cancels the voucher so it cannot be resubmitted for payment.
Example of weakness in IC=
accounts payable clerk has both the recordkeeping and custody functions.
Clerk 3 mails the checks and remittances after they have been signed.
In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of:
Completeness.
When testing liabilities, an auditor generally is concerned about understatement (as opposed to overstatement, for assets). Therefore, in auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of completeness (if accounts payable is not complete it would be understated).
confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be:
Vendors with whom the entity has previously done business
Type of CASH FRAUD:
CHECK kiting
check fraud that involves using a check from an account with insufficient funds to make a deposit into another account.
Frequent kiting may result in a high level of deposits coupled with a low average balance.
Type of CASH FRAUD:
Lapping
type of accounting fraud that involves an employee stealing money from a customer and using other customer payments to cover it up.
contingent liability
Via Standard bank confirmation. which has an “exceptions and comments” box that specifically discloses contingent liabilities as endorser of loans, for open letters of credit, etc
Type of CASH FRAUD:
Embezzlement
financial fraud that involves stealing or misusing money or assets that have been entrusted to someone
Malversación de fondos
An auditor generally tests the segregation of duties related to inventory by:
Personal inquiry and observation.
Verification of the existence of inventory is achieved when
reviewing and testing control procedures over physical inventory count?
Inquiries of warehouse personnel, production and sales personnel concerning possible obsolete or slow-moving inventory items
provide assurance about management’s assertion of:
Valuation.
(i.e., has inventory been properly recorded at lower of cost or market?).
Observation of physical inventory counts ASSERTIONS
Observation of physical inventory counts provides evidence about both existence and completeness.
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s assertions about:
Valuation and allocation.
sales returns
Failure to record sales returns would result in actual inventory quantities being greater than those recorded in the perpetual inventory records.
Inventory Turnover
auditor obtain assurance that slow-moving and obsolete items included in inventories are properly identified?
Test the computation of standard overhead rates.
relates to the accumulation of costs during the manufacturing process, and not to whether the inventory is slow-moving, defective, or obsolete after manufacture.
Existence =
OBSERVING
Tracing inventory items from the tag listing back to the physical inventory quantities is an example of what assertion
COMPLETNESS
Which of the following procedures best addresses the adequacy of presentation and disclosure for inventory of a nonissuer?
Obtaining confirmation of inventories that are pledged under loan agreements.
In addressing the adequacy of presentation and disclosure for inventory, the auditor should determine if such inventory pledged under loan agreements, have been properly disclosed.
Confirming inventories pledged under loan agreements.
Confirming inventories pledged under loan agreements.
Cashier JOB
cashier receives remittances from the mailroom and also prepares the Daily deposit slip.
safeguard marketable securities
Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.
controls most likely would give the greatest assurance that securities held as investments are safeguarded
> Access to securities requires the signatures and presence of two designated officials.
> An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.
controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?
The internal auditor compares the securities in the bank safe deposit box with recorded investments.
In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the:
Completeness of recorded investment income
In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client’s name, an auditor most likely gathers evidence in support of management’s financial statement assertions of existence and:
Rights and obligations.
To establish the existence and ownership of a long-term investment in the common stock of a publicly traded company, an auditor ordinarily performs a security count or:
Confirms the number of shares owned that are held by an independent custodian.
A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will:
Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date.
The primary purpose of scanning a client’s investment records for the period just before and just after the year-end to determine that any transfers between categories of investments have been properly recorded is to obtain evidence about management’s financial statement assertions of:
Understandability of presentation and classification, and valuation and accuracy
EXPLANATION: Investments may be classified as trading, available-for-sale, or held-to-maturity. The classification of each investment into one of these three categories determines how it will be shown on the balance sheet
An auditor would most likely verify the interest earned on bond investments by:
Vouching cash receipts would only verify the recording of checks received. This may not be the same as interest earned, since interest is accrued between cash payment dates.
MNGMT use of a broker’s quotation to support a fair value estimate
If the quotation is from the broker who initially sold the instrument, the evidence might be less objective and might need supplementation.
best evidence of fair value pertaining to a client’s investments in derivative instruments that are listed on a national exchange and disclosed at fair value
Quoted market prices.
A nonissuer client has a material investment in the securities of another entity that is valued on the basis of the investee’s financial results. The auditor has learned that the investee’s financial statements are not audited. What should the auditor do first in this situation?
Ask the client to arrange with the investee to have another auditor apply the appropriate auditing procedures to the investee’s financial statements.
interest rate swap contract
auditor most likely Test the data used to arrive at the fair value of the interest rate swap contract
According to PCAOB standards which one of the following statements does not reflect a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement?
The dollar amount of the error.
b/c $ dollar amount is a quantitative factor they are asking for qulitative
The cost of correcting the misstatements
> should be considered when evaluating the materiality of an uncorrected misstatement.
> would NOT consider when determining whether uncorrected misstatements are material, individually or in the aggregate,
An auditor’s evaluation of uncorrected misstatements for an audit of an issuer should include evaluation of the effects of uncorrected misstatements detected in:
The prior years and misstatements detected in the current year that relate to prior years.
When evaluating misstatements, the auditor should consider the impact of both prior year uncorrected misstatements on the current year and current year misstatements on the prior year. If a misstatement identified in the current year would have had a material impact on the prior year financial statements, the auditor must determine if the prior year opinion in the auditor’s report needs to be amended.
Misstatements discovered by the auditor were immaterial in the aggregate in prior years. Such misstatements should be:
Considered in the evaluation of audit findings in the current year.
MNGMT Rep Letter date same as
Auditor Report Date
MNGMT Rep Letter is to reduce:
The possibility of a misunderstanding concerning management’s responsibility for the financial statements.
MNGMT Rep Letter should be signed by …?
CEO/president and CFO
MNGMT Rep Letter
Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion.
is NOT a statement that is included in the MNGMT REP LETTER
AUDITOR es el que dice si fue sufficient and appropriate
auditor’s required communication with those charged with governance
The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.
Audit committee
is considered a subgroup ordinarily charged with assisting the board of directors in fulfilling its oversight responsibilities.
consider in making a judgment about whether a control deficiency is a significant deficiency?
When evaluating whether a control deficiency is a significant deficiency or a material weakness, the auditor should consider both the
>likelihood and
>magnitude
Deficiency in the operation of internal control exist when….
when a properly designed control is either not executed as designed or the person performing the control does not have either the authority or the skill to perform the control.
significant deficiencies in internal control
auditor may communicate significant deficiencies during an audit or after the audit’s completion.
Audit completion= pencils down NOT after issuing the report/opinion
material weakness
Is a deficiency, or combination of deficiencies, such that there is a reasonable possibility (LIKELIHOOD)that a material misstatement (MAGNITUDE) of the entity’s financial statements will not be prevented or detected/corrected.
In a group audit of a nonissuer, which of the following matters should the group engagement team include in a communication to group management?
Significant deficiencies in internal control identified in the audit
auditor’s required communication of significant deficiencies is restricted?
Yes, an auditor’s report on significant deficiencies should include a restriction on the distribution of the report.
report issued on significant deficiencies should indicate that the purpose??
Yes, any report issued should indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control.
All MATERIAL Weaknesses are….
Significant Deficiencies
significant deficiencies
The auditor is NOT required to search for significant deficiencies (but any that are identified should be reported).
unrecorded retirements of fixed assets
Inspect the property ledger and the insurance and tax records, and then tour the client’s facilities
PP&E
significant debits to accumulated depreciation accounts in the current year is an indicative of?
Plant assets were retired during the current year.
PP&E
Original insurance policy on plant equipment is not available for inspection … is an indication of?
Lien on the plant equipment.
Use of time tickets to record actual labor worked on production orders ….
is the best way to prevent direct labor from being charged to manufacturing overhead.
When a client company does not maintain its own stock records, the auditor should request
the transfer agent and registrar to confirm the number of shares issued and outstanding.
The primary responsibility of a bank acting as registrar of capital stock is to:
Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.
The purpose is to restrict dividends,
such restrictions should be disclosed in the financial statements.
