A4 - Performing Furhter Procedures, Forming Conclusions, and Communications Flashcards
What are the tests of details that are performed as test of controls?
- Completeness.
- Cutoff = sales were recorder in correct period.
- Valuation, allocation and accuracy = appropriate amt.
- Existence and occurrence = sales are valid.
- Understandability of presentation and class.
What is a characteristic of blank positive AR confirmations?
a. Provide > assurance bc customer tells you the $.
b. Result in lower response bc customers are lazy and don’t want to find out how much $ they owe.
What is a characteristic of negative AR confirmations?
a. Lack of response is not super indicative of ARs.
What should an auditor do when there are no responses on AR confirmations?
- Ask customers again (2nd and even 3rd time).
2. If no response at 2nd time, then ask the client to contact their customer.
When are negative AR confirmations used?
When:
- Combined inherent and control risk is low.
- A lof of tiny balances are being confirmed.
- You don’t expect to be ignored.
What’s the key to tracing invoices back and forth to shipping docs?
- Tracking invoices to docs = verifies invoiced items were shipped.
- Tracking docs to invoices = verifies shipped items were billed.
How should you trace a sales transaction when testing for existence?
From GL to source docs.
How should you trace a sales transaction when testing for completeness?
From source docs to GL.
How should you trace a sales transaction when testing for ficticious sales?
From invoices to shipping docs.
When will the auditor focus on primarily on management’s assertion of existence?
On an asset account.
When will the auditor focus on primarily on management’s assertion of completeness?
On an liability account.
What’s the process to pay an invoice?
- Purchasing/procurement preps the PO.
- AP matches receiving report with PO and invoice.
- Treasury pays invoice.
What information is confirmed on the AICPA bank confirmation form?
- Cash balances.
2. Loan collaterals.
What is the primary purpose of bank confirmations?
To corroborate information regarding deposit and loan balances.
What is another purpose of bank confirmations?
To seek information on contingent liabilities, security agreements, and deposit account balances.
How do you prevent EEs to steal checks?
Have a bank lockbox!
How can you detect kiting on a bank transfer schedule?
Receipt date per bank comes before disbursement date.
What assertion does the inventory turnover ratio help obtain evidence for?
Valuation and allocation.
What would the auditor do when assessed level of control risk on the inventory cycle is high?
Ask the client to make an inventory count at YE.
How should the auditor verify the existence of inventory?
By observation.
If the inventory is immaterial, then confirmation is enough.
What does the auditor do when it tests LT investments?
The auditor would use Analytical Procedures to ascertain the reasonableness of the completeness of recorded investment income.
What information is included in a security count worksheet?
- Details of the count.
2. Acknowledgement from client that securities were returned intact.
How does the auditor verify the reasonableness of dividend income?
By checking online, or checking dividend records produced by investment advisory services.
How does the auditor test for occurrence/existence of hours worked regarding payroll?
By vouching to time card data.
How does the auditor test for completeness of equipment?
By tracing from source to book. You are trying to see if the books are complete.
What is a reasonable test?
When different data is checked for consistency.
Whats the difference between a reasonable test and a test of details?
A reasonable test tests data in two or more fields for consistency, and a test of details tests specific details.
What is the primary responsibility of a bank acting as a registrar of capital stock?
Verify that stock is issued in accordance with the authorization of the BOD and the articles of incorporation.
How do you test for unrecorded retirements?
Inspect the GL, then go check facilities.
Regarding retirements, what are you testing if you check the facilities first?
Completeness.
Regarding retirements, what are you testing if you check the GL first?
Existence.
Regarding PP&E, what is a good control that would reduce assessed control risk?
Periodic inspections by the internal auditor.
What is capital and treasury stock traced to?
To BOD minutes/meetings.
What’s the relationship between Low/High control risk and substantive testing?
Low level of control risk = Test of controls, limited substantive test because you have proved that controls are effective.
High control risk = No test of controls (since they don’t work anyway), and lots of substantive testing.
Why would the insurance policy of an equipment not be available for the auditor to review?
Because the equipment may be subject to a lien, and the lien holder might have the policy with them.
What should the auditor do if management plans do not alleviate substantial doubt about going concern?
Add a section called “Substantial Doubt About an Entity’s Ability to Continue as a Going Concern” in the auditor’s report.
What should the auditor do if management plans alleviate substantial doubt about going concern?
Auditor MAY (optional) add an EOM paragraph.
What should you do if management refuses to allow you to talk to external legal counsel?
Provide a disclaimer of opinion, or withdraw from the audit (if still in the planning phase).
What should you do if the client’s attorney refuses to give you information?
Provide a disclaimer of opinion, or withdraw from the audit if the refusal is at the client’s request.
What is the auditor objective when evaluating client’s estimates?
To determine if the estimates are reasonable and in conformity with GAAP.
How does the auditor evaluate the reasonableness of an accounting estimate?
- By understanding how management developed the estimate.
- Review and test management’s procedures.
- Develop and independent estimate to compare.
- Review subsequent events for corroborative purposes.
What are the factors that may indicate substantial doubt about an entity’s ability to continue as a going concern?
FINE!
- Financial difficulties.
- Internal matters.
- Negative trends.
- External mattters.
What are the factors that an auditor would concentrate on when evaluating the reasonableness of an accounting estimate?
- Factors thate are significant to the accounting estimate.
- Sensitive to variations.
- Deviations from historical patterns.
- Subjective and susceptible to misstatements and bias.
What are the mitigating factors to the substantial doubt about an entity’s ability to continue as a going concern?
Entity:
- Plans to borrow money or restructured debt.
- Plans to sell assets.
- Plans to delay or reduce expenses.
- Plans to increase ownership equity.
When would an auditor conclude that a misstatement below the quantitative materiality limit is qualitatively material?
If it results in a favorable balance. Ex: Misstatement makes Net loss becomes Net Income.
What should the auditor do regarding PY immaterial misstatements?
Consider those misstatements for CY evaluation of audit findings. They might be material this time around.
How can auditor note a control deficiency?
- In the design of controls.
2. In the failure of the effectively designed control.
What is the date of the management representation letter?
The same date as the auditor’s report.
What does the management representation letter contain?
Information in 4 categories:
- FS.
- Completeness.
- Recognition, measurement, and disclosure.
- Subsequent events.
What management representations must be obtained?
- Uncorrected misstatements identified by the auditor.
- Unrecorded transactions.
- Instances of immaterial fraud by EEs in Internal Control.
What is the material weakness riddle?
All material weaknesses are significant deficiencies, but not all significant deficiencies are material weaknesses.
What is a material weakness?
A material weakness is a significant deficiency that results in a reasonable likelihood that a material misstatement in the FS will not be prevented, detected, or corrected.
