Assurance Flashcards
Balance Sheet Assertions
- Existence - do assets/liabilities/equity exist?
- Rights & Obligations - entity holds control/rights to asset, & liabilities are obligation of entity
- Completeness - all assets/liabilities/equity have been recorded
- Valuation & Allocation - all assets/liabilities/equity are recorded at the correct amount
- Classification - all assets/liabilities/equity are recorded to correct accounts
- Presentation - all relevant disclosures made, & in compliance with financial reporting framework
Procedures - Cash
Assertions - Existence, Completeness, Valuation
Procedures
- Agree bank statement to bank reconciliation
- Agree bank reconciliation to general ledger
- Review bank reconciliation for stale-dated cheques
- Review outstanding cheques/deposits to ensure recorded in correct period
Procedures - A/P & Other Liabilities
Assertions: Completeness, Valuation
Procedures
- Review subsequent bank statements for unrecorded liabilities
- Review subsequent bank statements to confirm cutoff of liabilities
- Request supporting documentation from vendors for balances outstanding
- Review final pay period if payable should be accrued
- Pull sample of AP items and agree to supplier invoices
Procedures - Long-term Debt
Assertions: Completeness, Valuation
Procedures:
- Review loan documentation to ensure correctly recorded as long-term
- Recalculate loan amortization schedule to confirm balance outstanding and current portion
- Recalculate any loan covenants to confirm entity is in compliance. If not, assess any consequences
First Year Audit Considerations
- Opening balances - Prior year balances not reliable
- Comparative figures - Prior year balances not reliable
- Understanding of business & internal controls - auditor needs to obtain understanding of business & controls in place
- Independence & Client Acceptance - (determine any independence issues) AND (any reason not to accept as a client)
Procedures - A/R
Assertions: Existence, Completeness, Valuation
Procedures:
- Agree AR listing to general ledger
- Review AR listing for negative balances
- Review AR listing for old accounts (typically over 60 days) to ensure these amounts are still receivable
- Review subsequent bank statements for any unrecorded receivables
Procedures - Inventory
Assertions: Existence, Completeness, Valuation
Procedures:
- Conduct inventory count
- Inquire with management for any obsolete/damaged inventory and if any adjustments have been made to the carrying balance
- Vouch supplier invoices to inventory balances to ensure recorded at correct cost
- Agree inventory listing to general ledger for valuation
Going Concern - Auditor Objectives
Auditor objectives
1) Obtain sufficient evidence regarding management’s going concern assumption
2) Conclude, based on evidence collected, whether material uncertainty exists for events/conditions to doubt entity’s ability to continue as a going concern
3) To report in compliance with CAS
Going Concern - Management Assumption Unreasonable
If management’s going concern assumption is unreasonable:
a) management to provide 12 month projected cashflows
b) auditor to assess projection for reasonableness through management discussions & review of supporting documents
Materiality for RAMP - Users, Overall Materiality, & Perf Materiality
Discuss users of materiality
- Shareholder
- Lenders
Overall Materiality
+For-profit
i) 1-3% of revenues, expenses, total assets
ii) 3-5% of equity
iii) 3-7% of normalized net income
+Non-profit
i) 1-3% of revenues, expenses, total assets
Performance Materiality
- 60-75% of Overall Materiality
Procedures - PP&E
Assertions: Existence, Rights & Obligations, Valuation
Procedures:
- Agree capital asset listing to general ledger
- Vouch additions/disposals to supporting documentation
- Request proof of existence for sample of PP&E
- Recalculate depreciation, & compare to client recorded amount
- Assess if any indicators of impairment
- Review R&M expense for capital items
Audit Opinions
Are F/S materially misstated?
+No - Issue unqualified opinion
+Yes - Is the material misstatement pervasive?
- No - Issue qualified opinion
- Yes - Issue adverse opinion
+Unable to assess due to scope limitations - Is the scope limitation pervasive?
- No - Issue qualified opinion
- Yes - Issue disclaimer of opinion
Using Work of Internal Audit: Why & Evaluation
Why: Using internal audit work can reduce the nature, & extent of procedures to be performed
Evaluation
1) Objectivity - reports to board of directors, not controller
2) Competency - competent in finance/accounting so work can be relied upon
3) Systematic Approach - formal approach prepared for the approach to conduct testing internally
Independence Concerns
1) Self-interest threat - has financial interest in client
2) Self-review threat - form opinion on own work
3) Advocacy threat - promotes position of the client
4) Familiarity threat - close relationship with client, making it difficult to be unbiased
5) Intimidation threat - client intimidates practitioner
Audit Risk Factors
Increases risk
- first year of audit
- complex transactions
- first year of operations
- compensation tied to company performance
- new stakeholders
- management disregard for controls
- company in poor financial health
Decreases risk
- repeat audit engagement
- simple transactions
- competent accounting staff
Income Statement Assertions
- Occurrence - revenue/expenses have occurred
- Completeness - all revenue/expenses have been recorded
- Accuracy - amounts & details of revenue/expenses have been recorded at correct amounts
- Cut-off - revenue/expenses recorded in correct reporting period
- Classification - all revenue/expenses classified to correct accounts
- Presentation - all relevant disclosures made, & in compliance with financial reporting framework
Special Reporting - 9100
- Details: Firm performs specific procedures as requested & report on results
- Procedures: To be specified by entity for what is needed
- Assurance - None, only conclude on procedures completed
- Cost - Dependent on number of procedures, since no assurance provided less risk to firm
Special Reporting Options
1) CAS 805 - Audits of Single Financial Statement & Specific Elements, Accounts, or Items
2) CRSE 2400 - Review Engagements
3) 9100 - Reports on results of Specified Audit Procedures to Financial Information other than F/S
Special Reporting - CRSE 2400
1) Provide reporting framework
2) Details - scope covers historical information
3) Assurance - Limited assurance, showing nothing has come to attention to influence F/S
4) Materiality - Specific materiality, typically lower than overall materiality
5) Cost - Less than CAS 805, due to less rigorous procedures
6) Procedures - limited to analytical procedures & inquiry
Special Reporting - CAS 805
- Provide reporting framework
- Details - description of responsibilities of management & firm, & statement of firms opinion in compliance with reporting framework
- Assurance - Reasonable assurance
- Materiality - Specific materiality, typically lower than overall materiality
- Cost - Most costly of special reporting options, can be mitigated if conducted by same auditor as overall F/S
- Procedures - Procedures include inspection, observation, confirmation, recalculation, reperformance, & analytics
Audit Approach Factors
Factors
- Number & value of each transaction (ex. high volume, low $)
- Controls in place
- Control testing needed
- Control issues noted in case
Procedures - Revenue
Assertions - Occurrence, Cut-off, Accuracy
Procedures:
- Pull sample of sales from general ledger and agree to receipt and bank deposit
- Test cut-off for last and first item reported in each reporting period
- Pull sample of returns and confirm they have been removed from revenue
