Assurance Flashcards
What is the special reporting under 8500?
This is a review reporting so it is a lot cheaper.
Report on financial statement information other than the financial statement
Must be financial information
What is CAS 805 special reporting .
- audits of single financial statements and specific elements, accounts on items of a f/s
- audit (higher cost )
Explain audit reporting?
Audit financial statement (CAS 700)
• Positive assurance – strongest assurance available
• Fairly stated
• Cover all the F/S including B/S, I/S, Cash flow, notes, etc)
• But very costly
• Required further evidence compares to review
• Management’s discussion is insufficient evidence to support an audit opinion
• Involved third party verification and detail procedures.
• Ex: confirming cash and accounts receivable for existence, vouching sales transactions to cash receipts for occurrence, and tracing subsequent payments from the bank statements back to the G/L to ensure completeness of accounts payable, and so forth
• Auditor will attend the inventory count
explain review reporting.
Review of financial statements (section 8100)
• Negative assurance (lower assurance level than audit)
• Procedures only focus on inquiries, discussion and analytical review to support the information on the F/S , without third party verification to support management explanation
• Less costly
what are the inventory valuation procedures?
• They will also need to perform procedures over inventory valuation, such as tracing recent purchase invoices to the inventory on hand to ensure it is accurately recorded, and tracing recent inventory sales transactions to inventory items to ensure they are valued at the lower of cost and net realizable value.
o There is a significant amount of inventory on hand at year-end. Inventory turnover is very slow (1.11 – 2012; 1.34 – 2011), and may indicate obsolescence issues. In addition to the existence testing they would perform through the inventory count, the auditors will need to perform valuation testing. This may be done by tracing a sample of inventory items to recent sales invoices, to ensure they are being sold for amounts greater than their cost. They may also trace a sample of inventory items to recent purchase invoices, to ensure their cost on the financial statements is accurate.
how to obtain assurance from the opening balance for audit and review purposes?
• Not sufficient level of opening balance to obtain-level assurance over opening balance
• Auditors can look at historical records to test the cutoff of sales and purchase transactions at April 1, 2011, by examining a sample of purchase invoices and tracing them to the G/L, thus ensuring they were recorded in the correct period. This work on inventory will also provide assurance in relation to completeness/existence of accounts payable opening balances, and the occurrence/completeness of expenses in fiscal 2012.
• They can also trace a sample of shipments from the shipping documents made around the fiscal 2011 year-end to the G/L, to ensure the revenue was recorded in the correct year. This work on inventory existence/completeness also provides assurance in relation to the existence/completeness of the opening accounts receivable balance, and occurrence/completeness of revenue in fiscal 2012.
• However, as the auditors did not attend the inventory count last year and do not have a reasonable procedure to verify the existence of inventory at April 1, 2011, the existence of the opening inventory is likely an issue.
o They could test a sample of inventory purchase transactions and inventory sale transactions throughout the entire year as a detailed roll-back procedure, but this would not be an efficient or effective process. Instead, they might have to include a scope limitation in their 2012 auditor’s report in relation to the accuracy of beginning inventory and cost of goods sold.
Test A/R procedures
o Slow-moving accounts receivables present a higher valuation risk. 2011 is approximately 2.66 times). Slow-moving accounts receivables present a higher valuation risk. In addition to testing accounts receivable existence at year-end through confirmations, the auditors will likely also test valuation through subsequent receipts. The auditors will likely want to discuss older accounts with management, to assist in the determination of their collectability. If they cannot obtain sufficient appropriate evidence, they might require management to book a provision (which would lower EBITDA).
o To verify the write-down pertaining to the bankrupt customer, the auditors will likely want to examine all sales invoices and shipping slips to that customer during the year. The auditors will also look for evidence that the customer has in fact filed for bankruptcy (i.e. by looking at the customer’s website, news articles, etc.).
How to test warranty?
o To ensure completeness of the warranty liability and related expense, the auditors will likely re-calculate the expected warranty expense for the year, and trace it to the G/L. They may also trace subsequent claims to the G/L, to ensure proper cutoff. To ensure the liability and expense is sufficient to cover this claim, they will likely compare the claim made in February, and any claims made subsequent to year-end, to the amount of warranty liability accrued at year-end.
How to test S/A transactions expense occurrence?
o To ensure any further personal shareholder transactions are excluded from the expenses, the auditors will likely vouch a sample of expenses to the related purchase invoice, and assess the invoice details to determine whether it is a business-related expense.
How to test Discontinued operation?
o The auditors will need to audit the discontinued operations note (discussed above) pertaining to HSI. They will want to review the HSI agreement, and any correspondence received between HSI and PAL. They will be looking for evidence that HSI operations have ceased, and will verify the income and expenses pertaining to HSI.
o In addition, as the legal expense pertaining to the closure of HSI is significant, the auditors will send legal confirmations to PAL’s lawyers in order to determine the existence of any pending litigation and completeness of any outstanding legal claims.
How to test going concern?
o The auditors will likely re-calculate the bank covenant to ensure PAL is in compliance with the financing agreement. If PAL is not in compliance, the auditors will require a waiver from the bank stating that they will not demand repayment of the debt within a year and one day from year-end; otherwise, there is potentially a going concern issue.
