AUD Flashcards
What is Kiting? How do you identify it?
Kiting is the process by which an entity attempts to use transfers between banks to inflate both balances. Identify using the receipt and disbursement dates per the bank. If the disbursement date is after year end, but the receipt date is prior, the balance is recorded in both and therefore kiting.
Times Interest Earned
Earnings before Interest and Taxes / Interest Expense
Internal Control Elements
CRIME - Control Environment, Risk Assessment, IT, Monitoring, and Control Activities
Control Activities
SCARE - Segregation of Duties, Physical Controls, Authorization, Performance Review, EDP (IT)
Emphasis of Matter
Comes after opinion, change in consistency of accounting procedure
Other Matter
Restriction on Report Use
Responsibility for Sig Deficiencies and Material Weakness
Report within 60 days of Report Release Date (Nonissuer)
Assertions for Account Balances (B/S)
Completeness, Existence, Accuracy/Valuation, Rights and Obligations
Assertions for Transactions (I/S)
Completeness, Existence, Accuracy/Valuation, Classification, Cutoff
Assertions for Presentation and Disclosure (Notes)
Completeness, Accuracy/Valuation, Classification, Rights and Obligations
Subsequent Events
Before B/S date, accrue. After B/S, disclose in notes, emphasis of matter (between B/S and Audit Report Date, NOT release date)
Going Concern
Add emphasis of matter paragraph if adequately disclosed (substantial doubt to continue as going concern). If not appropriately disclosed, adverse opinion
Referencing Component Auditor
Reference when not taking ownership of work, if taking ownership no reference
Operating Margin Percentage
Operating Income / Sales
Gross Margin Percentage
Gross Margin (Sales - COGS) / Sales
Sequential Sampling - What is it and when is it used?
Type of attribute sampling, used when many errors are expected, each step is conditional on the previous step
Upper Precision Limit
Allowance For Sampling Risk + Observed Error Rate
Elements of Attribute Sampling - Sample Size
Risk of Assessing Control Risk too Low (coefficient of confidence rate), Tolerable Deviation Rate, Expected Deviation Rate -> population size does NOT effect the sample size
Assessing Sample Results - Attribute Sampling
Population Deviation Rate + Sampling Risk = Upper Precision Limit -> compare this to tolerable deviation rate
Purpose of Stratification in Population?
Decrease the effect of variance in the population, and therefore reduce sample size.
Ratio Estimation - How to Calculate
Auditor Balance / Book Balance (in sample) = Factor x Book Balance = auditor value (in population)
PPS Sampling - What is it and how do you evaluate results?
Type of variable sampling, each dollar represents a sampling unit, if observed error is less then sampling interval, then the projected misstatement is equal to observed error. If not then must apply tainting percentage, which is
An auditor’s program to examine long-term debt most likely would include steps that require
Correlating interest expense recorded for the period with outstanding debt
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is
Stamped paid by the check signer
Can separate reports be issued on separate financial statements?
Yes as long as they are separate reports (cannot be in conjunction with FS audit).
Projected Misstatement
Projected Misstatement = Actual Misstatement * Population Size / Sample Size = 3,000 * 1000 / 50 = $60,000. For the account to be misstated, the projected misstatement should be more than the tolerable misstatement.
Management Rep Letter should be up to?
The representations should be made as of the date of the auditor’s report.
Communication of significant deficiencies and material weaknesses?
In writing, no later then 60 days from the audit report release date.
Forecast
Based on normal circumstances, general or limited use, disclaimer that the results may not be achieved
Agreed Upon Procedures
Independence, limited use,
Projection
Limited use, disclaimer on limitation of scope/usefulness
According to US GAAS, when the auditor of the group financial statements is assuming responsibility for the work of component auditors, for components that are not significant components, the group engagement team should perform
Analytical procedures at the group level
According to US GAAS, in a group audit, both component materiality and component performance materiality should be ____________ the materiality and performance materiality for the group financial statements as a whole.
Lower than
When there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time, according to US GAAS, the auditor should
Obtain written representations from management about management’s related plans
When financial statements are materially affected by a departure from GAAP, the auditor should express
a qualified or an adverse opinion.
If an auditor has issued an adverse opinion on a complete set of financial statements, the auditor is precluded from expressing which of the following in an audit report on a single financial statement of the nonissuer entity?
An unmodified opinion.
Critical audit matters are:
Specific to each entity
How often should PCAOB inspect audits?
Every year for firms with more then 100 reports
Every 3 for firms that provide up to 100 reports
Disclaimer of opinion
Material and pervasive scope limitation
Qualified opinion
Misstatements, scope limitation or departure from GAAP that is material but not pervasive
Adverse opinion
Departure from GAAP that is material and pervasive
Auditor responsibility for RSI
Obtain representations from management, and compare RSI to Financials for consistency
Is an accountant required to obtain an understanding of internal control for a review?
No
An agreed upon procedures report should include what?
A disclaimer of responsibility for the sufficiency of the procedures
Management representations should be obtained on
Uncorrected misstatements, absence of unrecorded transactions, and instances of immaterial fraud involving employees who have sig role in internal control
What framework is used for internal control audits?
Committee of Sponsoring Organizations of the Treadway Commission (COSO)
PPS sampling
Recorded Amount - Book Amount / Recorded Amount = tainting percentage
Apply this to the sampling interval
If the recorded balance selected is larger then the sample interval, the error becomes the projected error
An Accountants compilation report on a financial forecast should include a statement that
There will usually be differences between the forecasted and actual results
Similarity between GAAS and Attestation Standards?
Both require independence
Accepting an engagement to compile a financial projection for a publicly held company most likely would be inappropriate if the
projection were to be distributed to all stockholders of record as of the report date (general use). Only a financial forecast is suitable for general use.
Which of the following is least likely to discover noncompliance?
Reviewing an internal control questionnaire provides information about control policies and procedures, but does not provide information about actual transactions or events that have occurred. Therefore, it is not likely to uncover any acts of noncompliance with laws and regulations.
An accountant performing a compilation is required to
have a general understanding of the client’s business. Does not need rep letter
Control activities (not the information and communication system)
are the policies and procedures that help ensure that management directives are carried out.
When an independent accountant’s report based on a review of interim financial information is presented in a registration statement, the prospectus
should include a statement clarifying that the accountant’s review report is not a “part” of the registration statement within the meaning of the Securities Act of 1933.
An accountant asked to review financial statements on a comprehensive basis of accounting other than generally accepted accounting principles should
modify the review report to reflect the fact that the financial statements were presented on another comprehensive basis of accounting.
An auditor’s engagement letter most likely would include
managements acknowledgement of its responsibility for internal control
Preparation engagements should be performed in accordance with
SSARS
The engagement quality reviewer is required to identify the documentation reviewed (i.e., fraud workpapers), but is not
required to include an assessment of workpapers reviewed. The other answer choices are the three requirements specifically stated in PCAOB standards to be documented by the engagement quality reviewer.
A disadvantage of microcomputer data files versus manually prepared files is
it is usually easier for unauthorized persons to access and alter the files.
A centralized accounting function is indicative of
less complex operations
Where do BOD minutes and Financial Statements go?
FS = current file Minutes = permanent file
Quick ratio
Current assets (minus inventory) / current liabilities
