AUD II Blake CPA Flashcards
5 components of Internal control:
Existing control activities
-Authorization of transactions
-Segregation of duties
-Pre-numbering documents
-Operating performance reviews
Control environment examples:
Participation of those charged w/ governance “Tone at the Top”
Assignment of authority, responsibility & Accountability “How Co operates”
Human Resource Policies & Practices “Way we operate”
Monitoring:
Internal Audit function “Checking up to making sure everything is okay”
Information & Communication systems
Proper PRESENTATION of transactions & Related disclosures
MEASUREMENT & RECORDING of proper monetary values
The way in which SIGNIFICANT events are captured by accounting SYSTEM
Risk Assessment
Adoption of a new Accounting principle “Risk is taken” need appropriate risk assessment on new principle
New Personnel
Incorporation of new technology
Corporate restructuring
Incentives/Pressure - Committing fraudulent reporting (Fraud triangle)
Exists when management is UNDER PRESSURE from sources OUTSIDE OR INSIDE THE ENTITY to obtain an expected or unrealistic earnings target or financial outcome
Consequences to mgt not meeting financial goals can be severe
Incentives/Pressure - Misappropriate Assets (Fraud triangle)
MGT is living beyond their means - stealing assets to keep up with lavish lifestyle
Opportunities - Fraud (Fraud triangle)
Makes/allows for a misrepresentation to Occur
ex: a perceived opportunity to commit fraud may exist when an individual believes internal control can be overridden (MGT or employee is aware of specific DEFICIENCIES IN INTERNAL CONTROL)
Nature of business such as easy to steal assets (Cash) may provide an employee opportunity to commit fraud
Attitudes/Rationalization of fraud (Fraud triangle)
Mindset created by employee to justify misrepresentation
ex: MGT’s disregard for controls or MGT overly aggressive attitude in meeting financial goals
What is an element that is agreed between management and the auditor during the planning phase?
Timing of inventory observation procedures that will be performed, agreed before implementation of strategy occurrs
Where in the audit report would supplementary information be disclosed of a non-issuer when presented with the basic F/S?
Included in a separate section that references the required supplementary information Headed “Required supplementary information”
When an auditor is asked to express an opinion on stockholders’ equity, what other basic F/S must be audited in order for External auditor to accept engagement?
Must also audit Balance sheet account due to the interrelationship btw stock holders’ equity & B/S account
What assertion is being tested when tracing accounting records to source documents (supporting evidence)?
Existence or occurrence Assertion
What assertion is being tested when tracing source documents to the accounting records (GL, TB, Sales journal.?)
Completeness Assertion
What basic F/S tends to be the most predictable for analytical procedures during a F/S audit?
Income Statement account since the statement covers a period of time
B/S accounts are less predictable b/c they are a snapshot in time
When are analytical procedures required?
During audit’s planning & Final Review
Valuation assertion
ensures that assets, liabilities, and equity interests are recorded fairly and at appropriate amounts, & any valuation adjustments are appropriately recorded.
ex: Testing collectibility of A/R would ensure that receivable and any necessary allowance adjustment is appropriately reflect in F/S
Rights & Obligations assertion
Ex: A/R would be tested by performing procedures such as contract review
How is the statement of $ Flows Audited?
Auditor reconciles amount on the cash flow statement to other basic F/S’s
What is the point of reperformance?
Auditor independently performs procedures or controls to ensure that they were performed appropriately.
ex: Testing the operating effectiveness of controls over bank reconciliation to make sure that auditor reaches same results and conclusions when re-performing the process
Exception
a response that indicates a difference between the information in the entity’s records and the information provided by the confirming party
ex: Payment mailed to client that has NOT been recorded
What is the calculation for Upper Deviation Rate?
Sample Deviation rate + Allowance for Sampling Risk
What happens when Upper Deviation rate > Tolerable Rate?
Auditor would reduce planned reliance on a prescribed control when using statistical sampling of attributes when testing internal controls
Expected deviation Rate
Auditor’s best estimate of the deviation rate in the population before the sampling plan is executed
