Audit 16 Flashcards
If you intend to assess CR below the maximum what must you do
must perform TOC
What are control activities
policies and procedures that management uses to provide reasonable assurance that the entity’s objectives will be achieved
When evaluating the reasonableness of accounting estimates the auditor will concentrate on those that represent the highest risk of misstatement. The audior will therefore concentrate on key factors and assumptions that are
Deviation from historical patterns
Since it is generally impractical of rte auditor to determine if a related party transaction occurred on terms equivalent to an arms length transactionIt the footnotes indicate this then the auditor would do what
They would modify an unmodified report
Relationships involving income statement accounts such as the relationship between cost of sales tend to be more predictable that
the relationships involving only balance sheet accounts
The negative form of confirmation request most likely would be used when
The combined assessed level of inherent risk and control risk relative to accounts receivable is low
What are some of the way which an auditor can determine whether to not to rely on management’s estimate
1) test the process they use, see if it is appropriate, assumption are reasonable, and data is reliable
2) auditor can independently develop an estimate and compare to clients
3) Can also use subsequent events to determine if they provide evidence as to the reliability of estimates
4) test the internal controls related to the development of estimates
Inventory Turnover increase substantially from prior year - 3 explanations
1) year end purchases of inventory were understated by incorrectly excluding items received before year end
2) Items shipped on consignment during the last month of the year were recorded as sales
3) Sales increases at a lower percentage than COGS increased as compared to the prior year
A/R turnover decreased substantially from prior year- 3 explanations
1) B A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded.
2) Items shipped on consignment during the last month of the year were recorded as sales
3Sales increased at the same percentage as cost of goods sold, as compared to the prior year.
Allowance for Doubtful accounts increased from the prior year, but allowance for doubtful accounts as a percentage of A/R decreased from prior year
- Items shipped on consignment during the last month of the year were recorded as sales.)
2A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded.
3Sales increased at a lower percentage than cost of goods sold increased, as compared to the prior year.
Long term debt increased from prior year but interest expense increased a larger than proportionate amount than long term debt - 1
Short-term borrowing was refinanced on a long-term basis at higher interest rates
Operating income increase from prior year although the entity was less profitable than in prior years - 2 explanations
1 - Sales increased at a greater percentage than cost of goods sold increased, as compared to the prior year.
2 - The effective income tax rate increased, as compared to the prior year.
Gross margin percentage was unchanged from prior years although gross margin increased from prior year - 1
Sales increased at the same percentage as cost of goods sold, as compared to the prior year.
When an auditor assesses control risk below the max level - the auditor is required to document what
Both the basis for concluding the CR is below the max and
the understanding of the entity’s internal control structure elements
An auditor would express an unmodified opinion with an explanatory paragraph added to the auditor’s report for
1 - an unjustified account change
2 - a material weakness in internal control
Nether - unjustified accounting changes gets an adverse opinion or qualified depending on materiality
no mention of material weakness in the report
