Audit 4 Flashcards
Audit evidence is gathered throughout the audit (objective of substantive testing: detect material misstatements in F/S)
S-ubstantive procedures
O-ther audit procedures
R-isk assessment procedures
T-est of controls
Types of audit evidence
A-ccounting records
C-orroborating evidence(obtained through Observation, Inquiry, and Inspection)
E-lectronic: Evidence in Electronic Form
Types of Analytical Procedures
Comparisons of Financial data
Ratio Analysis
Steps in designing analytical procedures
- Determine procedures suitable for testing assertions
- Determine reliability of data
- Perform analytical procedures and compare the results
- Investigate the significant differences
Analytical procedures are More & Less reliable
More-I/S accounts are more predictable
Less-Accounts with management discretion are less predictable
Documentation required for Substantive Analytical Procedures
F-actors considered
E-xpectation of the auditor
A-dditional audit procedures performed
R-esults of such analytical procedures
Audit Terminology
F-oot (add down), crossfooting (add across), and recalculation-verify mathematical accuracy
I-nquiry-requesting info both internally and externally
V¬-ouching
E-xamination/Inspection
C-onfirmation-specific type of inquiry from external 3rd parties
A-nalytical Procedures=look for unusual items
R-eperformance
R-econciliation
O-bservation
T-racing
C-utoff Review
A-uditing related Accounts Simultaneously
R-epresentation Letter=conclusion of fieldwork
S-ubsequent Events review
Account Balances Assertions
C-ompleteness (all assets, liabilities and equity interests that should have been recorded have been)
V-aluation, Allocation, and Accuracy (amounts fairly and appropriately made, as well as adjustments)
E-xistence and Occurrence
R-ights and Obligations
Transactions and Events Assertions
C-ompleteness cutOff V-aluation, Allocation, and Accuracy E-xistence(B/S) and Occurrence(I/S) U-nderstandability and Classification (recorded in the proper accounts)
Presentation and Disclosure Assertion
C-ompleteness
V-aluation, Allocation, and Accuracy
R-ights and Obligations, and Occurrence (Disclose events and transactions that have occurred and pertain to the entity)
U-nderstandability (of the footnotes only) and Classification=clearly expressed)
Positive confirmations is best for
L-arge $ amounts
E-xpected errors/disputes
W-eak IC
Negative confirmations are used when
L-ow risk
E-xpect customer attention
S-mall balances
The accounting department (accounts payable) has 3 functions
R-ecord the payable
A-pprove the invoice for payment
P-ayment: Record the payment after it is approved by the Treasurer
Risk reduced by segregation of duties
A-uthority
R-ecordkeeping
C-ustody
7 cycles of auditing
P-P&E: acquisitions and disposals, and related depreciation expense
I-nventory: Perpetual, physical, and manufacturing
P-ayroll and personnel: payroll and personnel functions
E-xpenditure: purchases, payables, and cash disbursements
R-evenue: sales revenues, receivables, and cash receipts
I-nvestments: investments in debt and equity and the income received from investments
&
F-inancing: debt and equity financing, repayments, interest expense, and dividends
The following functions of the Inventory cycle should be segregated
W-arehouse
R-eceiving
A
P-urchasing
S-hippingDual testing of inventory observation
O-bserving the performance of management’s count procedures
T-est counts get performed
I-nspecting the inventory to ascertain its Existence and Condition
E-valuating management’s Instructions and Procedures for the inventory count
3 things to look for in PP&E retirements
T-axes: Company does not pay taxes on unknown property
I-nsure: Company does not/cannot insure an asset they don’t have
T-our plant/inquire
Related Parties may include
A-ffiliates: Reporting entity’s affiliates
M-embers of their immediate families
O-wners(Principle)
May indicate a related party transaction
C-ompensating balance arrangement
L-oan Guarantees
U-nusual, nonrecurring transactions near year-end
N-onmonetary exchanges
T-ransactions based on terms that differ significantly from market terms
Significant related party transactions outside of the normal course of the entity’s business, auditor should?
T-erms of the transactions R-ational(Business) of the transaction A-ccounted for(Transactions) D-isclosed(Transactions) E
Identifications of previously unidentified or undisclosed related party or significant related party transactions
- Communicate the information to the other members of the engagement team
- Request management to identify all transactions with the newly identified related parties
- Inquire why IC failed, and disclosure of the related party relationships or transactions.
- Perform appropriate substantive procedures
- Reconsider the risk of other related party transactions
- Evaluate the audit implications if management purposefully did not disclose related party transactions.
Auditor’s responsibility with estimates
P-olicies and Practices assessment: Assess management’s written policies and practices regarding the development and use of estimates
G-AAP: Ensure estimates conform to GAAP
R-easonable: Determine that the accounting estimates are reasonable
U-ncertainty: Evaluate the degree of estimation uncertainty
V-erify that all material misstatements have been developed
E
Fair value must comply with
P-ast track record of estimates is accurate
I-ndustry: Appropriate in relation to industry
C-hanges: Justify any changes in approach
C-onsistent method with prior period
Auditor’s responsibility for FV
C-ontrols (Understand) that are relevant
A-ssess the risk of material misstatement of FV measurements
P-rocess(Understand)
E-valuate the sufficiency, competency, and consistency of evidence obtained
PCAOB standards state that auditor’s evaluation of audit results should include evaluation of the following
- Result of the AP performed during the overall review of the F/S
- Misstatements/uncorrected misstatements found during the audit
- Qualitative aspects of the companies practices
- Conditions related to fraud risk
- Presentation/disclosures of the F/S
- Sufficiency and appropriateness of the audit evidence obtained
The auditor must evaluate the materiality of all misstatements found during the audit
QUALITATIVE conditions
A-pproaches materiality in the aggregate
P-rior period misstatements
E-ffects both individually and in the aggregate of misstatements
S-ize of misstatement
Documentation Requirements for misstatements
T-rivial Amount below which misstatements are clearly trivial
A-ll misstatements accumulated during the audit and whether they have been corrected
U-ncorrected: Summary/conclusion/basis of uncorrected misstatements
Audit documentation for 2nd review partner (sign-offs)
C-ompleted: date work was completed
R-eviewed(Who)
O
P-erformed(Who)
D-ate of reviewA significant engagement deficiency exists when?
F-ailed to obtain sufficient appropriate evidence
I-nappropriate conclusion
N-ot appropriate report for the circumstances
I-ndependent NOT
