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Audit 1 > audit 4 > Flashcards

audit 4 Flashcards

1
Q

Internal Controls Over Inventory:

A

Segregation of duties The Cost Accounting System (Manufacturers only) Perpetual inventory record-keeping I/T Systems (including “EDI) Purchasing process controls Monitoring and Review Physical Inventory Counts (Dual Tests):

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2
Q

Segregation of duties

A

Four Primary Departments (may not all apply): Stores/Manufacturing | Purchasing | Receiving | Accounting

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3
Q

The Cost Accounting System (Manufacturers only)

A

Maintaining accurate records within the manufacturing process: Job orders, processes, machine hours, time cards, manuf. O/H

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4
Q

Perpetual inventory record-keeping

A

Stronger internal control leads to better inventory record-keeping and should lead to more efficient and effective inventory management. (Verified with inventory counts performed at least annually)

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5
Q

I/T Systems (including “EDI)

A

May reduce the number of “manual” steps or controls limiting risks related to human error. Also, may allow for more efficient and effective inventory management.

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6
Q

Monitoring and Review

A

Budget vs. Actual comparisons, Cost Variance analyses, inventory turnover or other efficiency metrics, CVP analyses, and others. These analyses often use information generated from a perpetual inventory system .

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7
Q

Physical Inventory Counts (Dual Tests):

A

A vital internal control for monitoring inventory will serve as the focal point for auditors control tests and substantive procedures: —Identifies missing or damaged items —Ensures internal controls are operating effectively (e.g. inventory balances are accurately maintained)

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8
Q

dual test for inventory counts

A

—Identifies missing or damaged items —Ensures internal controls are operating effectively (e.g. inventory balances are accurately maintained)

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9
Q
A

jhk

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10
Q

Existence/occurrence

A

inventory items/additions vouched to receiving reports and purchase requisitions

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11
Q

Completeness

A

Trace from receiving reports and purchase requisitions to physical inventory items/additions

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12
Q

OBSERVING PHYSICAL INVENTORY: A DUAL-PURPOSE TEST

10 points

A
  1. Ensure that no production is scheduled. If production is scheduled proper controls must be established for movement between departments in order to prevent double counting.
  2. Ensure that there is no movement of goods during the inventory count.
  3. Make sure that the client’s count teams are following the inventory count instructions.
  4. Ensure that inventory tags are issued sequentially to individual departments.
  5. Perform test counts and record a sample of counts in the working papers.
  6. Obtain tag control information for testing the client’s inventory compilation.
  7. Obtain cutoff information, including the number of the last shipping and receiving documents issued.
  8. Observe the condition of the inventory for items that may be obsolete, slow moving, or carried in excess quantities.
  9. Inquire about goods held on consignment for others or held on a “bill-and-hold” basis.
  10. Remember direction of testing in relation to the audit trail
  • Existence/occurrence: inventory items/additions vouched to receiving reports and purchase requisitions
  • Completeness: Trace from receiving reports and purchase requisitions to physical inventory items/additions
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13
Q

Define contingent liability

A

is defined as an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when some future event occurs or fails to occur.

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14
Q

three types of likeliness relating to contingent liabilities

A
  1. Probable
    * –The future event is likely to occur
  2. Reasonably possible
    * –The chances of the future event occurring are more than remote but less than probable
  3. Remote
    * –The chance of the future event occurring is slight
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15
Q

Probable

A

1.Probable
–The future event is likely to occur

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16
Q

reasonably possible

A

2.Reasonably possible
–The chances of the future event occurring are more than remote but less than probable

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17
Q

remote

A

3.Remote
–The chance of the future event occurring is slight

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18
Q

Recording the effects of the transaction is required when the event is ….

A

probable and the amount of the loss can be reasonably estimated

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19
Q

Disclosure is required when ….

A

the event is reasonably possible or the amount can not be reasonably estimated

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20
Q

examples of contingent liabilities

A
  1. Pending or threatened litigation
  2. Actual or possible claims and assessments
  3. Income tax disputes
  4. Product warranties or defects
  5. Guarantees or obligations to others
  6. Agreements to repurchase receivables that have been sold
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21
Q

Other specific procedures to be conducted near the completion of the audit include:

A
  1. Inquire and discuss with management regarding its policies and procedures for identifying, evaluating and accounting for contingent liabilities
  2. Examine documents in the entity’s records such as correspondence and invoices from attorneys to identify potential pending or threatened lawsuits
  3. Obtain a legal letter that describes and evaluates any litigation, claims, or assessments
  4. Obtain written representation from management that all litigation, asserted and unasserted claims, and assessments have been disclosed in accordance with FASB ASC Topic 450
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22
Q

•The auditor will send a letter to the client’s attorneys and other legal service providers to complete the following procedures:

A

▫Confirm the existence of billed amounts outstanding
▫Identify possible unbilled expenses that should be accrued at year-end
▫Evaluate possible obligations due to ongoing litigation
▫Where appropriate, substantiate estimated litigation accruals and disclosures with the corresponding legal professionals

▫See example: Exhibit 17-2 (Earthwear Clothiers)

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23
Q

Events or transactions that occur after the B/S date but before issuance of the financial statements (see Fig 17-1):

A
24
Q

type 1 event

A

Conditions existed before the balance sheet date and affect estimates that are part of financial statements

Require adjustment of the financial statements

25
Q

type 2 event

A

Conditions did not exist at the balance sheet date and do not affect the accuracy of the financial statements

Require disclosure and possibly pro forma financial statements

26
Q

dual dating

A
27
Q

When a subsequent event is recorded or disclosed in the financial statements after sufficient, appropriate audit evidence has been obtained but before the issuance of the financial statements, the auditor considers the following options for dating of the auditor’s report:

A

●
1.“Dual date” the report (original date of report plus date of subsequent event – limits potential liability)
●
2.Change the date of the auditor’s report to the date of the subsequent event – extends liability

28
Q

▫Procedures used to identify subsequent events:

A

1.Review the latest interim financial statements and minutes of directors, stockholders, and appropriate committee meetings.
●
2.Inquire about matters dealt with at meetings for which minutes are not available.
●
3.Inquire of appropriate client officials as to loss contingencies; changes in capital stock, debt or working capital; changes in the current status of items estimated in the F/S under audit; or any unusual adjustments made subsequent to the B/S date.

29
Q

▫Final Evaluation Steps

A
  1. –Performance of final analytical procedures
  2. –Obtaining a representation letter
  3. –Review of working papers
  4. –Final evaluation of audit results
  5. –Evaluation of financial statement presentation and disclosure
  6. –Obtaining an independent review of the engagement
  7. –Evaluation of the entity’s ability to continue as a going concern
30
Q

▫SOX’s Documentation Standard:

A
  • –Require audit firms to archive their public-company audit files for retention within 45 days following the time the auditor grants permission to use the auditor’s report in connection with the issuance of the company’s financial statements.
  • –Require audit firms to retain audit documentation for 7 years from the date of completion of the engagement, as indicated by the date of the auditor’s report, unless a longer period of time is required by law.
  • –Require audit firms to retain all documents that “form the basis of the audit or review.”
  • –Require audit firms to include in the audit file for significant matters any document created, sent, or received, including documents that are inconsistent with the final conclusion. Significant changes in audit plans or conclusions must also be documents.
31
Q

▫Steps in the Going Concern Evaluation:

A
  1. –Consider whether the results of audit procedures performed during the planning, performance, and completion of the audit indicate whether there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time (one year). Typically, this would be due to financial distress.
  2. –If there is substantial doubt, obtain information about management’s plans to mitigate the going concern problem and assess the likelihood that such plans can be successfully implemented.
  3. –Conclude, in light of management’s plans, whether there is substantial doubt about the ability of the entity to continue as a going concern; if substantial doubt exists, consider the adequacy of disclosures about the entity’s ability to continue and include an explanatory paragraph in the audit report.
32
Q

▫Communications with those charged with governance:

A

–The auditor’s responsibilities under GAAS or under the standards of the PCAOB if the client is a public company.
–
–An overview of the planned scope and timing of the audit.
–
–Significant findings from the audit:

33
Q

–Significant findings from the audit:

A
  • –Disagreements with management (if any)
  • –Significant internal control deficiencies (or material weaknesses)
  • –Uncorrected misstatements deemed trivial by the auditors
  • –Significant difficulties encountered
  • –For comprehensive list, see Table 17-4
34
Q

▫In some cases an auditor may discover facts after signing the auditors’ report and after the F/S are issued that indicate that a material misstatement exists in the issued F/S. In these rare instances, the auditor should request that management issues restated F/S with a description of the revisions included in the footnotes. If management refuses, the auditor should immediately do the following:

A

–Notify the client that the auditors’ report must no longer be associated with the misstated F/S (e.g. client cannot hold these F/S to be “audited”)
–
–Notify any regulatory agency that has jurisdiction over the client to communicate to them the F/S can no longer be relied upon
–
–Notify each person known to be relying on the F/S (often times, this is not practical beyond the 2nd bullet)

35
Q

—Recall: The Fourth Standard of Reporting:

A

—The auditor must either express an opinion regarding the financial statements taken as a whole, or state that an opinion cannot be expressed, in the auditor’s report. When the auditor cannot express an opinion an overall opinion, the auditors should state the reasons therefore in the auditor’s report. In all cases where an auditor’s name is associated with financial statements, the auditor should clearly indicate the character of the auditor’s work, if any, and the degree of responsibility the auditor is taking, in the auditor’s report.

36
Q

—The standard report meets this standard by:

A
37
Q

The standard unqualified report is issued when …

A

—the auditor has gathered sufficient, appropriate evidence, the audit has been performed in accordance with applicable auditing standards, and the financial statements conform to GAAP.

38
Q

8 elements of a standard unqualified report

A
  1. Report title
  2. Addressee
  3. Introductory paragraph
  4. Scope paragraph
  5. Opinion paragraph
  6. Explanatory paragraph referring to the audit of ICFR
  7. Name of auditor
  8. Audit report date
39
Q

The Body of the Audit Report (3 Paragraphs)

A
  1. Introductory paragraph
  2. Scope paragraph
  3. Opinion paragraph
40
Q

intro Paragraph

A

▫Audit==> “reasonable assurance”
▫F/S under audit (Which company? What time period?)
▫Management and auditor responsibilities

41
Q

scope paragraph

A

▫Audit performed in accordance with U.S. GAAS
▫Test basis affords “reasonable assurance”
▫“We believe that our audit provides a reasonable basis for our opinion”
▫Note: New ASB standards require separate paragraphs describing management’s and auditor’s responsibilities, and a distinct scope paragraph (see example next slide).

42
Q

opinion paragraph

A

▫Opinion will vary depending on the type of report (next slide)
▫Standard unqualified report will state that the accompanying F/S present fairly, in all material respects, the financial position of the named company at the balance sheet date…
▫…in conformity with accounting principles generally accepted in the U.S.

43
Q

•Fourth paragraph (for integrated audits):

A

–States that the auditor also audited the effectiveness of the Company’s internal controls
–Based on PCAOB (audit) and COSO (suitable basis) standards
–Issues opinion on internal controls

44
Q

“Modifications” to the Unqualified Report

A
45
Q

Conditions for Departure from Unqualified

A

scope limitation

departure from gaap

lack of auditor independence

46
Q

scope limitation

A

Results from an inability to obtain sufficient competent evidence about some component of the financial statements.

47
Q

non conformance with gaap

A

Results when financial statements are materially affected by an unacceptable departure from GAAP.

48
Q

auditor not independent

A

Results when auditor has some form of prohibited relationship with the client (see Ch. 19).

49
Q

Types of Departures from Unqualified

A

qualified

disclaimer

adverse

50
Q

Qualified Opinions (2 distinct types)

A
51
Q

Adverse and Disclaimer Opinions

A
52
Q

Adverse Opinion:

A
  • F/S do not fairly present the financial position in conformity with GAAP
  • Very material departures from GAAP
  • Auditor believes the departure causes the F/S, taken as a whole, to be misleading
53
Q

Disclaimer of Opinion:

A

•Auditor has no opinion; not an alternative to adverse opinion.
•Circumstances resulting in a disclaimer include substantial circumstance-imposed scope restrictions, scope restrictions imposed by the client, or uncertainties
●

54
Q

Effect of Materiality

A
55
Q

The auditor has no responsibility beyond the financial information contained in the report, and he or she has no obligation to perform any audit procedures to corroborate the other information. However, the auditor is required to read the other information and consider whether it is consistent with the information contained in the audited financial statements.

A

annual reports and registration statements

56
Q

The auditor provides _________ as to compliance with the provisions of contractual agreements or regulatory requirements.

A

negative assurance

57
Q

Contrast Btwn F/S and Integrated Audit Reports
•Key Modifications from a F/S Report Include:

A

–Title: “Report of Independent Registered Public Accounting Firm”
–Signature: Location of auditor (city, state, country) must be included
–Auditing Standards Referenced: “…[s]tandards of the Public Company Accounting Oversight Board (United States)” now referenced (instead of “GAAS”)
–Inclusion of “Fourth” Paragraph:
–Auditor also audited the client’s I/Cs
–Based on PCAOB (audit) and COSO (suitable criteria) standards
–Issues opinion on internal controls

Audit 1 (4 decks)

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