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Audit > Audit II final > Flashcards

Audit II final Flashcards

1
Q

Accounting estimate

A

“An approximation of a financial statement element, item or account.”

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2
Q

Management’s point estimate

A

Amount selected by management and recorded in the financial statements

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3
Q

Reasons to include estimates

A

Measurement or valuation of an account is uncertain Relevant data concerning the events cannot be accumulated Estimates are included in several accounts in the FS

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4
Q

Analytical procedures

A

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data

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5
Q

Preliminary analytical procedures

A

Used to help the auditor identify risks and plan the nature, timing and extent of audit procedures. Comparing historical numbers to current numbers Required, ratio analysis

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6
Q

Substantive analytical procedures

A

Used to obtain evidence about specific assertions related to account balances or transactions

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7
Q

Final Analytical procedures

A

Used as an overall review for the financial statement audit. Required, corroborating evidence required

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8
Q

Types of analytical procedures

A

trend analysis- across time periods ratio analysis- relative size reasonableness test- not unusual

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9
Q

Short term liquidity ratios

A

Current ratio Quick ratio Operating cash flow ratio

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10
Q

Activity ratios

A

Receivables turnover Days outstanding in A/R Inventory turnover Days of inventory on hand

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11
Q

Profitability ratios

A

Gross profit percentage Profit margin Return on assets Return on equity

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12
Q

Assurance filling the bucket hierarchy

A
  1. Risk assessment procedures 2. Tests of controls 3. Substantive analytical procedures 4. Remaining assurance needed from tests of details
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13
Q

Tolerable difference depends on _____

A

the significance of the account; the desired degree of reliance on the substantive analytical procedures; the level of disaggregation in the amount being tested; and the precision of the expectation. Always less than planning materiality

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14
Q

Data reliability criteria

A

From an independent source Level of aggregation Effectiveness of controls Tested in a prior year

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15
Q

Auditor’s point estimate

A

Amount or range of amounts, derived from audit evidence for use in evaluating recorded amounts

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16
Q

Estimation uncertainty

A

Susceptibility of an accounting estimate to lack of precision in measurement

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17
Q

Outcome of auditing estimate

A

The actual monetary amount that results from resolution of events/conditions that caused an estimate to be recorded.

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18
Q

Financial statement estimate accounts

A

NRV of receivables/inventory Valuation of long-lived/intangible assets Revenue recognition Pension/warranty reserves, accruals

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19
Q

In regards to estimates, Auditors must obtain reasonable assurance that _____

A

All accounting estimates that could be material to the F/S have been developed Accounting estimates are reasonable in the circumstances Accounting estimates are presented in conformity with applicable accounting principles – and properly disclosed

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20
Q

3 ways auditors test for reasonableness

A

Review and test the process used by management to develop the estimate Develop an independent expectation of the estimate to corroborate the reasonableness of management’s estimate Review subsequent events or transactions occurring prior to the date of the auditors report

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21
Q

Steps to test the process of developing an estimate

A

Identify relevant controls over preparation Evaluate reliability, relevance and sufficiency of data \ Consider any other key factors and assumptions Consider consistency with industry and historical data. Review documentation of assumptions used Consider specialist Test management calculations

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22
Q

Sources that provide evidence about estimates

A

Board minutes (changes in uses of long lived assets) Changes in the way mgmt. accumulates and uses information Inquiries from lawyers / legal counsel Regulatory correspondence (FDA for Inquires of management

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23
Q

Factors to consider when auditing estimates

A

Factors and assumptions that are significant to the accounting estimate Sensitivity to variation Deviations from historical patterns Subjectivity and susceptibility to misstatement and bias How good has management been at developing estimates in the past

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24
Q

Areas with fair value measurements

A

Investment securities Derivatives Mergers and acquisitions (assets and liabilities) Financial liabilities Asset impairment tests (i.e. goodwill, intangibles, PPE) Pensions

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25
Q

Fair Value (definition)

A

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement (balance sheet) date

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26
Q

Market approach

A

Uses prices and other relevant information generated by market transactions for identical or comparable assets/liabilities Level 1 or 2

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27
Q

Income approach

A

Converts future values (cash flows) into a single current value Level 2 or 3 (More likely level 3)

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28
Q

Cost approach

A

Fair value is based upon what it would cost to build an identical asset or replace the service capacity of an asset, adjusted for obsolescence Level 2 or 3

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29
Q

Valuation inputs

A

Assumptions that market participants would use in valuing the asset or liability, including assumptions about risk

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30
Q

Observable inputs

A

Assumptions market participants would use in pricing the asset or liability based on market data obtained from independent sources

31
Q

Un-observable inputs

A

Company’s own assumptions about assumptions market participants would make to value an asset

32
Q

Levels 1,2,3

A

Level 1- quoted market prices in active markets for identical assets Level 2- quoted market price either in inactive markets or similar assets Level 3- Unobservable imputs, management assumptions. Ex. projected growth rate

33
Q

Process to audit FV measurements

A

Risk assessment - inherent risk, control risk and risk of material misstatement for FV measures Understand management’s process and controls over fair value measurements Perform substantive procedures Reporting – ensure proper disclosure of FV measures

34
Q

Ways to test FV measurements

A

Test management’s process Develop their own independent fair value estimate Review subsequent events and transactions

35
Q

Ways to evaluate a model with no observable inputs

A

Management has sufficiently evaluated and applied accounting standards Valuation method is appropriate for circumstances, business, industry and environment in which it operates

36
Q

Precision (definition)

A

How good of expectation can you develop How good is the analytical procedure at developing an expectation How well did you plan, design, and execute the analytical test

37
Q

Revenue recognition criteria

A

Evidence of arraignment Evidence that goods/services have been delivered Price is fixed or determinable Ability to collect payment is reasonably assured.

38
Q

ASC 606 Steps to recognize revenue

A

Identify the contract Determine the performance obligations Determine the transaction price Allocate the transaction price Recognize revenue

39
Q

Rules for recognizing revenue when customers have a right to return

A

Consignment- Sale is not contingent on buyer reselling Buyer’s obligation to pay does not change in instance of theft Buyer is economically separate from seller Seller does not have significant obligations for future performance Future sales returns can be reasonably estimated

40
Q

Premature revenue recognition methods

A

Channel stuffing- sending customers products who have not yet agreed to purchase them. Most common Shipping unfinished products to customers Test- Look for unusually high sales returns right after the year end.

41
Q

Ways to detect/prevent premature revenue recognition

A

Look for unusually high sales returns right after the year end. Check that shipping personnel are arranging shipments, not sales personnel Check that accounting personnel require a copy of customer order form

42
Q

Ways to test for fictitious sales

A

Positive/negative confirmation request. Negative only works if the customer exists and the balance is wrong Collections from customers after year-end. If the sale is fictitious no collection can be made Higher risk if sales are from one major source

43
Q

Round tripping

A

Two parties record transactions with each other but there is no economic benefit. Ex. 2 companies sell inventory to each other and record revenue

44
Q

Ways to test for round tripping

A

Review significant transactions involving counterparties in the same line of business or related parties Look for identical vendors and customers Review transactions with a counter party that is being acquired Look where the products are being shipped (not to someones house)

45
Q

Percentage of completion method

A

Used in revenues with service, revenue recorded based on the percentage of completion Often companies over state how much of product has been completed

46
Q

Ways to test that % of completion revenue has not been overstated

A

Review sales agreement for timing of payments and estimated completion date Make sure “Upfront fees” are not recorded, they should be recognized over life of service provided Examine the product to see how much has been completed

47
Q

Sales contracts with multiple elements

A

If a contract requires the seller to provide “multiple deliverables” such as shipping and installation, the sale is not complete until substantially all elements are delivered

48
Q

Ways to test revenue for sales contracts with multiple elements

A

Confirm with customers which elements of the contract have been completed Assess whether substantially all elements have been completed

49
Q

Ways to test for fictitious receivables

A

Look for unexpected increase in days sales outstanding or in proportion of credit sales Test for excessive write-offs of receivables after the year-end Aging analysis Receivables from related parties

50
Q

Audit procedures to test for fictitious inventory

A

Attend year-end inventory count Inspect inventory for existence as of year-end, open boxes, make sure it exists Test for manual journal entries to the inventory accounts

51
Q

Going concern assumption

A

Assumption that the client will remain a GC for the “foreseeable future” - 1 year from date of the financial statements

52
Q

Steps to evaluate substantial doubt of going concern

A

Evaluate management’s plans to overcome the events/conditions causing substantial doubt Examine the assumptions in the plans (most important) Project future conditions and events for 1 year following date of financial report If there is still substantial doubt, include an explanatory paragraph in audit opinion

53
Q

Indicators of substantial doubt about Going Concerns

A

Operating- lack of strategy, loss of management/customers, strikes, cash flow problems Financial- can’t meet loan covenants (biggest indicator), high leverage, lack of profits, dividend cuts, disposal of assets External- successful competitor, litigation, obsolete products, new regulations

54
Q

Audit procedures to evaluate going concern assumption

A

Verify compliance with loan covenants Assess management plans to improve performance Identify post balance sheet date events Review A/P (can they pay) and recent accounts Written confirmation from related parties about willingness to provide financial support

55
Q

Management was required to evaluate going concern assumptions effective ________

A

December 15, 2016 Applies to periods ending after

56
Q

2 types of Illegal Acts

A

Direct and Material- directly affects financial statements Ex. tax laws Indirect and Material- Ex. violation of safety laws. Only investigate if brought to attention.

57
Q

Indicators of Illegal Acts

A

Unauthorized/improperly recorded transactions Unusual fines, government investigation Excessive sales commissions Large cash payments Payments to government officials Not filing taxes

58
Q

Ways auditors discovers illegal acts

A

Routine audit procedures Review of board meeting minutes / special committee minutes Communications with legal counsel Reviews of litigation, claims and assessments Explicit inquiries of management

59
Q

Circumstances where auditor must disclose an illegal act to a 3rd party

A

Change in auditor (Form 8-K) When successor auditor makes inquiries In response to a subpoena Funding agency for entities that receive funding from a governmental agency

60
Q

Who is required to comply with FCPA?

A

US listed companies Foreign companies listed in US Third parties (Ex. brokers) acting on behalf of a listed corporation

61
Q

Required items for audit completion

A

Contingent Liabilities Legal letters Disclosure of Commitments Review Subsequent Events Evaluate audit results, going concern assumption Communicate with management/audit committee

62
Q

Contingent liability

A

An existing condition, situation, or set of circumstances with uncertainty as to possible loss to an entity that will be resolved when some future event occurs or fails to occur

63
Q

Categories of contingent liabilities

A

Probable- Accrue if estimable, otherwise disclose Possible- Disclose in footnotes Remote- No disclosure

64
Q

Documents to review for contingent liabilities management failed to disclose

A

Board meeting minutes contracts leases loans correspondence from gov’t agencies tax returns IRS reports income tax liability schedules

65
Q

Requirements for sending a request for legal letter

A

Specify a materiality amount Materiality amount must be much lower than financial statement materiality

66
Q

Subsequent events

A

Events that occur after the balance sheet date but before the audit opinion are issued

67
Q

Type 1 and Type 2 subsequent events

A

Type 1- Uncollectible account, lawsuit settlement Type 2- M&A, disposal of business, Issuance of stock or debt, fire/flood

68
Q

Audit Procedures to look for Subsequent events

A

Inquire of management Inquire of legal counsel Read Minutes of Meetings Read interim financial statements

69
Q

Liquidation basis

A

Basis for financial statements when business is not a GC Used when the Going concern values of assets > liquidation values Mark assets and liabilities to fair value

70
Q

Management obligation on going concern assumption

A

Management must disclose conditions and events that raise doubt if substantial doubt exists

71
Q

Critical audit matters

A

A matter that was communicated, or required to be communicated to the audit committee that is both material and subjective/complex

72
Q

Lack of auditor independence results in a ________

A

Disclaimer of opinion

73
Q

Auditor’s responsibility for areas outside the FS

A

Read all of the paragraphs and make sure they are not inconsistent with FS and footnotes If inconsistent, require a change or take action if mgmt doesn’t make change

74
Q
A

Audit (5 decks)

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