Audit Set 1 Flashcards
The term for which the design and operation of controls on a timely basis and taking timely corrective action.
That is the definition of ongoing monitoring activities.
How does an internal auditor verify completeness of investment security certificates?
Internal Auditor physically compares certificates in the bank safe deposit lockbox to records.
Generally reconciliations for accounts receivable and payable is for which assertion?
Accuracy that billed sales for example is correctly posted to general ledger.
For the accounts receivable process, why should the daily summary of receipts be compared to the accounts receivable ledger?
Receipts are reconciled to receivable ledger to ensure that all billed sales appears in the ledger.
Which audit procedure correctly tests for overstatement of sales?
Treat this like a test for existence - accounting record to source document.
see wiley focus notes page 80 or 81 “Accounting cycles” - “directional testing”
What does SOC Type 1 and Type 2 reports entail?
Type 1 - design awareness - controls placed in operation
Type 2 - operating awareness of controls
When does title pass to customer for FOB shipping point.
Title passes at the time of shipping.
The collectibility of accounts receivable is represented by which allowance?
Allowance for bad debt
By determining if bad debts allowance is correct, which assertion for accounts receivable have you completed?
accuracy/valuation/allocation
What should be excluded from accounts receivable to be appropriately presented in the FS?
Non trade receivables from employees should be excluded from accounts receivable.
Which transaction should be included and excluded in accounts receivable to be complete? Hint - similar to cut-off testing testing
Transactions shortly before and after year end.
How do you verify existence of cash, besides physical inspection?
Trace balance per reconciliation to year end bank statement.
What is the sampling risk formula that results in a accept or modify control risk?
What was the error rate in the sample, then add the “buffer” or “allowance for sampling risk”. That result is the maximum errors based on sample testing. Compare the result to the tolerable deviation rate and then its accept/modify decision. So the tolerable deviation rate is possibly the acceptable errors in the population that will not result in a modified opinion.
sample error rate/observed deviation rate (3 deviations found in 100) 3%
+ allowance for sampling risk 2%
= Upper error limit/ achieved upper precision limit 5%
Compare to tolerable (deviation) rate 5%
= accept control risk
if tolerable (deviation) rate is 4%
= modify planned level of control risk (cant rely on control)
What are the elements of sampling risk for attributes?
Sample error rate/observed deviation rate (#errors/n)
Achieved upper precision limit (AICPA tables)
Tolerable (deviation) rate
Explain a type 1and type 2 errors in sampling
Type 1 - under reliance on control by false rejection of control - so nothing was wrong in the first place.
Type 2 - over reliance on control, so false acceptance - missed the error in the sample and now relying on a control you shouldn’t be relying on.
define tolerable deviation rate/tolerable rate.
set by the auditor to determine how many errors can be found in the population and still rely on the control. typically given in question and you compare actual error/sample rate/observed deviation rate to determine if you/re accepting or modifying control risk.
The auditor cannot determine an amount related to a fraud scheme, which type of opinion should be issued.
Disclaimer of opinion.
What is a utility program
The auditor uses this to perform processing functions on data like sorting, merging, editing, and mathematical routines
A company maintaining financial records of a DOL client should not audit the DOL client, T or F
True
Definition of tolerable misstatement
- Amount of total materiality allocated to an individual audit area.
- population is class of transactions or an account balance
- intentionally set below materiality of FS as a whole
Define deficiency in internal control
Employee could not perform control to prevent, detect, correct a misstatement on a timely basis. The deficiency could be in the design or the operation of the control. Misstatement is well below materiality but important to still bring up.
Define significant deficiency
Deficiencies in internal control below materiality but still close enough.
Define material weakness
Deficiency in internal control that is above materiality and will no chance of being prevented, detected or corrected timely.
In the sales process, who is responsible for approving the write off of bad debts.
Treasurer, not accounts receivable. To separate custody from record keeping
Which type of attribute sample is used on a population with a low expected rate of errors.
Discovery sampling
Which type of sampling is used to estimate a numerical measurement of a population, for example dollar value
Sampling for variables
Which type of sampling is used to test for occurrence rates in a population?
Sampling for attributes
Sim question tbs.TBSAC00070
What effect does an increase in ending inventory have on COGS for the turnover ratio?
Decreases Cost Of Goods Sold.
Because of the formula:
Beginning inventory
+purchases
- ending inventory
= cost of goods sold
Therefore if ending inventory has to increase cost of goods sold decreases. D
For ratio’s which change is bigger an increase in an average number or an increase in a whole number?
An increase in average RoE (or inventory or whatever) is lower than an increase in a whole number such as net income. Therefore the direction of change in the ratio is affected by the change of the whole number in the numerator, which is net income in this example
For RoE ratios, how are changes in inventory made to RoE through the cost of goods sold inventory formula?
Beginning inventory + purchases - ending inventory = cost of goods sold
This places ending inventory and cost of goods sold in opposite directions of each other. When ending inventory increases cost of goods sold decreases. Then cost of goods sold affects net income which is the numerator of RoE and there for if cost of goods sold decreases then net income increases and that’s how RoE increases.
