Ch 4 And Ch 5 Class Notes Flashcards
Name a business risk of Walmart?
Not having product on the shelf
Audit risk equation
Planning tool for what audit procedures to do
Inherent risk
Risk of error or misstatement before considering controls
Control risk
Risk internal controls fail to detect fraud/error
Direct effect noncompliance, define, example
Material effects on financial statements
Ex. Violation of tax and pension laws
Audit strategy memorandum, who writes it?
Written by manager and looked over by partner
Indirect effect noncompliance
Violations laws in non material misstatements
Ex. Insider trading, OSHA violation
Stuff channels
Company gives product to distributor and records sale
Information risk
Risk management will provide false/misleading information
How does Walmart manage levels of inventory?
Perpetually, by having cash registers electronically linked to
Headquarters to track sales and inventory level
Test count
Sample count to calculate inventory
Do auditors or manager select the inventory samples that auditors count?
Auditors select inventory samples to count
5% difference from assertion
May or may not be worth checking
When do auditors count inventory?
Year end after client counts inventory
Audit risk
Risk of Giving clean opinion when shouldn’t have
Who asses management fraud risk?
Auditor assesses management fraud risk
Red flag in management fraud risk
High turnover of management
Errors
Unintentional
Irregularities
Fraud and intentional
Revel’s business decision to build a casino last year was…
A bad business decision
Employee fraud
Employee takes assets from company
Embezzlement
Steal money from organization of money you are entrusted with
Larceny
Misappropriation of assets
Basic stealing
How can short shipment from vendors be prevented?
Should be counted to prevent
Where are minutes meetings disclosed
Disclosed in footnotes
How can auditor discover fictitious sales?
Auditor must look at sales journal and check shipping document
Then check invoices
What should be looked at when shipments aren’t recorded?
Look at shipping to sales
Checking failure to disclose litigation?
Auditor will ash clients for analysis of legal expenses
and ask for legal invoice
When and how should litigation be disclosed in financial statements?
Booked in consolidated if probable and estimable
If either probable or estimable than disclosed in footnotes
Circularity attorneys
Send confirm to client’s attorneys
Attorneys should respond directly to auditors
PHAE
Proposed adjusting journal entries
Proposed adjustments from auditors to management
Management override
The boss tells you what to report
Management can override internal controls
Operating characteristics red flag: personnel
Personnel are lax or inexperienced in their duties
Note: info from inexperienced employees is unreliable to
Quantify control risk
High control risk and high inherent risk must have…
Low detection risk
AR= .32
32% chance audit opinion will be incorrect
To lower detection risk an auditor must…
Turn over a lot of stones
Sampling risk
Risk of choosing unrepresentative sample
Non sampling risk
Risk auditor may reach inappropriate decision based upon
Available evidence
Ex. When unauthorized personnel approves transaction,
Auditor must ask client why
Can auditors record receivables other than year end?
Yes, if strong internal controls
Ex. Where client monitors receivables and customer credit scores
Inquiry of client is a lot less effective than…
Confirmation,
But inquiry of client is more efficient than confirmation
Function of analytics?
Point out red flags
Significant difference example
$1 million and $2 million has a 100% difference in accounts
Purchase commitment
contract to purchase certain quantity of product at fixed price
For certain period of time
Must be disclosed
Preliminary planning
Attention getter
Brainstorming occurs during planning
Red flags of potential noncompliance: unauthorized transactions, how are they discovered?
Discovered because employee is careless and greedy
