chapter 4 Flashcards
Valuation, allocation, and accuracy assertion - audit procedure
Inspection
Footing
Independent recalculation
Reconciliation
Completeness assertion - audit procedure
Tracing
Analytical procedure
Observation
Rights and obligations assertion- audit procedure
Inspection
Existence and occurrence assertion - audit procedure
Vouching Observation, Inspection, Confirmation Examination
Understandability and understanding
Inquire of mgmt
Inspection
Review
Account balances – ASSERTIONS?
Completeness
Valuation and allocation
Existence and occurrence
Rights and Obligations
Transactions & events –
ASSERTIONS?
Completeness O -Cutoff Valuation and allocation Existence and occurrence Understandability and classification
Documentation requirement - analytical procedure used as the principal substantive test
- expectation
- factors
- results
- more audit procedures
Presentation and disclosure –
ASSERTIONS
Completeness
Valuation and allocation
Rights and obligation
Understandability and classsification
Accounting estimates: auditing procedures
1) review and test the procedures used by mgmt
2) develop an independent estimate
3) review subsequent events and transactions
Evaluation of audit findings includes:
- results of analytical procedures
- the company’s accounting practices
- about the companies accounting procedures
- conditions identified that relate to fraud
- the presentation of the FS
- sufficiency and appropriateness of evidence obtained
Auditing fair values (1)
Auditor should:
1) understand the entities process
2) understand relevant controls
3) assess the risk of material mistatement
4) evaluate conformity
Accounting estimate - auditors responsibilities:
1) checkout the degree of estimation uncertainty
2) assess mgmts written policies
3) verify all material estimates
4) see that estimates are reasonable
5) see that the estimates are properly presented
Auditing fair values (2)
5) test value measurements
6) evaluate sufficiency of evidence obtained
7) obtain mgmt representations
8) communicate relevant matters
Material mistatement: documentation requirements
1) materiality threshhold
2) misstatements accumulated during the audit and whether corrected
3) summary of uncorrected misstatements
Substantive analytical procedures- auditor should:
1) determine the analytical procedures that are suitable for testing the assertions
2) evaluate the reliability of the data from which the auditors expectation is to be developed
3) develop an expectation of recorded amounts
4) perform analytical procedures
5) investigate any significant differences
Evaluating reasonableness of an estimate - Focus on factors that are:
1) significant to the accounting estimate
2) sensitive to variations
3) deviations from historical patterns
4) subjective and susceptible to bias
Auditing A/R
- Obtain an aged trial balance and trace
- examine results of confirmations
- confirm sample of A/R
- review bank confirmations and debt agreements
Positive confirmation (prefilled) used when:
large individual accounts, expected errors, or items in dispute and when IC is weak
Auditing Presentation and Disclosure
- ensure all required disclosures related to A/R and sales are in footnotes
- auditor should read all A/R and sales related to disclosures
- read the footnotes and other information related to A/R
- determine whether any receivables have been pledged
Confirmations
generally provide evidence regarding existence and rights and obligations
Auditing Sales Transaction
- trace sample of shipping docs to the matching sales invoice
- compare sample of invoices from shortly before and after yearend with shipment dates
- compare prices and terms on sample of sales
- vouch sample of sales transactions from sales journal to sales invoice back to the customer order and ship docs
- examine sample of sales invoices for proper classification
Auditing Ending Inventory Balance - Valuation, Allocation and Accuracy
- Test the mathematical accuracy
- inquire about obsolete or damaged goods
- examine vendor invoices
- perform inventory price tests
Auditing Ending Investment Balance - Completeness
- search for unrecorded purchases of securities
- confirm securities held by the third party custodian or count securities
Auditing Ending Investment Balance - Valuation and Allocation
- obtain evidence corroborating the quoted year-end fair value by comparing assigned values to prices published
- determine whether there has been any permanent impairment
Auditing Ending Investment Balance - Existence
- confirmation requested from the custodian for securities
- examination of the securities on hand
Auditing Ending Investment Balance - Rights and Obligations
- confirmation and count of securities on hand
- examine broker’s advices for a sample of securities purchased
Auditing Investment Transactions
- perform analytical procedures testing the reasonableness of dividend & interest income (C)
- cutoff review performed to ensure recordings in proper period (O)
Auditing the ending property, plant and equipment balance: completeness
obtain and foot the fixed asset schedule and agree the total to the general ledger
Auditing the property, plant and equipment balance
- review the related repair and maintenance expense accounts to test for completeness of asset additions (C)
- review fixed assest purchases and dispositions from shortly before and after yearend (O)
- depreciation expense should be recalculated for reasonableness and conformity (V)
- vouch a sample of purchases to the receiving report and vendor invoice and a sample of dispositions to the asset retirement (E)
Payroll IC evaluation
- observe segregation of duties
- compare the personnel records for each dept with the actual time cards
- observe payroll distribution
- observe the use of time clocks
- test transfers and underlying employee authorizations if direct deposit is used
Auditing the Ending Debt Balance
- review board minutes for evidence of new debt (C)
- obtain listing of all debt and agree the total to the general ledger (C)
- recompute any interest payable and recompute the amortization of premiums or discounts (V)
- confirm notes/bonds with creditors (E)
- examine note/bond agreements to verify if obligations of the entity (R)
Auditing Debt Transactions
- review interest expense for payments to debt holders not listed on debt listing (C)
- examine lease agreements for proper classification as operating or capital (C)
- test a sample of debt receipts and payments and compare interest expense to the debt balance for reasonablenss (C)
- review board minutess and inspect agreements (E)
- examine the due dates of notes and bonds to determine whether the debt should be classified as ST/LT (U)
Related Party Transaction objectives
- recognize fraud risk factors
- conclude whether the FS achieve fair presentation
- evidence about whether related party transaction and relationships have been appropriately identified, accounted for, and disclosed
Identifying Contingencies: Auditor should…
1) Review the minutes
2) Review mail and invoices from lawyers
3) Review contracts & agreements - correspondence from taxing authorities
4) review bank confirms for hidden loans
5) discuss purchase committments
Specific procedures regarding related parties
1) evaluating the company’s controls related to the authorization and approval of significant related party trans
2) asking mgmt for the names of all related parties
3) reviewing the reporting entity’s filings with the SEC
4) reviewing material transactions for related party evidence
- reviewing prior years audit documentation
Identifying Contingencies: Auditor should…(2)
6) Review long-term leases
7) obtain a client representation letter
8) send inquiry letter to the clients attorneys
Examples of estimates include:
- net realizable values of inventory
- compensation in stock options plans
- future pension and warranty expenses
- probability loss and related amounts due to litigation
Letter of client attorney inquiry
- auditor should document why not seeking communication with legal council
- attorney refusal to respond = no unmodified opinion
- client refusal to permit inquiry = disclaimer or withdrawal
Revealing unidentified accounting estimates
- review the lawyers letter for info about litigation
- confirm inventories at locations outside the entity
- inquire about the existence of related party transactions
Section 403: Management Assessment of IC - annual report filed with the SEC
contain an internal report. report states:
- mgmt responsibility of mgmt for establishing and maintaining an adequate IC structure
- procedures for financial reporting
- an assessment of the effectiveness of the internal control structure and procedures
Section 403 of Title IV of SOX
dictates that any person who is directly or indirectly the beneficial owner of more than 10% of any class off any equity security must file stmts required by SOX and the SEC
Section 402 of Title IV of SOX
dictates that it is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer
Section 404 of Title IV of SOX
requires that an IC report be filed with each annual report. Mgmt has to acknowledge responsibility for establishing adequate IC
Section 406 of Title IV of SOX
requires disclosure of whether or not the issuer had adopted a code of ethics for senior Financial officers
When auditing computerized payroll transactions, auditor LEAST concerned with:
Control and distribution of unclaimed checks
Tracing shipping documents to prenumbered sales invoices provides evidence that:
shipments to customers were properly invoiced
In searching for unrecorded liabilities, an auditor would most likely:
Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices
In auditing payroll, auditor would most likely:
compare payroll costs with entity standards or budgets
In searching for unrecorded retirements of equipment, an auditor would most likely:
select items of equipment from the accounting records and then locate them during the plant tour
To test the existence of assertion of PP&E, auditor would:
Obtain listing of all current-year additions, vouching significant additions to original voices and seeing if they were put in place
Acid-test Ratio - Formula
CL
Helps measure the entities abilities to meet ST needs
Cash Ratio - Formula
CL
A/R turnover - Formula
Average net receivables
Helps measure firms success in collecting receivables
Inventory turnover - Formula
Average Inventory
Measures how quickly inventory is sold.
Operating cycle
Indicates the number of days between acquisition of inventory and realization
Working capital turnover
Average working capital
Return of Investment
Measures the performance of the firm without regard to the method of financing
Return on common equity
Uses net income less preferred divs in numerators to better measure returns accruing to CS.
Debt/Equity
CS equity
indicates the degree of protection to creditors in case of solvency
