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AUDIT > chapter 4 > Flashcards

chapter 4 Flashcards

0
Q

Valuation, allocation, and accuracy assertion - audit procedure

A

Inspection
Footing
Independent recalculation
Reconciliation

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1
Q

Completeness assertion - audit procedure

A

Tracing
Analytical procedure
Observation

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2
Q

Rights and obligations assertion- audit procedure

A

Inspection

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3
Q

Existence and occurrence assertion - audit procedure

A 
Vouching
Observation, 
Inspection, 
Confirmation
Examination
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4
Q

Understandability and understanding

A

Inquire of mgmt
Inspection
Review

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6
Q

Account balances – ASSERTIONS?

A

Completeness
Valuation and allocation
Existence and occurrence
Rights and Obligations

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7
Q

Transactions & events –

ASSERTIONS?

A 
Completeness
O -Cutoff
Valuation and allocation 
Existence and occurrence 
Understandability and classification
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7
Q

Documentation requirement - analytical procedure used as the principal substantive test

A
  • expectation
  • factors
  • results
  • more audit procedures
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8
Q

Presentation and disclosure –

ASSERTIONS

A

Completeness
Valuation and allocation
Rights and obligation
Understandability and classsification

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9
Q

Accounting estimates: auditing procedures

A

1) review and test the procedures used by mgmt
2) develop an independent estimate
3) review subsequent events and transactions

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10
Q

Evaluation of audit findings includes:

A
  • 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
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11
Q

Auditing fair values (1)

A

Auditor should:

1) understand the entities process
2) understand relevant controls
3) assess the risk of material mistatement
4) evaluate conformity

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12
Q

Accounting estimate - auditors responsibilities:

A

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

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13
Q

Auditing fair values (2)

A

5) test value measurements
6) evaluate sufficiency of evidence obtained
7) obtain mgmt representations
8) communicate relevant matters

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14
Q

Material mistatement: documentation requirements

A

1) materiality threshhold
2) misstatements accumulated during the audit and whether corrected
3) summary of uncorrected misstatements

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15
Q

Substantive analytical procedures- auditor should:

A

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

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17
Q

Evaluating reasonableness of an estimate - Focus on factors that are:

A

1) significant to the accounting estimate
2) sensitive to variations
3) deviations from historical patterns
4) subjective and susceptible to bias

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18
Q

Auditing A/R

A
  • Obtain an aged trial balance and trace
  • examine results of confirmations
  • confirm sample of A/R
  • review bank confirmations and debt agreements
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18
Q

Positive confirmation (prefilled) used when:

A

large individual accounts, expected errors, or items in dispute and when IC is weak

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19
Q

Auditing Presentation and Disclosure

A
  • 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
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20
Q

Confirmations

A

generally provide evidence regarding existence and rights and obligations

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22
Q

Auditing Sales Transaction

A
  • 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
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23
Q

Auditing Ending Inventory Balance - Valuation, Allocation and Accuracy

A
  • Test the mathematical accuracy
  • inquire about obsolete or damaged goods
  • examine vendor invoices
  • perform inventory price tests
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24
Q

Auditing Ending Investment Balance - Completeness

A
  • search for unrecorded purchases of securities

- confirm securities held by the third party custodian or count securities

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25
Q

Auditing Ending Investment Balance - Valuation and Allocation

A
  • obtain evidence corroborating the quoted year-end fair value by comparing assigned values to prices published
  • determine whether there has been any permanent impairment
26
Q

Auditing Ending Investment Balance - Existence

A
  • confirmation requested from the custodian for securities

- examination of the securities on hand

27
Q

Auditing Ending Investment Balance - Rights and Obligations

A
  • confirmation and count of securities on hand

- examine broker’s advices for a sample of securities purchased

28
Q

Auditing Investment Transactions

A
  • perform analytical procedures testing the reasonableness of dividend & interest income (C)
  • cutoff review performed to ensure recordings in proper period (O)
29
Q

Auditing the ending property, plant and equipment balance: completeness

A

obtain and foot the fixed asset schedule and agree the total to the general ledger

30
Q

Auditing the property, plant and equipment balance

A
  • 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)
31
Q

Payroll IC evaluation

A
  • 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
32
Q

Auditing the Ending Debt Balance

A
  • 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)
33
Q

Auditing Debt Transactions

A
  • 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)
34
Q

Related Party Transaction objectives

A
  • 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
34
Q

Identifying Contingencies: Auditor should…

A

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

35
Q

Specific procedures regarding related parties

A

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

36
Q

Identifying Contingencies: Auditor should…(2)

A

6) Review long-term leases
7) obtain a client representation letter
8) send inquiry letter to the clients attorneys

37
Q

Examples of estimates include:

A
  • net realizable values of inventory
  • compensation in stock options plans
  • future pension and warranty expenses
  • probability loss and related amounts due to litigation
38
Q

Letter of client attorney inquiry

A
  • 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
39
Q

Revealing unidentified accounting estimates

A
  • review the lawyers letter for info about litigation
  • confirm inventories at locations outside the entity
  • inquire about the existence of related party transactions
41
Q

Section 403: Management Assessment of IC - annual report filed with the SEC

A

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
42
Q

Section 403 of Title IV of SOX

A

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

43
Q

Section 402 of Title IV of SOX

A

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

44
Q

Section 404 of Title IV of SOX

A

requires that an IC report be filed with each annual report. Mgmt has to acknowledge responsibility for establishing adequate IC

45
Q

Section 406 of Title IV of SOX

A

requires disclosure of whether or not the issuer had adopted a code of ethics for senior Financial officers

46
Q

When auditing computerized payroll transactions, auditor LEAST concerned with:

A

Control and distribution of unclaimed checks

47
Q

Tracing shipping documents to prenumbered sales invoices provides evidence that:

A

shipments to customers were properly invoiced

48
Q

In searching for unrecorded liabilities, an auditor would most likely:

A

Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices

49
Q

In auditing payroll, auditor would most likely:

A

compare payroll costs with entity standards or budgets

50
Q

In searching for unrecorded retirements of equipment, an auditor would most likely:

A

select items of equipment from the accounting records and then locate them during the plant tour

51
Q

To test the existence of assertion of PP&E, auditor would:

A

Obtain listing of all current-year additions, vouching significant additions to original voices and seeing if they were put in place

52
Q

Acid-test Ratio - Formula

A 
                       CL

Helps measure the entities abilities to meet ST needs

53
Q

Cash Ratio - Formula

A 
                      CL
54
Q

A/R turnover - Formula

A 
        Average net receivables

Helps measure firms success in collecting receivables

55
Q

Inventory turnover - Formula

A 
         Average Inventory

Measures how quickly inventory is sold.

56
Q

Operating cycle

A

Indicates the number of days between acquisition of inventory and realization

57
Q

Working capital turnover

A 
   Average working capital
58
Q

Return of Investment

A

Measures the performance of the firm without regard to the method of financing

59
Q

Return on common equity

A

Uses net income less preferred divs in numerators to better measure returns accruing to CS.

60
Q

Debt/Equity

A 
             CS equity

indicates the degree of protection to creditors in case of solvency

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