Chapter 5 Flashcards
Guess the Procedure - Sending a written request to the entity’s customers requesting that they report the amount owed to the entity.
Confirmation, NOT inquiry
Guess the Procedure - Examining large sales invoices for a period of two days before and after year-end to determine if sales are recorded in the proper period
Inspection of records or documents, NOT analytical procedure
Guess the Procedure - Agreeing the total of the accounts receivable subsidiary ledger to the accounts receivable general ledger account
Inspection of records or documents/Reperformance
Guess the Procedure - Discussing the adequacy of the allowance for doubtful accounts with the credit manager.
Inquiry
Guess the Procedure - Comparing the current-year gross profit percentage with the gross profit percentage for the last four years.
Analytical Procedure
Guess the Procedure -Examining a new plastic extrusion machine to ensure that this major acquisition was received.
Inspection of Tangible Assets, NOT Observation
Guess the Procedure - Watching the entity’s warehouse personnel count the raw materials inventory
Observation
Guess the Procedure - Performing test counts of the warehouse personnel’s count of the raw material.
Reperformance, NOT observation
Guess the Procedure - Obtaining a letter from the entity’s attorney indicating that there were no lawsuits in progress against the entity.
Confirmation, NOT inquiry
Guess the Procedure - Tracing the prices used by the entity’s billing program for pricing sales invoices to the entity’s approved price list.
Inspection of Records or Documents/Reperformance
Guess the Procedure -
Reviewing the general ledger for unusual adjusting entries.
Scanning
What is detection risk if client has LOW Audit Risk but MODERATE Risk of Material Misstatement?
Moderate
What is detection risk if client has VERY LOW Audit Risk but HIGH Risk of Material Misstatement?
Low
What is detection risk if client has LOW Audit Risk but LOW Risk of Material Misstatement?
High
What is detection risk if client has VERY LOW Audit Risk but MODERATE Risk of Material Misstatement?
Low
Internal or External Document? - Duplicate copies of sales invoices
Internal
Internal or External Document? - Purchase Orders
Internal
Internal or External Document? - Bank Statements
External
Internal or External Document? - Remittance Advices
External
Internal or External Document? - Vendor’s Invoices
External
Internal or External Document? - Materials Requisition Forms
Internal
Internal or External Document? - Overhead Cost Allocation Sheets
Internal
Internal or External Document? - Shipping Documents
Internal
Internal or External Document? - Payroll Checks
Internal
Internal or External Document? - Long-term Debt Agreements
External
What is the Accounting Information System?
Methods and records to process, summarize, and report the company’s transactions
Define Data Interrelationships
Comparisions between the relationships among financial or nonfinancial data. Tested via Analytical Procedures
Audit standards require that the representation letter is dated as the same date as the _______.
Audit Report
Which evidence is considered “stronger” - evidence obtained by a third party or evidence obtained from the client (if client has strong internal control)?
Third Party is still stronger
Strong internal control ____ (increases or decreases) reliability of certain evidence and ____ (improves or reduces) overall quantity of substantitive procedures
Increase / Reduces
Oral evidence is sufficient by itself if it comes from a top corporate officer. True or False
False, must come with corroborating or supporting documentation
As a general rule, evidence about the existence of assets is considered most reliable when it is provided by the employee or department with custody of the related assets. True or False
False - evidence from third parties over existence are more reliable than evidence provided by client
Client officers are reminded of their responsibility for financial statements through the ______
Client Representation Letter
Related party transactions have in common that they all result from dealings between parties related due to ownership interests. True or False
False. For example, many related party transactions are between the client and employees of the client in order to commit fraud.
Audit working papers should provide primary support from the client’s financial statements - Yes or No?
No, the primary concern of Audit Working Papers are to support the auditor’s COMPLIANCE WITH AUDITING STANDARDS, as well as their OPINION. Information contained would constitute principal evidence of their work and resulting conclusions.
If client requests auditing papers, does the Auditor have to hand them over?
Fuck no! Auditors own the papers
Audit working papers generally provide evidence of compliance with planning and risk assessment requirements of an audit, but not of performing further audit procedures. True or False?
False, Working Papers would mention performing further audit procedures
Once income statement accounts are closed to Retained Earnings, should they still be included on the working trial balance?
Yes, they are still needed to accurately reconcile amounts in trial balance
Should a copy of a long-term lease agreement be filed in the permanent file?
Yes, any material long-term agreements would be included
The auditor preparing the working paper and the auditors reviewing the working paper should initial working papers. True or False?
True! All reviewers of the working papers must sign off.
Reclassification entries are used to correct for the effects of errors or fraud discovered in the client’ s financial statements and accounting records. Yes or No?
No, Reclassification entries are alterations proposed by the auditor themselves.
Working Papers should never be prepared by the client’s personnel. True or False
False, many papers and evidence incorporated will obviously be from the client
No audit working papers may be discarded after the date of the audit report. True or False
True
Audit procedures performed to obtain an understanding of the client and its environment, including its internal control, and to assess the risk of material misstatement are referred to as:
Risk Assessment Procedures
When there is enough of it to afford a reasonable basis for an opinion on the financial statements, is evidence considered
“sufficient”?
Yes
Ordinarily the most reliable audit evidence is
Documentary rather than oral
Definition of Analytical Procedures?
Tests that involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data.
_____ eliminates voluminous details from the auditors’ working trial balance by classifying and summarizing similar or related item
Lead Schedules, NOT Supporting Schedules
Would the timing and the number of personnel to be assigned to the engagement. have an affect on the quantity, type, and content of working papers?
No. The nature of the audit report, financial statements/schedules, or the need for supervision of the engagement would.
Tracing a sample of documents from the source documents to the ledgers is designed to test the financial statement assertion of
COMPLETENESS, not Existence. That would be the other way around.
If following a transaction from a source document to a recorded entry, is that Tracing or Vouching?
Tracing
If confirming existence of an asset from going from the asset to the source document, is that Tracing or Vouching?
Vouching
What kind of risk - A client fails to discover employee fraud on a timely basis because bank accounts are not reconciled monthly.
Control Risk
What kind of risk - Cash is more susceptible to theft than an inventory of coal.
Inherent Risk
What kind of risk -
Confirmation of receivables by an auditor fails to detect a material misstatement
Detection Risk (says “by auditor”)
What kind of risk - Disbursements have occurred without proper approval.
control risk
What kind of risk - There is inadequate segregation of duties
Control risk, NOT inherent risk
What kind of risk - A necessary substantive audit procedure is omitted.
Detection Risk
What kind of risk - Notes receivable are susceptible to material misstatement, assuming there are no related internal controls.
Inherent Risk, (def. not Detection risk)
What kind of risk - Technological developments make a major product obsolete
Inherent Risk
What kind of risk - The client is very close to violating debt covenants.
Inherent Risk
What kind of risk -
XYZ Company, a client, lacks sufficient working capital to continue operations.
Inherent Risk
Define a Relevant Assertion
Assertions that, without regard for controls, have a reasonable possibility of having a material misstatement.
Define an Inherent Risk
Risk assuming no internal controls (not controllable by audit or client)
Define a Control Risk
Risk not prevented or detected on timely basis by internal control (Controllable by client but not audit)
Define a Detection Risk
Risk that auditor themselves have a procedure that concludes that misstatement does not exist when it really does. (Controllable by audit but not client)
Auditor must obtain ____ and ____ evidence, meaning quantity and quality
Sufficient and Appropriate
Is cost the primary motivation in considering how much evidence to be obtained?
No, but considered. Sufficient and Appropriate evidence alongside a low audit risk at the lowest total cost is the goal. Cost is never adequate for omitting a necessary procedure.
What is the Audit “NET”?
o Nature – obtain more reliable evidence (such as external over internal)
o Extent – examine more items (increase sample size)
o Timing – wait until year-end to obtain evidence from entire set of transactions
Changing these increases scope of Substantive Procedures
