Chapter 5 - Planning an audit (development) Flashcards
What is an accounting estimate?
Monetary amount with estimation uncertainty
What is estimation uncertainty?
Susceptible to inherent lack of precision, maybe due to the limited knowledge of whoever prepared them.
What are some common accounting estimates:
Inventory obsolescence
Depreciation
Valuation
Pending litigation
Fair value of assets/liabilities
Impairment
Non monetary exchanges
Revenue from long term contracts
What is an auditor’s point estimate/range?
Amount developed evaluating management’s point estimate.
What is management’s point estimate?
Management selected amount recognized/disclosed in F/S as an accounting estimate.
How should the auditor test accounting estimates?
- Obtain evidence of subsequent events to see if estimate was accurate
- Test how estimate was made (method/data)
- Develop own estimate
What are some Data Analytics that could be used for Audit procedures?
Compare the last time an item was bought with the last time it was sold (Cost vs NRV)
Inventory ageing
Receivables/Payables ageing
Revenue trends (split product/region)
Analyse gross margin/sales
Match orders to cash and purchases to payment
Can do did do testing - user codes to test is segregation of duties is appropriate
Recalculate depreciation
Analyse capital vs revenue expenditure
Three way matches Orders vs GDN/GRN vs invoices
If the company is a NOT a going concern
the F/S should be prepared on a break up basis which involves:
- No long term assets/liabilities
- Assets valued at recoverable amount
- Provisions for new costs eg: Redundancies
Whose responsibility is to prepare the F/S under the appropriate going concern basis and make the disclosures?
Directors
Whose responsibility is to obtain sufficient/appropriate evidence that there was correct use of the going concern assumption?
Auditor
Should consider at all stages of the audit
Suggest EVIDENCE auditors could use to back the going concern assumption made by management.
Review future plans - financial forecast/projection
Review company’s borrowing facilities (could a loan covenant be breached?)
Review minutes of board meetings
Why would auditors rely on internal audit?
Need to understand/document internal controls for control risks
External auditors CANNOT use internal audit for DIRECT assistance
TRUE/FALSE
TRUE
Performance indicators for assessing the work of internal audit:
Progress compared to planned work
Time taken to complete vs planned
Number of reports within target date
Feedback from users of internal audit
What type of experts could auditors rely on?
Interpret legal contracts (solicitors)
Valuation of land, buildings
Analysis of tax issues
Design procedures/evaluate data analytics
