CPAExcl 4-Audit Evidence Flashcards
1
Q
What is the only component of the audit risk model that the auditor controls?
A
Detection risk.
2
Q
List the 2 broad categories of substantive procedures.
A
- Tests of details
2. Substantive analytical procedures.
3
Q
How might the auditor’s decisions about the extent of audit procedures lower detection risk?
A
Increasing the sample sizes for audit testing will lower detection risk.
4
Q
Define analytical procedures.
A
Evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.
5
Q
Identify the 2 categories of substantive tests of details.
A
- Tests of Ending Balances
2. Tests of Transactions
6
Q
Identify the 4 considerations that determine the effectiveness and efficiency of analytical procedures used for substantive purposes.
A
- Nature of the assertion;
- Plausibility and predictability of the relationship;
- Availability and reliability of data; and
- Precision of the expectation
7
Q
How might the auditor’s decisions about the timing of audit procedures lower detection risk?
A
Moving the auditor’s important substantive procedures away from an interim date (before year-end) to year-end will lower detection risk.
8
Q
How might the auditor’s decisions about the nature of audit procedures lower detection risk?
A
Choosing audit procedures that provide a stronger basis for conclusions will lower detection risk.
9
Q
Identify the 3 purposes that might be served by performing analytical procedures.
A
- Audit planning (required).
- As a form of substantive evidence (not required).
- A final review (required)
10
Q
List the five assertions about classes of transactions and events during the period (income statement).
A
- Accuracy;
- Occurrence;
- Completeness;
- Cutoff; and
- Classification
11
Q
Describe what the valuation or allocation assertion means.
A
It means that the dollar amounts attributed to the elements of the company’s financial statements are appropriate and in accordance with GAAP (or other applicable financial reporting framework).
12
Q
What are the AICPA’s guidelines to rank the reliability of audit evidence?
A
- Direct personal knowledge by the auditor is the most reliable audit evidence.
- Evidence obtained from an independent outside source is the next most reliable.
- Evidence obtained from the entity under effective internal control is next.
- Documentary evidence is more reliable than verbal responses to inquiries (and original documents are more reliable than faxes and photocopies).
13
Q
Describe what the rights and obligations assertion means.
A
It means that the company has all the rights associated with its reported assets and all the obligations associated with its reported liabilities; any limitations on such rights or obligations must be appropriately disclosed.
14
Q
Describe what the completeness assertion means.
A
It means that there are no omissions of transactions that should have been reported.
15
Q
What is meant by “sufficient” and “appropriate” when “Sufficient Appropriate Audit Evidence” is mentioned?
A
- “Sufficient” refers to the quantity of evidence that is required; and
- “Appropriate” refers to the quality of the evidence involved, in terms of “relevance” and “reliability.”
16
Q
Define audit evidence.
A
All the information used by the auditor in arriving at the conclusions on which the audit opinion is based. Audit evidence includes the information contained in the accounting records underlying the financial statements and other information.
17
Q
Describe what the existence (occurrence) assertion means.
A
It means that the recorded transactions are valid economic events of the period in which they are reported, i.e., the recorded transactions/items are properly recorded.
18
Q
List the three broad categories of assertions under AICPA professional standards.
A
- Account balances at the end of the period (there are 4 assertions related to the balance sheet);
- Classes of transactions and events during the period (there are 5 assertions related to the income statement);
- Presentation and disclosure (there are 4 assertions related to the footnotes applicable to any of the financial statements).
19
Q
Define assertion.
A
Implicit or explicit statements of fact by management that are associated with the entity’s financial statements.
20
Q
List the four assertions about account balances at the end of the period (balance sheet).
A
Existence;
Completeness;
Rights and obligations; and
Valuation and allocation
21
Q
List the four assertions about presentation and disclosure (footnotes).
A
- Occurrence and Rights and Obligations;
- Completeness;
- Classification and Understandability; and
- Accuracy and valuation
22
Q
List the three categories of audit procedures.
A
- Risk assessment procedures;
- Tests of control; and
- Substantive procedures
23
Q
What are risk assessment procedures?
A
Procedures performed to obtain an understanding of the entity and its environment, including internal control, to assess the risk of material misstatement, whether due to fraud or error.
24
Q
What are tests of control?
A
Procedures performed to obtain information about the operating effectiveness of controls in preventing or detecting and correcting material misstatements at the relevant assertion level.
25
What are substantive procedures?
Procedures performed to detect material misstatements at the relevant assertion level; these consist of tests of details and substantive analytical procedures.
26
What is meant by the term projected misstatements?
The auditor's best estimate of misstatements in populations suggested by audit sampling. (The AICPA formerly used the term likely error for this concept.)
27
What matters must be documented by the auditor in connection with the evaluation of misstatements?
1. The threshold for determining what is viewed as clearly trivial.
2. All misstatements accumulated during the audit (and whether they have been corrected).
3. The auditor's conclusion as to whether any uncorrected misstatements are material (individually or in the aggregate), and the basis for that conclusion.
28
What is meant by the term judgmental misstatements?
Differences arising from the judgments of management that the auditor considers unreasonable; or the selection of accounting policies deemed inappropriate.
29
Define misstatement.
A difference between the amount, classification, presentation, or disclosure of a reported financial statement item and that which is required for the item to be in accordance with the applicable reporting framework.
30
Describe the auditor's responsibility to accumulate misstatements identified during the audit.
The auditor should accumulate identified misstatements, except for those that are clearly trivial. (Clearly trivial means clearly inconsequential.)
31
What is meant by the term factual misstatements?
Misstatements for which there is no doubt.
32
What is contained in the permanent file of the audit documentation?
The permanent file contains documentation of matters having ongoing audit significance.
33
Define report release date.
The date the auditor grants the entity permission to use the auditor's report; (that date must be documented).
34
List 3 purposes of audit documentation.
1. Provides the principal support for the auditor's report
2. Documents the auditor's compliance with GAAS
3. Assists in controlling the audit engagement
35
What is meant by the term documentation completion date under the AICPA and PCAOB standards, respectively.
Under AICPA standards (applicable to audits of "non-issuers") - The auditor should complete the assembly of the final audit file no later than 60 days after the "report release date."
Under PCAOB standards (applicable to audits of "issuers") - The auditor should complete the assembly of the final audit file no later than 45 days after the "report release date."
36
What changes can the auditor make to the audit documentation after the documentation completion date?
The auditor must not delete audit documentation before the end of the retention period;
The auditor may add to the documentation but must document any materials added, by whom, when, the reasons for the change, and the effect on the auditor's conclusions
37
What are the audit documentation retention requirements under the AICPA and PCAOB standards, respectively.
Under AICPA standards (applicable to audits of "non-issuers") - The audit documentation should be retained for at least 5 years from the report release date.
Under PCAOB standards (applicable to audits of "issuers") - The audit documentation should be retained for at least 7 years from the report release date
38
When might negative confirmations be justified?
1. The financial statement item involves a large number of small (immaterial) accounts;
2. Control risk is low (that is, internal control is viewed as effective);
3. Recipients are expected to pay attention to the request
39
List 2 alternative procedures for a nonresponse to a positive confirmation (usually performed after a second request was sent, but no response was received).
First - verify subsequent cash receipts; or
Second - Examine underlying documents for apparent validity
40
What is meant by the term positive confirmation?
A response is requested whether or not the confirming party agrees with the entity's recorded amount. A non-response indicates a "loose end" that must be resolved.
41
List the 2 general types of confirmations.
Positive;
| Negative
42
What is meant by the term negative confirmation?
A response is only requested in the event the confirming party disagrees with the identified balance. A non-response is viewed as indicating that party's agreement.
43
Identify 3 factors affecting the nature of estimation uncertainty.
The nature of estimation uncertainty varies with:
1. The nature of the accounting estimate;
2. The extent to which there is an accepted method (or model) to be used; and
3. The subjectivity of any assumptions or the degree of judgment involved.
44
What further substantive procedures should the auditor perform in responding to significant risks?
The auditor should evaluate: (1) how management addressed estimation uncertainty in making the estimate; (2) whether management's significant assumptions are reasonable; and (3) whether management has the intent and ability to carry out specific actions, as relevant.
45
What is the auditor's basic responsibility when auditing accounting estimates?
Evaluate the reasonableness (and the adequacy of related disclosures) of any significant accounting estimates relative to GAAP or other applicable financial reporting framework.
46
What is meant by the term estimation uncertainty?
The susceptibility of an accounting estimate and related disclosures to an inherent lack of precision in its measurement. (The risks of material misstatement increase when there is high estimation uncertainty.)
47
What matters should the auditor document in connection with accounting estimates?
1. The basis for the auditor's conclusions about the reasonableness of accounting estimates resulting in significant risks and their disclosure; and
2. Any indications of possible management bias.
48
List some audit procedures that might be used to assess accounting estimates.
1. Inquire of management to understand how the estimate was developed;
2. Review and test management processes;
3. Develop an independent expectation for comparison to the entity's estimate;
4. Review subsequent events for additional evidence.
49
What is meant by the term observable inputs?
Assumptions that market participants would use in pricing an asset or liability based on market data from sources independent of the reporting entity.
50
What is the auditor's basic responsibility regarding Fair Value Measurement and Disclosures?
The auditor must obtain sufficient appropriate audit evidence to provide reasonable assurance that fair value measurements and disclosures comply with GAAP. The auditor should also determine that the methods used to determine fair value are consistently and appropriately applied.
51
Define "fair value."
The amount at which the asset could be bought or sold in a current transaction between willing parties, that is, other than in a forced or liquidation sale.
52
What is meant by the term unobservable inputs?
An entity's own judgments about what assumptions market participants would use. (Estimation uncertainty increases when the fair value estimates are based on unobservable inputs instead of observable inputs.)
53
What is the best evidence of fair value?
Published price quotations in an active market.
54
What is meant by the term asserted claim?
Also referred to as "pending or threatened litigation" - a claim that has already been filed (pending) or when the other party has announced an intention to sue (threatened).
55
What is the lawyer's responsibility for communicating omissions of asserted and unasserted claims that should have been included in the letter of inquiry?
Regarding asserted claims - the lawyer's letter should inform the auditor directly of such an omission from the letter of inquiry;
Regarding unasserted claims - the lawyer should inform management of such an omission and encourage management to discuss the matter with the auditor (but the lawyer will not inform the auditor directly)
56
What is the auditor's purpose in obtaining a lawyer's letter?
To corroborate management's responses to the auditor's inquiries about litigation-related issues.
57
List the three matters the lawyer's letter should address regarding "Unasserted" claims.
1. The nature of the litigation;
2. How management intends to respond if the claim is asserted; and
3. An evaluation of the likelihood of an unfavorable outcome and an estimate, if one can be made, of the amount or range of potential loss
58
What is meant by the term unasserted claims?
Audited entity has exposure to litigation but no one has yet filed a law suit or announced an intention to sue.
59
Under what circumstances might an auditor NOT be required to obtain a letter from the entity's legal counsel?
If the entity had no litigation, claims, or assessments having financial reporting relevance and, accordingly, did not engage legal counsel. (In such a case, the management representations letter would include a statement to that effect.)
60
What is the effect of a limitation in the lawyer's response to the letter of inquiry on the audit report?
This would be considered a scope limitation sufficient to prevent an unqualified opinion and likely resulting in a disclaimer of opinion.
61
List the two types of letters involved in the communication with the entity's lawyers.
1. Letter of inquiry - management's letter to the entity's lawyer(s) (as requested by the auditor) asking the lawyer to provide litigation-related information directly to the auditor;
2. Lawyer's letter - the lawyer's response directly to the auditor.
62
List the 4 matters the lawyer's letter should address regarding "Asserted" claims.
1. The nature of the litigation;
2. The progress of the case to date;
3. How management is responding or intends to respond to the litigation; and
4. An evaluation of the likelihood of an unfavorable outcome and an estimate, if one can be made, of the amount or range of potential loss.
63
What are the 2 basic categories of issues usually addressed by the management representations letter under the AICPA's clarified auditing standards?
1. Financial statements; and
| 2. Information provided.
64
When should the management representations letter be dated?
It should have the same date as the auditor's report.
65
What would be the effect on an audit opinion of management's unwillingness to sign the management representations letter?
This would be considered a scope limitation; probably resulting in disclaimer or withdrawal.
66
What periods should be covered in the management representations letters?
All periods included in audit report.
67
What is the purpose of obtaining the required management representations letter?
To document in writing the essence of management's verbal responses to the auditor's important verbal inquiries.
68
List the members of management who are responsible for signing the management representations letter.
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
69
List audit procedures used to identify the existence of related parties.
1. Inquire of management as to the existence of related entities;
2. Review prior year's audit documentation;
3. Review any applicable SEC filings (for a public company);
4. Inquire of predecessor auditors if applicable;
5. Review stockholder listings of closely held companies to identify major stockholders.
70
What is meant by the term arm's length transaction?
A transaction conducted on such terms and conditions between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.
71
What is the primary focus of the auditor regarding an entity's transactions with related parties?
Evaluating the adequacy of disclosure about the related party transactions.
72
Identify 3 responsibilities of the auditor when related party transactions have been identified.
1. Obtain an understanding of the business purpose of the related party transaction;
2. Determine if the related party transaction was authorized by board of directors (those charged with governance);
3. Evaluate the adequacy of the disclosures of the related party transactions.
73
What is meant by the term related party?
One party that controls or can significantly influence the management or operating policies of another party.
74
List 3 audit procedures that an auditor might use to identify an entity's transactions with a related party.
1. Review minutes of board of directors' meetings (those charged with governance) for activities with related parties;
2. Inquire of management as to such transactions; and
3. Examine underlying documents for unusual or large transactions or transactions with terms or conditions that are inconsistent with prevailing market conditions.
75
What is meant by the term dual dating the auditor's report?
The auditor uses one date for the overall audit report, but specifies a later date to address a particular subsequent event. The later date is limited to the specific subsequent event, and does not imply responsibility for other matters beyond the basic date of the report.
76
If management revised the financial statements because of subsequently discovered facts that became known to the auditor after the report release date, what should the auditor do?
1. The auditor should perform appropriate audit procedures on the revision.
2. The auditor should assess whether management's actions are appropriate and timely to inform users about previously issued (erroneous) financial statements.
3. If the resulting opinion differs from that previously expressed, add an other-matter paragraph to the auditor's report to comment on that change of opinion.
77
What procedures should the predecessor auditor perform when reissuing an audit report?
1. Read the subsequent financial statements and compare to those previously audited.
2. Make inquiries of management and obtain written representations from management about issues affecting the previous representations obtained from management.
3. Obtain a representations letter from the successor auditor about known relevant matters.
78
When would a subsequent event require disclosure in (but not adjustment of) the financial statements?
When material events or circumstances arise after the balance sheet date.
79
When is the auditor's report normally dated?
When the auditor has obtained sufficient appropriate audit evidence as a reasonable basis for the opinion. (The date of the auditor's report cannot precede the completion of fieldwork and may be later than that.)
80
What should the auditor do when subsequently discovered facts become known to the auditor (either before or after the report release date)?
Discuss the matter with management (and possibly those charged with governance) and determine whether the financial statements require revision. If so, inquire how management will deal with the matter.
81
List 4 audit procedures the auditor might perform to identify subsequent events.
1. Inquiry of management;
2. Review minutes of board meetings (or those charged with governance);
3. Review the lawyers' letters in response to the letter(s) of inquiry; and;
4. Scan the accounting records subsequent to year end for unusual activities
82
What is meant by the term subsequent events?
Events or transactions that occur after the balance sheet date up to the date of the auditor's report which have a material effect on the financial statements and, therefore, require either financial statement adjustment or disclosure.
83
When would a subsequent event require adjustment of the financial statements?
When material events or circumstances clarify (that is, provide better information about) circumstances already in effect as of the balance sheet date.
84
What period of time defines a subsequent event?
The period after the balance sheet date up to the date of the auditor's report.
85
What is meant by the term mitigating factors when the auditor is evaluating an entity's going concern issues?
Those aspects of management's strategy that might be expected to improve the entity's cash flows (that is, generate cash inflows or reduce cash outflows).
86
When the auditor has substantial doubt about an entity's ability to continue as a going concern, what further evidence-gathering responsibilities does the auditor have?
1. Inquire about management's strategy to overcome the entity's financial difficulties; and
2. Evaluate the feasibility of the "key" elements of management's plans with emphasis on "mitigating factors."
87
What communication is required with those charged with governance when there is "substantial doubt regarding an entity's ability to continue as a going concern"?
1. Nature of conditions identified;
2. The possible effect on financial statements and disclosures; and
3. The effect on the auditor's report.
88
Describe the auditor's reporting responsibilities when the auditor has substantial doubt about an entity's ability to continue as a going concern.
1. Consider the adequacy of disclosure about these issues relative to GAAP or other applicable financial reporting framework (is there a misstatement?); and
2. If the financial statements (including disclosure) are consistent with the requirements of the applicable framework, the auditor should add an emphasis-of-matter paragraph after the unmodified opinion.
89
What is meant by the term reasonable period of time when the auditor is assessing an entity's going concern issues?
A period of time not to exceed one year beyond the date of the financial statements being audited.
90
List some indicators that might suggest to an auditor substantial doubt about the entity's ability to continue as a going concern.
1. Negative trends (recurring losses, negative cash flows from operating activities, etc.);
2. Internal matters (labor problems, dependence on a single project or customer);
3. External matters (litigation, general decline in the economy or industry, etc.); and
4. Other indicators (defaults on debt, violations of debt covenants, etc.).
91
List routine audit procedures that should identify whether there is "substantial doubt about an entity's ability to continue as a going concern."
1. Analytical procedures;
2. Review for subsequent events;
3. Review loan agreements for compliance with restrictive debt covenants;
4. Read minutes of meetings of the board or those charged with governance;
5. Inquire of management about legal liability issues and obtain lawyers' letters.
92
Identify the 4 assertions for account balances at the end of the period.
1. Existence;
2. Completeness;
3. Rights and obligations; and
4. Valuation and allocation.
93
Identify several substantive procedures usually performed in every audit area.
Agree financial statement elements, or trial balance from which financial statement elements are derived, to underlying accounting records (general ledger);
Scan the entity's journals and ledgers for any "unusual" items;
Make inquiries of management and other personnel; document inquiries and management's responses in the management representations letter; and
Perform specific analytical procedures - consider historical trends and events within the industry
94
What is the schedule of interbank transfers used for?
It is used to verify that transfers between the entity's bank accounts are recorded properly (and to detect kiting, which overstates the cash balance).
95
What is the purpose of a bank confirmation?
1. It verifies the existence and ownership of bank accounts; and
2. It also provides evidence about the completeness and terms of notes payable with bank.
96
What is meant by the term kiting?
An overstatement of the true cash balance at year-end caused by recording the receipt, while failing to record the disbursement, associated with a transfer between the entity's cash accounts.
97
List some typical audit procedures applicable to cash accounts.
1. Review and test the entity's bank reconciliations;
2. Prepare and test a schedule of interbank transfers if there are multiple bank accounts with transfers among them;
3. Prepare proof of cash if fraud is suspected;
4. May count petty cash, but usually do not due to its immateriality;
5. Inquire about minimum balance requirements on bank accounts.
98
What is meant by the term cutoff bank statement?
Short period bank statement obtained directly from the bank (normally for a 10-day period) useful in verifying the deposits in transit and providing some (usually partial) evidence about outstanding checks on a bank reconciliation.
99
What does the proof of cash compare?
Compares the beginning balance per the bank plus deposits minus checks clearing the bank versus the beginning balance per the books plus receipts minus disbursements according to the books.
100
Describe how the auditor performs the "cutoff test" for sales.
Examine the last few transactions before year-end and the first few after year-end. Agree the entries on the sales journal to the shipping documents (existence); and agree the shipping documents to the sales journal (completeness).
101
Identify 2 audit procedures that address the rights and obligations assertion for accounts receivable.
1. Inquire about receivables pledged as collateral.
| 2. Read the debt agreements for any discussion of collateral.
102
Identify several audit procedures that address the existence assertion for accounts receivable.
1. Verify subsidiary ledger agrees with the general ledger control account
2. Confirm individually material accounts and selected others.
3. Investigate exceptions (disputed balances) from confirmations
4. Complete alternate procedures for nonresponses to positive confirmations.
103
What is meant by the term lapping related to accounts receivable?
An attempt to cover up a theft of receipts, where a clerk might apply a different customer's payment to a prior customer's account (whose payment was stolen) to conceal the theft.
104
What is the main audit procedure that addresses the completeness assertion for accounts receivable?
Perform cutoff test of sales to verify that sales transactions are recorded in the proper period. Sales transactions may be recorded prematurely, violating the existence assertion, or recorded belatedly, which violates the completeness assertion.
105
Identify several audit procedures that address the valuation assertion for accounts receivable.
1. Review the aged trial balance (and test its accuracy).
2. Inquire about individually large, delinquent items.
3. Estimate uncollectible accounts based on time outstanding (that is, based on each category of age).
4. Review receiving documents after year-end for sales returns.
106
Describe the basic steps associated with the auditor's participation in an entity's physical count of inventory.
1. Review and evaluate the entity's written counting procedures.
2. Perform test counts for selected count tags to compare to client counts.
3. Determine that all inventory tags are properly accounted for
4. Be alert for and inquire about any obsolete or damaged items.
107
Describe how the auditor might address the existence assertion of for inventory in the entity's possession.
Participate in the client's count of inventory and perform test counts of selected inventory tags to verify the accuracy of the entity's counts. (Select a sample of items on the entity's inventory listing and agree them to the auditor's test counts.)
108
How might the auditor address the rights and obligations assertion for inventory?
Inquire of management about any inventory held on consignment or pledged as collateral. The auditor might also read the entity's debt agreements for any discussion of collateral, such as inventory.
109
Identify a few audit procedures that might address the valuation assertion for inventory.
1. Perform price tests (to evaluate the appropriateness of the inventory's cost/unit - e.g., agree unit costs to a recent supplier's invoice).
2. Test the extensions (quantity times cost/unit) and foot the total.
3. Perform lower of cost or market analysis. Might calculate the inventory turnover ratio to identify slow-moving inventory.
110
Describe how the auditor might address the completeness assertion for inventory.
1. Test sales cut-off (regarding cost of goods sold, decreases to inventory)
2. Test purchases cut-off (regarding purchases of inventory).
111
What is meant by the term derivative?
A derivative is a financial instrument or other contract whose value is derived (hence, the name derivative) from its relationship to something else known as the underlying. The underlying can be another financial instrument, a physical commodity, currency, etc.
112
What is the auditor's basic responsibility if estimates of fair value for financial instruments are based on management's valuation model?
The auditor should obtain sufficient appropriate audit evidence about the fair value based on that model.
113
What else should the auditor do if estimates of fair value for financial instruments are obtained from third-party sources (such as broker-dealers)?
The auditor should obtain an understanding of the methods they used.
114
What is usually considered to be the best evidence of fair value for a financial instrument that is measured at fair value?
Quoted market prices obtained from financial publications, national exchanges, or NASDAQ.
115
What audit procedures might an auditor perform to evaluate an investment in securities that is based on cost?
The auditor might inspect the documentation of the purchase price, confirm the existence of the security with the appropriate outside parties, and test the amortization of any premium or discount.
116
What audit procedures might an auditor perform to evaluate an investment in securities that is based on the investee's financial results?
The auditor would normally read the audited financial statements of the investee.
117
What considerations might be helpful to the auditor in determining whether a decline in fair value for a financial instrument is other than temporary?
1. How much (and how long) the fair value is below the carrying value.
2. Whether the financial condition of the issuer has deteriorated.
3. Whether a rating agency has downgraded the security.
4. Whether dividends have been reduced or eliminated (or interest payments not made).
5. Whether the entity recorded losses on the security after the period-end
118
What is meant by the term hedge?
A hedge is a defensive strategy designed to protect against the risk of adverse price or interest rate movements to achieve a state of balance.
119
Identify a few audit procedures that address the existence assertion for fixed assets.
1. Verify that detailed (subsidiary) listing supports general ledger account
2. Examine underlying documents to evaluate any additions
3. Trace proceeds from any disposals (retirements) to cash receipts journal and to bank statement.
120
Identify 2 audit procedures that address the rights and obligations assertion for fixed assets.
1. Inquire about any fixed assets pledged as collateral for debts
2. Read the entity's debt agreements for any discussion of collateral, such as fixed assets.
121
Describe how the auditor might address the valuation assertion for fixed assets.
1. Review calculations for depreciation expense
| 2. Inquire of management as to whether any assets have become impaired.
122
Describe how the auditor might address the completeness assertion for fixed assets.
Review repairs and maintenance expense accounts to see if any transactions should have been capitalized instead of expensed.
123
Give an example of an analytical procedure to evaluate dividends payable at year-end.
The auditor might estimate the dividends payable, in view of the declared dividends/share (per the minutes of board meetings) times the number of shares outstanding at year-end.
124
Identify a few audit procedures to address the existence assertion for accounts payable.
1. Compare the general ledger control account to the supporting detailed listing of payables.
2. Agree selected items to vendors' invoices
3. May choose to confirm payables (but usually do not, since completeness is typically a greater concern than existence with respect to liability accounts).
125
Identify an audit procedure that addresses the rights and obligations assertion for accounts payable.
Inquire of management about any transactions with related parties that result in obligations.
126
Give an example of an analytical procedure to evaluate interest payable at year-end.
The auditor might estimate the accrued interest for the time period involved, based on the interest rate (and payment dates) specified in the underlying debt agreements.
127
Give an example of an analytical procedure to evaluate wages and salaries payable at year-end.
The auditor might estimate the wages and salaries payable based on the number of days to be accrued relative to the payroll for a normal pay period.
128
Describe the basic steps that comprise the auditor's search for unrecorded liabilities.
1. Review cash disbursements after year-end and examine underlying documents to identify liabilities of the period under audit.
2. Examine unpaid invoices (and receiving documents) at the time of the test.
3. Inquire of management as to the completeness of liabilities (document that in the management representations letter).
129
Give an example of an audit procedure for completeness of Long-term Liabilities.
1. Verify due dates for payments in the loan agreements
2. Trace cash disbursements from the accounting records to the bank statement
3. Examine canceled notes if paid in full.
130
Identify a few audit procedures that address the valuation assertion for long-term liabilities.
1. Trace related cash receipts (for increases) and disbursements (for decreases) from the accounting records to the bank statement for anydebt activities.
2. Examine underlying loan documents for issuance of new debt and scheduled payments.
3. Recalculate the amortization of any discount or premium involved.
131
Identify a few audit procedures that address the existence assertion for long-term liabilities.
1. Obtain copies of new loan agreements for the audit documentation.
2. Verify authorization of new debt in minutes of meetings of those charged with governance.
3. Trace the proceeds received from the accounting records to the bank statement.
132
Identify an audit procedure that addresses the rights and obligations assertion for long-term liabilities.
1. Review loan documents for any restrictive debt covenants to be disclosed.
2. Review the loan documents (or inquire of management) to identify the current portion of long-term debt to be reclassified as a current liability.
133
Identify an audit procedure that addresses the existence assertion for stockholder's equity.
If the entity has an external registrar, confirm the outstanding shares of stock.
134
Identify an audit procedure that addresses the valuation assertion for stockholder's equity.
1. Review the cash receipts journal and the cash disbursements journal for any changes related to the stock accounts.
2. Compare the subsidiary ledger related to the stock accounts to the general ledger balance.
3. Verify the par value on the stock certificate or the stated value in the minutes of meetings of those charged with governance.
135
Identify a few audit procedures that address the rights and obligations assertion for stockholder's equity.
1. Review minutes of meetings of those charged with governance for authorization of stock-related transactions.
2. Review the entity's compliance with contracts for employee stock plans.
3. Inquire of management about any restrictions applicable to retained earnings.
136
Identify an audit procedure that addresses the completeness assertion for stockholder's equity.
1. Read the minutes of meetings of those charged with governance for authorization of any stock-related transactions that should have been recorded.
2. Verify that all certificate numbers are accounted for.
137
List the 5 assertions related to income-statement items (that is, for transactions and events during the period).
1. Accuracy;
2. Occurrence;
3. Completeness;
4. Cutoff; and
5. Classification.
138
When is the detailed testing of payroll (or other expense accounts) typically performed?
Usually performed only when the auditor 's analytical procedures suggest that there is a risk of material misstatement relating to payroll (or other expense accounts).
