Evidence and Risk 2 Flashcards
How do Analytical Procedures assist the auditor?
- AP provide evidence as to the reasonableness of management’s assertions
- AP involve comparing information in the financial statement to evaluate the relationships
- AP may involve financial and nonfinancial data
- AP use ratio analysis
When Analytical Procedures may be performed during an audit?
AP may be performed at 3 different times during an audit:
Risk assessment/ in planning the audit – focus on enhancing the auditor’s understanding of the client’s business and events that have occurred since the last audit date, and on identifying areas that may represent specific risks relevant to the audit → Required
Substantive procedure - used to obtain relevant and reliable audit evidence to substantiate accounts for which overall comparisons are helpful → Optional
Near the end of audit – used to assess conclusions reached and evaluate overall financial statement presentation - performed by manager or partner with overall knowledge of the client business and industry → Required
NOTE GAAS requires the use of analytical procedures during the risk assessment and near the end of the audit. Analytical procedures are not a required substantive test.
5 basic types of comparison that may be performed as AP
CRAFT
- Client vs. Industry
- Related Accounts
- Actual vs. Budget
- Financial vs. Non-Financial
- This year vs. Prior
More predictable relationship AU-C 520
- Income statement than BS for AP
- not subject to management discretion
How is the Current Ratio calculated?
Current Ratio = Current Assets / Current Liabilities
Liquidity ratio measures short-term debt-paying ability
How is the Quick or Acid test Ratio calculated?
Quick Ratio = Liquid Assets / Current Liabilities
Liquid Assets = Cash, cash equivalent + Marketable securities (current investment) + Net Account receivable (does not include inventory)
Liquidity ratio measures short-term liquidity
How is the Asset Turnover calculated?
Asset Turnover = Net Sales / Average Assets
Activity Ratio measures how efficiently assets are used to generates sales
How is the Inventory Turnover calculated?
Inventory Turnover = COGS / Average Inventory
Acitivity Ratio measures the liquidity of inventory
inventory turnover analysis may be useful to the auditor in detecting the existence of obsolete merchandise
Receivables turnover
Receivable turnover = Net credit sales / Average net accounts receivable
Acitivity Ratio measures the liquidity of receivables
How is Gross Margin calculated?
Gross Margin = Net Income / Net Sales
Profitability ratio measures net income generated by each dollar of sales
Debt to equity ratio
Debt to equity = Total debt / stockholders’ equity
Coverages ratio shows creditors the corporation’s ability to sustain losses
Gross Profit ratio
= Gross profit or (sale- COGS) / Net Sale
How do management assertions affect the audit?
- Assertions are representations by management, explicit or otherwise, that are embodied in the financial statement, as used by auditor to consider the different types of potential misstatements that may occur.
- Management assertions help the auditor to plan the audit and select substantive tests.
What assertions do auditors test?
U-PERCV
U-PERCV
AU-C 500
- Understandability & Classification
- Presentation & Disclosure
- Existence/Occurrence - Did it happen? Does it exist?
- Rights & Obligations - Does the company own them?
- Completeness & Cutoff - Was everything recorded? Is it in the right period and category?
- Valuation, Allocation & Accuracy - Are they worth the amount at which they are recorded?
11 Management Assertions
COCA-CURVE
COCA-CURVE
- Completeness: All transactions and events that should have been recorded have been recorded.
- Occurrence
- Cutoff: Transactions and events have been recorded in the correct accounting period.
- Accuracy
- Classification
- Understandability
- Rights & Obligations
- Valuation & Allocation
- Existence
NOTE No Presentation & Disclosure
11 Management Assertions are groupe in 3 Categories
3 Categories
- Transaction Classes & Events
- CPA CO
- Account Balance – at year end
- RACE
- Presentation & Disclosures
- RACU
