Evidence and Risk 4 Flashcards
Typical Substantive audit procedures for cash - PERCV
Presentation & Disclosure
- review and disclosures for compliance with GAAP
- Inquire about compensating balance requirements and restrictions
Existence/Occurrence
- confirmation
- count cash on hand
- prepare bank transfer schedule (kitting)
Rights & Obligations
- review bank Statements
Completeness & Cutoff
- review cutoff (receipts and disbursements)
- perform AP
- obtain bank cutoff statement to verify reconciling items on bank reconciliation
Valuation, Allocation & Accuracy
- foot summary schedules
- reconcile summary schedule to the ledger
- test translation of any foreign currencies
Deposit in Transit
- Deposit in Transit occurs when the disbursement per books occurred before year end but the receipt occurred after year-end
- Understament of the total cash
Lapping of A/R
Attempt to cover theft of receivables collection by posting subsequent collection from another customer to that subsidiary account
Tests to ensure that No lapping of A/R
Best way to control lapping is Segregation of duties
Lapping can be detected by using the following procedures:
- Analytical Procedure - age of receivable and turnover ratio
- Confirm receivable
- Deposit slips: suprise inspection
- Bookkeeping systems: Foot cash reciept journal
- Comparison of the dates on the check deposit to the bank with the posting dates in the receivable records
Existence, Valuation, and Completness assertion of AR
- Existence: receivable confirmation primarily test the existence assertion of the receivable - Confirmation is a generally accepted auditing procedure
- Valuation: subsequent collection, aging of receivable, examination of credit rating of customer
- Completeness: perform cutoff test, tracing of shipping documents to sales invoices, examination of numerical sequences of shipping documents and sale invoices
3 types of confirmation
1) Negative confirmation
- No need to response
- Customer only responds if balance is materially wrong
- Used when small balance and if reliance ↑ RRM (CR + IR) ↓ DR↑ AU-C 505
- No response - customer agree with the amount
2) Positive confirmation
- Customer need to confirm the correctness of amount
- Used when large balance and if reliance ↓ RRM (CR + IR) ↑ DR↓
3) Blanc confirmation
- Customer need to provide the amount without being told value on client records
- Used when large balance and if reliance ↓ RRM (CR + IR) ↑ DR ↓
NOTE
When using confirmations the auditor should consider
a. Prior experience—response rates, misstatements identified, and inaccurate replies
b. Nature of information being confirmed—consider whether respondents may reply effectively and understand the information being confirmed
c. Appropriate respondent—consider who should receive the confirmation request so as to help assure a meaningful response
Procedures when customer does not respond to positive or blank confirmation
- Send 2nd confirmation
- Ask client to contact customer and request response
- Alternative procedures:
- Review cash receipts in subsequent period
- Inspect shipping document
- examine customer correspondence with client
- consider Audi adjustment
- However, the auditor may consider not performing alternative procedures when (a) no unusual qualitative factors or systematic characteristics related to responses have been identified, and (b) the nonresponses in total, when projected as 100% misstatements to the population, are immaterial.
Typical Substantive audit procedures for A/R
Presentation & Disclosure
- Review and disclosures for compliance with GAAP
- Inquire about pledging and discount
- Review loan agreement for pledging, factoring
Existence/Occurrence
- Confirmation
- Inspect notes
- Vouch ( examine shipping documents, invoices, credit memos)
Rights & Obligations
- Review cutoff (sales, cash, receipts, sale returns)
- Inquires about factoring of receivables
Completeness & Cutoff
- Perform Analytical Procedure
Valuation, Allocation & Accuracy
- Foot subsidiary ledger
- Reconcile summary subsidiary ledger to general ledger
- Examine subsequent cash receipts
- Age receivable to test adequacy of allowance for doubtful accounts
- Discuss adequacy of allowance for doubtful accounts with management and compare to historical experience
Typical Substantive audit procedures for Inventory
Presentation & Disclosure
- Review and disclosures for compliance with GAAP
- Inquire about pledging
- Review purchase and sale commitments
Existence/Occurrence
- Confirmation of consigned inventory and inventory in warehouses
- Observe inventory count
Rights & Obligations
- Inquire about inventory from vendors on consignment
Completeness & Cutoff
- Review cutoff (sales, sale returns, purchase, purchase returns)
- Perform Analytical Procedure
- Perform test counts and compare with client’s counts/summary
- Inquire about consigned inventory
- Account for all inventory tags and count sheets
Valuation, Allocation & Accuracy
- Foot and extended summary schedule
- Reconcile summary schedule to general ledger
- Test inventory cost method
- Determine that inventory is valued at lower of cost or market
Confirmation of Accounts Payable
- Confirmation may be sent to vendors
- Confirmation are to major client did business during the year, vendors with low or zero balance
- But omitted due to the availability of externally generated evidence (e.g. purchase agreement, vendor’s invoices)
- Confirmation is used bad internal control, financial position and when vendor do not send month end statement
The search for unrecorded liabilities
The search for unrecorded liabilities is an effort to discover any liabilities that may have been omitted from recorded year end payable - assertion of completeness
Typical procedures include
(a) Examination of vendors’ invoices and statements both immediately prior to and following yearend.
(b) Examination, after year-end, of the following to test whether proper cutoffs have occurred:
1] Cash disbursements
2] Purchases
3] Unrecorded vouchers (receiving reports, vendors’ invoices, purchase orders)
(c) Analytical procedures
(d) Internal control is analyzed to evaluate its likely effectiveness in preventing and detecting the occurrence of such misstatements.
Management/ Client Representation Letter
- AU 580
- UPERCV is included in the letter
- Dated no later than audit report date
- Signed by CEO and CFO and addressed to the auditor
- obtained for all periods being reported upon, even if management was not present during all of those periods
- Mandatory audit procedure – if not received → scope limitation sufficient to preclude unqualified opinion
- should include management’s disclosure to the auditor of its knowledge of fraud or suspected fraud affecting the entity
- meant to reduce the possibility of misunderstanding concerning management’s responsibility for the financial statement
- meant to complement not replace substantive test
- Representations may be limited to matters considered either individually or collectively material to the financial statements, provided management and the auditor have an agreement on materiality
- But no materiality limitations should exist for management’s responsibility for the financial statements, the availability of financial records, the completeness of records, or communications from regulatory agency
Attorney Letter / Letter of Audit inquiry
- AU- C 501
- Primary source of evidence about litigation, claims, and assessment is the management of the client
- The auditor will prepare and arrange for management to sign a letter of inquiry to the attorney to obtain corroborating evidence
- If Attorney letter is not received, it is considered a Scope limitation
- Management requests the inquiry, but the letter should be physically mailed by the auditor
- letter is used for both SEC and non-SEC reporting firms
Specialist
- AU-C 620
- The auditor must understand the methods and assumptions underlying the specialist work and must be able to evaluate the results of that work
- The specialist must understand the manner in which the auditor will be utilizing the specialist’s work to provide corroborative evidence to support the auditor’s opinion
- The auditor should consider the specialist’s competence and objectivity
- The auditor must not refer to the specialist in the audit report unless required to do so because findings form the specialist caused the auditor to: * express a qualified or adverse opinion on the financial statement ; * add an explanatory paragraph to the audit report to emphasize a matter such as an uncertainty over whether an amount or disclosure is correct
- Internal Auditor is not a specialist
Fair value
- AU-C 501
- Management is responsible for making the fair value measurements and disclosure
- The auditor evaluates whether the Fair Value measurement are in conformity with accounting technical literature guidance
- same 3 step approache then estimate
