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Audit > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

audit sampling

A

The application of an audit procedure to less than 100 percent of the items for the purpose of evaluating some characteristic of the balance or class.

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2
Q

sampling risk

A

The possibility that a properly drawn sample may not be representative of the underlying population. The auditor may thus form a different conclusion

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3
Q

procedures that use sampling

A

Inspection of tangible assets (e.g., inventory)- not easy to look at all inventory
Inspection of records or documents- thousands of contracts
Confirmations- have people confirm that the amount of money they owe is correct
Reperformance- auditor redoes a calculation

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4
Q

procedures that do not use sampling

A 
(Easy to look at entire populations)
Analytical procedures- using regression
Scanning
Inquiry- ask questions about everything
Observation- easy to observe all people
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5
Q

advantages of statistical sampling

A

Plans an efficient sample- gives exact sample size needed

Objective way to determine whether there is enough evidence and whether it is right or wrong

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6
Q

Disadvantages of statistical sampling

A

Costly to train auditors
Requires semi-random method to draw sample
Selecting items to be tested

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7
Q

systematic sampling formula

A

in population/ # in desired sample size = sampling interval

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8
Q

haphazard selection

A

Made without any special reason for including or excluding an item.
Cannot be used in statistical sampling, because it is not based on defined probability concepts.

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9
Q

attribute sampling

A

Testing controls for effectiveness

Primarily used to assess control risk, by conducting tests of controls

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10
Q

attributes sampling examples

A

Credit only given to only to authorized customers.
Billing department verification of agreement of sales invoice prices with authorized prices.
Purchase department approval of purchase requisitions.

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11
Q

Variables sampling

A

Estimating dollar amounts or quantities—primarily to limit detection risk by conducting substantive testing
Ex. Tests of inventory quantities and amounts.

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12
Q

Tolerable deviation rate

A

The maximum rate of deviations from the control policy that an auditor could accept without altering the planned assessed level of control risk.

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13
Q

Tests of Controls Sampling Steps

A 
Determine the objective
Define deviation conditions
Define population
Specify risk of assessing control risk too low and tolerable deviation rate.
Estimate population deviation rate
Determine sample size
Select the sample
Perform the sampling plan
Evaluate sample results
Document sampling procedure
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14
Q

probability proportional to size

A

Population is the individual dollars of the population book value
Uses stratification- 3rd dollar- customer 2, 8th dollar- customer 3

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15
Q

Advantages of PPS sampling

A

Smaller sample sizes than classical sampling
Automatically results in a stratified sample
Sample can be designed and sample selection can begin prior to availability of entire population..
Easier to apply- everyone has a semi-random sample

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16
Q

Disadvantages of PPS sampling

A

Accounts with zero balances.
Accounts with negative balances.
Accounts are understated.

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17
Q

projected misstatement

A

The most likely amount of any misstatement in a population

Upper limit on misstatements

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18
Q

Calculating upper limit on misstatements

A

projected misstatement +
basic precision +
incremental allowance (for projected misstatements)

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19
Q

Calculate basic precision

A

Reliability Factor x Sampling Interval

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20
Q

Calculate incremental allowance

A

(Reliability factor Increment - 1) x projected misstatement

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21
Q

Calculate projected misstatement

A

((Book Value - Audited Value)/ Book value) * projected sampling interval

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22
Q

imprest account

A

balance maintained at a fixed amount; i.e. petty cash

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23
Q

internal control guidelines for cash

A

Do not permit any one employee to handle a transaction from beginning to end.
Separate cash handling from recordkeeping.
Centralize receiving of cash to the extent possible.
Record cash receipts on a timely basis.
Encourage customers to obtain cash receipts and observe cash register totals.
Deposit cash receipts daily.
Make all disbursements by check (except for petty cash items).
Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks or custody of cash.
Forecast expected cash receipts and disbursements and investigate variances.

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24
Q

Common substantive tests for cash

A

Trial balance

Confirmations- paper or email sent out to financial institutions

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25
Q

trial balance

A

Obtain analysis of cash balances and reconcile to the general ledger.
Client should be checking their cash balances, tying up documents.

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26
Q

bank reconciliations will only record _______

A

differences between bank statements and financial statements

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27
Q

Bank statement balance 8/31-9/30 reconciliation

A

Balance 8/31
+Deposits
-Checks and Charges
=Balance 9/30

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28
Q

Bank balance 8/31- Book balance 8/31 reconciliation

A 
Balance 8/31
\+ Deposits in transit 8/31
- Outstanding checks 8/31
\+ Bank service charge August
-Interest earned August
=Book balance 8/31
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29
Q

purpose of a bank reconciliation

A

Existence of cash

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30
Q

bank cut off statement

A

A bank statement for the first 7-10 business days following the end of the client’s fiscal year.
Includes cancelled checks, credit memos etc.
Tie all amounts from bank rec to cut off statements
Make sure that outstanding checks and deposits did show up

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31
Q

3 rules for counting cash on hand

A
  1. All cash from client needs to be in the same place
  2. More than one auditor needs to count the cash
  3. Someone who works for the client must be there
32
Q

kiting

A

Using the “float period” to count the cash in two or more accounts
Moving money around from bank accounts to inflate the bank balance

33
Q

Clues to kiting

A
  1. Frequent Deposits and Checks in same round amounts to same banks.
  2. Money goes into an account and leaves a day or two later
  3. Large deposits on Fridays, weekends, bank holidays- largest float period
  4. High deposits – low average balances
34
Q

When should revenue be recorded?

A

When title passes from seller to buyer

35
Q

Eight common methods for committing financial statement fraud

A

Early revenue recognition- most common
Holding the books open past the accounting period
Fictitious sales-overstatement in A/R as well
Failure to record returns
Fraud in the percentage of completion method.
Related party transactions
Overstating receivables and inventory
Liability and expenses omissions.

36
Q

Audit objective of: Obtain aged listing of receivables and reconcile to ledgers

A

Valuation

37
Q

Audit objective of:

Inspect notes on hand and confirm those not on hand.

A

Existence, Rights

38
Q

Audit objective of: Confirm receivables with debtors

A

Existence, Rights, Valuation

39
Q

Audit objective of:

Review year-end cutoff of sales transactions.

A

Existence, Rights, Completeness

40
Q

Audit objective of: Perform analytical procedures

A

Existence, Rights, Completeness

41
Q

Audit objective of: Verify interest earned on notes receivable, recalculation

A

Existence, Rights, Completeness

42
Q

Audit objective of: Investigate the existence of pledges receivables and receivables from related parties

A

Presentation and Disclosure

43
Q

Audit objective of: Evaluate the business purpose of significant and unusual sales transactions

A

Existence, Rights, Valuation,

Presentation and Disclosure

44
Q

lapping

A

A person who collects payments for a company pockets it, then applying the payment from another customers account, and so on. Eventually the last payment from a customer just gets written off

45
Q

Ways to detect lapping

A

Compare details of bank deposit slips with the details of credits to customer accounts.
Compare names on checks to deposits in A/R
Accounts receivable confirmations—emphasize accounts written off and exceptions
Call customers to confirm when they paid
Analytical Procedures — e.g., Receivable turnover
Average time and balances go up.
Bookkeeping system

46
Q

Anderson embezzled from her company’s account and at year-end she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. What would be effective in detecting the fraud?

A

Comparison of bank cut off statements from cash receipts and disbursements journals

47
Q

What criteria have to be true to use a negative conformation letter?

A

Risk of material misstatements is low
Low number of accounts with low balances
No reason to believe the auditor just won’t respond

48
Q

Alternate procedures if no response from positive confirmation

A

Send a second letter out
Find cash payment from customer sometime after year end
Build portfolio of documents such as sales invoices, shipping documents.
Treat it as an overstatement of receivables.

49
Q

What assertion are confirmations concerned with?

A

Existence

50
Q

Importance of auditing inventory

A

Inventory is material to the financial statements.
It is related to COGS and indirectly related to revenue. Fraud risk is pretty high.
Valuing inventory involves a lot of subjectivity and estimates.

51
Q

Audit approach to inventory

A

Overstate inventory

52
Q

Audit challenges and procedures

A

Problem identifying quality- audit specialist
Use of geometric computations- audit specialist
Accuracy of scales- Examine certification
Measurement of volume- climb tanks
Quantity measurement estimation- aerial photos
Movement uncontrollable- animals- use chutes

53
Q

Auditing inventory steps

A

Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to inventories and cost of goods sold.
Obtain an understanding of internal control
Assess the risks of material misstatement and design further audit procedures
Perform tests of controls
Perform substantive procedures

54
Q

Audit objective: Obtain listings of inventory and reconcile to ledgers

A

Existence, occurrence, rights

55
Q

Audit objective: Evaluate the client’s planning of inventory

A

Existence, Occurrence, Rights, Completeness, Valuation, Cutoff

56
Q

Audit objective: Observe the taking of inventory

A

Existence, Occurrence, Rights, Completeness, Valuation, Cutoff

57
Q

Audit objective: Inventory cutoff

A

Existence, Occurrence, Rights, Completeness, Valuation, Cutoff

58
Q

Audit objective: Obtain a copy of the completed physical inventory and test its accuracy

A

Existence, Occurrence, Rights, Completeness, Valuation, Cutoff

59
Q

Audit objective: Evaluate the bases and methods of inventory pricing. Test the pricing of inventories.

A

Valuation

60
Q

Audit objective: Perform analytical procedures

A

Existence, Rights, Completeness, Valuation, Accuracy

61
Q

Audit objective: Determine whether any inventories have been pledged

A

Valuation, Presentation, Disclosure

62
Q

Audit objective: Evaluate financial statement presentation and disclosure

A

Presentation and Disclosure

63
Q

Planning of client’s physical inventory

A

Who is going to do the counts? – Client or a Professional Inventory Services Co.?
Dates of counts
Adequate written instructions
Inventory tags to keep track of counting
Business shuts down while inventory counting is going on
Set near balance sheet date

64
Q

Auditor inventory observation process

A

Review physical layout
Observe client’s team as they take inventory
Watch for any movement of inventory
Observe tag control procedures
Take test counts
Note how the “tagging” process affects the Existence and Completeness Assertions
Write memo

65
Q

2 types of audit sampling

A

Attributes- tests of controls

Variables- substantive tests

66
Q

Two types of variables sampling

A

Classical

Probability proportion to size

67
Q

Sample deviation rate

A

of deviations found/ sample size

68
Q

Internal control over inventory documents

A 
Purchase requisitions
Purchase orders
Receiving Reports
Material Requisitions
Production Orders
Move Tickets
Time Tickets
Shipping Documents
Bill of Lading
69
Q

Grant Thornton tips for detecting inventory fraud

A

Test count high value items and sample low value items
Do not follow a pattern or advise client ahead of time of what locations will be audited
Be alert for inventory not used in a while
Be skeptical in large differences in test counts

70
Q

Inventory turnover

A

COGS/average inventory

Tests for inventory obsolescence

71
Q

Substantive procedures: Inventory includes in inventory records does not exist

A

Observe client’s physical inventory count
Confirm inventory held by others on consignment
Vouch items on inventory listing to inventory count tags.
Analytical procedures. Compare inventory turnover and gross margin to budget and previous periods and discuss differences with client personnel.

72
Q

Substantive procedures: The entity records inventory that is owned by other parties

A

Inquire whether any inventory is on consignment.
Inquire whether inventory has been pledges as collateral or security.
Inspect loans and other agreements for the use of inventory as collateral.

73
Q

Substantive procedures: Inventory that should have been recorded has been omitted from the inventory account.

A
  • Trace inventory subsidiary accounts to inventory control account.
  • Observe physical inventory to ensure all items were counted.
  • Trace test inventory counts to inventory subsidiary accounts and control account.
74
Q

Substantive procedures: Inventory is included in the financial statements at incorrect amounts

A

Perform lower-of-cost-or-NRV.
Review cost of goods sold calculations.
Trace inventory cost to standard costs or purchase invoices.
Inquire whether any inventory is obsolete or unsalable.
Analytical procedures. Compare inventory turnover and gross margin budget and previous periods and discuss differences with client personnel.

75
Q

Accounts payable audit

A

Best check is to look for who the cash is going out to and any liabilities associated with that are recorded as of the balance sheet date.

76
Q

Voucher system

A

Cover sheet for a packet of documents that clients should compile for something they purchased. Voucher includes purchase order, receiving report, and vendor invoice.
Method for internal control over cash disbursements

77
Q

When do we confirm accounts payable?

A

Bad internal control

  1. Bad financial position
  2. When some vendors don’t send monthly statements

Audit (5 decks)

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