External Confirmations, Accounting Estimates, Investments in Securities, and Inventory held by others Flashcards
a confirmation is
a direct, written response to the auditor from a party outside of the entity being audited and is usually sent out using standard forms
standard bank confirmation does not…
get into transaction level detail
verifies balances in deposit accounts, outstanding loans and agreements relating to compensating balances or collateral for loans
2 acceptable reasons for management to refuse to authorize confirmations includes:
- legal disputes
- ongoing negotiations related to account balances
3 types of confirmations
blank positive
positive
negative
blank positive confirmations are…and suitable for…
-confirming party always required to respond
-manually fill in amount
-high risk
-large balances
positive confirmations are…and suitable for…
-confirming party always required to respond
-high risk
-large balances
-customer may not investigate
negative confirmations are…..and suitable for…
-customers asked to respond only if amount provided is incorrect
-low risk
-small balances
the confirmation process
- develop audit objectives
- choose appropriate confirmation form and determine timing and extent of work
- identify information to be confirmed
- prepare and send requests
- send second requests for non-responses
- perform alternative procedures for non-responses
- resolve exceptions
- document procedures and results
an auditor is required to confirm AR unless:
AR balance is immaterial
confirmations would not be effective
risk is low and addressed by other procedures
what is an acceptable disclaimer?
those that do not call into question the accuracy or completeness of the information in the confirmation
auditors standard report states an audit includes assessing
significant estimates made by management
substantive procedures test existence of marketable securities by…
-confirming directly with thrid parties
-inspecting security documents
-tracing recorded investments to purchase docs
with respect to the equity method
inspecting stock certificates indicates an investment exists/owned by the client
brokers advice indicates ownership
cancelled check confirms original purchase price
market quotations reflect investment’s current price
examine audited F/S indicates valuation (each reporting period, investment BV is adjusted)
tests of controls are performed to see if substantive testing can be reduced. when there is a limited number of transaction, substantive testing is
already reduced
auditor _____ about economic order quantity
does not care
factors influencing interim substantive testing
-effectiveness of I/C
-availability of needed information at year end
-purpose of the test
-assessed RMM
-type of account or transaction
-cost and ability to control AR between interim and year end
-predictability of year end balances after interim testing
pledging
using an asset as collateral for a loan
presentation and disclosure assertions
address the way facts are presented in F/S (including footnotes)
presentation
whether inventory is presented net of or separately from the allowance for inventory that is obsolete
disclosure
whether appropriate disclosures of any pledging agreements have been made
when reviewing inventory and inventory held by others…
review disclosures for GAAP compliance
inquire about pledging
review purchase commitments
