Final Flashcards
Inventory Substantive Procedures
Biggest Risk - Overstatement ( Existence and Valuation)
- Obtain a detailed inventory listing from the client
a. Recalculate the quantity by cost extensions ( 1 valuation)
b. Foot the listing and agree totals to the client’s trial balance ( 1 valuation)
c. Scan the inventory listing for large or unusual balances ( 1 existence, one completeness, one valuation) - Perform Analytical Procedures for inventories ( 1 existence, 1 completeness, 1 valuation) ( ex., low inventory turnover ratios might indicate obsolescence)
- Inventory Observation ( MOST IMPORTANT)
a. Select items on the inventory listing and take test counts ( “ listing to floor”, “ sheet to floor” ) ( 1 existence, 2 valuations)
b. Select Items on the floor and trace test counts of those items to the inventory listing ( “ floor to listing” , “ floor to sheet “ ) ( 2 existence ,1 Valuation)
c. Look for obsolete inventory and inquire about writing it down ( 1 Valuation ) - Consider consignor/ consignee relationships. A consignor asks the consignee to sell inventory on their behalf while the consignor retains rights to the inventory.
a . Inquire about goods in on consignment from another company. Is it common practice in the industry? If they had a material amount of inventory in on consignment last year and now they have none, the auditor should confirm that fact with previous consignors. ( 1 existence, 2 rights obligations)
b. Inquire about material inventory amounts out on consignment to another company ( consignee). Inspect the consignment agreements and consider confirming amounts held with the consignee. ( 1 existence , 2 rights obligations )
c. Inspect consignor/consignee agreements and ensure that all goods out on sonsignment are included in inventory. ( 2 rights obligations, 1 completeness ) - Confirm inventories held at external locations ( public warehouse) ( 1 existence , 2 rights obligations )
- Perform cost tests for selected inventory items. Are the costs appropriate for the inventory method? ( SECOND MOST IMPORTANT) , ( 1 valuation)
- Evaluate the need for a write- down to reduce inventory to the lower of cost or market. How would we determine the market? ( 1 valuation)
- Evaluate the overall presentation of inventories in the financial statements
a. Review disclosures related to inventories ( inventory method) ( 1 presentation)
b. Inquire about whether inventories are pledged as collateral or entered into firm purchase commitments. ( 1 presentation)
Preventing Double Counting
Have controls in place, like the sheet-to-floor counts.
Determining Costs for the inventory method
Evaluate the Specialist on :
a. Competency - Consider certifications, licenses, experience, and reputation
b. Objectivity - Do they work for the client?
c. Understand methods or assumptions used
d. Make appropriate tests of data provided to the specialist,
e. Evaluate whether the specialist’s findings support the related assertions in the financial statements.
Costs Tests
A.Method of Pricing ( LIFO, FIFO) - Inquire
B. Consistency - Compare method to prior year
C. Purchase Invoices ( watch for dates ), FIFO = More recent purchase invoices, LIFO= Older purchase invoices
D. Work In Process , Ask the client how they value and determine reasonableness
E. Lower Cost or Market - Catalog Price or Website
Management Representations
- End of Audit
- Required without regard to materiality :
a. Management’s Responsibility for the fairness of the financial statements
b. Availability of all financial records and data
c. Management is responsible for designing and implementing fraud-related programs and controls.
d. Disclosure of Deficiencies in Internal Control
e. Information concerning fraud, non- compliance with laws, related parties, and undisclosed litigation
Subsequent Discovery of Facts
Requires Disclosures if
Facts are reliable and existed at the report date
Facts affect financial statements and auditor’s report
Persons are relying on financial statements and audit
AICPA Audit Report
- Opinion
- Basis for Opinion
- A Key Audit Matters
-Responsibilities of Management for the Financial Statements
-Auditor’s Responsibilities for the Audit of the Financial Statements
Opinion
We have audited - list each financial statements
In our opinion, financial statements present fairly, in all material respects, in accordance with generally accepted accounting principles ( GAAP)
Basis for Opinion
Audit in Accordance with generally accepted auditing standards ( GAAS).
Required to be 1) independent & 2) meet other ethical responsibilities
Evidence is sufficient and appropriate as a basis for our opinion
Key Audit Matters ( Optional)
Most significant matters are communicated to those charged with governance. List each key audit matter, why it was selected, and how it was addressed.
Responsibilities of Management for the Financial Statements
Management Responsible for:
1) Financial Statements
2) Design, Implementation, and Maintenance of Internal Controls
3) Evaluation of going concern
(FIG)
Auditor’s Responsibilities for the Audit of the Financial Statements
Reasonable Assurance ( Not Absolute )
Risk of not detecting a material misstatements is greater for fraud then error.
Misstatements are material if they can influence users
Auditors:
1. Exercise Professional Judgement & Professional Skepticism
2. Identify and assess the risk of material misstatement ( ROMM) and design procedures
3. Understand internal control to design audit procedures but not express opinion internal control
4. Evaluate accounting policies, significant estimates, & presentation of the financial statements.
5. Conclude on going concern.
6. Communicate with those charged with governance communicate ( scope and timing , significant audit findings, internal control related matters)
PRICCE
3 differences between AICPA and PCAOB
1 . Opinion vs Opinion on Financial Statements ( PCAOB) - is it a paragraph long
2. Mentions the SEC in the Basis for Opinion
3. Key Audit Matters vs Critical Audit Matters
Qualified vs Disclaimers, Qualified vs Adverse
Financial Statements Materially Misstated & Material but Not Per
Financial Statements Materially Misstated
Material but Not Pervasive - Qualified “ Except For”
Material and Pervasive - Adverse
Inability to obtain sufficient, appropriate audit evidence
Material but Not Pervasive - Qualified “ Except for “
Material and Pervasive - Disclaimer
Non Pervasive
Fly Lands on Sandwich you only rip the piece off
