Final Exam Flashcards
Statistical sampling
an approach to sampling where random selection is used to select a sample and probability theory is used to evaluate the sample results
Non-statistical sampling
any sample selection method that does not have the characteristics of statistical sampling
Statistical sampling
Advantage and Disadvantage
An advantage of statistical sampling is that it allows an auditor to measure sampling risk; that is, the risk that the sample chosen by the auditor is not representative. Sometimes a disadvantage of statistical sampling is the cost involved in using this technique.
Non-statistical sampling
Advantage and Disadvantage
An advantage is that it is easier to use than statistical sampling, is lower cost, and allows an auditor to select a sample that they believe is appropriate
Disadvantge is that it is a not a random sample so it can be scewed
Most audit firms use a combination of _______ and ____________ as both methods provide appropriate audit evidence and allow the auditor to form a conclusion on the items being tested
statistical, non-statistical sampling
Examples of Non-statistical sampling
Haphazard selection
the selection of a sample without use of a methodical technique
Judgemental selection
the selection of items that an auditor believes should be included in the sample for testing
Examples of Statistical sampling
Random selection
process whereby a sample is selected free from bias and each item in a population has an equal chance of selection
Systematic selection (Inerval) the selection of a sample for testing by dividing the number of items in a population by the sample size, giving the sampling interval (n) and then selecting every nth item in the population
Block selection
the selection of items that are grouped together within the population of items available
Tests of controls (controls testing)
the audit procedures designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level
Preventive Control
Sales occur that are not collectable.
The computerized accounting program will not allow a sale to be processed if a customer has exceeded its credit limit.
Preventive Control
Fictitious employees are paid.
Amounts cannot be paid to employees without first matching a valid social insurance number to the employee master file.
Preventive Control
Sales are recorded at the wrong amount.
Sales invoices are automatically priced using a master pricing file
Preventive Control
Transactions are classified and coded to incorrect accounts.
The account coding on each purchase order is checked by the computer using a table of valid account numbers, and then various logic tests are performed by the computer.
Testing Controls
Enquiry
Observation
Inspection of physical evidence
Re-performance
Enquiry
This technique involves the auditor asking questions to determine how the control is performed and whether it appears to have been carried out properly and on a timely basis. For example, the auditor may ask the employees who prepare the sales invoices how they determine when to prepare the invoice and how they ensure that the revenue is recorded on a timely basis.
Observation
This technique involves the auditor observing the actual control being performed. For example, they may observe the preparation of an invoice to determine if the related shipping report has been received.
Inspection of physical evidence
This technique relies on the auditor testing the physical evidence to verify that a control has been performed properly. For example, the auditor may select a sample of invoices to determine if the related shipping document is attached.
Re-performance
This technique involves the auditor re-performing the control to test its effectiveness. For example, the auditor may test the application controls for accessing the billing module to ensure an unauthorized employee is unable to generate invoices (and that an unauthorized attempt to do so is recorded on an exception report).
Understand how to interpret the results of testing of controls
If the controls tested are considered to be effective and can be relied on for the purposes of reducing overall audit risk for a particular significant account and assertion, the level of additional substantive testing required is reduced. If the controls tested are considered to be ineffective and are not able to provide any audit evidence that reduces overall audit risk for a particular significant account and assertion, the level of additional substantive testing that is required is increased
EXAMPLE TESTS ALWAYS PERFORMED - AUDITING CASH
Confirm cash held by others (for example, bank balances and/or overdrafts) and cash on hand, if significant. (E, R&O)
Examine the client’s bank reconciliations. (C, V&A)
• Foot the bank reconciliation to ensure mathematical accuracy.
• Trace the book balance to the general ledger.
• Agree confirmed balance with the bank balance per the reconciliation.
• Obtain cut-off bank statement.
• Determine whether outstanding cheques have subsequently cleared and whether deposits in transit have been recorded by the bank.
• Verify the appropriateness of reconciling items.
Test cut-off of cash receipts, cash payments, and transfers as at year end. (C, V&A)
EXAMPLE ANALYTICAL PROCEDURES - AUDITING CASH
Compare the listing of cash accounts with the prior period’s and investigate any unexpected changes (for example, credit balances, unusually large balances, new accounts, closed accounts) or the absence of expected changes. (E, C, V&A, Cl)
Review interest received and/or paid in relation to the average cash balances and/or bank overdrafts (accuracy of interest income in the income statement). (O, A)
EXAMPLE OTHER GENERAL PROCEDURES - AUDITING CASH
Review the cash accounts in the general ledger for unusual items. (C, V&A)
Review bank confirmations, minutes of meetings, loan agreements, and other documents for evidence of restrictions on the use of cash or liens on cash. (C&U)
Recalculate any foreign currency–denominated bank accounts using the appropriate foreign exchange rate. (V)
Prepare a schedule of cash transfers between accounts before and after year end, ensuring that transfers are recorded in the correct period. (E, C)
Count cash on hand. (E)
Example substantive tests of transactions—cash
CASH RECEIPTS PROCESS
Perform a proof of cash by reconciling activity per the client records to activity per the bank. Also, correlate these transactions to the activity in the sales and trade receivables ledgers. This procedure is limited to less complex engagements that have a limited number of transactions. (C, A)
Test the mathematical accuracy of the cash receipts journal. (A)
Test the recording of miscellaneous receipts (that is, receipts not usually recorded in trade receivables, such as proceeds on disposal of assets or royalties); consider whether the recorded amounts are reasonable. (A)
Compare the total amounts of daily deposits shown on the bank statement with the totals of the daily cash receipts shown in the cash receipts journal. Investigate unusual delays in depositing cash receipts and any splitting of daily cash receipts into separate deposits. (C)
Example substantive tests of transactions—cash
CASH PAYMENTS PROCESS
Account for the numerical sequence of cheques issued during a specified period. (CO, C)
Compare paid cheques and supporting documents with the cash disbursement journal as to date, payee, amount, and account classification; determine whether supporting documents indicate the item has been paid. (C)
Determine whether the signatures on paid cheques are authorized. (A)
Test the postings of the totals in the cash disbursement journal to the general ledger and subsidiary ledgers. (C)
Example substantive tests of transactions—trade receivables
SALES PROCESS
Account for the numerical sequence of sales invoices, sales orders, and shipping documents during a specified period. Reconcile billings with shipping documents for substantial portion of the period.
(C, CO)
Test the records of products ordered and shipped to the sales records; agree dates, customers, products, quantities, prices, and amounts.
(O)
Trace individual sales invoices to the sales journal and to the trade receivables sub-ledger.
(Cl)
Test recorded sales to the records of products ordered and shipped; agree dates, customer, products, quantities, and amounts.
(O)
Review the listing of accounts receivable and investigate unusual balances, credit balances, and accounts that may not be properly classified as accounts receivable.
(V&A, Cl)
Investigate large or unusual credit memos issued subsequent to year end.
(V&A)
Test the pricing and mathematical accuracy of sales invoices.
(A)
Test the accounting classification of sales transactions.
Example substantive tests of transactions—trade receivables
SALES RETURNS AND ALLOWANCES (CREDIT MEMOS) PROCESS
Compare credit memos and supporting documents with the sales returns and allowances ledger as to dates, customers, products, quantities, prices, and amounts.
(O)
Account for the numerical sequence of credit memos during a specified period.
(C)
Test the posting of individual credit memos to the sales returns and allowances ledger and to the trade receivables sub-ledger.
(Cl)
Compare recorded credit memos with the documents supporting returns and allowances as to dates, customers, products, quantities, prices, and amounts.
(O)
Test credit postings in the trade receivables sub-ledger to the cash receipts journal or approved credit.
(C)
Example substantive tests of transactions—trade receivables
CASH RECEIPTS PROCESS
Compare remittance advices or lists of cash receipts with the entries in the cash receipts journal as to date, remitter, amount, and account classification.
(C)
Compare the details of duplicate deposit slips with the entries in the cash receipts ledger. Investigate abnormal delays in depositing cash receipts.
(C)
Compare the total amounts of the daily deposits shown on the bank statements with the totals of the daily cash receipts shown in the cash receipts journal. Investigate unusual delays in depositing cash receipts and any splitting of daily cash receipts into separate deposits.
(C)
Compare entries in the cash receipts journal (for example, date, remitter, amount, and account classification) with the remittance advices, lists of cash receipts, duplicate deposit slips, and bank statements.
(O)
Test the accounting classifications of cash receipts.
(Cl)
Test the mathematical accuracy of the cash receipts journal.
(A)
Test the postings of the totals in the cash receipts journal to the general ledger, trade receivables sub-ledger, and other subsidiary ledgers.
(C)
Test the posting of individual cash receipts from the cash receipts journal and supporting documents to the trade receivables sub-ledger.
(Cl, C)
Examine the client’s bank reconciliations. When appropriate (for example, to determine whether receipts of payments are recorded on a timely basis, or to verify the appropriateness of reconciling items), obtain cut-off bank statements.
(CO)
Test cut-off of cash receipts, disbursements, and transfers at year end.
(C)
Example substantive tests of account balances—trade receivables
EXAMPLE TESTS ALWAYS PERFORMED
confirm Accounts Receivable.
- If accounts are confirmed at an interim date, review the roll-forward of activity from the confirmation date to year end and compare the level of activity with the prior period. (E)
- Investigate unusual items; consider confirming (at year end) significant new accounts and those accounts with significant increases or decreases between the confirmation date and year end. (E)
- Examine subsequent cash receipts, shipping records, sales contracts, and other evidence to verify the validity of accounts receivable for which replies to confirmation requests were unsatisfactory or were not obtained as part of supporting year-end receivables balances. (E)
Test the cut-off by inspecting the sales ledger, billings, shipping documents, and other supporting documents immediately before and after the cut-off date and determine that the transactions were recorded in the proper period; compare the receivables cut-off to cut-offs in related areas (for example, sales and inventory). (C)
Evaluate the adequacy of the allowances for doubtful accounts. See the example procedures that may be performed under other general procedures below. (V&A)
Scan the general ledger and sub-ledgers for unusual balances and unusual entries. (E)
Investigate all exceptions noted on the confirmations. (E)
Example substantive tests of account balances—trade receivables
EXAMPLE ANALYTICAL PROCEDURES
Allowances for doubtful accounts
Compare the aged listing of accounts receivable with the prior period’s and note any significant changes (for example, changes in major customers or in major trade receivables balances overdue). (V&A)
Compare the current period’s accounts written off and the allowance for doubtful accounts as percentages of accounts receivable and sales with the prior period’s percentages. Evaluate the trends in light of current economic conditions and what you know about the client and the industry in which it operates. (V&A)
Compare the current year’s to the prior year’s allowance for doubtful accounts as a percentage of receivables and sales. (V&A)
Compare the current period’s receivables as a percentage of net sales with the prior period’s percentages and consider the reasonableness of the current period’s percentage in relation to current economic conditions, credit policies, and collectability. (V&A)
Compare the current period’s accounts receivable turnover and number of days’ sales outstanding with prior amounts and consider the reasonableness of the current period’s amounts in relation to current economic conditions, credit policies, and collectability. (V&A)
Compare the aging with the client’s and with the industry’s collection practices (if known). (V&A)
Compare the current period’s sales returns and sales discounts as percentages of sales by product line with prior period percentages. Investigate significant or unusual fluctuations. (V&A)
Compare the number and amounts of sales credit notes issued with those of the prior period. (V&A)
Example substantive tests of account balances—trade receivables
EXAMPLE OTHER GENERAL PROCEDURES
Trace the totals of accounts receivable in the trade receivables sub-ledger to the general ledger control accounts or accounts receivable summary. (V&A, C)
Allowance for doubtful accounts
Understand and document the rights of return offered to customers under the terms of sales agreements or as a matter of practice. (V&A)
Review analysis of activity in the allowance for uncollectable accounts and bad debts expense accounts during the period. (V&A)
Evaluate the adequacy of the allowance for doubtful accounts at year end. (V&A)
Review analysis of activity in the allowances for discounts, returns, warranties, and similar items during the period. (V&A)
Evaluate the adequacy of the allowances for discounts, returns, warranties, and similar items at year end. (V&A)
Test the accuracy of the accounts receivable aging by tracing details to and from the trade receivables sub-ledger or supporting documentation. Test aging for clerical accuracy. (V&A)
Evaluate the adequacy of any collateral and guarantees on any receivables balances. (V&A)
Review payments received subsequent to year end or confirmation date. (V&A)
Other
Test the timing and amount of year-end revenue recognition by tracing to long-term contracts, service agreements, licence agreements, or other appropriate documentation to detect errors and/or estimate amount of incorrect revenue recorded. (E, V&A, Cl)
Examine details of accounts receivable from related parties; investigate unusual items as well as significant reductions or increases at year end; determine that necessary disclosures are made. (C&U)
Review minutes, loan agreements, and other documents for evidence of liens, pledges, or other security interests in receivables; determine that necessary disclosures are made. (R&O)
Explain the procedures performed as part of the engagement wrap-up, including gathering and evaluating audit evidence.
During the engagement wrap-up, the auditor reviews planned audit procedures to ensure they are completed, finalizes any open items (including review notes and to-do items), ensures that all necessary documentation is in the working paper files and removes any unnecessary documentation, reconsiders their risk assessment and fraud risk, reconsiders materiality, performs analytical procedures, assesses misstatements, and performs subsequent events procedures.
