first 50 Flashcards
Control environment
1) HR
2) management philosophy and operating style
3) integrity and ethical values
4) commitment to competence
5) participation with governance
6) entitys authority and responsibility
7) entitys organizational structure
The overall attitude and awareness of an entity’s board of directors concerning the importance of internal control usually are reflected in its control environment.
Reasonable Assurance
cost should not exceed benefit
An auditor always performs substantive tests regardless of the assessed risk
true
when CR is at max level
document the assessment
controls do not pertain to assertions
what is the objective of tests of details?
evaluate if ic is operating effectively and detect mm in fs
There are no significant deficiencies in the design or operation of the internal control structure.
should never be included in a report
internal controls require a restriction on the distribution of the report.
true
material weaknesss are separate from sigfig def
true
An independent auditor may NOT share responsibility with an internal auditor in any audit judgment area, regardless of the internal auditor’s competence and objectivity.
true
internal auditors are allowed to perform tests of controls or substantive tests
true
Internal auditing standards developed by The Institute of Internal Auditors assess objectivity
true
fixed assets affect internal audits
true
objectivity
(1) the organizational status of the internal audit function; and (2) the policies affecting the internal auditor’s objectivity about areas audited.
prenumbering helps to ensure that everything is recorded and “complete”
true
treasurer should authorize write offs
true
how do you ensure that billed sales are correctly posted to AR ledger?
compare daily summaries to daily postings in AR; daily summaries provides you info about the population of billed sales
how do you ensure that good ships are properly billed?
examine shipping documents with matched invoices
credit and sales should be separate functions
true
returning goods should be given to receiving clerks
true; debit memo
batch systems take more time than online systems
true
A/P function
- The accounts payable clerk files invoices and supporting documentation after payment.
- The accounts payable clerk manually verifies arithmetic on the vendor invoice.
- The accounts payable system compares the receiving report to the vendor invoice.
- indicating asset and expense account to be debited
what helps to maintain accurate inventory records?
The use of periodic inventory counts to adjust the perpetual inventory records ensures that the inventory records are accurate. The physical count is compared to the book amount and the necessary adjustments are made.
follow up errors ensure rights and obligations
true
credit approval ensures valuation and allocation
true
Period Ened
There are 4 assertions applicable to account balances at the period end: (1) existence; (2) completeness; (3) rights or obligations; and (4) valuation and allocation.
Tests of controls do not provide a basis for making conclusions about material misstatements in the financial statements. Substantive tests are used to detect material misstatements.
true
tests of details/substantive tests- relevant assertion level
tests of control- if internal controls are effective
true
judgmental misstatements
unreasonable accounting estimates
factual misstatements
The misapplication of accounting principles.
An inaccuracy in accounting processing data.
A difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles
The use of negative accounts receivable confirmations requires:
1) a low risk of material misstatement;
2) a large number of small balances; and
3) an expected very low exception rate;
4) no reason to believe that the recipients of the confirmations would not review them properly.
how does one evaluate the reasonableness of accounting estimates?
deviations from historical patterns
subjective to bias
sensitive to variations
significant to AE
*review the lawyers letters about litigation to discover ALL accounting estimates that may be material
What is the best indicator of fair value?
Examining published price quotations in an active market.
Management rep letter
- indicate fraud
- minute of meetings
- compensating balances and other arrangements involving restrictions on cash balances have been disclosed.
in obtaining written rep materiality levels would apply to related transactions but would not apply to ?
irregularities involving management
“There are no violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency.”
management rep letter
material weaknesses are acknowledged by the auditor
true
when evaluating related parties what is important
disclosure and if approved by board
subsequent events
investigate long term debt occurring after year-end
In reviewing subsequent events, the auditor would read the latest interim financial statements and board of directors’ minutes, inquire with legal counsel concerning litigation, claims, and assessments, and make specific inquiries of management.
true
signs of going concern
delay in expenditure negative balances debt agreements disposal of assets decrease in ownership equity credit denied
if disclosed financial difficulties then qualified opinion is not necessary
true
when concluding going concern what should the auditor do
Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern.
confirm with third parties
possible effects of financial statements
Accounts Receivable Existence
confirm selected individual customer accounts
Accounts Receivable Valuation
evaluate the reasonableness of management estimates for allowance for uncollectibles and sale returns
review the aged trial balance of ar
review the receivers after year-end for sales returns; consider prior years in view of economic conditions
review adjusting journal entries or write offs for appropriate authorization
Accounts Receivable Completeness
perform cutoff tests of sales by examining the shipping documents forthe last few shipments before year-end and the first few shipments after year-end; compare these shipping documents with sales invoices and assess whether the sales were recorded in the appropriate period
- compare shipping doc around end of the period with the related sales invoices to assess whether the sales were recorded in appropriate period
- proper cutoff involves two assertions (existence and completion)
Accounts Receivable and Rights+Obligations
receivables pledged as collateral for debts
shipments on consignment that are not actual sales
receivables from employees or management that should be classified separately from trade receivables
document such inquiries in management representation letter
