Important Info - AUD Flashcards

Question 1

Q

What are the presumptive fraud risks?

Answer

A

Improper Revenue Recognition

Mngt override for controls

Question 2

Q

What is Audit Risk and what does the model look like?

Answer

A

Audit risk (AR) is the risk that the auditor may un-knowingy fail to appropriately modify the opinion on the F/S that are materially misstated.

AR = Risk of Material Miss (RMM) x Detection Risk (DR)

RMM = IR x CR

IR is high if it is more likely to contain MM (High vol. transactions, complexity, decline in econ)

CR is high if there are no effective controls

DR is risk that the auditor will not detect a MM that exists in a relevant assertion.

*Inverse relationship of RMM to DR - like a scale

Less RMM > Less Work > Accept more DR

More RMM > More Work > Accept Less DR

Question 3

Q

Directional Testing

Answer

A

Vouching: Looking down to see if foundation exists and supports everything.

Risk of overstatement of rev and assets

l

V

Documents: - F/S - Trial Balance - Gen. Ledger - Books of orig. entry - Source Doc - Execution of event -Transaction approved

T

Tracing: Looking up to see if roof completely covers everything. Risk of understatement of expenses and lia.

Question 4

Q

What are the sampling risk in substantive testing and test of controls?

Answer

A

Beta: (Loses Effectiveness - could lead to inappr. result)

Risk of incorrect acceptance - Risk that sample supports the conclusion that the recorded amount balance is NOT a MM when IT IS!

Risk of assessing control risk too low - Risk that assess level of control risk based on the sample is less than the true risk based on actual operating effectiveness of controls

Alpha: (Loses Efficiency - More work for auditor)

Risk of incorrect rejection - Risk that sample supports the conclusion that the recorded amount balance IS a MM when IT IS NOT!

Risk of assessing control risk too high - Risk that assess level of control risk based on the sample is greater than the true risk based on actual operating effectiveness of controls.

Question 5

Q

How do you evaluate the sample results of statistical sampling for attributes?

Answer

A

Sample Deviation Rate + Allowance for Sampling Risk = Upper Deviation Rate (UDR)

Sample Deviation Rate = Actual deviation/ total sample amount

If UDR > Tolerable Rate, sample results can not be accepted.

Question 6

Q

What are the auditing procedures that match the auditing assertions?

Completeness
Off(Cut)
Valuation, Allocation, Accuracy
Existence and Occurrence
Rights and Obligations
Understandability and Classification

Answer

A

Tracing, Analytical Procedures, Observation
Cutoff Procedures
Inspection, Footing, Recalculation, Reconciliation
Vouching, Confirmation, Observation, Inspection, Examination
Inspection
Inspection, Review, Inquiry

Question 7

Q

What are the sections in the standard unmodified (nonissuer) report?

Answer

A

Title: “Independent”

Addressee: Not Mgnt

Introduction:
- ID the entity whose F/S have been audited
- State that the F/S have been audited
- ID title of each F/S
- Specify dates or periods covered
Management’s Responsibility: (MR) (DIM)
- Explanation that mngt is responsible for the preparation and fair presentation of the F/S in accordance with the applicable fin. reporting framework.
- Their responsibility also includes the DESIGN, IMPLEMENTATION, and MAINTENANCE of IC
Auditor’s Responsibility: (REPPORTS CRAME)
- to EXPRESS an opinion
- audit was conducted in accordance with auditing standards generally accepted in the usa
- standards require the auditor to PLAN and perform the audit
- audit involves PERFORMING procedures to OBTAIN audit evidence
- procedures selected depends on the auditor’s judgement, including assessing the RISKS of mm
- auditor considers [TEST] internal control relevant to entity’s preparation and fair presentation of the financial STATEMENTS
- but not for the purpose of expressing an opinion on the effectiveness of internal CONTROL
- audit includes evaluating the appropriateness of the accounting policies used and the REASONABLENESS of significant ACCOUNTING estimates made my MANAGEMENT, as well as EVALUATING the overall presentation of the f/s.
Opinion:
- the f/s present fairly in all material respects
- ID of the applicable fin. reporting framework
- Other Reporting Responsibilities (As Necessary)

Signature of Auditor

Auditor’s Address

Date of Auditor’s Report - Should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence.

Question 8

Q

Sample Report for Unmodified Opinion (Nonissuer)

Intro

Answer

A

Independent Auditor’s Report

Appropriate Addressee

Report on the Fin. Statements:

We have audited the accompanying f/s of ABC company, which comprise the balance sheet as of December 31, 20X1, and the related statement of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the f/s.

Question 9

Q

Sample Report for Unmodified Opinion (Nonissuer) Management’s Responsibility

Answer

A

Management’s Responsibility:

MANAGEMENT is RESPONSIBLE for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the usa; this included the DESIGN, IMPLEMENTATION, and MAINTENANCE of internal control relevant to the preparation and fair presentation of f/s that are free from material misstatement whether due to fraud or error.

Question 10

Q

Sample Report for Unmodified Opinion (Nonissuer)

Auditor’s Responsibility

Answer

A

Auditor’s Responsibility:

Our RESPONSIBILITY is to EXPRESS an opinion on these f/s based on our audit. We conduct the audit in accordance with auditing standards generally accepted in the usa. Those standards require that we PLAN and perform the audit to obtain reasonable assurance about whether the f/s are free from material misstatement.

An audit involves PERFORMING procedures to OBTAIN audit evidence about the amounts and disclosures in the f/s. The procedures selected depend on the auditor’s judgement, including the assessment of the RISKS of mm of the f/s, whether due to fraud or error. In making those risk assessments, the auditor considers [TESTS] internal control relevant to the entity’s preparation and fair presentation of the fin. STATEMENTS in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal CONTROL. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the REASONABLENESS of significant ACCOUNTING estimates made by MANAGEMENT, as well as EVALUATING the overall presentation of the f/s.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Question 11

Q

Sample Report for Unmodified Opinion (Nonissuer)

Opinon

Answer

A

Opinion:

In our opinion, the f/s referred to above present fairly, in all material respects, the financial position of ABC Company as of December 31, 20X1, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the usa.

Auditor’s Signature

Auditor’s City and State

Date of the Auditor’s Report

Question 12

Q

What are the sections in the standard unqualified (issuer) report?

Answer

A

1. Opinion:

Name of the Company whose f/s were audited
ID each f/s that has been audited
Date or period covered
Statement indicating that the f/s were audited
An opinion that the f/s present fairly and ID of applicable fin. reporting framework.

2. Basis for Opinion: (RRAAPP MMEEEE)

f/s are RESPONSIBILITY of the company’s management
auditor’s RESPONSIBILITY is to express an opinion
AUDIT was conducted in ACCORDANCE with standards of pcaob
Pcaob standards require auditor to PLAN and PERFORM the audit to obtain reasonable assurance about whether the f/s are free of MATERIAL MISSTATEMENT, whether due to error or fraud
audit includes EXAMINING, on a test basis, EVIDENCE
EVALUATING the accounting principles used and significant ESTIMATES made by management.
Auditor believes the audit provides a reasonable basis for the auditor’s opinion
Auditor is a public accounting firm registered with the PCAOB and is required to be independent.

3. Ending:

Signature of the audit firm
The year the auditor began serving consecutively
City and State
Date - Shows the final date of the auditor’s responsibility

Question 13

Q

Sample Report for Unqualified Opinion (Issuer)

Opinion

Answer

A

Report of Independent Registered Public Accounting Firm

To the shareholder and the BOD of X Company

Opinion on the Fin. Statements:

We have audited the accompanying balance sheets of X Company as of December 31, 20X2, the related statements of income, comprehensive income, stockholders equity, and cash flows for each of the years then ended, and the related notes and schedules. In our opinion, the f/s present fairly, in all material respects, the fin. position of the company as of December 31, 20X2, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the usa.

Question 14

Q

Sample Report for Unqualified Opinion (Issuer)

Basis for Opinion

Answer

A

Basis for Opinion:

These f/s are the RESPONSIBILITY of the company’s management. Our RESPONSIBILITY is to express an opinion on the Company’s f/s based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board and are required to be independent with respect the Company in accordance with the U.S federal securities laws and the applicable rules and regulations of the SEC and PCAOB.

We conduct the AUDIT in ACCORDANCE with the standards of the PCAOB. Those standards require that we PLAN and PERFORM the audit to obtain reasonable assurance about whether the f/s are free of MATERIAL MISSTATEMENT, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the f/s, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included EXAMINING, on a test basis, EVIDENCE regarding the amounts and disclosures in the f/s. Our audits also included EVALUATING the accounting principles used and significant ESTIMATES made by management, as well as evaluating the overall presentation of the f/s. We believe that our audit provides a reasonable basis for our opinion.

Signature

We have served as the Company’s auditors since

City and State

Date

Question 15

Q

What are the sections in the qualified or adverse (nonissuer) report due to F/S material misstatement?

Answer

A

1. Introduction: Same

2. Management’s Responsibility: Same

3. Auditor’s Responsibility: Same except last sentence. “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified/adverse audit opinion.

4. Basis for Qualified Opinion (New)

“The Company’s f/s do not disclose [insert nature of omitted info]. In our opinion, disclosure of this info is required by accounting principles generally accepted in the usa.”

5. Qualified Opinion: (Modified)

“In our opinion, [except (when qualified) / because of (when adverse)] [for the omission of info (when qualified) / the significance of the matters (when adverse)] described in the Basis for qualified/adverse opinion paragraph, the f/s present fairly / do not present fairly in all material respects….”

Signature of Auditor

Auditor’s Address

Date of Auditor’s Report - Should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence.

Question 16

Q

What are the sections in a qualified or adverse (issuer) report due to F/S material misstatement?

Answer

A

1. Opinion: Same except,

Qualified: “In our opinion, except for or with the exception of” Adverse: “because of the effects of maters discussed in the following paragraph, the f/s do not present fairly”

2. New Paragraph

Should include all substantive reasons that lead auditor to conclude there has been a departure from GAAP
Disclosure of the principal effects of the subject matter of the qualifications on fin. position

3. Basis for Opinion: Same

Question 17

Q

What are the sections in the qualified (nonissuer) report due to audit issues?

Answer

A

1. Introduction: Same

2. Management’s Responsibility: Same

3. Auditor’s Responsibility: Same except last sentence. “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

4. Basis for Qualified Opinion (New)

Should describe the reasons for the inability to obtain sufficient appropriate audit evidence

5. Qualified Opinion: (Modified)

“In our opinion, except for the possible effects of the matters(s) described in the basis for qualified opinion paragraph, the f/s present fairly in all material respects….” Signature of Auditor

Auditor’s Address

Date of Auditor’s Report

Question 18

Q

What are the sections in the disclaimer (nonissuer) report due to audit issues?

Answer

A

1. Introduction:

“Auditor was engaged”

2. Management’s Responsibility: Same

3. Auditor’s Responsibility: Complete Change.

“Our responsibility is to express an opinion on the f/s based on conducting the audit in accordance with GAAS in the USA. Because of the matter(s) described in the basis for disclaimer of opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.”

4. Basis for Disclaimer of Opinion (New)

Should describe the reasons for the inability to obtain sufficient appropriate audit evidence

5. Disclaimer of Opinion: (Modified)

“Because of the significance of the matter(s) described in the basis for disclaimer of opinion paragraph, the auditor has not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, the auditor does not express an opinion on the f/s”

Signature of Auditor

Auditor’s Address

Date of Auditor’s Report

Question 19

Q

What are the sections in the qualified (issuer) report due to audit issues?

Answer

A

1. Opinion: Same except,

Qualified: “In our opinion, except for or with the exception of”

2. New Paragraph

Should describe the reasons for the inability to obtain sufficient appropriate audit evidence

3. Basis for Opinion: Same, except for second paragraph, “Except as discussed above, we conducts our audits …..

Question 20

Q

What are the sections in the disclaimer (issuer) report due to audit issues?

Answer

A

1. (Change Name) Disclaimer of Opinion on the F/S:

“We were engaged to audit”, “As described in the following paragraph, because [insert limitations] we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on the f/s, and do not express an opinion.”

2. New Paragraph

Should describe the reasons for the inability to obtain sufficient appropriate audit evidence /disclaimer

3. (Change Name) Basis for Disclaimer of Opinion: Eliminate “Our responsibiity is to express an opinion on the co.’s F/S” and entire 2nd paragraph which begins with “We conduct our audits in accordance…”

Question 21

Q

Auditor’s Report Summary - Nonissuer

Question 22

Q

Auditor’s Report Summary - Issuer

Question 23

Q

Uncertainties - Decision to accrue and/or disclose (CHART)

Question 24

Q

When are Other Matter paragraphs used?

Answer

A

Nonissuers - Refer to matters other than those presented or disclosed in the F/S that are relevant to the users’ understanding of the audit, audits responsibility, or auditor’s report.

Placed after the opinion, and emphasis of matter paragraphs

Required when:

Auditor resticts the use of the report
Change in audit opinon
F/S of the prior period were audited by a predecessor auditor
Current period F/S are audited and presented in comparative form with complied or reviewed F/S for the prior period or with prior period F/S that were not audited, reviewed, or complied
Material inconsistency in other information that requires revision and mgnt resues to revise
Auditor choses to report on supplementary info
To refer to required supplementary info
To restrict use of auditor’s report when special purpose F/S are prepared
Report on compliance is included

Question 25

Q

When is an explanatory paragraph used?

Answer

A

Issuer - Will generally follow the opinion paragraph

Required when:

Going concern doubts
Material change b/w periods in accounting principles/methods
Change in reporting entity
Change in investee
A Material. Miss in previously issued F/S has been corrected
Other info is materially inconsistent
Selected Quarterly Fin data required by SEC has been omitted
Supplementary info has been omitted, or departs materially
PY audit report not presented
PY opinion is updated
Mgnt is required to report in the Co. internal controls over fin. reporting but such report is not required to be audited.

Question 26

Q

Summary of Emphasis of Matter, Other Matther, Explanatory paragraphs (Chart)

Question 27

Q

Special Purpose Frameworks Overview (Chart)

Question 28

Q

What are the most common transaction cycles?

Question 29

Q

Under strong internal controls, segregation of the functions in a sales transaction should exist as follows…

Answer

A

Preparation of the serially numbered sales order
- Sent to credit department
Credit Approval
- Once approved, a copy is sent to shipping, billing & accounting department
Shipment
- Shipment prepares serially numbered bill of lading (BOL), copy sent to customer, receivable created based on terms.
Billing
- Billing prepared serially numbered sales invoice. Shipping docs, sales order, and invoice compared and must match.
- Invoice then sent to customer and A/R
Accounting
- Sale is entered into journal and receivable is recorded

Question 30

Q

Under strong internal controls, segregation of the functions in a accounts receivable should exist as follows…

Answer

A

1. Sales

Independent person should reconcile A/R control account in the GL and A/R subsidiary ledger.

2. Collection of Cash Receipts

3. Uncollectible Receivables

Controls for writting off receivables include proper authorization (by the treasurer) ad record keepering

4. Sales Returns

Credit memos should not be prepared by individuals who collect or receive cash payments on A/R

5. Sales Discounts

Question 31

Q

Under strong internal controls, segregation of the functions in a cash receipts should exist as follows…

Answer

A

Mail must be opened by person who does not have access to the accounts receivable ledger. The receipts should be listed in detail and 3 copies sent to the following.

1. Cashier

Receives actual receipts and prepares bank deposits

2. A/R Department

Enters receipts into A/R sub records

3. Accounting Department

Enters receipts into A/R control account

Question 32

Q

What procedures can be performed to obtain evidence for the revenue cycle?

Answer

A

Auditing Sales Transactions
1. Completeness
  1. Should trace a sample of shipping docs to the corresponding sales invoice, and to the sales journal and A/R sub ledger
2. Cutoff
  1. Compare sample of sale invoices from shortly before and after YE with the shipment dates and dates the sale was recorded in the journal.
  2. Analyze record of sales returns the following year.
3. Valuation, Allocation, and Accuracy
  1. Compare prices and terms on a sample of sales invoices with authorized price lists and terms of trade
4. Existence and Occurrence
  1. Vouch a sample of sale transactions from the JE to the sales invoice back to customer order and shipping docs
5. Understandability and Classification
  1. Examine sales invoices for proper classification into proper revenue accounts
Auditing A/R
1. Completeness
  1. Obtain aged trial balance of A/R an trace total to GL
2. Valuation, Allocation, and Accuracy
  1. Examine results of confirmations (test of accuracy) and test adequacy of allowance for doubtful accounts (test of valuation)
3. Existence and Occurrence
  1. Confirm a sample of A/R
4. Rights and Obligations
  1. Review ank confirms and debt agreements for liens on receivables
  2. Inquiry of Mgnt and review debt agreements, minutes
A/R Confirmations
1. Confirmations of A/R is a GAAP unless
  1. Receivables is immaterial
  2. Confirmations would be ineffective
  3. Inherent and control risks are very low and evidence provided by other procedures is sufficient to reduce audit risk to acceptably low level
2. Positive confirmations - Auditor sends client’s customers stating the amount and are requested to return a statement indicating whether they agree. Should be used when:
  1. Large individual accounts
  2. There are expected errors/disputes
  3. Internal control is weak
3. Negative confirmations - Customers are requested to respond only if they disagree. Can be used when:
  1. Combined assessed level of inherent and control risk is low
  2. A large number of small account balances
  3. There is no reason to expect the requests will be ignored
4. Confirmations:
  1. Received electronicaly should be verified
  2. Generally provide evidence regarding existence and rights and obligations.
  3. Do not provide reliable evidence regarding valuation or completeness
  4. Nonresponses should be followed up and client may be asked to intervene. If still not responding, alternative procedures may be performed. If 100% overstatement of A/R from nonresponding customer would be immaterial, alt. procedures may not be necessary.
5. Exceptions:
  1. Timing Differences
  2. Misstatements
Auditing Presenation and Disclosure
1. Completeness
  1. Ensure all required disclosures are included
    1. Revenue Recognition Methods
    2. Revenue by reportable segments
    3. Related party revenues and receivables
    4. Receivables by type and term
    5. Pledged or discounted A/R
    6. Allowance for doubtful accounts and discussion of analyssi to assess credit risk
    7. Inclusion in receivables of amounts related to LT contracts.
2. Valuation, Allocation, and Accuracy
  1. Read the footnotes and other info
3. Rights and Obligations, and Occurrence
  1. Determine whether any rec. have been pledged, assigned, or discounted
4. Understandability and Classification
  1. Read all A/R and sales related disclosures

Question 33

Q

What duties should be segregated related to the expenditure cycle?

Answer

A

Purchases
1. Purchase requisition
  1. Dept. in need of asset send properly approved serially numbered requistion to purchasing dept.
2. Purchase Orders
  1. Purchasing dept should request bids, once properly approved the purchasing dept. created the PO. Copies should be sent to:
    1. Requisitioning dept
    2. Vendor
    3. Receiving dept
    4. Accounting
3. Receipt of Goods or Services
  1. Receive blind copy so they are forced to count and description should match. Receiving report is prepared and sent to accounting. Goods are sent to requisitioning dept.
Accounts Payable
1. Recording the payable
  1. Copy of PO notifies accountng of a future disbursement. The receiving report is compared with PO, vendor’s invoice
  2. Record the goods into inventory and record the payable.
2. Approving invoice for payment and recording payment
  1. When invoice arrives the accounting department approves it by matching the invoice, PO, and receiving report
Cash Disbursements
1. Function of approving the payment and signing the checks should be segregated. Approved vouchers package (invoice, PO, receiving reportm requisition) are received by treasurer, who prepares, signs and mails the checks . Vouchers are returned to accounting to post payment.

Question 34

Q

What are the two most common cash fraud?

Answer

A

Lapping: (Today’s cash receipt covers yesterday’s theft)

Occurs when an employee withholds funds recieved by a customer for personal use and fails to apply these receipts of cash to a customer’s A/R. The unrecorded receipt is is covered by applying a subsequent receipt to the previous unrecorded account.
Safeguards: Independent comparisons of recorded cash receipts and funds actually deposited or comparison of details of bank deposits and details of remittance credits, confirmation of customer balances, lockbox.

Kiting: (Cash is recorded in two places at once)

Occurs when a check is drawn on one bank is deposited in another bank and no record is made of the disbursement in the balance of the first bank until after year end. Can be used to cover cash shortage or to pad a co’s cash position.
Safeguards: bank transfer schedules, the disbursement date on the check and in the ledger should come before the receipt date noted by bank and lesger for recieving account.

Question 35

Q

What procedures can be performed to obtain evidence for the cash cycle?

Answer

A

Auditing the cash balance

- Completeness, valuation, allocation, existence

Bank Confirms
Bank Reconciliations (including cutoff)
2. Auditing cash receipts and cash disbursements (dual tests w/ samples)

- Completeness:

- Receipts:* Trace remittance advices to cash receipts journal and deposit slips
- Disbursement:* Trace canceled checks to cash disbursement journal

- Cutoff:

compare dates of recording cash receipts with dates cash was deposited in the bank and dates recording of checks with dates checks cleared, noting significant delays

- Valuation, Allocation, Accuracy:

- Receipts:* Foot remittance advices and entries on the deposit slip and agree to cash receipt journal and bank statement
- Disbursement:* Agree the PO, receiveing report, invoice, cancelled check, and disbursement journal.

- Existence and Occurrence:

- Receipts:* Vouch entries in cash receipt journal to remittance advices, deposit slips, and bank statement.
- Disbursement:* Vouch entries rom cash disbursement to cancelled checks, voucher package, and bank statement.

- Understandability and Classification:

Examine remittance advices and cancelled checks for recording in proper account
3. Auditing presentation and discloseure

- Completeness:

Related Disclosurses:
Policy defining cash and cash equivalents
Restrictions on cash, including sinking fund requirements
Compensating balance requirements

- Valuation, Allocation, Accuracy:

Read the footnotes and other info

- Rights and Obligations, and Occurence:

Compare disclosures to other audit evidence

- Understandability and Classification:

Read all cash related disclosures

Question 36

Q

What duties should be segregated related to inventory?

Answer

A

1. Purchasing

Serially numbered, properly approved POs should be prepared and issued to accounting and receiving depts.

2. Receiving

Solely responsible for the receipt of goods, verification of quantities received, detection of damaged goods, preparation of receiving report, delivery of goods received to warehouse dept.
They should receive a copy of the PO that does not indicate the quantity ordered so they are forced to count the goods

3. Warehouse

Act as custodian

4. Shipping

Responsible for shipment of goods after authorization

Question 37

Q

What procedures can be performed to obtain evidence for the inventory cycle?

Answer

A

Auditing the Inventory balance
1. Inventory observations (beginning and end) to:
  1. Evaluate Mngt’s instructions and procedures
  2. Observe performance of Mngt’s count
  3. Inspect the inventory to ascertain existence and condition
  4. Perform test counts
2. Completeness:
  1. Trace independent test counts to inventory report (Floor to sheet counts)
3. Valuation, Allocation, Accuracy:
  1. Test mathematical accuracy of inventory report and reconcile to GL
  2. Inquire about obsolete goods, slow moving items, and be alert during inventory observation for damaged goods
  3. Examine vendor invoices, review direct labor rates, test computation of standard overhead rates and examine standard cost variance analyses.
4. Existence and Occurence:
  1. Verify existence of sample of items in inventory report by locating and performing test counts of the items (Sheet to Floor)
5. Rights and Obligations:
  1. Should ascertain that consigned inventory on hand is excluded from the physical inventory count, whereas consigned goods held off site is included in inventory balances.
  2. Should also confirm that any inventory in transit at year end is properly accounted for based on shipping terms.
Auditing Inventory Transactions
1. Should be audits as part of the audits of the rev and expenditure cycle
Auditing Presentation and Disclosure
1. Completeness:
  1. Required disclosures must be included:
    1. Cost method (LIFO, FIFO, Weighted Average) and valuation method (NRV or lower cost of mkt)
    2. Raw material, WIP, and FG inventory balances
    3. Consigned inventory
    4. Pledged or assigned inventory
    5. Significant losses from inventory write downs or purchase commitments
    6. Warranty obligations
2. Valuation, Allocation, Accuracy:
  1. Should read the footnotes and other info related to inventory to determine whether the info is accurate and presented properly
3. Rights and Obligations, Occurrence:
  1. Determine inv. obligations have been properly disclosed by inquiring of Mgnt and reviewing the loan agreements and minutes, inquire about warranty oblig.
  2. Compare disclosures to other audit evidence to ensure all disclosed info as occured
4. Understandability and Classification:
  1. Read all inv. related disclosures to ensure they are understandable
  2. Review inventory records for proper classification of RM, WIP, and FG.

Question 38

Q

What duties should be segregated related to the investment cycle?

Answer

A

Authorization of Purchase and Sale of Investments
1. BOD should have this power
Custody of Investments
1. Independent 3rd party is recommended, but at minimum two company officials with investments kept in a safe deposit box
Record Keeping
1. Separate party from those mentioned above must keep detailed records

Question 39

Q

What procedures can be performed to obtain evidence for the investment cycle?

Answer

A

Auditing the Investment Balance
1. Completeness (of ending invest. bal.)
  1. Search for unrecorded purchases of securities
    1. Should not focus on evidence related to cash receipts and disbursements as derivatives may only involve a commitment to perform
  2. Confirm securities held by 3rd parties
  3. Request info from the counterparty to the derivatice or holder of a security to determine whether any side agreements exist
  4. Any differences b/w expected interest earned and actual earned may indicate existence of int. rate swap agreement.
2. Valuation and Allocation
  1. Obtain and foot a listing of investments by categories and agree total to GL
  2. Review schedule of investment activity and obtain evidence of any additions and subtractions
  3. Obtain evidence corroborating the quoted year end fair value by comparing assigned values to prices published by various sources
  4. Recalc. the ending values of investments not reported at FV
    1. Held to Maturity investments should be valued at amortization cost at YE
    2. Investments in another entity where sign influence exist and ownership is b/w 20% and 50% should be accounted for using equity value.
  5. Determine if any permanent impairment has occured
  6. Assess the reasonableness and appropriateness of assumptions, mkt variables and valuation models and decline in FV
3. Existence
  1. Confirmations of securities held by 3rd parties
  2. Examination of securities on hand
  3. Analytical Procedures over interest earned
4. Rights and Obligations
  1. Confirmations of securities
  2. Count of securities on hand
  3. Examine broker’s advices
Auditing the Investment Transactions
1. Completeness
  1. Analytical procedures testing the reasonableness of dividend and interest income
2. Cutoff
  1. Purchases, sales, and investment income were recorded in the proper period
3. Valuation and Allocation, Accuracy
  1. Independent calculations
4. Existence and Occurence
  1. Analytical procedures testing the reasonableness of dividend and interest income
5. Understandability and Classification
  1. Examine sample of investment transactions to determine they were recorded in proper accounts
    1. Unreal gains and losses on available for sale (AFS) securities should be recorded in Other comprehensive income. (OCI)
    2. Unreal gains and losses trading securities should be recorded in earning.
Auditing Presentation and Disclosure
1. Completeness
  1. Determine whether all required mktable securities and derivative disclosures were made
2. Valuation and Allocation, Accuracy
  1. Read the footnotes and other info
3. Rights and Obligations, Occurrence
  1. Inquire of Mgnt and review loan agreements, minutes, and other docs to determine whether investments have been pledged as collateral.
  2. Compare disclosures to other audit evidence
4. Understandability and Classification
  1. Read the required disclosures, review methods used to account for, classifym and value securities.