Lec 15 Q3 Flashcards
what is the equation for materiality
revenue
less: all expenses besides tax, extraordinary items, income tax expense
NIBT is then multiplied by 5-10% and then times 50-75% for performance materiality
generally, confirmations for a/r are used for what assertion
existence
confirmation for 0 balance a/r are used for what assertion
completeness
should confirmation be used for all audits
no, it is suggested but it can be skipped if it is unfeasible in the case that there is a high volume and low price of the account
what should be done if confirmations are not available
alternative procedures must be done and reasoning must be documented in case you are audited by CPAB
what are the analytical procedures that can be used as substantive processes
- horizontal (year to year analysis)
- vertical (ratio)
- to budget
- to industry competition
- bad debt exp to gross sales
- # of days in A/R
anal procedures at planning are
attention directing to identify riskier accounts
anal procedures at conclusion are used to
measure if audited f/s are reasonable
analysis when used as substantive procedure develops expectations t/f
true
more precise expectations indicate what
have a better possibility of indicating misstatement
the higher the knowledge of the auditor the ______
higher the quality of evidence provided by analysis
describe the analysis done in the in class case with sales and expected returns
maximum estimated returns were calculated as a percentage of the total sales to indicate what the top amount was. this was then compared to what was actual recorded. thus the analytical estimate indicated the possibility of misstatement
what is the difference between analytical procedures and reperformance/calculate
analytical is an estimate
reperform/calc is an exact calculation
what features must auditors have in order to perform anal procedures as substantive
they must hold strong knowledge of the industry and business
what are the three aspects that development of expectations is influenced by
- environmental stability - less stability, harder to develop expectations (inflation, raw materials prices, fuel prices)
- level of detail
- management discretion - items left to mgm discretion such as depreciation policies are harder to predict
what is the highest quality data
external data
inside data has what sort of bias
management bias
what are the three levels of assurance from anal procedures and how good are the estimates
high probability of detection - precise estimates from quality data
medium prob of detection - reasonable estimates
low probability - low quality estimates that must be supplemented with high quality substantive tests
what are the most important assertions for assets and a/r
existence and ownership
the main substantive procedure for a/r is
confirmation
what is the 30 days cut-off procedure
you select the last 30 days of sales transactions and first 30 days of sales transactions and match them to shipping documents
cut-off is a subordinate of what
existence and completion
what 2 procedures can be used for valuation of a/r and describe them
inquiry of management with use of CATs
testing of subsequent cash receipts and aging schedule
what 2 procedures can be used for ownership of a/r and decribe them
inquire mgm if they have pledge or factored any a/r
examine the SEC meeting minutes for a/r pledging or factoring
what are the 5 aspects of evaluating the results of confirmations
- reliability of response
- restrictions in cofirmation response - confirmation not returned as it was send and needs disclosing in notes
- unreliable response
- non-reponse or oral response
- expectation - if mailed, expect response in mail format
what are the 7 aspects of assessing reliability of confirmations
- form of confirmation -/+
- blank or non-blank confirmation
- knowledgebility of 3rd party respondant
- competent, appropriate evidence provided
- obbjectivity/independance of third party
- paper or electronic response
- address is easy to verify
bank confirmations are always
blank confirmations
blank or non-blank confirmations are better and why
blank confirmations are better because non-blank can just be stamped at sent back
what does the knowledgebility of 3rd parties have to do with confirmations and who should and shouldnt respond
response should come from an ar manager or clerk
responses from a jr employee or a VERY high level employee is a red flag because they likley dp not have the relevant knowledge
what are the 4 options for alternative procedures if no answers are given bakc
- inspect of subsequent cash receipts - high q evidence proving valulation and existence
- inspect sales invoices - mid evidence since it is internal doc
- inspect supporting shipping doc - external shipping doc from currier thus high q
- inspect correspondence between client and hteur customer
what are the 2 roll over procedures
- review of changes from date of confirmation to fye
- perform anal procedures for period between confirm date and fye
what % of bank rec should be audited and why
100% because htey affect multiple of the client’s accounts and because a small difference can be the net of 2 big material differences - thus htere is no threshold
what are ht e3 steps in bank rec
- confirm balance iwth bank through blank confirmation
- reperform/refoot
- vouch 100% of the items with supporting documents and obtain pure external cut-off bank statement
what is a/r lapping and how is it done
manippulation of a/r to cover theft or fraud
done by applying the money paid towards a recent a/r to an older missapropriated a/r so no suspisctions are raised for the old a/r
how can a/r lapping be found and stopped
inspect cheques, deposit slips, and accounts credits
look for customers credited for which no payment was received - (crediting old a/r when the initial paymetn has already been missapropriated)
what is cheque kitting
the practice of obtaining an unauthorized loan with an inssuficient funds cheque used as collateral before the bank realizes
how can cheque kitting be detected
review of interbank transfers
what are the 2 mgm reporting objectives and which is for private and public
income minimization - for private companies
income maximization - for public companies
what are the assertions at risk for public companies with income max
existence of assets
completeness of liabilities
what are the assertions at risk for private companies with income min
completeness of assets
existence of liabilities
when would a public company want to use inocme minimization
- union negotiations
- unwanted m&a or hostile takeover
