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ACCT 425 > Lec 15 Q3 > Flashcards

Lec 15 Q3 Flashcards

1
Q

what is the equation for materiality

A

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

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2
Q

generally, confirmations for a/r are used for what assertion

A

existence

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3
Q

confirmation for 0 balance a/r are used for what assertion

A

completeness

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4
Q

should confirmation be used for all audits

A

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

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5
Q

what should be done if confirmations are not available

A

alternative procedures must be done and reasoning must be documented in case you are audited by CPAB

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6
Q

what are the analytical procedures that can be used as substantive processes

A
  • horizontal (year to year analysis)
  • vertical (ratio)
  • to budget
  • to industry competition
  • bad debt exp to gross sales
  • # of days in A/R
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7
Q

anal procedures at planning are

A

attention directing to identify riskier accounts

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8
Q

anal procedures at conclusion are used to

A

measure if audited f/s are reasonable

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9
Q

analysis when used as substantive procedure develops expectations t/f

A

true

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10
Q

more precise expectations indicate what

A

have a better possibility of indicating misstatement

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11
Q

the higher the knowledge of the auditor the ______

A

higher the quality of evidence provided by analysis

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11
Q

describe the analysis done in the in class case with sales and expected returns

A

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

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12
Q

what is the difference between analytical procedures and reperformance/calculate

A

analytical is an estimate
reperform/calc is an exact calculation

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13
Q

what features must auditors have in order to perform anal procedures as substantive

A

they must hold strong knowledge of the industry and business

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14
Q

what are the three aspects that development of expectations is influenced by

A
  • 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
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15
Q

what is the highest quality data

A

external data

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16
Q

inside data has what sort of bias

A

management bias

17
Q

what are the three levels of assurance from anal procedures and how good are the estimates

A

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

18
Q

what are the most important assertions for assets and a/r

A

existence and ownership

19
Q

the main substantive procedure for a/r is

A

confirmation

20
Q

what is the 30 days cut-off procedure

A

you select the last 30 days of sales transactions and first 30 days of sales transactions and match them to shipping documents

21
Q

cut-off is a subordinate of what

A

existence and completion

22
Q

what 2 procedures can be used for valuation of a/r and describe them

A

inquiry of management with use of CATs
testing of subsequent cash receipts and aging schedule

23
Q

what 2 procedures can be used for ownership of a/r and decribe them

A

inquire mgm if they have pledge or factored any a/r
examine the SEC meeting minutes for a/r pledging or factoring

24
Q

what are the 5 aspects of evaluating the results of confirmations

A
  • 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
25
Q

what are the 7 aspects of assessing reliability of confirmations

A
  • 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
26
Q

bank confirmations are always

A

blank confirmations

27
Q

blank or non-blank confirmations are better and why

A

blank confirmations are better because non-blank can just be stamped at sent back

28
Q

what does the knowledgebility of 3rd parties have to do with confirmations and who should and shouldnt respond

A

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

29
Q

what are the 4 options for alternative procedures if no answers are given bakc

A
  • 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
30
Q

what are the 2 roll over procedures

A
  • review of changes from date of confirmation to fye
  • perform anal procedures for period between confirm date and fye
31
Q

what % of bank rec should be audited and why

A

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

32
Q

what are ht e3 steps in bank rec

A
  • 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
33
Q

what is a/r lapping and how is it done

A

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

34
Q

how can a/r lapping be found and stopped

A

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)

35
Q

what is cheque kitting

A

the practice of obtaining an unauthorized loan with an inssuficient funds cheque used as collateral before the bank realizes

36
Q

how can cheque kitting be detected

A

review of interbank transfers

37
Q

what are the 2 mgm reporting objectives and which is for private and public

A

income minimization - for private companies
income maximization - for public companies

38
Q

what are the assertions at risk for public companies with income max

A

existence of assets
completeness of liabilities

39
Q

what are the assertions at risk for private companies with income min

A

completeness of assets
existence of liabilities

40
Q

when would a public company want to use inocme minimization

A
  • union negotiations
  • unwanted m&a or hostile takeover

ACCT 425 (21 decks)

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