More Grinding Concepts Flashcards
How could I best determine whether accounts payable are valued properly?
By vouching accounts payable to supporting documentation
Why? - Because this helps me determine if accounts are accurately valued
What is most relevant when considering the client’s organizational structure in the context of the risks of material misstatement (RMM)?
The suitability of the client’s lines of reporting
Why? - Because reporting lines are part of the organizational structure and affect the auditor’s assessment of the RMMs
What is the best approach to minimizing the likelihood of software incompatibilities leading to unintelligible messages?
By having a company and its customers agree to synchronize their updating of EDI-related software
What is a “Control deficiency?”
When a design or operation of a control may not allow management or employees, in the normal course of performing their assigned functions to;
- prevent, or
- detect and correct, misstatements on a timely basis
How would the auditor best test the valuation assertion when auditing an investment accounted for by the equity method?
By examining the audited financial statements of the investee company
What would an attestation standard NOT include?
A statement that:
“A sufficient understanding of internal control shall be obtained to plan the engagement”
Why? - Because NO attestation standard mentions internal control
How would I gather audit evidence that uncollected items in an entity’s customers’ accounts represented valid trade receivables?
By selecting a sample of items from the population represented by the:
- Subsidiary customers’ accounts ledger
E.g. These represent open accounts receivable which can be confirmed directly with the debtor
What would be a response with an overall effect on the conduct of the audit ?
Whether management’s applications of accounting principles indicates a bias
E.g. Considering the selection and application of accounting principles(especially those involving subjective measurements - bias)
What would an unexplained decrease in the ratio of gross profit to sales suggests ?
Unrecorded Sales
Why? - Because this would cause inventory to decrease and cost of sales to increase (with no increase in sales)
This would ultimately decrease the ratio
What procedures would an Auditor usually perform when they assess the risks of material misstatement at a low level for property and equipment?
They would perform;
- Tests of controls and limited tests of current-year property and equipment transactions
E.g. If RMM is low controls have been assessed to be operating effectively; hence I would perform tests of controls and less substantive procedures
What are Pro Forma Financial Statements?
They are financial statements that show;
- What the significant effects on historical financial information would have been, had a consummated or proposed transaction (or event) occurred at an earlier date
What would be a likely cause of an auditor’s lower than expected return on an equity method investment?
An error in recording amortization of the excess of the investor’s cost over the investment’s underlying carrying amount
E.g. The transaction to record the amortization is a recurring entry that;
- if miscalculated, could result in a lower return than expected
What is a procedure I would perform after accepting an initial audit engagement?
Tour the client’s facilities
E.g. This type of procedure helps me to obtain an understanding of the entity and its environment, including internal control
Note: I must gain this understanding before performing further audit procedures
What procedure should I perform when auditing a Capitalized Lease Asset?
Evaluate the propriety of the interest rate used in discounting the future lease payments
Why? - Because the capital lease should be recorded by the lessee as an asset and a liability at the present value of the minimum lease payments
This is what I should be investigating by evaluating the interest rate used in the discounting process
What procedure would I perform when I have identified a weakness in internal control over recording retirements of equipment?
Select certain items of equipment from the accounting records and locate them in the plant
Why? - Because a failure to record retirements results in overstating equipment in the subsidiary records (E.g. Physical assets are not in the entity’s possession)
My best bet will be to vouch from the accounting records to the physical assets to verify whether retirements are unrecorded
