Procedures

Question 1

When should you use positive versus negative confirmation requests

Answer 1

Positive: When balances are relatively large, errors exist, fraud, weak internal controls

Negative: assessed level of control risk is low

Question 2

What is a test of detail

Answer 2

Tests of details include tracing figures to supporting documentation to determine if ransactions are valid, properly classified, accurate and complete

Question 3

What is completeness

Answer 3

One of the assertions auditors make over the financial statements
* Ensuring each transaction is present in the financial statements
* Done by doing walkthroughs from the purchase order to the financial statements
* Examining documents for debt

Question 4

What is cutoff

Answer 4

One of the assertions auditors make over the financial statements
* Ensure all sales/expenses were actually earned/recorded in the year
* Perform cutoff tests on shipments occurring close to B/S date (revenue)
* Examine revenue contracts

Question 5

What is valuation, allocation, and accurracy

Answer 5

One of the assertions auditors make over the financial statements
* Reconciliation of invoices to Price List (Valuation) & Recalculation (AccurracY)
* Expenses are assigned where they need to be
* Making sure accounts receivable aging is proper (recalculate ADA)
* Verify subsequent collection

Question 6

What is existence

Answer 6

One of the assertions auditors make over the financial statements
* Making sure each transaction exists
* Typically used for revenue/assets because an overstatement of expenses is not an issue
* Trace transactions from financial statement to purchase order
* Physically checking if assets exists. Inventory count

Question 7

How do you confirm existence of Accounts Receivable

Answer 7

Valuation is concerned with the value of AR collectible. Confirmation is how much actually exists

Question 8

What is Presumptively Mandatory

Answer 8

Something that is mandatory and if you do not do it you must document why
Example: Legal Contingencies

Question 9

What must you consider when addressing legal contingencies

Answer 9

1. Management representation letter
2. Third party review
3. If management does not let you contact lawyers (diclose in quaified)
4. Review recent legal expenses

Question 10

When should you rely on internal auditors

Answer 10

In areas with low risk and little judgement. For example testing internal controls. They cannot make judgements

Question 11

What should you consider before relying on internal auditors

Answer 11

Consider the competency of the internal auditors, their independence from management, experience in the field, certifications (must acquire proof), and prior experience working with them.

Question 12

What responsibility does the internal auditor share with the external audit

Answer 12

None. All responsibility falls on the external auditor

Question 13

What must you ensure before using the work of a component auditor

Answer 13

1. Component Auditor used GAAS
2. Audit report is not restricted as to use
3. Prepared using the same financial reporting framework or if main items are similar

Question 14

What happens if management refuses to correct mistatements

Answer 14

Ask why they are not fixing it. Evaluate impact on audit opinion by projecting errors in the financial statements

1. Immaterial = Unqualified
2. Material = Qualified
3. Material and Perverse = Adverse

Question 15

What procedures are mandatory during the course of the audit

Answer 15

1. Obtaining representation letters
2. Analytical Procedures

Question 16

What happens during a quality control review

Answer 16

Another partner at the firm reviews the audit work/opinion and must agree. Otherwise more substantive tests will be performed

Concurring approval is not required for private audits

Question 17

What is the difference between a current file and a permanent file

Answer 17

Permanent files are are files that do not change year over year
1. Bylaws
2. Internal Controls layout
3. Deeds

Current files are files only relevant to that year of the audit

Question 18

What is the difference between a current file and a permanent file

Answer 18

Permanent files are are files that do not change year over year
1. Bylaws
2. Internal Controls layout
3. Deeds

Current files are files only relevant to that year of the audit

Question 19

What happens after you finish the audit and declare an opinion

Answer 19

You have 45 days (public) or 60 days (private) to clean up the files for release
Only formatting changes are allowed, you cannot change the opinon

Question 20

What is vouching

Answer 20

Vouching is a procedure that auditors use to authorize the credibility of the entries allowed in the books of accounts. In other words, it is the documentation (original or photocopies of originals) that helps the auditors to check the authentication and the accuracy of the documents that the client has presented.

Question 21

What are some transactions an auditor would use vouching for

Answer 21

1. Verifying opening and closing balances
2. Cash received from debtors
3. Loan repayments
4. Other income received

Question 22

What is a type 1 event

Answer 22

Type 1 events - Provide evidence of conditions existing at Balance Sheet date that require an adjustment in the Financial Statements

Question 23

What is a type 2 event

Answer 23

Type 2 events - Do not affect Financial Statements, as the condition did not exist at Balance Sheet Date, but may still need to be disclosed to ensure Financial Statements do not become misleading

Question 24

What are procedures performed for tracing and vouching in inventory

Answer 24

Inventory Tags to Inventory Listing Schedule = Tracing = Completeness
Inventory Listing Schedule to Inventory Tags = Vouching = Existence (Validity)

Question 25

What types of accounts is an auditor most likely to test during interim

Answer 25

Income statement accounts. Not balance sheet