Procedures Flashcards
Identify Risks & Appropriate Procedures
What is the Assertion & an Appropriate procedure for the following risk:
The company is under pressure to meet aggressive sales targets, creating an incentive to overstate revenue, potentially by recognizing revenue prematurely or for fictitious sales.
Assertion: Occurrence and potentially cut-off
Procedures: Review sales contracts and related documents, examine the terms of sales agreements, including delivery terms, acceptance criteria, rights of return to ensure revenue recognition criteria are met in accordance with framework
Perform Cut-Off Testing, select a sample of sales transactions around the year-end and examine the dates of the sales invoices, shipping documents, and revenue recognition to ensure they are recorded in the correct period.
What is the Assertion & an Appropriate procedure for the following risk:
The company holds inventory that is susceptible to obsolescence or spoilage, and there is a risk that the inventory is not written down to its net realizable value as required.
Assertion: Valuation & Allocation
Procedures:
Review the aging of inventory, analyze the inventory aging report to identify slow-moving or old inventory items that may be obsolete
Inspect inventory for obsolescence or damage, physically observe the inventory during the inventory count or through other procedures to identify any items that appear damaged, obsolete, or unsaleable.
Review managements calculations for net realizable value, assess the reasonableness of management’s assumptions and calculations used to determine the net realizable value of inventory, considering factors such as selling prices, costs to complete, and disposal costs.
Identify a Potential risk that would be associated with the following assertion and Procedure
Assertion: Completion
Procedure: Perform a search for unrecorded liabilities: examine cash disbursements made after year-end and review supporting documentation to identify any payments that relate to goods or services received before year-end but were not recorded as liabilities at year end.
Risk: There is a risk that the company has not recorded all liabilities particularly accounts payable, leading to an understatement of expenses and liabilities. This could occur intentionally or due to inadequate controls.
Add’t Procedures: Review open purchase orders and receiving reports - compare open purchase orders at year-end to goods received notes and invoices received after year-end to identify any liabilities that should have been accrued.
Obtain confirmation from key suppliers: send confirmation requests to significant suppliers to verify the outstanding balance owed by the company at year-end.
What is the Assertion & an Appropriate procedure for the following risk:
Risk: The company may be intentioinally or unintentionally recording fictitious fixed assets to inflate the asset base.
Assertion: Existence
Related Procedures:
Physically inspect selected fixed assets, for a sample of fixed assets recorded in the fixed asset register, physically verify their existence at the company’s premises.
Examine supporting documentation for addtions: for significant additions to fixed assets during the year, review supporting documentation such as invoices, purchase agreements, and receiving reports to ensure the assets were actually aquired.
Review the capital expenditure authorization process: Assess whether there are adequate controls over the approval and recording of capital expenditures.
What is the Assertion & an Appropriate procedure for the following risk:
There are significant events or conditions that may cast significant doubt on the company’s ability to continue as a going concern (significant operating losses, loss of a major customer, debt covenant breaches)
Assertion: Presentation & Disclosure
Related Procedures:
Review management’s assessment of going concern: evaluate the process management used to assess the company’s ability to continue as a going concern, including the assumptions and data used in their assessment.
Analyze key financial ratios and trends: review financial performance indicators, such as profitability, liquidity, and solvency ratios, for any negative trends that may indicate going concern issues.
Review debt agreements and compliance with covenants: Examine the terms of debt agreements and assess whether the company has complied with all covenants.
Inquire with management about plans to address going concern issues: Discuss with management their plans to mitigate any identified going concern risks, such as obtaining additional financing or implementing cost-cutting measures.
