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Auditing > Summary > Flashcards

Summary Flashcards

1
Q

what kind of companies have Statutory requirements for financial statement audits?

A 
Corporations Act
■ Public interest entity
■ Proprietary companies 
- Large
- Small if directed
■ Companies limited by guarantee if rev >$1m
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2
Q

what is Information Risk?

A

“The risk that information on which a business decision is made is inaccurate”

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3
Q

what causes information risk? 4

A

■ Remoteness of information
■ Biases/ motives of the provider
■ Voluminous data
■ Complexity of transactions

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4
Q

what are the The benefits of an external audit? 4

A

■ access to capital markets.
■ lower cost of capital
■ A deterrent to inefficiency and fraud
■ Control and operational improvements

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5
Q

t2 whats the difference between General Controls and Application controls?

A

GC Manual and computer controls affecting the overall computer information system,

AC Controls over the processing of transactions within a specific accounting application, such as invoicing, purchasing and payroll

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6
Q

t2 what are 4 examples of general controls?

A

1: Segregation of I T duties
2: Control over programs
3: Control over data
4: Other general controls

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7
Q

t2 what are 4 examples of application controls?

A

■ Data preparation i.e. renumbered source docs
■ Data entry i.e. password access
■ Transaction processing and master file update. i.e. detect errors in data
■ Document and report generation i.e. controls to ensure reasonable outputs

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8
Q

t2 who is responsible for preparing financial statements? what are Financial Statements based on?

A

managers

judgement- factors determining impairment
estimations - i.e. useful life
choice - i.e. depreciation

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9
Q

t3 define auditing

A

A systematic process of objectively obtaining and evaluating evidence

regarding assertions about economic actions and events

to ascertain the degree of correspondence between those assertions and established criteria

and communicating the results to interested users.”

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10
Q

t3 Assertions fall into two categories what are they?

A

transactions and events

account balances

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11
Q

t3 what is underlying accounting data? what are examples of corroborating info?

A
  • journal entiers, general and subsidiary ledgers, working papers and spreadsheets
  • invoices, sales orders, shipping notes, POs, receiving report
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12
Q

t3 what are the 2 directions of testing? what assertion do they test?

A

tracing
source doc to journal entry
completeness

vouching
journal entry to source doc
occurrence

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13
Q

t3 shipping note to sales journal?

what is the direction of testing? what assertion if being tested?

A

tracing

completeness

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14
Q

t3 inventory records to physical inventory?

what is the direction of testing? what assertion if being tested?

A

vouching

existence

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15
Q

t3 physical inventory to inventory records?

what is the direction of testing? what assertion if being tested?

A

tracing

completeness

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16
Q

t3 sales journal to shipping note?

what is the direction of testing? what assertion if being tested?

A

vouching

occurrence

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17
Q

t3 audit evidence must be relevant and reliable, what makes evidence revealed?

A

Direction of testing - vouching vs tracing
Timeliness - how close evidence is to balance date
Appropriateness of procedure

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18
Q

t3 what are the four key steps to Performing Analytical Procedures?

A
  • develop expectation about account
  • determine level of difference that will be acceptable
  • compare balance amount/ratio analysis to expectation
  • investigate significant differences
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19
Q

t3 what can an auditor base their expectations on for analytical testing purposes?

A
  • prior period results
  • budget amounts
  • relationships between financial items for the period
  • compare to other firms/industry averages
  • relationship between financial and non-financial data
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20
Q

t4 what are the two categories of testing?

A
  • test of controls - effectiveness of controls in detecting, preventing and correcting material misstatements
  • substantive testing -misstatements at assertion level
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21
Q

t4 what does the auditor do when testing controls? 4

A
  • Applying a procedure to test a specific internal control that the client has put in place to meet an objective (assertion).
  • identify the evidence source, and the attribute of interest
  • determine the criterion for success (Tolerable Deviation Rate).
  • determine sample size
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22
Q

t4 Select a sample of purchase orders and inspect for evidence of authorisation?

what assertions is being tested? what is the evidence source? what is the item of interest?

A

occurence

PO

managers signature

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23
Q

t4 what does the auditor do when carrying out substantive tests? 4

A
  • Apply a procedure to test an assertion about a particular item in the financial statements.
  • identify the evidence (information) source
  • criteria for success (requirements of the accounting standards and materiality level).
  • determine the method of evidence collection, and (where sampling is used) the sample size.
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24
Q

t4 what are two types of substantive tests?

A
  • test of details i.e. account balance, class of transactions or disclosure.
  • Substantive Analytical Procedures- relationships between accounting data and related information to
    determine the reasonableness of relationships, and to identify unusual fluctuations.
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25
Q

t4 a substantive test of details, has which three sub categories?

A
  • Tests of of Balances
  • Tests of Transactions-validity of transaction classes.
  • Test of Disclosures -required disclosures are made and that the overall presentation of the financial statements is satisfactory.
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26
Q

t4 sample of entries in the Sales Journal to the Shipping Order

what type of test is this? what is the direction of testing?what assertions is being tested? what is the evidence source?

A
  • substantive Test of Transactions
  • Vouching
  • Occurrence
  • sales journal, shipping note
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27
Q

t4 Compare the closing balance of Accounts Payable with those of previous years.

what type of test is this? what assertions is being tested? what is the evidence source?

A
  • substantive analytical procedure
  • completeness
  • AP account
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28
Q

t4 Write to sample of the client’s debtors and ask them to confirm the balance owed to client.

what type of test is this? what assertions is being tested? what is the evidence source?

A
  • substantive test of balances
  • existence and rights and obligations
  • third party confirmations and AR account
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29
Q

t4 what is an example of a Dual Purpose Test?

A

checking an invoice for

  • signature - TOC
  • check that account number is correct for the customs Substantive Test Of Transaction
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30
Q

t4 which test provides Indirect and Direct Evidence?

A

indirect evidence of misstatement - tests of control

direct evidence of misstatement - substantive tests

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31
Q

t4 whats the formula for the audit risk model?

A

AR = IR x CR x DR

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32
Q

t4 what principle is applied with the audit risk model?

A

the greater the risk of material misstatement the greater the amount of appropriate evidence needed

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33
Q

t4 if an auditors wants to be more certain about an audit opinion, what will happen to the level of audit risk? what does this imply for evidence and work load

A

the acceptable Audit risk level will be reduced - implying more appropriate evidence will be needed, therefore the auditor must do more work

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34
Q

t4 by setting the audit risk to a particular level what can the auditor do?

A

auditors seek a balance between the costs of an incorrect audit opinion and the costs of performing the additional work necessary to reduce audit risk.

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35
Q

t4 what are the 3 main causes of audit risk?

A
  • nature and environment of entity
  • effectiveness of controls
  • effectiveness of audit procedures
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36
Q

t4 Inventory obsolete valuation is problematic.

what account is impacted and what is the potential misstatement?

A
  • inventory

- inventory overstated

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37
Q

t4 Unusual pressures on management. Sales recognised before they are completed.

what account is impacted and what is the potential misstatement?

A

sales

sales overstated

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38
Q

t4 Complexity of transaction: Debt instrument

what account is impacted and what is the potential misstatement?

A 
loans
Loans (and equity) wrongly classified
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39
Q

t4 sales transactions not subject to ordinary processing

what account is impacted and what is the potential misstatement?

A

sales

Sales overstated or understated

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40
Q

t4 Judgement required for account balance of depreciation

what account is impacted and what is the potential misstatement?

A

dep expenditure

dep over/ understated

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41
Q

t4 Rapid change in technology

what account is impacted and what is the potential misstatement?

A

PP&E

Depreciation/ Carrying amount (useful economic life)

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42
Q

t4 what causes CONTROL RISK? which areas does it nee to be considered? 3

A

nature of entity’s internal controls

consider control risk in relation to each transaction cycle, account and assertion.

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43
Q

t4 what are the 3 main causes of control risk?

A
  • Poor control environment
  • Problems with information system
  • Ineffective control activities
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44
Q

t4 which two risks in the audit risk model can the auditor not control?
AR = IR x CR x DR

A

IR

CR

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45
Q

t4 what is detection risk? what causes DR?

A

risk that the auditor will not detect a misstatement exists in an assertion that could be material, either individually or when aggregated with other misstatements

Detection risk arises because of the (in)effectiveness of the audit work

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46
Q

t4 what are the 3 main causes of detection risk?

A
  • problems with planning
  • Problems with collection of evidence
  • Problems with interpreting results of testing
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47
Q

t4 how can an auditor reduce DR?

A

■ Appropriate planning, direction, supervision and review.
■ Decisions about the nature, timing and extent of audit procedures
■ The effective performance of the procedures and the evaluation of results

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48
Q

t4 how can the audit risk model be rearranged to plan for DR?

A

DR = AR / (IR x CR)

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49
Q

t4 what are the 3 steps in Applying the Audit Risk Model?

A

[1] Set a planned level of audit risk
[2] Assess inherent risk and control risk
[3] Determine appropriate level of detection risk.

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50
Q

t4 if both IR and CR are high, what impact will this have on DR? if they are low?

A

low level of detection risk

high level of detection risk

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51
Q

t4 how does the audit strategy change if control risk is low vs high?

A

low CR: high TOCs, reduced substantive testing

high CR: low TOCs high level of substantive testing

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52
Q

t4 what are two conents of the Working Papers?

A

permanent file

current file

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53
Q

t4 what is usually included in the permanent File?

A

overall details of the company
■ Copy of constitution
■ Chart of accounts
■ Ongoing contracts, e.g. loan agreements
■ Analysis of accounts of ongoing importance
■ Results of previous analytical procedures
■ Copies of significant correspondence
■ Extracts from minutes of meetings

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54
Q

t4 what is usually included in the current File?

A

details specific to the current audit?
■ Evidence of planning, including audit strategy
■ Details of the reviews undertaken by the
auditor of internal controls
■ The audit program
■ Results of audit tests
■ Other evidence relied on by the auditor
■ Working trial balance and related schedules
■ Draft financial statements

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55
Q

t4 what are 3 types of auditor experts? (areas)

A

■ Industry specialists
■ Functional specialists
■ Technical specialists

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56
Q

t4 what are the 3 levels of materiality?

A

■ Materiality for the financial statement as a whole.
■ A materiality level for specific classes of transactions, balances or disclosures.
■ Performance materiality.

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57
Q

t4 what does the Materiality for the financial statement as a whole imply? what is this specific to?

A

Maximum amount by which the financial statements could be misstated without affecting the decisions of users.

Entity/ Engagement specific.

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58
Q

t4 when assessing materiality of the whole statement it is important to set appropriate base, list types of bases and relative advantage 4

A

the appropriate base

  • Net profit - relevance
  • total revenue - stability
  • total assets - predicability/stability
  • equity - stability
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59
Q

t4 audit risk, materiality and evidence, discuss their relationship.

what does it mean if auditor sets low materiality?

A
  • if AR high - materiality level should be set low
  • if materiality is low - will require more/better quality of audit evidence

■ The lower the level of materiality, the more confident that auditor can be about his/her conclusions.

60
Q

t5 what are 6 key questions the auditor must ask of themselves during client Acceptance and Continuance stage of the audit?

A

■ Does the auditor wish to be associated with the entity?
■ Can the auditor perform the audit competently?
■ Can the meet the independence and other
ethical requirements?
■ Why does the entity want an audit?
■ If there is a change of auditor-why?
■ What is the applicable financial reporting framework?

61
Q

t5 how does audit planning ensure that audit runs smoothly? 5

A 
■ Ensure effective audit
■ Ensure efficient audit
■ Focus on areas of greatest risk
■ Resource allocation
■ Identify concerns at an early stage and discuss with management
62
Q

t5 what are the 4 key initial planning considerations for audit engagements?

A
  • Locations and timing issues
  • select stuff
  • evaluate the need for outside specialists
  • prepare working papers
63
Q

t6 what are three quick tests an auditor can do to assess business risk?

A
  • SWOT
  • PEST
  • Value chain approach
64
Q

t6 why does the auditor uses analytical procedures as a risk assessment tool at the planning stage?

A

■ to identify issues of which the he/ she was unaware.
■ Enhances understanding of the client and its environment.
■ Identifies areas that require greatest attention.
■ Highlights unusual relationships and unexpected fluctuations.

65
Q

t6 The audit must be planned in such a way that the auditor has a reasonable expectation of detecting any material misstatements. Where the auditor believes that the risk of misstatement is higher, what will the auditor do to ensure that they are detected?

A

set materiality low

66
Q

t6 what are three things that may affect the level of performance materiality set?

A

■ Users’ expectations (e.g. management remuneration).
■ Key disclosures in relation to the entity’s industry, (e.g. R&D costs for a pharmaceutical co.)
■ Whether attention is focussed on a particular
separately disclosed aspect (e.g. a newly acquired business).

67
Q

t6 if there is one or more specific transaction classes/ balances for which misstatements of a lesser amount are expected to influence users’ decisions, what must he auditor do with the level of materiality for these specific items? give three examples of such items

A

a lower level of materiality will be applied

■ Remuneration
■ Research and Development
■ Items impacting loan covenants

68
Q

t6 what causes inherent risk,? at which two levels must IR be considered?

A

IR - nature of entity

report level (i.e. management experience/integrity/pressure)
assertion level (i.e. impacting only one account/transaction class)
69
Q

t6 was are 5 areas that are considered special business risk areas?

A
  • Fraud
  • Earnings management
  • Illegal acts
  • Related parties
  • Appropriateness of going concern
70
Q

t6 what is earnings management?

A

the use of judgment and / or the structuring of transactions to alter financial reports to influence the perceptions of those reading the reports about the underlying economic performance of the company

71
Q

t6 list four examples of earnings management

A

■ Intentional violation of accounting standards that are themselves immaterial.
■ Inappropriate revenue recognition.
■ changes under the guise of restructuring.
■ Improper accruals and estimations of liabilities in good times.

72
Q

t6 why is it important for the auditor to consider related parties of the audit client? 3

A

■ Source of audit evidence
■ Requirements of accounting standards & laws
■ Motivation for such transactions

73
Q

t6 list four things that reduce the risk of an entity not being able to fulfil the requirement of going concern?

A

Asset factors ■ Ability to dispose assets ■ Sale and leaseback

Debt factors ■ Unused lines of credit ■ Debt restructuring

Cost factors■ Postpone expenditures ■ Reduce discretionary expenditures

Equity factors ■ Vary dividend ■ Additional investment

74
Q

t6 what are the key objectives of internal controls? 6

A

■ Risks are identified and minimised
■ Management decision making is effective
■ Transactions are carried out in accordance with authorisation requirements
■ Prompt (timely) recording
■ Access to records and documents in
accordance with management instructions
■ Detection and correction

75
Q

t6 what are examples of Management Controls, that are included in internal controls/ make them effective? 5

A

■ Communicate objectives and goals
■ Establish lines of authority and accountability
■ Monitor internal and external conduct
■ Determine policies and procedures for dealing with risk
■ Monitor performance

76
Q

t6 list 3 internal controls involving documents

A

■ Pre-numbering of documents and sequence checks
■ Restriction of access (physical and electronic “locks”)
■ Document matching

77
Q

t6 the internal control of authorisation, ensures which assertion is accurate?

A

occurrence

78
Q

t6 the internal control of program control, ensures which assertion is accurate?

A

accuracy

79
Q

t6 the internal control of sequence check, ensures which assertion is accurate?

A

completeness

80
Q

t6 the internal control of independent check, ensures which assertions is accurate? 2

A

cut-off and classification

81
Q

t6 what are 5 procedures for Understanding Internal Controls?

A

■ Consider past experience with client
■ Inquiries of key management
■ Read policy and systems manuals
■ Inspect documents containing policies and procedures
■ Observe entity activities and operations

82
Q

t6 what are 5 things within the entity that help the auditor obtain an Understanding of Internal Controls?

A 
■ Significant classes of transactions 
■ Initiation of transactions
■ Records, documents and accounts 
■ Accounting processes
■ Controls around journal entries
83
Q

t6 what are 4 things that make source docs and records appear more adequate?

A
  • Clear and well designed
  • Multi-copy, prenumbered forms
  • Monthly statements to/from customers
  • Internal verification/ validity
84
Q

t6 Does the Credit Manager perform a credit check for sales?

which assertion is being tested for?
whats the internal control?

A

Occurrence

authorisation

85
Q

t6 Are Shipping Orders prenumbered and are sequences accounted for periodically?

which assertion is being tested for?
whats the internal control?

A

Completeness

renumbered source documents

86
Q

t6Does the Financial Controller review supporting documentation prior to making payment?

which assertion is being tested for?
whats the internal control?

A

accuracy

Reviews and Approvals

87
Q

t6 Does the client have clear instructions for recording transactions around balance date?

which assertion is being tested for?
whats the internal control?

A

cut-off

Written procedures

88
Q

t6 Does a second Clerk check that account codings on source documents are in accordance with the entity’s chart of accounts?

which assertion is being tested for?
whats the internal control?

A

Classification

Independent Check

89
Q

t6 Are authorising and executing transactions undertaken separately?

which assertion is being tested for?
whats the internal control?

A

occurrence

segregation of duties

90
Q

t6 how do auditors document their understanding of internal controls?

A

Internal control questionnaires
Narrative memoranda
Flowcharts

91
Q

t6 what should an auditor do if CR is assessed as high?

A

performed planned and additional substantive tests

92
Q

t6 what should an auditor do if CR is assessed as low?

A

perform TOCs to find deviations in CR assessment.

if deviations don’t exist: then perform planned substantive tests

if deviations exist: check if there are compensating controls - if yes then perform planned substantive tests
if no then perform planned and additional substantive tests

93
Q

t7 where does the auditor place the greatest focus when assessing business risk?

A

Auditor places greatest focus on areas where risk of material misstatement is highest.

94
Q

t7 what are the two categories of business risk?

A

CR and IH

95
Q

t7 what are the 4 steps to testing internal controls?

A

■ Identify the internal control
■ Determine the objective
■ Specify the assertion
■ Specify a test of the internal control

96
Q

t7 Every Sales Orders is prepared (in triplicate) and forwarded to the Credit Department where the Credit Manager checks that the amount of the sale is below the limit approved for the customer. The Credit Manager evidences performance of this control by signing the Sales Order.

■ Determine the objective
■ Specify the assertion
■ Specify a test of the internal control

A

Control Objective: Sales are only made to customers who can afford to pay for the goods.

This aims to satisfy the occurrence objective.

Test: Select a sample of Sales Orders from the file, and inspect for evidence of authorisation (signature). Count those signed/ not signed and determine the Percent not signed. Compare this with the Tolerable Deviation Rate (TDR)

97
Q

t7 what are the 5 areas if internal control system?

A 
the control environment
risk assessment processes
information system
monitoring of controls
control activities
98
Q

t7 when testing controls the auditor is trying to determine which three things?

A

■ Existence of controls
■ Effectiveness of controls
■ Continuity of controls.

99
Q

t7 what are 4 control activities for sales?

A
  • Adequate separation of duties
  • Proper authorisations
  • Adequate documents and records (including document matching)
  • Independent checks on performance
100
Q

t7 The auditor selected a sample of Sales Orders from the file and inspected for evidence that they were approved (initialled by manager).

what is the internal control, assertion and control objective?

A

Control Objective: Sell only to customers who have the ability to pay for the goods/services supplied.

Internal Control: Credit approval must be undertaken before sales are processed.

Assertion: Occurrence.

101
Q

t7 Ensure all shipments are recorded

what is the internal control, assertion and test of control?

A
  • Assertion: Completeness
  • Internal Control: Use of prenumbered documents and sequence is accounted for.
  • Test of Control: The auditor inspected filed Shipping Notes and reviewed for evidence (tick) that a sequence of renumbered Shipping Notes was account for
102
Q

t7 Control Objective: Ensure all sales are invoiced

what is the internal control, assertion and test of control?

A
  • Internal Control: Quantities shipped are periodically reconciled to quantities invoiced.
  • Assertion: Completeness
  • TOC:The auditor inspects for evidence (initials) of client’s reconciliation of shipments to invoices.
103
Q

t7 Control Objective: Ensure accuracy of transaction processing

what is the internal control, assertion and test of control?

A

Internal Control: Re-computation and comparison of details on invoice (quantity, price, terms) with supporting documentation.

Assertion: Accuracy.

TOC:The auditor inspects a sample of entries in the sales journal and reviews for evidence that the corresponding invoice was recomputed and compared with supporting documentation.

104
Q

t7 Control Objective: Ensure sales are recorded in correct period

what is the internal control, assertion and test of control?

A

Internal Control: Written procedures detailing recording of last sale for the period and first sale for the following period and independent checks undertaken.

Assertion: Cut-off.

TOC: The auditor ascertains (inquiry), that written procedures
were followed and independent checks carried out.

105
Q

t7 control Objective: Ensure transactions are properly classified

what is the internal control, assertion and test of control?

A

Internal Control: Appropriate account codings on sales
documents.
Assertion: Classification.
TOC: The auditor reviews (inspects) approvals of account codings.

106
Q

t7 Control Objective: Recorded cash receipts are for collections from sales to customers of the entity.

what is the internal control, assertion and test of control?

A

Internal Control: Cash receipts matched to sales invoices. Assertion: Occurrence
TOC: The auditor selected a sample of entries in the Cash Receipts Journal and reviewed evidence of matching to specific sales invoices

107
Q

t7 control Objective: Ensure that all cash receipts are recorded and deposited

what is the internal control, assertion and test of control?

A

Internal Control: Segregation of duties
Assertion: Completeness
TOC: The auditor observes that opening of mail and prelisting of cash receipts is undertaken independently of the cashier

108
Q

t7 Control Objective: Accurate processing of cash receipts.

what is the internal control, assertion and test of control?

A

Internal Control: Bank accounts are reconciled promptly with
cash record and general ledger.
Assertion: Accuracy.
TOC: The auditor inspects client’s banks reconciliations for evidence of performance (tick).

109
Q

t7 what are the Primary Control Activities for the Expenditure Cycle?

A

Segregation of duties
Control over source documents
Checks, approvals and reconciliations

110
Q

t7 what are 4 examples of source documents?

A

Purchase Orders
Receiving reports
Vouchers
Cheques

111
Q

t7 Purchases are for goods and services required by the entity

what is the internal control, assertion and test of control?

A

Internal Control: Purchases must be approved by Manager.
Assertion: Occurrence.
TOC: The auditor selects a sample of purchase orders and checksfor evidencethattheywereapproved(initialled by manager)

112
Q

t7 control Objective: Recoded purchases are bona fide

what is the internal control, assertion and test of control?

A

Internal Control: Comparison of Purchase Order, Receiving
Report and Sales Invoice before recording liability.
Assertion: Occurrence.
TOC: The auditor inspected sample of entries in the purchasesjournaland vouchedtovoucherpacksto
for evidence of reconciliation.

113
Q

t7 Ensure that all purchases are recorded

what is the internal control, assertion and test of control?

A

Internal Control: Use of prenumbered documents and a
sequence is accounted for.
Assertion: Completeness
TOC: The auditor inspected filed Receiving Notes and reviewed for evidence (tick) that a sequence of prenumbered Receiving Notes was account for

114
Q

t7 Purchases are correctly classified.

what is the internal control, assertion and test of control?

A

Internal Control: Independent review of recording of purchases.
Assertion: Classification
TOC: The auditor inspected a sample of entries in the Purchases Journal for evidence of independent review

115
Q

t7 Control Objective: Recorded cash payments are for G&S that were authorised and received.

what is the internal control, assertion and test of control?

A

Internal Control: Cheques prepared only when supporting documents matched and approved.
Assertion: Occurrence.
TOC: The auditor selected a sample of transactions from the Cash Payments Journal and inspected supporting documentation for indication of checking and approval.

116
Q

t7 control Objective: All cash payments are recorded.

what is the internal control, assertion and test of control?

A

Internal Control: Presented cheques and electronic payments listedonbankstatementare reconciledto
accounting record.
Assertion: Completeness
TOC:The auditor inspected the client’s Bank Statement for evidence of reconciliation

117
Q

t7 Cash payments are accurately recorded

what is the internal control, assertion and test of control?

A

Internal Control: Cash payments verified (independent review)
Assertion: Accuracy.
TOC: The auditor inspected a sample of entries in the Cash Payments Journal for evidence of internal verification

118
Q

t7 list 4 Potential Misstatements? which control is lacking?

A

Classic disbursements fraud- fake accounts (control over source Docs)
Kickbacks - purchasing office gets paid by supplier (control over purchasing)
Illegal Acts - stealing funds (control over journal entries)
Unauthorised executive perks - exceeding credit card limit (reconciliation and authorisation)

119
Q

t7 Control: To ensure sales are made only to customers who can be reasonably expected to pay, sales must be processed using Sales Orders that have been authorised
by the Credit Manager.

what is the audit objective, the attribute of interest, population and sampling unit?

A

The audit objective = occurrence.
Attribute = presence of the credit manager’s signature.
Population = the total number of sales for the year
Sampling unit = an individual sale

120
Q

t7 what are three methods of determining sampling size?

A

Statistical; Judgment or Haphazard.

121
Q

t7 if sample deviation rate is larger than the tolerable deviation rate what must auditors do?

A
  • ask mgmt to investigate and adjust

- modify planned audit procedure

122
Q

State the main benefit of using multi-copy forms.

A

Information is recorded only once and therefore reduces the possibility of error.

123
Q

why do auditors prefer using dollar unit sampling?

A

Auditors have a preference for dollar unit sampling because there is a higher probability (when compared to classic variable sampling) that the larger items in the population will be included in the sample.

124
Q

t8 Substantive Tests are used to?

A

Substantive tests are used to reduce detection risk

125
Q

t8 what are the three types of substantive test?

A

■ Substantive Tests of Transactions
Tests to substantiate transactions

■ Substantive Tests of Details of Balances
Tests to substantiate account balances

■ Substantive Analytical Procedures
Use of analytical procedures to substantiate account balances

126
Q

t8 whats the Difference Between Substantive Tests of Transactions and Tests of Controls?

A

■ Substantive Test of Transactions
Tests to substantiate transactions

■ Test of Controls
Tests effectiveness of controls over
processing transactions

127
Q

t8 For the balance of Cash at Bank, the emphasis is on which two assertions?

A

E and Co, using confirmations and substantiations of bank reconciliations.

128
Q

t8 For transactions that or Cash at Bank, the emphasis is on which two assertions?

A

O and Co.

129
Q

t8 where the entity undertakes foreign currency transactions, which assertions are important?

A

accuracy and valuation and allocation

130
Q

t8 whats the formula for bank recs?

A 
Cash at Bank (Accounting Records)
- Deposits in transit
- Unrecorded bank fees Customer 
\+ Outstanding cheques
\+/- Other reconciling amounts.
Cash Balance per Bank Statement
131
Q

t8 Confirm client’s balances with bank. Perform a bank reconciliation

whats the assertion and direction of testing? what if they were testing for completeness?

A

existence of Cash
Balance Cash Balances in Balance Sheet exists at B/D
vouching

completeness Perform a bank reconciliation, tracing process

132
Q

t8 sample of entries in the Cash Journal to supporting documentation.

whats the assertion and direction of testing?

A

occurrence, vouching

133
Q

t8 from source document to Cash Receipts Journal

whats the assertion and direction of testing?

A

completeness tracing

134
Q

t8 for sales and AR which two assertions have the most emphasis?

A

existence and valuation of accounts receivable.

sales occurrence, accuracy and cut-off.

135
Q

t8 Auditor undertakes a STOT to find out if all
transactions are bona fide, and that no fictitious sales transactions have been recorded.

whats the concern and whats the test?

A

Concern here is overstatement

Test: Vouch a sample of entries in the sales journal to shipping order/ sales order

136
Q

t8 Auditor undertakes STOT to find out whether all sales that were made were actually recorded

whats the concern and whats the test?

A

Concern is understatement

Test: Trace a sample of shipping orders/ sales orders and to the sales journal

137
Q

t8 STOT to gather evidence that transactions were recorded in the correct period

whats the concern and whats the test?

A

cut-off

Test: Inspect the last sales invoice before balance date and the first sales invoice after balance date for cut off. Compare with shipping orders.

138
Q

t8 why do auditors review aged trial balances?

A

Auditor reviews aged trial balance to ascertains whether the valuation of Acc. Rec. is appropriate.

139
Q

t8 sample of entries in the Purchases
Journal to the Receiving Note and Purchase Order (supporting documentation).

whats the concern?

A

Concern here is overstatement.

Auditor wants to find out if all recorded purchases transactions are bona fide.

140
Q

t8 sample of Receiving Notes to the Purchases Journal to ensure that each is recorded?

whats the concern?

A

completeness/ understatement

141
Q

t8 STOT to gather evidence that acquisition transactions were recorded in the correct period

whats the concern and whats the test?

A

cut- off

Compare dates on receiving reports and vendors’ invoices in the purchases journal

142
Q

t8 which assertions have emphasis on them for AP?

A

Completeness

Rights and obligations and purchases cut-off are also important.

143
Q

t8 The auditor compared the closing balance of Accounts Payable with those of previous years.

what is he testing for?

A

completeness

144
Q

t8 The auditor inspected the Cash Payments Journal
after balance date and traced payments to the list of Acc. Payable recorded by the client at balance date

what is he testing for?

A

completeness

145
Q

t8 for inventory what are the main assertions?

A

existence and valuation and allocation

146
Q

t8 if Projected Error > Allocated Materiality, what does the auditor need to do?

A

■ Ask management to investigate & make adjustments
■ Modify planned audit procedures, and
undertake more Substantive Testing;
■ Consider result with results of other STs and
their effect on the audit report.

147
Q

t9 what is are the significant issues auditors must communicate with managers? 4

A

Fraud or information that a fraud may exist [ASA240:40]
Material weaknesses in the design or implementation of internal controls [ASA265.9]
Going Concern assumption is inappropriate; or where management will not extend the assessment thereof [ASA 570:25]
Assessment Key Audit Matters [ASA 701.17]

Auditing (16 decks)

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