Test of Controls & Details Flashcards
what is existence and how to test
existence: the F/S can be supported by evidence
to test: auditors start from F/S and trace to supporting evidence
what is completeness and how to test
completeness: the evidence can be supported by the F/S
to test: auditors start at the supporting evidence and trace it to F/S schedules
what is rights and obligations and how to test
rights and obligations: entity owns or has title to items in the F/S
to test: look at purchase orders, payables or financing documents
what is valuation and allocation and how to test
valuation and allocation: assets, liabilites and equity are presented in the appropriate amounts
ie according to GAAP; financial information allocated and valued correctly
to test: auditors confirm historical values were used to properly account for depreciation, identifying possible slow moving or obsolete items
what is cutoff
transactions are recorded in the proper period
what is understandability
F/S disclosures are easy to understand
what is classification
reviewing supporting documentation to confirm account classification
what is assertion
supporting documents to verify the correct prices
what is occurrence and how to test
occurrence: verifying if somethings on the F/S actually occurred
to test: auditors could inquire to accounting personnel to provide evidence
most reliable audit evidence is based on information obtained directly by
auditor
types and examples of audit procedures
inquiry: asking how a control is performed
confirmation: performing account confirmations; are obtained from parties outside the client
observation: observing/watching inventory count
recalculation: recalculating depreciation expense
re-performance: re-performing an internal control to test its effectiveness
inspection (tangible assets): inspecting inventory to verify it exists and is in sale able condition
inspection (records): inspecting shipping documents to verify dates
analytical procedures: performing ratio analysis
substantive analytical procedures
test the reasonableness of amounts
tests of details
test directly for misstatements
substantive tests address
assertions related to material classes of transactions, account balances and disclosures
cover the closing process
respond to areas of significant risk
focus on detection of material financial misstatements
four procedures for testing controls (RIIO): how effectively an I/C process is being applied
Reperformance/Recalculation
Inspection
Inquiry
Observation
what factors influence interim substantive testing
effectiveness of I/C
availability of needed info at year end
purpose of the test
assessed RMM
type of account or transactions
cost and ability to control audit risk between interim and year end
predictability of year end balances after interim testing
related to account balances (RACE)
rights & obligations ——> inventory owned by entity
allocation & valuation —-> quantities are
correct/properly priced
completeness ————->inventory is included
existence ——> inventory actually exists
related to transactions (CCACO)
completeness——–>all transactions that occurred have been reported
period cutoff ——->all events/transactions reported in appropriate period
accuracy ——->all transactions have been reported in appropriate amounts
classification ———>all transactions are included in appropriate accounts or categories
occurrence ———>all transactions occurred
related to presentation and disclosure (RACOU)
rights & obligations
accuracy & valuation
completeness
occurrence
understandability & classification
bills of lading
shipping documentation
receiving reports
a copy of the purchase order with the order quantities omitted
receiving department physically counts and records the quantity received for each item
matched to purchase orders; vendor invoices are traced to AP or inventory subsidiary ledger
outstanding checks
- trace them to cutoff bank statement
- trace outstanding uncleared checks to cash disbursements journal
the number of days sales are in AR calculates the
number of days on avg it takes to collect AR
if increase: more sales are fraudulently reported
low inventory turnover ratio means
less is being sold and more inventory on hand
lower debt to equity ratio means
portion of debt is paid off
decreasing debt compared to equity
OR increase in equity
decrease in return on asset indicates
demand is decreasing
tests of controls measure
operating effectiveness of I/C
