Test of Controls & Details

Question 1

what is existence and how to test

Answer 1

existence: the F/S can be supported by evidence

to test: auditors start from F/S and trace to supporting evidence

Question 2

what is completeness and how to test

Answer 2

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

Question 3

what is rights and obligations and how to test

Answer 3

rights and obligations: entity owns or has title to items in the F/S

to test: look at purchase orders, payables or financing documents

Question 4

what is valuation and allocation and how to test

Answer 4

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

Question 5

what is cutoff

Answer 5

transactions are recorded in the proper period

Question 6

what is understandability

Answer 6

F/S disclosures are easy to understand

Question 7

what is classification

Answer 7

reviewing supporting documentation to confirm account classification

Question 8

what is assertion

Answer 8

supporting documents to verify the correct prices

Question 9

what is occurrence and how to test

Answer 9

occurrence: verifying if somethings on the F/S actually occurred

to test: auditors could inquire to accounting personnel to provide evidence

Question 10

most reliable audit evidence is based on information obtained directly by

Answer 10

auditor

Question 11

types and examples of audit procedures

Answer 11

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

Question 12

substantive analytical procedures

Answer 12

test the reasonableness of amounts

Question 13

tests of details

Answer 13

test directly for misstatements

Question 14

substantive tests address

Answer 14

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

Question 15

four procedures for testing controls (RIIO): how effectively an I/C process is being applied

Answer 15

Reperformance/Recalculation
Inspection
Inquiry
Observation

Question 16

what factors influence interim substantive testing

Answer 16

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

Question 17

related to account balances (RACE)

Answer 17

rights & obligations ——> inventory owned by entity
allocation & valuation —-> quantities are
correct/properly priced
completeness ————->inventory is included
existence ——> inventory actually exists

Question 18

related to transactions (CCACO)

Answer 18

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

Question 19

related to presentation and disclosure (RACOU)

Answer 19

rights & obligations
accuracy & valuation
completeness
occurrence
understandability & classification

Question 20

bills of lading

Answer 20

shipping documentation

Question 21

receiving reports

Answer 21

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

Question 22

outstanding checks

Answer 22

1. trace them to cutoff bank statement
2. trace outstanding uncleared checks to cash disbursements journal

Question 23

the number of days sales are in AR calculates the

Answer 23

number of days on avg it takes to collect AR
if increase: more sales are fraudulently reported

Question 24

low inventory turnover ratio means

Answer 24

less is being sold and more inventory on hand

Question 25

lower debt to equity ratio means

Answer 25

portion of debt is paid off
decreasing debt compared to equity
OR increase in equity

Question 26

decrease in return on asset indicates

Answer 26

demand is decreasing

Question 27

tests of controls measure

Answer 27

operating effectiveness of I/C