Audit Final

Type 1

events that provide additional evidence about conditions that existed at the balance sheet date and affect the estimates included in the statements.

Type 1 subsequent events come into existence due to new ______becoming available.

evidence

a. The conditions that should exist for the auditors to use negative confirmation requests include:

1. The combined assessed level of inherent and control risk is low; 2. A large number of small balances; and 3. Reason to believe the person receiving the confirmation will give it consideration

Related BS Item to prop plant + equip

depreciation

Negative confirmations

-ask debtor to advise the auditors only if the balance shown is incorrect Low level of assessed risk of material misstatement Large number of small balances A low error rate is expected No reason to believe the respondent will ignore the request

Type 2

-events that provide evidence about conditions that arose subsequent to the balance sheet date and require disclosure in the financial statements.

qualified opinion

A qualified opinion states that the financial statements are presented fairly in conformity with generally accepted accounting principles "except for" the effects of some matter.

An adverse opinion

An adverse opinion states that the financial statements are not presented fairly in conformity with generally accepted accounting principles.

Projected misstatements

Arise from sample results projection to population.

Related BS Item to IS Accounts Receibvale

Bad Debt

Typical Coverage of Audit Reports *financial statements

Balance sheet Income statement Statement of cash flows Statement of retained earnings (equity)

Segregations of Functions—Payroll (seperate departmnents should handle?)

Employment (personnel) Timekeeping Payroll preparation and record keeping Distribution of pay to employees

The audit of inventories may help in the auditor determination of ________.

COGS

Inventory Observation

Client counts and supervises inventory Auditors observe Determine all items included Employees comply with instructions Be alert for inclusion of obsolete or damaged merchandise

Auditor should analyze account to look for items improperly recorded as miscellaneous:

Collections on previously written-off accounts or notes receivable Write-offs of old outstanding checks or unclaimed wages Proceeds from sales of scrap

Interest bearing debt, when can you examine?

End of the year - often wait until after balance sheet date for many procedures

How to Confirm interest-bearing debt?

Confirmed by financial institution Included with standard confirmation form for cash For others, use letter drafted on client's letterhead Confirm dates of origin, due dates, unpaid balances of notes, interest rates, dates to which interest has been paid, and collateral for notes

Sources of Owners' Equity

Corporate accounts Capital stock accounts Preferred and common Retained earnings Prior period adjustments Transactions generally few in number but material in amount

Which of the following is most likely to be considered a Type 1 subsequent event?

Customer checks deposited prior to year-end but determined to be uncollectible after year-end.

When is the Representation Letter dated for?

Dated as of the date of the audit report

Dividends

Determine the dates and amounts of dividends authorized Verify the amounts paid Determine the amount of any preferred dividends in arrears Review the treatment of unclaimed dividend checks

Judgmental misstatements

Differences arising from judgments of management that the auditor consider incorrect.

Presentation and Disclosure (inventory)

Disclosure of inventory pricing methods or methods in use Other important disclosures: Changes in methods Classifications of inventory

Primary Objective of A/R

Existence

Obtain listings of inventory and reconcile to ledgers

Existence, Occurence

How is fraud difficult to conceal?(regarding payroll)

Extensive segregation of duties relating to payroll Use of computers with proper controls for preparation of payrolls Filing of frequent payroll reports with the government

D. Valuation and Allocation

F. Examine current vendors' price lists I. Select a sample of recorded items and examine supporting vendors' invoices and contracts

E. Presentation and disclosure

G. Review drafts of the financial statements

A. Completeness

H. Select a sample of items during the physical inventory count and determine that they have been included on count sheets.

D. Valuation and Allocation

I. Select a sample of recorded items and examine supporting vendors' invoices and contracts F. Examine current vendors' price lists

Payroll

Importance - typically largest operating cost Payroll fraud had been common

When the Auditors are Engaged after Year-End

Inventory verification when auditor unable to observe taking of inventory at close of year. May conclude that sufficient appropriate evidence cannot be obtained to express an opinion , or Could obtain satisfaction with alternative auditing procedures Existence of strong internal control Perpetual inventory records

Loss contingencies should be reflected in the financial statement amounts when:

It is probable that a loss had been sustained before the balance sheet date the loss can be reasonably estimated

Working papers

Lead schedule for accounts payable Trial balances of various types of accounts payable Confirmation requests for accounts payable Listing of unrecorded accounts payable

Impairment of Long-Lived Assets

Long-lived assets must be reviewed for impairment whenever events or changes in circumstances indicate that carrying value may not be recoverable

A possible loss, stemming from past events that will be resolved as to existence and amounts, is referred to as a(n):

Loss Contigency

Qualitative Materiality Factors

Mask a change in earnings or other trends. Hide a failure to meet analysts' consensus expectations for the company. Change a loss into income, or vice versa.

Accrued Liabilities 1/3

Obligations payable sometime during the succeeding period for services or privileges received before balance sheet date

Basis of opinion

Our responsibility is to express an opinion on the Company's financial statements based on our audits

Which of the following procedures is most likely to be included near completion of an audit?

Performing analytical procedures

Two methods of confirmation of receivables:

Positive and Negative Confirmations

Primary Concern in Audit of Liabilities

Possibility of understatement or omission of liabilities Exaggerates the financial strength of company Conceals fraud as effectively as overstatement of assets Accompanied by understatement of expenses and overstatement of net income

Why do we Obtain Representation Letter?

Purpose is to have the client's principal officers acknowledge that they are primarily responsible for the fairness of the financial statements

Auditors' Approach for Depreciation

Review and test management's process of developing the estimate Review subsequent events or transactions bearing on the estimate Independently develop an estimate of the amount to compare to management's estimate

Potential Revenue Recognition Problems

Sales with unusual right to return Side agreements Franchise fees

Audit Procedures Completed Near the End of Field Work

Search for unrecorded liabilities. Review the minutes of meetings. Perform final analytical procedures. Perform procedures to identify loss contingencies. Perform the review for subsequent events. Obtain the representation letter.*** Communicate misstatements to management. Evaluate audit findings.

C. Rights and Obligations

Select a sample of recorded items and examine supporting vendors' invoices and contracts.

Inherent Risk

Similar to accounts payable in that understatement of debt is a major potential audit problem Disclosure of debt

Factual misstatements

Specific misstatements identified during the course of the audit for which there is no doubt

Steps for Recognition of Revenue

Step 1: Identify the Contract. Step 2: Identify the Performance Obligations. Step 3: Determine the Transaction Price. Step 4: Allocate the Transaction Price to the Performance Obligations. Step 5: Recognize Revenue When the Performance Obligations Are Satisfied.

Working papers

Summary analysis that emphasizes changes during the year under audit Analyses of additions and retirements for the current year Tests Depreciation

a. Confirmation of accounts payable is not a presumptively mandatory auditing procedure because:

The auditors' primary objective with respect to accounts payable is establishing completeness, and confirmation is primarily a test of existence; and There is a large amount of reliable evidence in the client's possession supporting the amount of accounts payable, such as vendors' statements.

Unmodified opinion—standard report

This report may be issued only when the auditors have obtained sufficient appropriate audit evidence to conclude the financial statements are not misstated and there is no need to alter the report for situations 2, 3, or 4 below.

Auditors' Standard Report - Nonpublic Clients

Title that includes the word independent Ordinarily addressed to the company itself, the shareholders, the audit committee, and/or the board of directors Signed with name of CPA firm not individual partner unless the firm is a sole practitioner

Unmodified opinion—with an emphasis-of-matter paragraph

To emphasize a matter appropriately presented in the financial statements (e.g., a change in accounting principles).

Unmodified opinion—with an other-matter paragraph

To emphasize a matter other than those presented or disclosed in the financial statements (e.g., other information in documents containing audited financial statements).

a. Describe the two general types of subsequent events.

Type 1 and Type 2

Review the Engagement

Typically performed by seniors Review of working papers not completed until near (of after) completion of fieldwork Partner and manager devote attention to accounts with higher risk of material misstatement

Objectives for the Audit of Property, Plant and Equipment

Use the understanding of the client and its environment to consider inherent risk, including fraud risks, related to property, plant, and equipment.

Unmodified opinion on group financial statements

When two or more CPA firms are involved in an audit and the group auditor (the firm that performs majority of the work) does not wish to take responsibility for the work of the component auditors.

Is a/r generally confirmed?

Yes

A disclaimer of opinion

a disclaimer of opinion states that due to a significant scope limitation, the auditors were unable to form an opinion or did not form an opinion on the financial statement

Existence/Occurrence

account balances exist and transactions that have been recorded and disclosed have occurred and pertain to the entity

Type 1 subsequent events require ______ of the financial statements.

adjustment

Type 2 subsequent events come into existence _____ the balance sheet date.

after

b. Describe the audit circumstances in which the auditors are likely to decide to confirm accounts payable.

b. The auditors are likely to decide to confirm accounts payable when the extent of the evidence available in the client's possession is not sufficient.

Auditors consider the ______ expense when determining the correct allowance for doubtful accounts.

bad debt

Within the audit there needs to be

basis of opinion, opinion paragraph, critical audit matters,

Type 1 subsequent events involve events that existed _____ the balance sheet date.

before

c. Describe the types of accounts payable the auditors are likely to select for confirmation.

c. The auditors select accounts that are more likely to be in error, such as accounts with a high degree of activity. Accounts with zero balances may also be selected.

Audit Report

fairness of financial statements through an audit is the most frequent attestation service When performing an audit, the auditors gather evidence to obtain reasonable assurance that the statements are in conformity with GAAP

Valuation/Accuracy

financial and other information are disclosed fairly and at appropriate amounts

Related BS Item to securities and other inv

gains on sale

Amortization relates to ______assets like depreciation relates to property and equipment.

intangible

Inventories often represent the ---- current asset of a company

largest

Presentation and Disclosure

management assertion that all transactions and events have been presented correctly and that all relevant information has been disclosed to financial statement users, usually in the footnotes to the financial statements

Is a/p generally confirmed?

no

Type 2 subsequent events occur after the balance sheet date but ____ the completion of fieldwork.

prior to

Positive confirmations

request addressed to the debtor asking for a reply Ordinarily sent with balances due on them Blank forms - leave amount blank (used less frequently)

b. If the initial response to a positive confirmation is not received, the auditors should:

1. Send a second request. 2. Consider sending a third request or telephoning the customer. 3. For significant nonrespondents perform alternative auditing procedures including:

Risk Assessment for the Audit of Inventories

A. Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to inventories and cost of goods sold. B. Obtain an understanding of internal control over inventories and cost of goods sold. C. Assess the risks of material misstatement and design further audit procedures.

Accrued Liabilities Examples

Accrued Property Taxes Accrued Payrolls Pension Plan Accruals

Auditor should _____________________ for misc. revenue

Auditor should Propose adjusting journal entry to classify items correctly Perform analytical procedures and investigate unusual fluctuations

Post-Audit Responsibilities

Auditor subsequent discovery of facts existing at date of report Advise client to make appropriate disclosure of the facts to anyone actually or likely to be relying upon the audit report and financial statements If client refuses to make disclosure, CPA should inform each member of board and notify regulatory agencies

What is the auditors' responsibility with respect to detecting subsequent events?

Auditors have a responsibility to search for material subsequent events to the date of the auditors' report.

Primary Objective of A/P

Completeness

For significant nonrespondents perform alternative auditing procedures include?

Examining subsequent cash receipts. Vouching transactions making up the account balance to invoices and shipping documents. Establishing the validity of the customer.

Opinion Paragaph

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company

Audit of Intangibles

Intangible assets with definite useful lives are audited similar to property, plant and equipment Intangible assets with indefinite useful lives (e.g., goodwill) must be tested for impairment

Related BS Item to IS Notes Pay

Interest

Miscellaneous Revenue 1/2

Mixture of minor items, some nonrecurring and others received at regular intervals

When is a/p most effective to examine

Most effective when performed immediately after the balance sheet date

a. Describe the principal purpose of internal controls relating to plant and equipment.

The principal purpose of internal controls relating to plant and equipment is to obtain maximum efficiency from the dollars invested in plant assets.

b. The following are major internal controls for plant and equipment (only four required):

Use of a plant budget to forecast and control acquisitions and retirements. Maintaining subsidiary ledger of property. Establishing a system of authorizations for acquisitions. A written statement of company policy distinguishing between capital and revenue expenditures. A policy requiring all purchases of plant and equipment through normal purchasing and receiving procedures. Periodic physical inventories. A system of retirement procedures, including serially numbered retirement work orders.

Examples of tests of controls. (Liabilities)

Verify a sample of postings to the accounts payable control account. b. Vouch to supporting documents a sample of postings in selected accounts of the accounts payable subsidiary ledger. c. Test IT application controls. d. If necessary, revise the risks of material misstatement based on the results of tests of controls.

Misstatements of inventories directly affect -------- and, therefore, -------

cost of goods sold, net income

It is difficult to audit ______without the consideration of the property account.

depreciation

Evaluate the bases and methods of inventory pricing

valuation

c. List three audit procedures that are used by the auditors to search for subsequent events.

Review interim financial statements. Review minutes of directors' and stockholders' meetings. Make inquiries of officers. Obtain a letter from the client's attorney. Obtain a letter of representations from management

Completeness

all the information that is necessary for faithful representation is provided

Related BS Item to intangible assets

amortization

Critical Audit Matters

arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

Financial statements that _______ the results almost never lead to legal action by financial statement users.

understate