Audit Accounting Exam #2

What are the 4 types of statistical sampling plans?

1)Attributes sampling 2) Discovery Sampling 3) Classical Variables sampling 4)Probability-proportional-to-size sampling

What are these examples of... 1) Involvement of two or more employees 2) Cash Registers 3) Electronic point of sales systems

Cash Sales internal controls

Type of accounting that accounts for usage of raw material; determines content and value of goods in progress; computes finished inventory

Cost Accounting

What are these functions related too? 1)Purchasing 2) Receiving 3)Storing 4) Issuing 5)Processing 6)Shipping

Inventory

What type pf transactions are these considered? Taking inventory, calculating depreciation expense

Non-Routine Transaction

Inventory method that determines inventory quantities sole by an annual physical out

Periodic Inventory System

The internal control of purchasing includes the segregation of what 3 things?

Purchasing Receiving Recording

This type of sample my result in a statistically unbiased sample that may not be a representative sample

Random sample

What is this a document cycle of? 1) Customer PO 2) Sales Order 3) Bill of lading 4) Control Listing 5) Credit Memo

Revenue

Which types of transactions generally have the strongest controls?

Routine

A FASB requirements for derivative instruments and hedging activities includes all derivative instruments valued at for values and unrealized gains or losses depend on classifications as hedges; FASB requirements allow companies to choose to use fair value accounting in this area

Test Valuation

A type of service auditor report that is management's description of the system and the suitability of the design of controls

Type 1

What are the two types of service Auditor Reports?

Type 1 and Type 2

A type of service auditor report that includes management's description of the system and the suitability of the design of controls PLUS the assurance on the operating effectiveness of controls; this type of report may provide the user auditor with a basis for assessing control risk below the maximum

Type 2

What are these examples of? 1) Types of products/services sold 2) Business affected by seasonal or cyclical demand 3) Typical marketing polices of industry 4) policies regarding pricing, sales returns, discounts, extension of credit, normal delivery and payment terms 5) Compensation arrangements based on recorded revenue 6) Typical revenue recognition principals used in the industry and their method of application

Understanding the clients business in regards to revenue and receivables

The acceptance and renewal of notes be authorized in writing by responsible official who does not have custody of what?

notes

What are the 6 considerations in planning a physical inventory count?

1) appropriate date(should be near BS date 2) stop production 3) segregations obsolete and defective goods 4) establish control over counting process 5) proper cutoff of sales and purchases 6) arranging services of specialists

What are these examples of?1) Money Market Funds 2) Certificates of deposit 3) Savings certificate

Cash Equivalents

What are these all examples of? 1) Interception of cash receipts before any record is made 2) Payment of Materials not received 3) Duplicate payments 4) Overpayments to employees or payments to fictitious employees 5) Payments for personal expenditures of officers or related parties

Cash Fraud that may be disclosed

The custodian of NR should not have access to what?

Cash/ general accounting records

States that checks may be processed electronically, electronic processing creates a substitute check that is an electronic image of a check this substitute check is the legal equivalent of the original check for all purposes

Check 21 Act

Commitment to integrity and ethical values, Board of Directors demonstrates independence from management and exercises oversight of internal control, establishment of effective structure, including reporting lines, and appropriate authorities and responsibilities, commitment to attract develop and retain competent employees, holding employees accountable for internal control responsibilities

Control Environment Factors

What are these examples of? 1) Establishment of formal investment policies 2) Review and approval of investments activities by the investment committee of the board of directors 3) Separation of duties among employees(Authorizing purchases and sales, having custody of the securities, maintaining records) 4) Detailed records of all securities owned and the related revenue from interests and dividends 5) Registration in the name of the company 6) Periodic physical inspection of securities 7) Determination of accounting for complex instruments by competent personnel

Controls over Financial Investments

A deficiency in internal control over financial reporting( or a combination of deficiencies) such that there is a reasonable possibility that a material misstatement of the company's financial statements will not be prevented or detected on a timely basis

Material Misstatement

What should be present/ disclosed in regards to inventory pricing?

Method, method same used in prior years, and has method been applied consistently and accurately

What is this criteria for? 1) Pervasive evident of an arrangement exists 2) Delivery has occurred or services have been rendered 3) Seller's price to the buyer is fixed or determinable 4) Collectability is reasonably assured

Recognition of Revenue

Revenue Cycle control should include _____ of bank accounts.

Reconciliation

Major types of this control activity includes authorizations and approvals, verification, physical controls, controls standing data, reconciliations, and supervisory controls and an important aspect of this is the proper authorization of all types of transactions

Transaction Control Activities

What primary audit objective does this substantive procedure cover in the terms of financial investments?; Inspect documentation of management's intent to classify derivative transactions at hedges, Evaluate the method of accounting investments, Test the Valuation of financial Investments

Valuation Presentation

Trace one or two transactions through cycle

Walk-Throughs

Revenue Cycle control should include control over shipping and ______ documents.

billing

Revenue Cycle control should include use of control listing of _____ receipts.

cash

Revenue Cycle control should include the use of chart of accounts and review of account _____.

codings

Revenue Cycle control should include use of authorized ____ memoranda. (memo)

credit

As population generally increases, what happens to sample size?

increases

What are these sources of? 1) Goods on hand ready for sale 2) Goods in the process of production 3) Goods to be consumed directly or indirectly in production such as raw materials, purchased parts and supplies

inventory

Revenue Cycle control should include ____ of monthly statements.

mailing

One of the Two types of methods confirmations in which the client makes formal requests; request addressed to the debtor asking for a reply; ordinarily sent with balances due on them; or blank forms that should be left blank(used less frequently)

positive confirmations

Why is the control environment of AR and Revenue essential? Should include... 1) Commitment to integrity and ethical behavior 2) Independence of Board and audit committee 3) Appropriate structure and lines of responsibility 4) Commitment to recruit, develop, and retain competent employees 5) Holding employees accountable

risk of intentional misstatement of revenue

What are the internal controls like in small companies?

weak due to lack of employees

Has increased electronic processing made kiting more difficult?

yes; by reducing or eliminating the float period

Federal legislation prohibiting payments to foreign officials for the purpose of securing business. The act also requires all companies under SEC jurisdiction to maintain a system of internal control providing reasonable assurance that transactions are executed only with the knowledge and authorization of management. Passed in 1977 response to American cooperation practice of paying bribes and kickbacks to officials in foreign countries to obtain business. 1)Requires an effective system of internal controls 2) Makes illegal payment of bribes to foreign officials

Foreign Corrupt Practices Act

A monitoring activity that is performed on a non routine basis

Separate evaluations

An auditor that provides examination of service organization's controls

Service Auditor

A deficiency in internal control over financial reporting(or combination of deficiencies) that is less severe than a material weakness

Significant deficiency

This form of sampling advantages are that it allows auditors to measure and control sampling risk which helps design efficient samples, measure sufficiency of evidence, and objectively evaluate sample results

Statistical Sampling

A types of supervisory and management activities that are regularly performed

Ongoing Monitoring Activities

What are these examples of? 1) Inaccurate recording of a purchase of disbursements 2) Duplicate recording and payment of purchases 3) Unrecorded Disbursements

Potential Misstatements of Cash Disbursements

Revenue Cycle control should include the use of budgets and analysis of ______.

Variances

How can auditors detect kiting?

Preparing a schedule of bank transfers for a few days before and after balance sheet date

What are the objectives for the Audits of Receivables and Revenue?

1) Use the understanding of the client and its environment to consider inherent risk, including fraud risks, related to receivables and revenues. 2) Obtain an understanding of internal control over receivables and revenues. 3) Assess the risks of material misstatement and design tests of controls and substantive procedures that: a) existence and occurrence b) completeness c) cutoff d) rights e) valuation and accuracy f) presentation and disclosure

What are the two uses of internal auditors work?

1) obtain audit evidence by using the internal auditor's work performed as normal responsibilities 2) Using internal auditors work to provide direct assistance on the external audit

The understanding if the client and its environment, including internal controls is used to help the auditor? (3)

1)Identity types of potential misstatements 2)Consider factors that affect the risks of material misstatement 3) Design tests of controls when applicable and substantive procedures

What is the primary audit objective of this substantive procedure for Cash?; Confirm cash balances w/ financial institutions, Obtain reconciliations of back balances and consider reconciling bank activity, Obtain bank cutoff statement, Count cash on hand.

Existence, Occurence, Accuracy, Cutoff, and Rights

Account receivables should be confirmed unless....

1) AR is immaterial 2) Use of confirmation would be ineffective 3) Auditor's combined inherent and control risk is low and audit risk can be reduced to acceptably low level with substantive procedures

Auditor should obtain an understanding of the outsourced function by following one of the following 3 things...?

1) Contacting service organization to obtain information 2) Visiting service organization and performing necessary procedures 3) Obtaining a report from service organization

What are the five internal control components?

1) Control Environment 2) Accounting information system 3) Risk assessment 4) Control Activities 5) Monitoring

What are the 3 things Test of Controls Addresses?

1) How controls were applied 2) Consistency with which controls were applied 3) By whom or by what means the controls were applied(ex; electronically)

Why is audit risk significant in terms of receivables/revenue? 3

1) Many Incidents of fraud have involved overstatements of receivables and revenue 2) Revenue Recognition may be based on complex accounting rules 3) Receivables and Revenue are usually subject to valuation using significant accounting estimates

What are the 3 types of Classical Variables Sampling under the Statistical Sampling Plans?

1) Mean-per-unit estimation 2) Ratio Estimation 3) Difference Estimation

What are these objectives of the Audit of Financial Investments?

1) Use the understanding of the client and its environment to consider inherent risk(including fraud risks, related to financial instruments) 2) Obtain an understanding of internal control over financial instruments 3) Assess the risks of material misstatement of financial instruments and design tests of controls and substantive procedures that: a) Existence & Occurence b) Completeness c) Cutoff d) Rights

What are the objectives of auditing inventory?

1) Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to inventories and cost of goods sold. 2) Obtain an understanding of internal control over inventories and cost of goods sold. 3) Assess the risks of material misstatement and design tests of controls and substantive procedures that: a. existence and occurrence b. completeness. c. cutoff d. rights e.valuation and accuracy f. presentation and disclosure

Three things that should be the internal control environment of inventories are?

1) commitment to competence and HR polices/practices; qualified and trained personnel assigned to inventory 2) Integrity/ ethical values; no "kickbacks" 3) Organizational structure and assignment of authority and responsibility

What are the 3 effects that control risk of revenue?

1) overall effect on audit 2) Design of audit procedures 3) Performing procedures to address material misstatement due to management override of internal control

What are the four types of ways to document the understanding of Internal Control?

1)Questionnaires 2) Written Narratives 3) Flowcharts 4) Walk-Thrrough

What are these sources of? 1) Claims against customers from sales of goods 2) Loans to officers of employees 3) Loans to subsidiaries 4) Claims against various other refunds 5) Claims for tax refunds 6_ Advances to supplies

AR

A form of sampling that is applying a procedure to less that 100% of a population by qualitative and quantitative measures

Audit Sampling

A method of sample selection; block sample consists of all items in a selected time period, numerical sequence or alphabetical sequence

Block Selection

What primary audit objective does this substantive procedure cover in the terms of financial investments?; Review investment committee minutes and reports

Completeness

These organizations provide processing services to customers who decide not to invest in their own processing of particular data

Computer Service Organizations

This activity consists of performance reviews, transaction control activities, physical controls, and segregation of duties and are policies and procedures that help mitigate the risk the organization's objectives are not met.

Control Activities

This case had a significant impact on responsibility of auditors with respect to validity of inventories • Case: 1939 - the audited financial statements contained $19 million of fictitious assets including $10 million of nonexistent inventories • Auditors followed customary auditing practice which limited audit work on inventories to examining records only • Statements on Auditing Procedures 1 and 2 - first formal auditing standards issued by AICPA affirmed the importance of auditors' observation of physical inventories although other auditing procedures could be substituted

Mckesson & Robbins Fraud Case

An control activity that includes reviews of actual performance compared to budgets, forecasts, and prior period performance; relating different sets of data to not another; and performing overall reviews of performance and provide management with an overall indication of whether personnel at various levels are effectively pursuing the objectives of the organization

Performance Reviews

Memos that describe flow of transactions

Written Narratives

The write-off of defaulted notes should be approved in writing by a responsible officials and effective procedures adopted for subsequent follow-up on?

the default note

Why would an audit review these statements? 1) Proxy and other filings with SEC or other regulatory agencies 2)conflict-of-interest statements by management 3) Transactions with unusual terms 4)Accounting records for unusual balances or transactions particularly near year-end

to identify related parties transactions

What type pf transactions are these considered? Determining the allowance for doubtful accounts

Estimation Transaction

Test of Controls includes: _______ of appropriate client personnel _______ of documents and reports ________ of the application of controls ______ of the controls

Inquiries Inspection Observation Reperformance

A process, effected by the entity's board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the categories of (1) operations, (2) reporting, and (3) compliance. To each area of internal control there are control objectives and sub objectives.

Internal Control

What is division of duties below an example of? 1) Prepare sales order 2)Approve credit 3)Issue merchandise from stock 4)Shipment 5)Billing 6) Invoice verification 7)Maintenance of control accounts 8) Maintenance of customers' ledgers 9) Approval of sales returns and allowances 10)Authorization of write-offs of uncollectible accounts

Internal control activity over A/R and Revenue

Amount used to create a range, set by + or - limits from the sample results, within the true value of the population characteristic being measured is likely to lie; Precision, wider the interval is more confident but less precise conclusion; can be used to construct a $ interval

Allowance for Sampling Risk

A method of sample selection; select items on an arbitrary basis, but without conscious bias

Haphazard Selection

A system that allows for easier control inventories and EDI to coordinate production and purchasing

IT Systems

Audit procedures performed to obtain an understanding of the client and its environment, including its internal control. Some of the information obtained by performing these procedures may be used by the auditor as audit evidence to support assessments of the risks of material misstatement. Risk assessment procedures include (a) inquiries of management and others within the entity, (b) analytical procedures, and (c) observation and other procedures, including inquiries of others outside the entity.

Risk Assessment Procedures

This factor has a significant effect on allowance for sampling risk and the sampling risk its self

Sample Size

Risk that the auditor's conclusion based on a sample may be different from the conclusion they would reach if they examined every item in the population

Sampling Risk

Under this section in regards to the approach to the Audit of Internal controls applies to public companies with a market capitalization of $75 million or more, and for these companies the auditors audit internal control as a part of the integrated audit as follows: 1) Plan the engagement 2) Use a top-down approach to identify the controls to test 3) Test and Evaluate design effectiveness of internal control 4) Test and evaluate operating effectiveness of internal control 5) Form an opinion on effectiveness of internal control

Section 404b

Auditor that uses the report

User Auditor

Kiting schemes rely upon the existence of a "______" in which transactions are not processed in real time

float period

What value is AR should on the balance as?

net realizable value

Auditors must consider all five internal control components including areas that are difficult to control like...?

non-routine transactions

What does these things potentially cause for...? 1) Sales with unusual right to return 2) Side agreements 3)Franchise fees 4)Bill and hold transactions 5) Sales using notes with unusual interest rates 6) Percentage-of-completion method of revenue recognition •6)Multiple element agreements

potential revenue recognition problems

What type pf transactions are these considered? Revenue, purchases, and cash receipts and disbursements

routine transactions

Revenue Cycle Controls should include segregation of duties between _____ & collection

sales

Revenue cycle control should include a credit approval on ____ transactions.

sales

Revenue cycle control should include the matching of ___ invoice and shipping documents

sales

What are the two examples of misstatements of kiting?

1) Date of recording per transfer per the books are from different financial statement periods 2) Date the check was recorded by the bank is from financial statement period prior to books

Obtaining the understanding of Procedures include:

1) Inquiring of entity personnel 2) Observing the application of specific controls 3) Inspecting documents and reports 4) Tracing transactions through the information system relevant to financial reporting

What are the 5 steps in audit documentation of receivables and revenue?

1) Lead schedules for receivables and net revenue and working papers 2) Comparative analyses of revenue 3) Documentation of internal control 4) Risk Analyses and audit plan/program 5) Aged trial balance of AR, other AR, NR and related interest, allowance for doubtful accounts/notes

What are the 3 reasons that auditors devote a large proportion of total audit hours even though cash typically has a small account balance?

1) Liabilities, revenues, expenses, and most other assets flow through cash 2) Most liquid asset so greater temptation for misappropriation 3) High Risk Account

What are the two audit implications of the substitutes checks under the Check 21 Act?

1) Need to rely on substitute check for evidence of check 2) Impossible for clients to kite checks

What are specific practices that should apply for internal controls in small business?

1) Record all cash receipts for small businesses 2) Deposit all cash receipts intact daily 3) Make all payments serially numbered checks, w/exceptions of petty cash disbursements 4) Reconcile bank account monthly and retain copies 5) Use serial numbered invoices, POS, and receiving reports 6) Issue checks to vendors only in payment of approved invoices that have been matched with purchase orders and receiving reports 7) Balance subsidiary ledger with control accounts 8) Prepare comparative financial statements monthly to disclose significant variations in any category of revenue or expense

The 3 Objectives for the Audit of Cash:

1) Use the understanding of the client and its environment to consider inherent risk(including fraud risks related to cash) 2) Obtain an understanding of internal control over cash 3) Assess the risks of material misstatement of cash and design tests of controls and substantive procedures that: a)Existence b)Completeness c) Cutoff & Accuracy d) Rights E) Presentation & Disclosure

What are the 3 monitoring activities for an internal control of inventory?

1) observation by supervisors of performance 2) Quality/Performance reviews 3) Formal program to consider improvements noted by the internal auditor

Significant estimate made by management, best evidence of collectibility is subsequent payment; these payments should be analyzed subsequent to balance sheet date and the subsequent payments inspected should be documented; and develop and estimate and evaluate reasonableness of managements estimate

Allowance for Doubtful Accounts

What does these deal with specifically in regards estimating and evaluating the reasonableness of managements estimates? 1)Compare the details of the aging of accounts receivable to prior years' aging. 2)Investigate the credit ratings for delinquent and unusually large accounts. 3)Review confirmation exceptions for an indication of amounts in dispute or other clues as to possible uncollectible accounts. 4)Summarize in a working paper those accounts whose collectability is doubtful based on the preceding procedures. List customer names, doubtful amounts, and reasons for considering these accounts doubtful. 5)Review with the credit manager the current status of significant doubtful accounts 6) Compute relationships, such as the number-of-days'-sales in accounts receivable and the relationship of the valuation allowance to (1) accounts receivable and (2) net credit sales.

Allowance for Doubtful Accounts

what are these examples of? 1)General Checking account 2) Payroll Checking Accounts 3) Petty Cash 4) Savings Account

Cash Sources

What are these all controls over? 1)Segregation of duties over purchases and custody of inventory 2)Use of pre-numbered requisitions, purchase orders, and receiving reports 3) Procedures for authorizing purchase transactions and verifying them for payment 4) General ledger control of inventories and reconciliation to production records 5)Cost accounting controls 6)Analysis of variances from standard costs 7)Use of perpetual records for inventories 8) Use of appropriate procedures for taking inventory 9) Appropriate physical controls over inventories

Conversion cycle

What is the primary audit objective of this substantive procedure for Cash?; Verify the client's cutoff of cash transactions, analyze bank transfers occurring year-end

Cutoff, existence, occurrence, rights, and completeness

This is a deficiency over financial reporting that exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect material misstatements on a timely basis

Deficiency of internal control

A test that is used both as a test of control and substantiating the dollar amount of an account balance(overstated/understated/accurate)

Dual Purpose Test

1) Do not permit any one employee to handle a transaction from beginning to end 2) Separate cash handling from record keeping 3) Centralize receiving of cash to the extent practical 4) Record cash receipts on a timely basis 5) Encourage customers to obtain receipts and observe cash register totals 6) Deposit cash receipts daily 7) Make all disbursements by check or electronic funds transfer, with the exception of small expenditures from petty cash 8) Have monthly bank reconciliations prepared by employees not responsible for the issuance of checks or custody of cash; completed reconciliation should be reviewed promptly by an appropriate official 9) Monitor cash receipts and disbursements by comparing recorded amounts to forecasted amounts

Examples of Cash Guidelines for Internal Control

What primary audit objective does this substantive procedure cover in the terms of financial investments?; Perfume Analytical Procedures, make independent computations of revue from securities

Existence Rights Occurence Completeness

What is the primary audit objective of this substantive procedure for Cash?; Obtain analyses of cash balances and reconcile them to general ledger

Existence and Accuracy

What primary audit objective does this substantive procedure cover in the terms of financial investments?; Obtain analysis of investments and related accounts to reconcile ledger.

Existence and Rights Occurrence

What primary audit objective does this substantive procedure cover in the terms of financial investments?; Inspect securities on hand and review agreements underlying derivatives, Confirm securities and derivatives instruments with holders and counterparts, Vouch selected purchases and sales of investments during the year; verify the client's cutoff of investment transactions

Existence and Rights Occurrence and Accuracy Completeness Cutoff Valuation

What two departments work together to make sure.....: 1) All cash that should have been received was in fact received, recorded accurately and deposited promptly 2) Cash Disbursements have been made for authorized purposes only and have been properly recorded 3) Cash balances are maintained at adequate, but nor excessive levels by forecasting

Finance & Accounting Departments( Management Assurance)

What are these examples of? 1. Obtain listings of inventory and reconcile to ledgers. 2. Evaluate the client's planning of physical inventory. 3. Observe the taking of physical inventory and make test counts. 4. Review the year-end cutoff of purchases and sales transactions. 5. Obtain a copy of the completed physical inventory, test its clerical accuracy, and trace test counts. 6. Evaluate the bases and methods of inventory pricing. 7. Test the pricing of inventories. 8. Perform analytical procedures. 9. Determine whether any inventories have been pledged and review purchase and sales commitments. 10. Evaluate financial statement presentation of inventories and cost of goods sold, including the adequacy of disclosure.

Further audit procedures that are substantive procedures for inventories and COGS

What are these examples of? 1)Obtain analyses of cash balances and reconcile them to the general ledger. 2) Confirm cash balances with financial institutions. 3)Obtain or prepare reconciliations of bank (financial institution) accounts as of the balance sheet date and consider the need to reconcile bank activity for additional months. 4) Obtain a cutoff bank statement containing transactions of at least seven business days subsequent to balance sheet date. 5) Count and list cash on hand. 6) Verify the client's cutoff of cash receipts and cash disbursements. 7) Analyze bank transfers for the last week of audit year and the first week of following year. 8) Investigate any checks representing large or unusual payments to related parties. 9) Evaluate proper financial statement presentation and disclosure of cash.

Further audit procedures that include substantive procedures of cash transactions and balances

What are these responses too? 1) Assigning more experience staff or those with specialized skills 2) Providing more supervision and emphasizing the need to maintain professional skepticism 3) Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed 4) Increasing the overall scope of audit procedures, including the nature, timing or extent

High Risk(Financial)

What are these examples of...: 1) Segregation of duties 2) Payment by check or electronic funds transfer 3) Pre-numbered checks 4) Match of purchase order and receiving by authorized check signer 5) Cancel of Supporting Documents 6) Authorized check signer should mail checks 7) Monthly bank reconciliation

Internal controls over cash disbursements

What are these examples of.... 1) Initial listing of cash receipts 2) Custody and depositing of cash receipts 3) Maintenance of customer account records 4) Reconciliation of customer's ledgers with control accounts 5) Mailing monthly statements to customers 6) Collection activity and past-due accounts 7) Direct receipt of funds by financial institution

Internal controls over collection of receivables(cash receipts)

Clients count and supervise inventory, auditors observe and determine that all items are included, employees comply with instructions, are alert for missing or damages items, record final count and shipping docs issued before taking inventory, make test counts and tag control

Inventory observation in audit

Revenue Cycle control should include clerical accuracy checks on _____.

Invoices

Manipulating bank balances to conceal cash shortages; manipulation that utilize temporarily overstated bank balances to conceal cash shortages or meet short-term cash needs

Kiting Checks

Errors may arise from misunderstanding of instructions, mistakes of judgement/fatigue, controls that depend on the segregation of duties may be circumvented by collusion, management may override the structure, compliance may deteriorate over time

Limitations of Internal Control

What are these risk related too in regards to inventories and COGS? 1)Inventories constitute a large asset and very susceptible to major errors and fraud. 2)The accounting profession allows numerous alternative methods for valuation of inventories, and different methods may be used for various classes of inventories. 3)The determination of inventory value directly affects the cost of goods sold and has a major impact on net income for the year. 4)The determination of inventory quality, condition, and value is inherently a more complex and difficult task than is the case with most other elements of financial position.

Material Misstatements

One of the Two types of methods confirmations in which the client makes formal requests; ask debtor to advise the auditors only if the balance should is incorrect; low level of assessed risk of material misstatement; large number of small balances; no reason to believe respondent will ignore the request

Negative Confirmation

Risk pertaining to non-sampling errors and can be reduced to low levels though effective planning and supervisions of audit engagements

Non-Sampling risk

The auditor estimates sampling risk by using professional judgement rather than statistical techniques; provides no means of quantifying sampling risk; sample may be larger than necessary or auditors may unknowingly access a higher than acceptable degree of sampling risk

Non-Statistical Sampling

What are these sources of? 1) Written promises to pay certain amounts at future dates 2) Notes for substantial amounts 3) Installment note or contract can allow seller to hold lien on goods

Notes Receivable

What are these examples of? 1) Obtain an aged trial balance of trade accounts receivable and analyses of other accounts receivable and reconcile to ledgers. 2) Obtain analyses of notes receivable and related interest. 3) Inspect notes on hand and confirm those with holders. 4) Confirm receivables with debtors. 5) Review the year-end cutoff of sales transactions. 6) Perform analytical procedures for accounts receivable, notes receivable, and revenue. 7)Review significant year-end sales contracts for unusual terms. 8)Test the valuation of notes receivable, computation of interest income, interest receivable, and amortization of discount or premium. 9) Evaluate the propriety of the client's accounting methods for receivables and revenue. 10) Evaluate accounting estimates related to revenue recognition. 11) Determine the adequacy of the client's allowance for uncollectible accounts. 12) Ascertain whether any receivables have been pledged. 13) Investigate any transactions with or receivables from related parties. 14) Evaluate the business purpose of significant and unusual sales transactions. 15) Evaluate financial statement presentation and disclosure of receivables and revenue.

Perform further audit procedures that are substantive procedures for receivable and revenue

What are the examples of? A) Trace several transactions for purchases and sales of investments through the accounting system. b) Review and test reports of investment activity prepared for the investment committee. c) Inspect reports by internal auditors regarding their periodic inspection and review of securities and derivative instruments. d) Inspect monthly reports on securities owned, purchased, and sold and amounts of revenue earned and budgeted. If necessary, revise the risk of material misstatement based on the results of tests of controls.

Performing further audit procedures by the Test of Controls for the audit of financial investments

What are these examples of? 1) Obtain or prepare analyses of the investment accounts and related revenue, gain, and loss accounts and reconcile them to the general ledger. 2) Inspect securities on hand and review agreements underlying derivatives. 3) Confirm securities and derivative instruments with holders and counterparties. 4) Vouch selected purchases and sales of financial investments during the year and verify the client's cutoff of investment transactions. 5)Review investment committee minutes and reports. 6) Perform analytical procedures. 7) Make independent computations of revenue from securities. 8) Inspect documentation of management's intent to classify derivative transactions as hedging activities. 9) Evaluate the method of accounting for investments. 10) Test the valuation of financial investments. 11) Evaluate financial statement presentation and disclosure of financial investments.

Performing further audit procedures(substantive procedures for investment transactions and year-end balances) of the Audit of financial investments

Inventory method where inventory in updated constantly, strong internal control over inventories, and may use test counts throughout the year; allows companies to control high costs of holding excessive inventory; provides information essential to purchasing, sales, and production-planning policies

Perpetual inventory record

What are these examples of? 1) Misstatement of recorded value of investments 2) Unauthorized investment transactions 3) Complete recording of investments 4) Inadequate disclosure of the nature of investment activities

Potential Misstatements of financial Investments

What primary audit objective does this substantive procedure cover in the terms of financial investments?; Evaluate financial statement presentation and disclosure of financial investments

Presentation

What is the primary audit objective of this substantive procedure for Cash?; Investigate payments to related parties, Evaluate financial statement presentation and disclosure

Presentation and Disclosure

Reconciles the account balance and reconciles cash transactions during a specified period used to identify: 1) Cash receipts and disbursements recorded in the accounting records, but not on the bank statement 2) Cash receipts and disbursements recorded on the bank statement, but not the accounting records 3) Cash receipts and disbursements recorded at different amounts by the bank than in the accounting records

Proof of Cash(look up)

Examine on a test basis the purchase invoices and receiving reports for several days before and after the inventory date. • Determine that liability has been recorded for all goods in inventory • Make sure shipments and purchases recorded in proper period

Proper cutoff of inventory

Clearly specify objectives to allow the identification and assessment of risks related to those objectives, identify and analyze risks to the achievement of its objectives to determine how they may be managed, consider potential fraud relating to the achievement of objectives, and identify and assess changes that could impact internal control

Risk Assessment

What are these example of? 1) Identifying controls at service organizations that provide financial services and are part of the client's information system. 2) Obtaining an understanding of information systems for securities and derivatives that are highly dependent on computer technology. 3) Applying complex accounting principles to various types of financial investments. 4)Understanding the methods used to determine the fair values of financial investments, especially those that must be valued using complex valuation models. 5) Assessing inherent and control risk for assertions about derivatives used in hedging activities.

Specialized Knowledge to Audit Financial Investments

A confirmation of amounts on deposit by direct communication with financial institution officials standard form agreed to by 1) AICPA 2) American Bankers Association 3) Bank Administration Institute and only addresses only the client's deposit and loan balances and this confirmation may be performed electronically if properly controlled

Standard Confirmation

Which steps of the overall approach of an audit relates most directly to the role of internal control in the financial statement audits? 1) plan the audit 2) obtain an understanding of the client and its environment. including internal control 3) Assess the risks of material misstatement and design further audit procedures 4) Perform further audit procedures 5) Complete the audit 6) Form an opinion and issue the audit report

Steps 2-4

A method of sample selection; technique of dividing population into relatively homogenous subgroups ex: stratum 1; accounts of $10,000 and over, Stratum 2; accounts of $5,000 to $9,999.99, Stratum 3; accounts of less than $5,000

Stratification

The resulta of tests of controls are used to determine the nature, timing, and extent of what procedures?

Substantive

As sample size increases, what happens to sampling risk and allowance?

decrease