Audit Final

In the McKinley fraud case study, how does the fraud triangle explain his actions?

Pressure -> McKinley needed funds ASAP to pay off an outstanding bank note Rationalization -> McKinley knew that this was critical for avoiding embarrassment as a CFO that couldn't manage their own finances. Opportunity -> As the CFO that designed the internal controls, McKinley could create journal entries that would go by unnoticed (since he had the final say on journal entries).

What is an example of a test of details of balance that can be applied to inventory? What assertions does this cover?

Procedure -> Attendance at the inventory count (auditor physically observes inventory) Applicable assertions: • Existence • Valuation (Ie. Does the auditor observe damaged inventory?) • Completeness (The auditor can compare with perpetual records)

What is sampling risk? What are two ways that an auditor can reduce it?

Sampling risk is the risk that an auditor reaches an incorrect conclusion because the sample chosen was not representative of the population from which it was drawn (Even though the sampling method was properly selected, applied, and interpreted). This can be reduced by: 1) Giving every item an equal chance of selection 2) Increasing the sample size

For the cash receipts class of transactions, what is an internal control that applies to the "occurrence" assertion?

Segregation of duties between handling cash and record-keeping

For the sales class of transactions, what is an example of internal control related to the "completeness" assertion?

Shipping documents are sequentially pre-numbered and accounted for (manual check or computerized)

What is the specific timing for substantive analytical procedures that audit A/R balances? When are these procedures done relative to other substantive procedures?

Substantive analytical procedures are usually done on year-end numbers (given that it often compares to prior years). These are generally always done before substantive tests of details of balances (TODB).

What are five examples of policies/procedures that a client might apply during an inventory count that would serve as internal controls?

1) 2 person count teams 2) Pre-numbered tags (with proper sequencing) 3) Control of count sheet by the supervisor 4) Halting shipping/receiving goods 5) Segregating any consignment items

What are two qualitative factors that should be accounted for when determining whether there was material misstatement (in any regard)?

1) Adequacy of note disclosures - particularly with contingent liabilities 2) Client did not disclose that a large portion of revenue was derived from sales to related parties

What are three examples of instances where a substantive analytical procedures might be applied in the execution stage of an audit?

1) As a primary (persuasive) test of a balance 2) As a corroborative test in combination with other procedures (tests of details of balances) 3) To provide at least some minimal level of support for the conclusion on a balance

What are four examples of limited-scope auditing services?

1) Audit of a single F/S and specific elements, accounts, or items of a F/S (CAS 805) 2) Engagement to review historical financial statements or specific elements (CSRE 2400) 3) Attestation engagements to report on compliance (CSAE 3530) -> To validate the client's compliance with particular accounting and financial reporting requirements that have been included in terms of a contract or agreement (Ie. have they met covenant restrictions in a loan agreement?) 4) Reports on the results of applying specified auditing procedures to financial information other than F/S (9100) -> No opinion is expressed and the client specifies the procedures to be performed

What are two advantages of non-statistical sampling compared to statistical sampling?

1) Avoids preparatory work and population studies (time-consuming and expensive, particularly for small populations) 2) Allows for experience and judgements in unique circumstances

What are three auditor responses to the risks of material misstatement due to fraud at the financial statement level?

1) Carefully select the audit team personnel and supervision 2) Consider the client's selection of accounting policies 3) Carefully apply NET to substantive procedures

What are five substantive tests of details of balances for auditing the completeness assertion of the accounts payable ledger?

1) Cash disbursements -> Examine payments made after year-end and see if they relate to year-end payments (this might uncover unrecorded liabilities) 2) Vendor invoices -> Examine open/unpaid vendor invoices after year-end to see if they relate to year-end payables (may need to link back to receiving reports) 3) Receiving reports -> Trace receiving reports issued before year=end to related vendor invoices. Check if an accrual has been missed. 4) Vendor statements -> Reconcile to the accounts payable sub-ledger 5) Confirmations -> Unlike receivables, we would send confirmations to vendors that show a low/zero balance at year-end, but which could have a bigger balance (Ie. a major supplier that normally contributes to a sizeable portion of the ledger).

What are three examples of analytical procedures that can be applied when auditing inventory?

1) Compare gross margin % with previous years 2) Compare inventory turnover with prior years )for both raw-materials and finished goods) 3) Compare unit costs of inventory with previous years

What supporting documents would be used to audit assertions related to the follow business functions for the sales and collection cycle: 1) Customers 2) Sales Department 3) Credit Department 4) Shipping 5) Accounting (A/R Billings) 6) Accounting (Cash Receipts)?

1) Customers -> Customer purchase order (CPO) 2) Sales Department -> Sales Order 3) Credit Department -> Credit application/credit report 4) Shipping -> Shipping document 5) Accounting (A/R Billings) -> Accounting (A/R Billings) 6) Accounting (Cash Receipts) -> Cheque received or E-payment

When applying variables sampling, what are the two methods for estimating likely misstatements (LM)?

1) Difference estimation - Focuses on the total misstatement in relation to the sample size (Ie. In a sample size of 10 with a misstatement of $1,000, the proportion would be applied based on the total number of customers) 2) Ratio estimation - Focuses on the portion of the sample dollars misstated (Ie. In a sample size of $20,000 with a misstatement of $1,000, the proportion would be applied based on the total recorded value in that account)

What are the five business functions that comprise the PPP cycle and what type of supporting documentation might an audtior seek in each?

1) Employee initiates order -> Purchase Requisition 2) Purchasing Department -> Purchase Order 3) Receiving Department -> Receiving Report 4) Accounts Payable (Accounting) -> Vendor Invoice 5) Accounting (Cash Disbursement) -> Cheque Payment

What are three risk assessment procedures that pertain specifically to identifying fraud?

1) Enquires of management and the audit committee (as the responsibility for preventing and detecting fraud ultimately rests with them) 2) Consideration of fraud risk factors (red flags) -> Events/conditions that indicate and incentive to commit or provide an opportunity to commit fraud (or a general attitude) 3) Analytical procedures -> To uncover unusual or unexpected relationships

What are the five conduct requirements for an auditor in accordance with Canadian Auditing Standards (CAS 200)?

1) Ethical requirements -> Compliance with a code of professional conduct (Ie. Maintaining an objective state of mind in fact and appearance; exercising due care) 2) Professional Skepticism -> Pursuing contradictory audit evidence and indications of fraud. 3) Professional Judgement -> In assessing the materiality of information, in risk assessments, and in assessing management's judgements/estimates (Ie. In areas like bad-debt expense and depreciation) 4) Sufficient Appropriate Audit Evidence and Audit Risk -> The auditor collects sufficient and appropriate evidence and obtains an understanding of the entity and its environment (including internal controls) 5) Conduct of an audit in accordance with CAS -> Adequate planning and good direction of assistants (including reviewing)

What are two alternative substantive procedures to A/R confirmation letters (if they are either not used, ineffective, or not replied to)?

1) Examine cash receipts for evidence of subsequent payments by customers (Ie. after year-end) 2) Examine bills of lading and shipping documentation for evidence of occurrence and existence of the initial transaction

What assertions are addressed via the A/R confirmation letter procedure?

1) Existence 2) Rights (to some extent, although this does not address factoring of A/R) 3) Valuation (specifically for the cost of the A/R, not in how it is impaired)

What are four methods in which companies can commit inventory fraud?

1) Fictitious inventory 2) Manipulation of inventory counts 3) Non-recording of purchases 4) Fraudulent inventory capitalization

In the Crazy Eddie case study, what five methods of financial fraud were employed?

1) Fictitious revenue 2) Fraudulent asset valuations 3) Timing differences 4) Concealed liabilities and expenses 5) Improper disclosures

What are three auditing procedures that an auditor should conduct after an inventory count occurs?

1) Follow-up on book-to-physical adjustments 2) Pricing tests (for "Cost" and Market) - Apply the selected method for determining cost (FIFO, Weighted-average) and trace back to invoices for proper calculation - Determine if different valuation methods need to applied for selected items (IE. Net-realizable value) 3) Compilation tests -> Are quantities properly brought forward from the inventory count? - Recalculate quantity*price to obtain extended value - Foot inventory schedules (column addition) - Reconcile perpetual inventory records/schedules to the G/L

What are the two types of fraud that can occur in an entity?

1) Fraudulent financial reporting -> This is a type of fraud that is usually committed by the organization to the benefit of said organization. This includes acts like earnings management and income smoothing. 2) Misappropriation of assets -> This is a type of fraud usually perpetrated by lower level employees committed against the organization to the benefit of individual employees. NOTE: These are rarely material and, therefore, are less of a concern for an auditor

What are three auditor responses to the risks of material misstatement due to fraud at the assertion level?

1) Gather more reliable audit evidence 2) Increase the sample size 3) Collect additional corroborating evidence

What are two examples of internal controls unique to the inventory and warehousing cycle?

1) Having a custodian of inventory and warehousing 2) Segregation of people with custody of inventory from people who maintain the perpetual records (Segregation of duties)

What are two examples of substantive tests that could be performed on the sales class of transactions in these two scenarios: 1) High detection risk 2) Low detection risk

1) High detection risk -> A substantive analytical procedure would be sufficient in this instance. An example of this would be a gross margin analysis compared with historical financial statements (regression analysis) 2) Low detection risk -> A test of detailed balances would be necessary in this instance. An example of this would be backwards testing from the ledger to source documents to confirm that transactions actually occurred.

What are three examples of material misstatements that can happen in relation to areas other than just net income?

1) Individual accounts (e.g. accounts receivable) 2) Subtotals (e.g. Current assets) 3) Total (e.g. Total assets)

Why are internal controls not enough to deter fraud? (Two reasons)

1) Internal controls are only supposed to provide reasonable assurance 2) There are few controls that cannot be overridden or circumvented by people with sufficient motivation

What are four reasons for which representative item testing (as opposed to 100% testing) is done during an audit?

1) Not seeking absolute certainty 2) Corroborative evidence 3) Examining all date may still not provide absolute certainty 4) Cost-benefit

What are five advantages of statistical sampling over non-statistical sampling?

1) Objective and defensible (mathematical results with a defined sampling risk) 2) Consistency of audit work 3) Avoids over-sampling 4) Quantifiable sampling error 5) Not auditor-specific

What types of audit procedures would an auditor perform during an inventory count? (Provide six examples)

1) Observe compliance with Client proposed policies/procedures for the inventory count 2) Ensure that counts by client personnel are being done properly/effectively 3) Observe the quality/condition of goods (obsolescence?) 4) Auditor does their own test counts (both representative and specific item testing) 5) Making note of all auditor counts and ensuring any book-to-physical adjustments occur (to ensure perpetual inventory records and G/L reflect the adjustments) 6) Obtain cutoff information such as: - Last 5 bills of lading (Sales-A/R cutoff; COGS-Inventory cutoff) - Last 5 receiving reports (acquisition cutoff)

For a review of the financial statements (CSRE 2400 level of engagement), what must the practitioner do? (7 things)

1) Obtain an understanding of the entity and its environment 2) Identify areas in the F/S where material misstatements are likely to arise 3) Perform inquiry and analytical procedures to address material F/S items and items where a risk of material misstatement has been determined likely to exist 4) Consider whether the data from the entity's accounting system records are adequate for the purpose of performing analytical procedures 5) Perform procedures to address specific matters, such as related party relationships/transactions, fraud, non-compliance with laws or regulations, going concern 6) Obtain evidence that the F/S agree with, or reconcile to, the entity's underlying accounting records 7) If practitioner becomes aware of a matter in the F/S that may be materially misstated, practitioner must perform additional procedures sufficient either to conclude whether or not the F/S are materially misstated

What are three cycles with internal controls that impact the assertions for inventory and in what regard?

1) PPP Cycle (Acquisitions and Payment) -> Raw materials purchase 2) Payroll and personnel cycle -> Direct labour for WIP inventory 3) Sales and collection cycle (sales of finished goods)

In general, what type of evidence might an auditor accumulate and evaluate?

An auditor may collect any of the following: • Shipping documents • Sales Invoices • General ledgers • Accounts receivable confirmations • Bank confirmations • Legal letters • Months of meetings/board of directors

What are the three types of A/R confirmation that an auditor can undertake?

1) Positive confirmation - filled in -> Requests that the customer respond as to whether or not the balance is correct (amount or information is stated on the letter). This is moderately expensive and moderately reliable. 2) Positive confirmation - blank -> Requests that the customer indicates the amount owed at a certain date (blank confirmation). This is the most expensive and most reliable method. 3) Negative confirmation -> Requests that the customer responds only if the customer disagrees. This is the least costly and least reliable.

For the acquisitions class of transactions (PPP cycle), what are two internal controls that relate to the completeness assertion?

1) Purchase orders are pre-numbered and accounted for 2) Receiving reports are pre-numbered and accounted for

What are five classes of transactions that occur in the sales and collection cycle (RRR Cycle)

1) Sales Class 2) Cash Receipts Class 3) Sales Returns and Allowances Class 4) Charge-offs of uncollectible class 5) Bad Debt Expense Class

What are four issues that must be addressed in inventory with respect to cut-off?

1) Sales of finished goods 2) Sales returns and allowances 3) Purchases of raw materials 4) Purchases returns and allowances

What are four types of internal controls that might be implemented for the cash disbursements class of transactions?

1) Segregation of duties (e.g. A/P clerk should not have signing authority on the bank account) 2) Bank reconciliation 3) Reconciling monthly statements 4) Cheque signers or electronic approvers should review documents prior to payment

For the cash receipts class of transactions, what are five internal controls that apply to the "completeness" assertion?

1) Segregation of duties between handling cash and record-keeping (Ie. Mailroom envelopes are sorted, where cheques are sent to the treasury group for depositing and a remittance advice is sent to accounting personnel) 2) Use of remittance advices or pre-listing of cash 3) Reconciliation of remittance advices to deposit slip 4) Endorsement of cheques received 5) Monthly customer statements to customers with independent follow-up of customer complaints

For the acquisitions class of transactions (PPP cycle), what are three internal controls that relate to the classification assertion?

1) Supervisor approval of journal entries prior to recording 2) Adequate chart of accounts (e.g. explanation of what types of charges should be recorded in which accounts 3) Compare balances with budget

For the acquisitions class of transactions (PPP cycle), what are two internal controls that relate to the occurrence assertion?

1) Supporting documents accompany the recording of a purchase (purchase requisition, purchase order, receiving report, and vendor's invoice) 2) Approval of purchase order

What are three auditor responses to the risks of material misstatement due to fraud as a product of management override of controls?

1) Test unusual journal entries and year-end adjustments 2) Evaluate accounting estimates 3) Determine the business rationale for significant transactions (Ie. special-purposes entities, related party transactions, and overly-complex business transactions)

What are three reasons for which negative A/R confirmation letters are the least reliable type of confirmation letter?

1) The customer might not have received the brokerage statement 2) The customer might find the error to be in their favour and thus won't respond 3) The customer might just ignore the letter

What are the nine distinct parts of an independent auditor's report (in order)?

1) Title (Ie. Independent Auditor 2) Addressee (Ie. To the shareholders of...) 3) Opinion 4) Basis for Opinion 5) Key Audit Matters 6) Responsibilities of Management and Those Charged with Governance for the Financial Statements 7) Auditor's Responsibilities for the Audit of the Financial Statements 8) Name of Engagement Partner 9) Date of report

What are the fives steps that an auditor should take during the planning phase (specifically for the PPP Cycle)?

1) Understand the entity & it's environment 2) For each cycle, identify internal controls that exist 3) Preliminarily assess CR and risk of material misstatement (IR x CR) 4) Evaluate cost benefit of testing controls and following a combined audit approach 5) If you want to follow a combined approach, determine the NET of the following audit procedures: • Test the controls • Substantive procedures

What are 6 general details that an auditing partner will want to know by the end of the audit planning phase?

1) Users of the F/S and a quantitative/qualitative assessment of materiality 2) Acceptable level of audit risk 3) Risk of material misstatement (IR + CR) on the F/S level 4). Risk of material misstatement (IR + CR) at the assertion level 5) Audit approach/strategy (general) -> Purely substantive or combined audit approach 6) Specific issues, including relevant audit procedures

What are the two different theories as to why employees commit fraud?

1) Wages in kind - If employees feel they are not being fairly treated or.adequately compensated, they are more likely to try and "balance the scales". 2) Fraud triangle - Opportunity, pressure, and rationalization must generally be present for fraud to take place.

What is a reservation in an auditor's report? What are the two natures of the matter that can give rise to a modified opinion?

A reservation occurs when an auditor modifies their opinion in the auditor's report in accordance with CAS 705. This can happen if the auditor: A) concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement (GAAP Departure); OR B) Is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement (Scope limitation)

What is the fundamental difference between accounting and auditing?

Accounting -> Pertains to recording, classifying, and summarizing transactions and events in accordance with GAAP (bookkeeping and F/S preparation). Auditing -> Pertains to accumulating and evaluating evidence to determine if the above information is prepared in accordance with GAAP.

What are the two classes of transactions that comprise the Purchases-Payables-Payments (PPP) cycle?

Acquisitions Cycle: DR Purchases, inventory, Capital Assets, or Expenses CR Accounts Payable Cash Disbursements Class DR Accounts Payable CR Cash

How are schedules of unadjusted misstatements assembled? What do these help determine?

After an individual account is audited, any identified misstatement (IMO or LM) that is in excess of the dollar scope is posted to the SUM for overall consideration. Collectively, this helps determine whether the F/S are materially misstated as a whole (as opposed to just individual items).

Although assertions made for accounts receivables are balance assertions, how do transaction class assertions relate to these assertions?

Although A/R is a balance sheet ledger, it's balance changes throughout the year as a product of: 1) Sales (transactions) 2) Cash receipts (transactions) Thus, assertions relating to these classes are relevant in assessing the A/R ledger. This is also why these three ledgers are often audited together in the cycle approach.

What account balance assertion would an auditor be most concerned with for accounts payable? Why?

Auditors are most concerned with the completeness assertion for accounts payable, given that there is a higher likelihood for misstatement as a product of management bias/earnings management. This is because they might be driven by incentives like loan covenants.

What are book-to-physical adjustments? Why do these occur, what journal entry would a a client make, and what role does the auditor play in this?

Book-to-physical adjustments are adjustments made to reconcile the difference in perpetual records and physical inventory. These are necessary because of inevitable shrinkage/theft/breakage. The journal entry for this would be as follows: DR COGS/Shrinkage CR Inventory An auditor should ensure that the proper adjustment is done.

What is CAS and ISA?

CAS -> Canadian assurance standards ISA -> International standard of auditing/assurance

Under what circumstances would an auditor generally send A/R confirmation letters?

CAS 505 does not specifically require that auditors perform A/R confirmations, but an auditor will generally send these unless A/R is immaterial or response rates are expected to be inadequate/unreliable.

When an auditor does their own test counts during an inventory count, how would they address the completeness and existence assertions for the inventory B/S ledger?

Completeness -> Floor to tags/sheets (to perpetual records). The auditor ensures that the selected items are represented in the perpetual records Existence -> Tags/Sheets to floor. The auditor will ensure that selected items in the perpetual records exist on the floor.

In the Wirecard case study, what fraudulent activity occurred and what did this prompt the auditors to do?

In this case, Wirecard was found to have fraudulently booked 1.9 billion euros that likely never existed. Given that the auditors were unable to confirm the existence of this balance in the trust accounts the company claimed they were being held, they issued a disclaimer of opinion (due to a material and pervasive scope limitation)

In the Bondfield case study, what form of fraud was uncovered?

In this case, a number of conspirators both within and outside of the company created false invoices to suppliers and contractors that didn't actually offer any value to the company (Ie. No supplies purchased, no real services offered).

A sales transaction is accidentally recorded twice. What class of transactions does this impact, what assertion does this concern, and what is an internal control that could prevent this?

In this instance, this relates specifically to the sales class of transactions (and the occurrence assertion). An internal control that could avoid this would be a periodic review of exception reports generated by an accounting system. Ideally, the accounting system would detect a mismatch between sales invoice # (if they're sequentially ordered) and would show the duplicate transaction.

What duration is an assessment of internal controls valid for?

Internal controls are evaluated based on the given period of reliance (Ie. the audited year). Thus, an internal control that was deemed effective during a prior year is not necessarily effective in the subsequent year.

What is a Key Audit Matter? What is the consideration process for evaluating whether something is a Key Audit Matter? What is disclosed in this section?

KAM's are matters that, in the auditor's professional judgement, were of the most significance in the audit of the F/S. These are determines via a judgement-based decision-making framework as informed by CAS 701. In this section of the report, the following items are disclosed: • Why the matter is considered one of the most significant in the audit • How the matter was addressed in the audit

What is a lapping scheme? How might this be detected?

Lapping involves covering up the receipt of cash for an accounts receivable by applying it to a later account (and iteratively doing so). This can be uncovered by: 1) Identifying a trending increase in aging A/R 2) Consistently finding mismatches in balance payments and the accounts that those payments are applied to

On what broad qualitative basis would a misstatement in a F/S be considered material? What about on a quantitative basis?

Misstatements, including omissions, are considered material if they individually or in the aggregate could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. On a quantitative level, this is considered material when it amounts to at least ~5-10% of normalized net income.

What is a common element between most occupational fraud offenders?

Most are typically first-time offenders (Ie. None of them took the job with the intent of committing fraud).

What are the two dimensions that dictate the type of reservations an auditor may have on a set of financial statements?

Nature of matter -> GAAP Departure or Scope limitation Auditor's judgement on the pervasiveness of the effects/possible effects -> Material but not pervasive OR material and pervasive

For the sales class of transactions, what is the core difference between the occurrence and completeness assertions with respect to the direction of testing?

Occurrence -> You start with the recorded amounts and look backwards to the source documents (customer purchase order, etc.) to determine whether said transactions actually occurred. Completeness -> You start with the source documents (shipping documents) and determine whether everything is completely represented in the sales revenue ledger.

Why are substantive analytical procedures often considered to be SAAE when auditing payables ledgers in a combined auditing approach?

Oftentimes, these account balances are quite small (Ie. Office expenses, telephone expenses, etc.) and as such, these amounts are not significant. However, some ledgers like legal expenses, R&M expenses, and lease expenses are worth analyzing separately.

What types of audit procedures will generally occur prior to an inventory count?

The auditor will typically review client proposed policies/procedures for the inventory count (essentially their internal controls). The auditor will then select a sample of items in advance for counting by the auditor (applying both representative and specific item testing)

What is the relationship between assertions in the sales and cash receipts transaction classes and the accounts receivable class?

The balance of A/R is comprised of sales and cash receipt transactions throughout a period. Thus, the following linkages between assertions can be drawn:• Sales occurrence -> A/R Existence • Sales completeness -> A/R Completeness • Cash receipts occurrence -> A/R Completeness• Cash receipts completeness -> A/R existence Note that this linkage also suggests that internal controls that impact specific transaction class assertions also impact account balance assertions for the receivables

In the Luckin case study, what was the source of their accounting fraud?

The company failed to disclose related party sales that were essentially large purchases for coffee that was never actually delivered (leading to unrealistic margins).

What is the fundamental difference between fraud and error? Who is primarily responsible for the prevention and detection of fraud?

The core difference between fraud and error pertains to whether the misstatement is intentional or unintentional (respectively). The primary responsibility for preventing and detecting fraud rests both with: 1) Those charged with governance of the entity (Board of Directors/Audit Committee) 2) Management

From an auditor's perspective, what is the final product of an audit?

The independent auditors report

What is the primary responsibility in a compilation engagement (Section 9200)? What criteria should a public accountant follow in deciding whether or not to accept this type of engagement?

The primary responsibility in this engagement is for arithmetical correctness. This is not concerned with compliance with GAAP or completeness of the F/S. The criteria a public accountant should follow in deciding whether to accept this engagement are as follows: 1) They have no reason to believe that the information supplied for the purpose of compilation is false or misleading 2) They believe that the client understands that: • Such F/S may not be appropriate for general purpose use • Uninformed users could be misled unless they are aware of the possible limitations of the F/S, and of the public accountant's very limited involvement

For the sales class of transactions, what is an example of internal control related to the "occurrence" assertion?

The recording of sales is supported by approved customer purchase orders and shipping documents

What is the official purpose of an external audit of financial statements and how is this achieved?

These are done to enhance the degree of confidence of intended users in the financial statements. This is achieved through the expression of an opinion by the auditor on whether the statements are presented fairly in all material respects in accordance with the respective framework.

What are substantive procedures and what are they used for?

These are either analytical procedures or tests of the details of balances that are ultimately used to address the risk assessment for each assertion of each account balance or class of transaction.

What are internal controls (with respect to auditing)?

These are policies and processes implemented by the client to enhance the reliability of the financial statements.

What is a test of details for a balance (generally)? What are three examples of these types of procedures?

These are procedures designed to verify a balance or a transaction by tracing it back to supporting documentation. These procedures include: 1) Confirmations 2) Physical Examination 3) Vouching (going back to source documents)

If counters during an inventory count are found to not be following procedures, what should an auditor do?

They should approach the counters and make them aware of their non-compliance. If they don't comply, then the auditor will need to re-assess CR for inventory (which would ultimately lower the DR, requiring more substantive procedures).

What is the implications behind the date of an independent auditor's report? Who accepts this and what implications does this have on subsequent events?

This date represents the date in which the client (one with sufficient responsibility in the entity; usually board of directors) accepts full responsibility for the financial statements. Thus, this is not the client's year end, but rather during the subsequent events period. Incidentally, this also implies that this date is the last in which the auditor is responsible for reviewing subsequent events.

What is negative assurance?

This is a form of assurance where the reviewer states that nothing has come to their attention that would lead them to believe that the financial statements are NOT, in all material respects, in accordance with GAAP.

What is the purpose of a management representation letter?

This is a letter from the client's management to the auditor that acknowledges management's responsibility for the preparation of the F/S and details of any verbal representations made by management during the course of the audit.

What is the fraud triangle?

This is a model that outlines the three conditions that are generally present when material misstatements due to fraud occur. This includes: 1) Incentives/pressure for fraudulent financial reporting (Ie. Excessive pressures to meet analysts expectations or stock options) 2) Opportunities for fraudulent financial reporting (Ie. Ineffective governance/weak internal controls and the presence of a significant amount of judgement/estimates in accounting) 3) Attitudes/rationalization for fraudulent financial reporting (Ie. Management has aggressive/unrealistic forecasts and a poor "tone at the top")

According to CAS 705 (paragraph 5), what is the meaning of pervasive?

This is a term used in the context of misstatements/scope limitations to describe the effect on the financial statements. These effects are those that, in the auditor's professional judgement, are deemed to be one of the following: 1) To not be confined to specific elements, accounts, or items of the financial statements 2) If so confined, represent or could represent a substantial proportion of the financial statements; 3) In relation to disclosures, are fundamental to users' understanding of the financial statements

What is an assurance engagement?

This is an engagement performed by a public accountant to enhance the reliability of the subject matter.

In general terms, what is Auditing in the context of accounting? Who should auditing be done by?

This is the accumulation and evaluation of evidence about information that comprises the financial statements of an entity for the purposes of reporting on the degree of correspondence between said information and the established criteria for the respective framework (IFRS or ASPE). To preserve the integrity of this reporting, auditing should be performed by a competent, independent person.

What is non-sampling risk? What are two ways that an auditor can reduce it?

This is the risk that an auditor reaches an incorrect conclusion for any reason not related to sampling risk. This arises from auditor failure (a failure to recognize errors or exceptions and a failure to apply effective or appropriate procedures). This can be reduced by: 1) Increasing auditor competence 2) Supervision of staff

Why might an auditor perform A/R confirmations as of an interim date rather than at year-end?

This might be done for practical reasons, given that the turnaround time between year-end and releasing the F/S is quite short. As such, they can sufficiently sample a representative population in order to form estimates prior to year-end, then perform substantive analytical procedures just after year-end. Provided that CR is below 100%, tests of internal controls can also be done during this period.

What is the purpose of the emphasis of matter section of an independent auditor's report? Where is it added and when would it not be warranted?

This section is used to draw attention to an issue that the auditor feels is important to the user's understanding of the F/S and believes has already been adequately and accurately disclosed in the F/S and notes. These are added after the basis of opinion paragraph, but may not be required if the matter is already discussed as a "Key Audit Matter"

What comprises the auditor's triangle? What relationships does it demonstrate?

This shows the relationship between three parties: • Clients • Auditors • Users This demonstrates how auditors play a role in communicating findings from auditing the client to the users of the financial statements.

What are the two types of subsequent events that can occur during the subsequent events period?

Type I (A) - Adjusting subsequent events (that require adjusting journal entires) Type II (B) - Non-adjusting subsequent events. If material, the client should disclose them in the notes.

What are four examples of circumstances in which an auditor may consider it necessary to include an emphasis of matter paragraph?

• An uncertainty relating to the future outcome of exceptional litigation or regulatory action • A significant subsequent event that occurs between the date of the financial statements and the date of the auditors report • Early application (where permitted) of a new accounting standard that has a material effect on the financial statements (Ie. Revenue recognition) • A major catastrophe that has had, or continues to have, a significant effect on the entity's financial position

What is the difference between an audit, review, and compilation? How are these communicated?

• Audit -> These are performed by an auditor and convey a high level of assurance (through positive assurance). This is communicated via an independent auditor's report. • Review -> These provide a moderate level of assurance (through negative assurance). This is communicated via an independent practitioners review engagement report • Compilation -> This is performed by a bookkeeper and pertains to compiling all of the statements, but does not provide any measure of assurance. This is communicated via a short Notice to Reader,.

What are five items that need to be addressed during an engagement wrap-up for an audit?

• File the review by a partner/manager • Ensure that all significant issues (identified during the planning phase and thereafter) have been addressed • Clear all "to do" items • Re-consider who are the users and foreseeable users and the determination of materiality • Analytical procedures in the completion phase just prior to reporting (Mandatory!)

What is the general timeline of an audit in a typical calendar year?

• May/June -> Client acceptance • July/August -> Planning phase • Sept/Nov -> Interim/preliminary phase • December 31 - February -> Final phase • March -> Approval of F/S, reporting phase

What are four reasons for which external audits (rather than internal audits) are necessary?

• There is a need for "Reliable Information" (in order for the information to actually be useful to users) • Reduces information risk (from the perspective of users) • To validate complex accounting procedures under the IFRS/ASPE framework • To mitigate the impact of biases/motives of management (Ie. Earnings management, income smoothing, bonuses, etc.)