Becker AUD Mnemonics
Ratio estimation (point estimate)
(Audited BV / BV of sample) x Total BV
Quick Ratio
(Cash,Cash Equiv. + Short term marketable securities + A/R, net) / Current Liabilities OR (Current Assets - Inventory - Prepaid exp.) / Current Liabilities
Gross (profit) margin
(Sales - COGS) / Sales
report to senior management and board
-significant deficiencies -material impact on F/S
A member of an issuer's audit engagement team may begin working for a registrant in a key position after a cool off period of...
1 year
which engagements require a representation letter
1. audit 2. review
Only times contingent fees are permitted
1. fixed by courts or other public authorities or for tax matters 2. compilations of F/S expected to be used by third parties
AP in the expenditure cycle
1. record the payable 2. approve invoice for payment 3. match PO, Rec. report, vendor invoice 4. record payment after made by treasurer
Covered person is anyone on team or individual that has provided...
10 or more hours of non-audit services to be part of an audit engagement
PCAOB will conduct ANNUAL inspections of registered public accounting firms that regularly provide audit reports for more than
100 issuers If less than 100 issuers, inspect every 3 years (also peer review every 3 years under AICPA)
Form AP due
35th day after the audit report OR within 10 days if the audit report is included in a registration statement
CRIME
5 components of Internal Control: CONTROL Environment RISK assessment INFORMATION and communication systems MONITORING EXISTING control activities
Lead and concurring partner must rotate on and off the audit every...
5 yrs on, 5 yrs off (timeout)
Other audit partners should rotate off audit engagement after no more than...
7 years on, 2 years off (timeout)
Difference estimation
Adj. required/projected error = (BV of sample - audited value of sample) / # of items tested) x population point estimate = total BV - projected error
Undue influence threat
Attempts to coerce or otherwise influence the CPA member (e.g., significant gifts or threats to replace the auditor over an accounting principles disagreement).
ADMITS
Audit procedures that examine for possibility of going concern ANALYTICAL procedures DEBT compliance MINUTES INQUIRY THIRD parties SUBSEQUENT events
DORE
Auditor should perform following with respect to fraud, Audit procedures help open DORE to help uncovering fraud DISCUSS the fraud risk with engagement personnel OBTAIN info to identify specific fraud risks Assess fraud RISK and develop and appropriate RESPONSE EVALUATE the evidence regarding fraud
CAPE CORP
Common concepts for attestation engagements COMPLIANCE with all attestation standards ACCEPTANCE and continuance procedures performed PRECONDITIONS (practitioner = independent, responsible party takes responsibility, subject matter is appropriate) ENGAGEMENT documentation standards followed acceptance of a CHANGE in terms of engagement using work of OTHER is allowed RESPONSIBILITY for quality control PROFESSIONAL skepticism and judgment required
MARS
Communication with Governance (if none are from mgmt) + SPAM PODIUM MATERIAL, corrected misstatements ACCOUNTANTS that mgmt used (3rd parties) REPRESENTATION (whats in rep letter) SIGNIFICANT issues worthy of mgmt attention in timely manner for non-issuers or issuance of audit report for issuers
SPAM PODIUM
Communications with Governance SELECTION of, changes in, appropriateness of significant Accounting Polices PROCESS by mgmt of formulating significant accounting estimates ADEQUACY of f/s Disclosures MGMT judgments that are Significant PLANNED Scope/Timing of audit OTHER issues significant DIFFICULTIES throwing off the audit procedures (delays, unreasonable expectations) IMPAIRMENT of Independence UNCORRECTED, nontrivial Misstatements and effects on opinion MGMT Disagreements in timely manner for non-issuers or issuance of audit report for issuers
I AM SURE
Conditions required to perform an agreed-upon procedures engagement: INDEPENDENCE AGREEMENT of parties MEASURABILITY and consistency SUFFICIENCY of procedures - is the responsibility of specified parties USE of the report is restricted to specified parties RESPONSIBILITY of subject matter (client) ENGAGEMENTS for prospective financial statements must include a summary of significant assumptions
Type 1 Report (service auditor)
Describes the service organization's controls and assesses whether they are suitably designed to achieve specified internal control objectives as of a specified date
DORCS
Disclosures required in an emphasis of matter / other matters OR explanatory paragraph when changing a prior opinion: DATE of the previous report OPINION of the previous report REASON for the prior opinion CHANGES that have occurred STATEMENT that "the opinion...has changed" Only "DORCS" change their mind.
Days Sales in Accounts Receivable
Ending A/R, net / (Sales, net/365)
A/R confirms test what assertions
Existence and rights/obligations NOT valuation/accuracy and completeness
3 types of fraud
F/S Fraud - Lying Asset Misappropriation - Stealing Corruption - Cheating
Substantial doubt to continues as a going concern for a reasonable period of time. Reasonable period of time is...
FASB - FS issuance + 1 year GASB - FS date + 1 year
FINE
Factors that may indicate substantial doubt about ability to continue as a going concern FINANCIAL difficulties INTERNAL matters NEGATIVE trends EXTERNAL matters
STAFF
General understanding of following for client's business for a compilation: STAFF qualifications TRANSACTION types and frequency ACCOUNTING basis used to prepare the financial statements FORM of the accounting records FINANCIAL statements' form and content
Type 2 Report (service auditor)
Goes further by testing whether the controls provide reasonable assurance that the related control objectives were achieved throughout a specified period
Inherent Limitations of Internal Control
Human error Collusion, deliberate circumvention, fraud Mgmt override
COPAL
IT duties that need seperation: Control group Operators Programmers Analyst (system) Librarians (weakness: anyone doing or supervising another area)
More reliable for analytical procedures
Income statement accounts
COVER U
Management assertions of financial statements: COMPLETENESS (account balances, transactions, disclosures) cutOff (correct accounting period, transactions) VALUATION allocation and accuracy (account balances, transactions, disclosures) EXISTENCE and occurrence (account balances, transactions exist) RIGHTS and obligations (to account balances, disclosures) UNDERSTANDABILITY and classification (disclosures clearly expressed)
Profitability Ratios
Measures of the operating success or failure of a company for a given period of time. (I/S accounts) return on assets, profit margin
Liquidity Ratios
Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash (B/S accounts), current/quick
Presumptions of risk
Mgmt override Revenue Recognition
NET
Nature (Type - controls or substantive) Extent (Scope - a lot or a little) Timing (When - interim or year-end)
Return on Equity
Net Income / Avg. Equity
Net Operating Margin Percentage
Net Operating Income/Net Sales
keep audit documentation/work papers for X years after report release date...
Nonissuers: 5 years Issuers: 7 years
Complete final audit documentation/work papers within X days following report release date...
Nonissuers: 60 days Issuers: 45 days
MR DIM REPPORTS CRAME
Parts of an Unmodified Opinion Report (nonissuer) MANAGEMENT RESPONSIBLE DESIGN IMPLEMENTATION MAINTENANCE auditors responsibility RESPONSIBILITY EXPRESS an opinion PLAN and perform the audit PERFORM procedures to OBTAIN audit evidence assess RISKS of material misstatements TESTS ic relevant to entity's prep and fair pres. of fin. STATEMENTS not to express opinion on effectiveness of internal CONTROL evaluate the appropriateness of REASONABLENESS of ACCOUNTING estimates made by MANAGEMENT & EVALUATING the overall presentation of the f/s
GAAS requires auditors to perform analytical procedures related to...
Revenue
U LIAR CPA
Review performance requirements: UNDERSTANDING with the client LEARN and/or obtain knowledge of the entity's business INQUIRY of management with financial and accounting responsibilities ANALYTICAL procedures REVIEW - other procedures CLIENT rep letter from management PROFESSIONAL judgement ACCOUNTANT (CPA) should communicate results
SSARS review report - RAM MR DIM AR SAL AC NAM
Reviewed "whatever is being reviewed", analytical procedures, making inquires Mgmt resp. design, implementation and maintenance of internal control Auditor resp. Stamements on Standards for Accounting Review Services, by Committee of the AICPA, procedures to obtain limited assurance Auditor's conclusion not aware (negative) of any material modifications
A/R Turnover
Sales, net / Average A/R, net
ARC
Segregation of duties is your ARC to protect against of a flood of troubles: AUTHORIZATION RECORD keeping CUSTODY of related assets client's IC should separate these functions
Government Ethical Principles
Serving the public interest Integrity Objectivity Proper use of government information, resources and positions Professional behavior
HELP ME
Six interrelated elements of quality control HUMAN resources ENGAGEMENT/client acceptance and continuance LEADERSHIP responsibilities PERFORMANCE of the engagement MONITORING ETHICAL requirements
C the FIVE CARROT WARS (CARS - removes walkthrough)
Standard procedures used in an audit for risk assessment, test of controls or substantive test (to be victorious) CONFIRMATION FOOTING, cross-footing, and recalculation INQUIRY VOUCHING EXAMINATION/inspection CUTOFF review ANALYTICAL procedures REPERFORMANCE RECONCILIATION OBSERVATION TRACING WALK-through AUDITING related accounts simultaneously REPRESENTATION letter SUBSEQUENT events review
PAID TIPS
Strong Internal control activities that are relevant to an audit: PRE-numbering of documents (your checkbook) AUTHORIZATION of transactions (signed approval) INDEPENDENT checks to maintain asset accountability (checks and balances) DOCUMENTATION (paper trail) TIMELY and appropriate performance reviews (analytical procedures) INFORMATION processing controls PHYSICAL controls for safeguarding assets (security) SEGREGATION of duties
Familiarity threat
Too sympathetic
Total Debt Ratio (Debt to Assets Ratio)
Total liabilities/total assets
FIND
Types of documentation of internal control, documentation may include any item the auditor can FIND: Flowchart Internal control questionnaire or checklists Narrative Documentation from the client, including copies of the entity's procedures manuals and organizational charts
Deficiency in design
a needed control is either missing or flawed
Auditing through the computer
auditing by testing automated internal controls and account balances electronically, generally because effective general controls exist
PRIME test
auditor should perform following during subsequent period (b/w year end and audit report issued): POST balance sheet transactions REPRESENTATION letter INQUIRY concerning litigations, claims, assessments MINUTES EXAMINE latest available interim f/s and compare with f/s under audit
Mean-per-unit estimation (point estimate)
avg. audited value x population
Self-interest threat
benefits for the CPA's interest over the public's interest
Mitigating factors to deal with GC
borrow money/restructure debt sell assets delay/reduce expenditures increase ownership equity
Inventory Turnover
cost of goods sold/average inventory
Current Ratio (working capital ratio)
current assets / current liabilities
Operating cycle
days sales in receivables + days in inventory
Cash Conversion Cycle
days sales in receivables + days in inventory - days of payables outstanding
SOAP
death by a thousand cuts, in an aggregate the amount is material but not individually Summary of adjustments passed
DAR them to fix it
if client refuses to change and do what you want, notify each member of board and take these steps to prevent reliance on financials DISASSOCIATE auditor's report w/ f/s ALERT agencies (regulatory) notify RELYING parties
Integrated Test Facility (ITF)
inserting a dummy account in a company's system without client knowing; similar to test data but commingled with live data
Activity Ratios
measure the effectiveness of the use of assets, TO and days
Long term Debt Paying Ability Ratios
measures security for long term creditors/investors
Adverse interest threat
member (CPA) interests oppose client's interests, not acting with objectivity (e.g., through litigation). (bias threat for gov.)
Return on Assets
net income / average total assets
Return on assets
net income/average total assets
Net Profit Margin
net income/net sales
Profit Margin
net income/net sales
Gross profit
net sales - cost of goods sold
Observation vs inspection
observe people inspect things
fraud generally occurs when these are present (3 elements of fraud)
opportunity - ineffective controls or override of controls rationalization/attitude - justification of fraudulent behavior incentives/pressures - a reason to commit fraud
Advocacy threat
promoting a client's interests or position, compromise objectivity/independence (structural threat for gov.)
Recalculation vs reperformance
recalc takes thing for face value and checks reperform takes different docs and does it over again
PPS: sample size
recorded amount of the population / sampling interval
SAS review report - REP MR DIM AR RAM SAD AC NAM
reviewed "whatever is being reviewed" of entity X, for the X month period then ended. Mgmt resp. design, implementation and maintenance of internal control Auditor resp. Reviewed "in accordance with GAAS", consists principally of applying analytical procedures and making inquires substantially less in scope than an audit, do not express such an opinion Auditor's conclusion not aware (limited) of any material modifications
Self-review threat
reviewing their own work, not objective
Asset Turnover
sales, net / average total assets
Working Capital Turnover
sales, net / average working capital
upper deviation rate
sample deviation rate + allowance for sampling risk (compare to tolerable deviation rate)
Report to Board (those charged with governance)
senior management fraud
Management Participation Threat
taking on the role of client management or otherwise performing management functions
PPS: sampling interval
tolerable misstatement / reliability factor every Xnth # will be selected
Debt to Equity Ratio
total liabilities/total equity
RAP MEE RAP MEE
unqualified opinion report, basis for opinon (issuer) f/s are RESPONSIBILITY of company's mgmt and auditor's RESPONSIBILITY is to express an opinion AUDIT conducted in ACCORDANCE with PCAOB standards PLAN PERFORM the audit to obtain reasonable assurance MATERIAL MISSTATEMENTS due to error or fraud EXAMINE EVIDENCE EVALUATING the accounting principles used and significant ESTIMATES
if recorded amount is larger than sample interval
use full difference as projected error
parallel simulation
using auditor-written software to process data and comparing the output with the client's output
Test Deck (Test Data)
using client's system offline with fictitious data under auditor's control to see if it is rejected, outcome is already known, used to tests invalid #'s, excess pay rates, excess hours
AEIOU
vowel test for hierarchy of audit evidence Actual knowledge (observation, examination, inspection, recalculation) External (independent sources outside client, not prepared by client) Internal (from client) Oral (inquiry) U KNOW THIS
Deficiency in operation
when a properly designed control does not operate as designed or when the person performing the control does not possess the necessary authority or qualifications to perform the control effectively
Inventory Formula
BI + Purchases = Goods Available for Sale - Ending Inventory = COGS
Retained Earnings Formula
Beginning RE + Net Income - Dividends = Ending Retained Earnings