Acct 497 Exam 3
If auditors are appointed on January 3, 2020, the date of the financial statements is December 31, 2020, the date of the auditors' report is February 7, 2021, and the audit report release date is March 3, 2021, what is the appropriate date of the written representations?
February 7, 2021
Compared exchange rates used by the client with an online source to determine if they were correct.
assertion: accuracy evidence: analytical procedures
Added the trial balance items for each column.
assertion: accuracy evidence: reperformance/ recalculation
Worked the client's allowance for doubtful accounts equation for the year end to review if we calculated matching amounts.
assertion: accuracy evidence: reperformance/ recalculation
Watched the client's payroll manager electronically approve employee checks to get a better understanding of the payroll process and the associated controls in place to ensure all checks are properly awarded.
assertion: authorization evidence: observation
Discussed the client's securities with the Chief Financial Officer to determine if they are properly listed as held to maturity as compared to available for sale.
assertion: classification evidence: inquiry
Sent requests out via mail to all suppliers on the client's approved vendors list whether they hold a payables balance with the client or not to determine whether the suppliers agree with the balance (or lack of a balance) or not.
assertion: completeness evidence: confirmation
interim testing
-Pros: audit completed sooner, less overtime for staff -Cons: risk of material misstatement between interim data and year end -feasible when client has strong internal controls, low probability of significant change, focuses on tests of transactions rather than year-end balance
Scanning
-Review of accounting data to identify significant or unusual items -manual- performed on a cost-benefit basis --ex. scan for large or unusual items recorded near period end -computerized- done through database query or audit software programs --can quickly identify all unusual or suspect transactions in a file
Cash/ Revenue Fraudulent Schemes
-Skimming -Theft of a daily/nightly deposit (taking all or part of a deposit) -Kiting -Recording fraudulent cash sales -Not recording sales returns -Not recording sales discounts
inspection of tangible assets
-verify existence -identify obsolescence or wear and tear -does not provide evidence of completeness, ownership, or proper valuation
engagement quality review documentation
-who performed -documents reviewed -significant discussions -date
What is a letter of audit inquiry?
-written to legal counsel -establish completeness of liabilities and provide factual information about contingencies -description of matter -likelihood of unfavorable outcome
Who signs the management letter?
CEO and CFO
When reviewing the working capital of the company, Derek noticed an increase in the company's current ratio due to a significant decrease in current liabilities. Current assets remained essentially unchanged from the prior year.
assertion: completeness procedure: review of subsequent events, tracing
Compared shipping and recording dates for sales invoices posted fifteen days before and after year-end to determine if revenues were recorded in the proper period.
assertion: cutoff evidence: documentation inspection
When Derek was reviewing the last quarter's revenues, he noticed a significant upswing in sales towards the end of December. The upswing did not appear to exist in the prior year.
assertion: cutoff procedure: inspection and examination, cutoff procedures
After reviewing the balance sheet and corresponding documentation, Derek found that the inventory balance has increased significantly over the prior year.
assertion: existence and occurrence procedure: observation, vouching, inspection and examination
Spent a day counting inventory to make sure all listed inventory is present at the client's site.
assertion: existence/ occurence evidence: physical examination
Discussed with the client's in-house legal counsel whether the pending lawsuit against the client would result in a probable fine or merely a remote possibility of a fine.
assertion: rights and obligations evidence: inquiry
When reviewing the accounts receivable subsidiary ledger, Derek found evidence that accounts had been sold to a factoring agency, but not removed from the books.
assertion: rights and obligations procedure: confirmation, review of subsequent events, inspection and examination
Reviewed the client's stated useful lives for fixed assets to determine if they were consistent with industry standards.
assertion: valuation and allocation evidence: analytical procedures
Derek is concerned that the allowance for uncollectible accounts, as a percentage of accounts receivable, has decreased, even though sales increased drastically over the prior year.
assertion: valuation, allocation, accuracy procedure: review subsequent events, independent recalculations/ estimates
valuation and allocation
assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded
Identify whether client's views expressed in the attorney letter are appropriate.
attorney
respond to attorney letter
attorney
What are the client's attorneys required to share with the auditors?
audit papers are not privileged, so attorney may not share everything
Who is involved in an engagement quality review?
audit team 2nd partner not part of audit team -partner rotates every 5 years
Initiate request for attorney letter.
auditor
Perform various procedures relating to litigation, claims, and assessments.
auditor
Who assembles the management letter?
auditor
Inspection of tangible assets provides evidence for which financial statement assertion?
existence
Assertions of account balances
existence rights and obligations completeness valuation and allocation
Vouching
existence or validity -from FS to documentation
accuracy and valuation
financial and other information are disclosed fairly and at appropriate amounts
classification and understandability
financial information is appropriately presented and described and disclosures are clearly expressed
holding sales journal open to record next year's sales in the current year
fraud
intentional overshipment of goods
fraud
recording a fictitious sale without receiving a customer order for the goods
fraud
recording a sale for goods that the customer is anticipated to return
fraud
authorization
have all transactions been properly authorized (BOD, etc)
Occurrence and Rights and Obligations (Presentation and Disclosure)
have the disclosed events, transactions, etc, actually occurred and pertain to the entity
As the entity's internal control is less effective, auditors would assess _______ levels of material misstatement. This would require auditors to control detection risk to ______ levels, which means that they would be required to gather _______ sufficient and ______ appropriate evidence.
higher lower more more
How are the auditors sure they are sending these letters out to ALL of the client's attorneys?
identify attorneys through discussions with client
recalculation
includes footing, cross-footing, tests of extension, recomputation -used to test accuracy of estimated accounts and allowances
procedure- Ask client personnel about accounting events.
inquiry and written representation
procedure -Complete an internal control questionnaire.
inquiry and written representations
procedure- Obtain written client representation letter.
inquiry and written representations
procedure- Verify existence of fixed assets by locating them.
inspection of tangible assets
What accounts are involved in the payment cycle?
inventory COGS A/P expenses Cash
The negative request form of accounts receivable confirmation is useful particularly when the: risk level: small balances: proper consideration by client:
low many likely
As the entity's internal control is more effective, auditors would assess _______ levels of material misstatement. This would allow them to permit a _____ level of detection risk, which means that they could gather _______ sufficient and ______ appropriate evidence.
lower higher less less
An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when:
no reply to a positive confirmation request is received.
How are contingent losses reported?
notes to financial statements
procedure- Observe test counting of client's physical inventory taking.
observation
Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of:
occurence
assertion: Sales recorded, goods not shipped
occurence
Audit Assertions- Transactions
occurence completeness authorization accuracy cutoff classification
Select a sample of open accounts payable and vouch to supporting documents of purchase.
occurrence
The assertion that auditors will probably emphasize in the revenue and collection cycle is:
occurrence
Vouch a sample of receiving reports to related purchase orders.
occurrence
What assertions are most important when auditing revenue cycle accounts?
occurrence completeness cutoff cash collections valuation accuracy existence
Permanent or current- client organizational chart
permanent
Permanent or current- prior year FS and audit reports
permanent
Permanent or current- royalty agreements
permanent
What makes evidence relevant?
pertains to audit objectives being tested
Requested written responses directly from customers regarding accounts receivables
procedure: confirmation classification: substantive
Asked the accounting manager how often cash is deposited and by whom.
procedure: inquiry classification: TOC
Questioned management about subsequent events
procedure: inquiry classification: substantive
Examined sales invoices to see if they were initialed by the credit manager indicating approval
procedure: inspection classification: Test of controls
Examined invoices to support additions to the fixed asset account during the year
procedure: inspection classification: substantive
Observed the accounting clerk record the daily deposit of cash receipts.
procedure: observation classification: TOC
Agreed sales invoices to credit files to determine whether the customer had a credit file and had been approved for credit
procedure: reperformance classification: TOC
Compared this year's expenses with last year's expenses and investigated unusual fluctuations.
procedure:analytical classification: substantive
depreciation expense is accurate
recalculation
procedure- Recompute the client's calculation of depreciation expense.
recalculation
audit evidence is needed to
reduce audit risk support the opinion
Evidence must be ____ and ____.
relevant and reliable
procedure- Analyze valuation of receivables by re-aging them by due date.
reperformance
payment cycle segregation of duties
requests purchasing receipt recording of purchases disbursement of checks
Many instances of misstatement are based on the inappropriate recognition of ______.
revenue
evidence- Refers to the quantity of evidence, which is the number of transactions or components of an account balance of class of transactions examined by the audit team.
sufficiency
auditor must gather ___ and ___ evidence
sufficient and appropriate
Small and Tall, CPAs, completed the December 31, 2020 audit of Big Company on February 10, 2021. After the audit report release date, an outstanding lawsuit against Big Company was settled for materially more than recorded in the December 31, 2020 financial statements. The amount recorded in the financial statements represented the best estimate of management and the company's attorneys at the time the audit was completed. Based on this new information, Small and Tall, CPAs should
take no action since the event took place after the audit report release date.
skimming
taking a little at a time so it is less noticeable (taking all or part of a cash sale)
dual date
the use of 2 dates in the auditor's report to limit the responsibility beyond the date of the auditor's report to a specific subsequent event identified in the report
all PPE additions were recorded
tracing-> completeness
lapping
trying to conceal the theft of cash from Customer ONE's payment by stealing cash from Customer TWO's payment and recording it as payment for Customer ONE. This process continues through the line of customers so you are always one payment behind.
a lawsuit that was in progress as of year-end was settled shortly thereafter
type 1
additional evidence about the conditions that existed at the BS date
type 1
during an audit, a customer with a high A/R balance at year-end declares bankruptcy
type 1
a flood damages a significant portion of the operating facility after year-end
type 2
conditions that have come into existence after the BS date
type 2
What are contingent losses?
uncertainty as to possible loss to an entity -pending -income tax disputes -litigation -debts of others
What is the greater risk in terms of overstatement or understatement of the accounts involved (payment cycle)?
understatement of liabilities
Single Date
use date of event as the date of the audit report
kiting
using multiple unrelated banks to shift money (in the form of uncollected checks) from each other to show balances used to support the approval of a loan ex. a person deposits a $1,000 check in Bank ONE, drawn on funds in Bank TWO. Before the first check clears he/she deposits a $1,000 check in Bank TWO, drawn on Bank ONE, and a $2,000 check drawn on Bank TWO in Bank ONE. By carefully timing the checks, he/she has accumulated $3,000 in fictitious balances.
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's policy of granting credit to customers to support management's financial statement assertion of
valuation and allocation
what procedures would one use to determine that PPE additions exist?
vouching
occurence
whether all recorded transactions and events really have occurred- validity- if not, account overstatement
How do auditors learn of subsequent events?
-BOD minutes -attorney letter -interim FS -management inquiry
What accounts are involved in the revenue process?
-Cash -A/R -Inventory -Revenue
Which of the following best describes the auditors' responsibility with respect to management's estimates? -Evaluating the reasonableness of management's estimates. -Verifying the mathematical accuracy of management estimates. -Identifying how the failure of the entity to achieve management's estimates will influence users' decisions. -Assessing the likelihood that actual results will be consistent with management's estimates.
-Evaluating the reasonableness of management's estimates.
Accounts Receivable Fraudulent Schemes
-Lapping -Recording fraudulent credits, discounts, or write-offs -Causing unauthorized shipments to be made -Diversion of goods to the wrong address -Manipulation of shipping or billing documentation to record false sales or to accelerate the recognition of sales. -Recording contingent sales as revenue -Recording a sale/receivable with intercompany accounts or with unconsolidated affiliates
inquiry
-used extensively in early stages of audit to gain understanding -efficient way to gather evidence -should be corroborated by other sources of evidence
cutoff
are transactions and events recorded in the correct accounting period?
revenue earned from franchise incorrectly calculated
error
evidence- Refers to the extent to which the audit team can trust the evidence.
appropriateness- reliability
One way to avoid misstatement of revenue is to ensure the client has proper ________.
cutoff policies
Type 2 Subsequent Event
events did not exist at balance sheet date -do not adjust, but disclose
What are the fraud risks related to the payment cycle?
- employee theft of inventory -fictitious vendors -purchase of goods for self -collusion with outside vendor -executive misuse travel and entertainment accounts -classify expenses as assets -"taking a bath"-> flood IS with expenses -inventory growing at greater rate than sales -expenses above or below industry norms -reduction of reserves -travel expenses with no documentation -inadequate follow-up
substantive tests of revenue: cutoff
- select sample of sales recorded during cutoff period (15 days before and after year end) and vouch back to sales invoice and shipping documents -examine terms of sales contracts -receiving reports
Requirements for auditing documentation
- support basis for conclusions regarding material financial assertions -document compliance with audit standards -show that accounting records agree with financial statements -contains planning information -shows execution/ progress of audit -facilitates review of audit work
Review the idea that we approach the audit of all companies in a different manner depending on their structure
- utility company has predictable revenue; analytical approach -hospital has unreliable confirmations, but reliable controls; transaction tests, analytical -software developer- subjective revenue recognition, confirmations
testing internal controls- valuation
-ADA risk assessment --estimated based on environmental factors and credit policy -walkthroughs --procedures for estimating allowance and writing off accounts
Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations? -The balance is immaterial. -The client requests alternative procedures be performed instead. -Other procedures provide sufficient competent evidence. -Confirmations would be ineffective.
-The client requests alternative procedures be performed instead.
Which of the following controls most likely would help ensure the completeness of recording credit sales transactions? -The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences they report. -The shipping department forwards pre-numbered bills of lading to the billing department upon shipment. -The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly. -The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.
-The shipping department forwards pre-numbered bills of lading to the billing department upon shipment.
Inventory Fraudulent Schemes
-Theft of inventory -Scrapping & selling good inventory -Concealment of revenue fraud through inventory manipulation
Questions to answer in planning an audit
-What audit procedures should be performed? -How much evidence is needed? -When should the audit procedures be performed? -Who will perform the work?
substantive tests of revenue: related party
-amounts due from related parties should be separately disclosed -review SEC filings -management inquiry -communicate names of related parties to all audit team members
Are vendors' invoices matched against purchase orders and receiving reports before a liability is recorded?
-assertion: accuracy -TOC: Observe client personnel making a three-way match between purchase orders, receiving reports, and invoices -Error or fraud: Purchase liabilities may be recorded for transactions that didn't exist or at incorrect amounts -Substantive Procedure: Reperform the three-way match between purchase orders, receiving reports, and invoices on a test basis
Are the quantity and quality of goods received determined at the time of receipt by receiving personnel independent of the purchasing department?
-assertion: accuracy -TOC: Observe the receiving department counting receipts -Error or fraud: Vendors could bill for quantities greater than the amount actually shipped, overstating costs or expenses -Substantive Procedure: Observe the client's inventory account and test the reconciliation of the count to the perpetual inventory
Are purchase orders above a certain level approved by an officer?
-assertion: authorization -TOC: For a sample of cash disbursements, vouch to approval signatures on invoices, receiving reports and purchase orders -Error or fraud: Purchasing employees could be colluding with vendors to pay inappropriate prices for products in return for a kickback -Substantive Procedure: Run a comparison of priced paid by purchasers to average price to extract any large overpayments
How do auditors address a concern with the client's ability to continue as a going concern?
-auditor discusses situation with management, considers effects on FS, considers effects on audit report -add explanatory paragraph -disclaim opinion
Examination of documents
-auditor examines underlying accounting data and records and corroborating info that validates data
What must be communicated with the audit committee at the wrap-up meeting?
-auditor responsibility under GAAS -management judgments and accounting estimates -audit adjustments -uncorrected misstatements -accounting policies and alternative treatments -implications of accounting alternatives -disagreements -fraud -difficulties -copies of significant communication -management discussion with other CPA firms
Confirmations
-auditor sends letter to outside party asking them to verify client information -considered strong evidence because it comes from external parties -reliability- depends on who is responding and what is being confirmed (adequate, timely, challenge figures) -relevance- check validity, cutoff, accuracy, valuation, ownership
Review the set-up of the confirmation letter.
-author= client -report differences to auditors
The SEC requires all of the following for revenue to be recognized except: -the seller's price to the buyer is fixed or determinable. -delivery has occurred or services have been rendered. -cash is collected. -persuasive evidence of an arrangement exists.
-cash is collected.
testing internal controls- cash collections
-cash registers -separate duties of recording receipts, handling cash, reconciling bank account -outsource collection process -separate duties between accounts receivable accounting and handling cash
analytical procedures
-compare account balances or ratios to expectations developed by auditor -sources include prior period info, industry data, expected results
testing internal controls- cutoff
-compare dates on BOL to sales invoices and date sales invoice recorded in sales journal -shipping documents forwarded to billing function daily -application controls in place to prevent early recognition of shipped items
What happens when auditors find out about subsequent events after they sign off on the audit report?
-determine reliability of new info, whether users are still relying on FS -advise client to make appropriate disclosures -may need to reissue -if client will not cooperate, auditor should notify regulatory agency and notify users that audit report should no longer be relied upon
What are the steps taken in engagement quality review?
-discuss matters related to FS and internal controls -evaluate materiality judgments -review engagement team evaluation -review related audit documentation for sufficiency -evaluate whether documentation supports conclusions
ownership of audit documentation
-documentation is property of auditor, but client permission is needed to show to others -all public company documentation must be retained for at least 7 years -all documentation must be finalized within 45 days of release date
observation
-gain understanding of client personnel and procedures -counting of physical inventory -limitations: intrusive, time-consuming, employees know they are being watched
Good audit documentation
-heading that includes client name, title, BS date -initials of auditor and date completed -initials of reviewer and date completed -description of tests performed and findings -assessment of whether tests indicate risk of MM -tick marks and legend -index to identify location of papers -cross-reference to related documentation, when applicable
What makes evidence reliable?
-independence of source -direct vs indirect evidence -effectiveness of internal control a factor for internal evidence -documents more reliable than oral representation -originals more reliable than fax or copy -management integrity -client economic risk -quality of client's information system -current market conditions and competitor actions
What do auditors consider when assessing the inherent risk of the revenue process of clients?
-industry-related factors --profitability, competition, rate of technological change, gov regulations -complexity and contentiousness of revenue recognition items -difficulty of auditing transactions and account balances -misstatements detected in prior audits -pressure/ motivation -unusual revenue growth
Types of Audit Evidence
-inspection of tangible assets -reperformance/ recalculation -inspection of documents -scanning -confirmation -analytical procedures -inquiry -observation
How do auditors find contingent losses?
-legal counsel -letters of inquiry -corporate minutes -contracts -bank confirmations
Know how the inventory count process works
-meet with client to discuss count plan -observe counting procedures -account for all tag numbers -make selected test counts -document conclusions -trace test counts to inventory records -trace obsolete or damaged inventory -inquire about inventory on consignment
substantive tests of revenue: fraud indicators
-missing or altered source documents -excessive credit memo or other adjustments to A/R just after year-end -sales in last month with unusual terms -unusual adjustments to sales accounts just before or after year-end -customer complaints and discrepancies in receivable confirmations -pre or post dated transactions -unusual entries -unusual reconciling differences -lack of operating cash flow
Understand the indicators of a going concern issue
-negative trends in key financial areas -internal matters (loss of key personnel, outdated products) -external matters (new legislation, loss of significant customer, casualty loss) -loan default -inability to pay dividends -debt restructuring -significant changes in competitive market
most reliable to least reliable evidence
-obtained by auditor -obtained from external sources -obtained from internal sources
How do auditors check for adequacy of disclosures?
-occurred -pertain to entity -all included -understandable -accurate
What is the difference between a positive confirmation and a negative confirmation?
-positive- requires a response -negative- does not require response; only respond if disagree; used with large number of small account balances, low environment risk, believe customers will give proper attention to confirmations
When are contingent losses accrued?
-probable and reasonably estimated= accrued and disclosed
What is the responsibility of management and the audit team regarding contingencies?
-probable and reasonably estimated= accrued and disclosed -reasonably possible and remote= disclosed
When are contingent losses disclosed?
-probable and reasonably estimated= accrued and disclosed -reasonably possible and remote= disclosed
appropriateness
-quality of audit evidence -function of relevance and reliability
sufficiency
-quantity of evidence -depends on risk and materiality
What are the exceptions to the auditing standards rule to require a receivables confirmations test?
-receivables not material -use of confirmations would be ineffective -environment risk is assessed as low and sufficient evidence is available from using other substantive tests
Why would auditors choose not to send out confirmation requests?
-receivables not material -use of confirmations would be ineffective -environment risk is assessed as low and sufficient evidence is available from using other substantive tests
What is the management representation letter?
-reminds management of responsibility for the FS -confirm significant oral responses -reduce possibility of misunderstandings between management and auditor
testing internal controls- completeness
-review computerized open-order files -review numerical sequence of shipping documents and sales invoices
Audit Procedures: Preliminary Planning and Risk Analysis
-review prior-year audit work -review publicly available data about the organization -perform analytical procedures -inquire of management and employees -perform internal control walkthrough
substantive tests of revenue: completeness
-scan pre-numbered shipping documents or sales invoices in audit software -select sample of shipping docs and trace back to sales journal -analytical procedures --sales to COGS --sales by customer, prior periods
testing internal controls- occurence
-segregation of duties -sample of sales invoices for presence of an authorized customer order and shipping document for each one --sale not recorded until shipment occurs
How do auditors respond to a lack of response from confirmation requests?
-send more requests -alternative methods -examine cash receipts journal for cash collected after year-end -examine documents supporting receivables to determine if sales occurred prior to year-end
substantive tests of revenue: sold, discounted, and pledged receviables
-should be disclosed -management inquiry -scan cash receipts journals for unusual sources of large cash flows -bank confirmations -BOD minutes
How do auditors address unadjusted errors at the end of the audit?
-summarize and evaluate -decide which adjustments will be booked and waived
How does the confirmation process differ when testing accounts payable vs. accounts receivable?
A/P- select from all vendors (even those with 0 account balance) -request vendor to respond with balance owed rather than confirm accuracy
Which of the following fraud signs could be detected by using data and analytic techniques? -All of the choices are correct. -Search for vendors with only post office box addresses. -Search for invoices always slightly lower than a review threshold. -Search for vendor's invoices submitted in numerical order.
All of the choices are correct.
Failure to post charges to customers for sales
Completeness
Following the audit report release date, auditors became aware of facts existing at the report date that would have affected the reports had auditors then been aware of such facts. What is the most appropriate initial course of action that auditors should take?
Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information.
rights and obligations
Does the entity really own the assets? Are related legal responsibilities identified? Does the entity hold or control the rights to assets included on the financial statements? are the liabilities the obligation of the entity?
Which of the following is not a step in the search for unrecorded liabilities? -All of the above are steps in the search. -Examine the unmatched receiving reports. -Examine disbursements for the period immediately before the end of the period. -Examine the open purchase order file
Examine disbursements for the period immediately before the end of the period.
Which of the following is a management financial statement assertion about fixed assets that relates to "valuation and allocation"? -The client has title to the machinery and equipment. -Pledge or assignment of fixed as collateral is appropriately shown in notes. -Fixed asset depreciation has been correctly calculated. -Fixed assts are properly classified as noncurrent assets.
Fixed asset depreciation has been correctly calculated.
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? Accounts receivable Interest expense Travel and entertainment expense Accounts payable
Interest Expense
For what legitimate reasons could a confirmation come back with the customer not agreeing to the balance? For what fraudulent reasons could this happen? How does the auditor follow up in these scenarios?
Legitimate -timing differences -disputed items -customer errors -client misstatement Fraud -skimming/ lapping -fraudulent sale
Assertions: Presentation and Disclosure
Occurrence and rights and obligations Completeness Classification and understandability Accuracy and valuation
Vouchers should be stamped PAID to
Prevent duplicate payment
Audit Procedures
Risk Assessment -Financial statement level -assertion level Tests of Controls -are controls operating properly? Substantive Tests -analytical procedures -transactions detail tests -account balance detail tests
An audit plan contains
Specifications of procedures the auditors believe appropriate for the financial statements under audit.
What is the greater risk in terms of overstatement or understatement of the accounts involved?
There is a greater risk of overstatement of revenue -make company look better
Which of the following is not a purpose of the review of audit documentation by a supervisor during fieldwork? -To ensure that referencing among audit documentation is clear. -To ensure that the explanations included in the audit documentation are understandable. -To ensure that all appropriate steps in the audit plan were performed. -To ensure that the overall scope of the audit was appropriate.
To ensure that the overall scope of the audit was appropriate.
What is the primary purpose of obtaining written representations?
To impress upon management its primary responsibility for the financial statements.
Which of the following audit procedures is the most effective in testing sales for understatement?
Trace a sample of shipping documents to sales invoices recorded in the sales journal.
accuracy
are amounts and data recorded appropriately? is the number correct? (valued correctly according to GAAP, discount on sales, etc)
classification
are transaction recorded to the proper accounts?
accounts receivable aging schedule
applying different percentages to accounts receivable balances depending on the length of time outstanding. -agree detail to control account balances -select customer balance for confirmation -identify amounts due from related parties for disclosure -identify past-due balances evaluate percentages of uncollectibility and recalculate balance in allowance account
Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation.
accomplished
Goods shipped to a bad credit risk customer
accuracy
Sales billed at the wrong price or wrong quantity
accuracy
Test a sample of cash disbursement voucher documents for accurate mathematics.
accuracy
Trace a sample of voucher debits to general and subsidiary ledger accounts.
accuracy
Side _________ can substantially alter the terms of a sale.
agreements
Completeness (account balances)
all assets, liabilities, and equity is included in financial statement balances as actually exist
Completeness (presentation and disclosure)
all disclosures that should have been included in the financial statements have been included
completeness
all transactions and events that should have been recorded (occurred) have been recorded; if not, account understatement
Procedures used by auditors near the end of the audit to identify unusual or unexpected relationships not previously identified during the audit are referred to as:
analytical procedures
procedure- Compare financial information to industry statistics.
analytical procedures
procedure- Compare financial information with budgets and forecasts.
analytical procedures
procedure- Compare financial information with that of prior periods.
analytical procedures
procedure- Study financial information in relation to nonfinancial information.
analytical procedures
procedure- Study predictable financial information patterns (e.g., ratio analysis).
analytical procedures
the net valuation of plant equipment is reasonable
analytical procedures
evidence--Affected by the information the evidence provides to the audit team.
appropriateness- relevance
Permanent or current- bank confirmations
current
Permanent or current- engagement letter
current
Permanent or current- schedule for current year depreciation calculation
current
Permanent or current- audit planning memorandum
current year file
January sales recorded in December
cutoff
Product line A sales recorded as Product line B
classification
Trace debits arising from accounts payable transactions for proper account.
classification
Party the attorney informs if an unasserted claim must be disclosed.
client
Provide initial description and evaluation of litigation, claims, and assessments.
client
Respond directly to auditors' initial inquiries regarding litigation, claims, and assessments.
client
request attorney letter
client
________ needs to be assured in order to recognize revenue.
collectibility
Auditors usually focus on which assertion when auditing current liabilities?
completeness
Scan a sample of vouchers for missing numbers.
completeness
Select a sample of receiving reports and trace to inventory record posting of additions.
completeness
The audit objective that all transactions and accounts that should be presented in the financial statements are included is related to which financial statement assertion?
completeness
While performing tests of controls, Muina, CPA, selects a sample of recorded cash receipts from the cash receipts journal and compares the date of receipt to the recording date. This is a test of controls primarily providing evidence related to which management transaction assertion?
completeness
assertion: goods shipped, sales not recorded
completeness
Tracing
completeness -from document to FS
What assertions are most important when auditing those accounts (payment cycle)? What tests do we perform to test these assertions?
completeness and cutoff -analytical review -cutoff tests -search for unrecorded liabilities existence- observe inventory count completeness- cutoff tests rights- review contracts valuation- direct tests and analytics disclosure- review GAAP
Type 1 Subsequent Event
conditions existed at the balance sheet date -FS numbers should be adjusted
procedure- Obtain accounts receivable confirmations.
confirmation
procedure- Obtain client's lawyer's letter.
confirmation
To be recognized, revenues must also be realized or realizable and:
earned
procedure- Scan expense accounts for credit entries.
document inspection (scanning)
procedure- Scan payroll check lists for unusually large checks.
document inspection (scanning)
procedure- Find brokers' invoices and canceled checks showing agreement with record amounts for securities investments.
document inspection (vouching)
procedure- Select a sample of shipping documents and trace them to sales invoices, sales journal recording, and posting to general ledger.
document inspection- tracing
recording sales in wrong period based on incorrect shipment information
error
When is the management letter signed?
dated as of audit report date
What is an audit program?
detail the auditor's plan to gather, evaluate, and document evidence -guide conduct of audit for organizing and distributing work, monitoring audit process, recording audit work performed, renewing audit procedures performed and evidence gathered
auditor's task
determine which procedures provide a sufficient level of evidence with the least amount of audit cost
existence
do all assets, liabilities, and equity actually exist as of the statement date?
