Audit Chapter 10 (Week One)

policies and procedures implemented by an entity to prevent or detect accounting frauds or errors and provide for their correction on a time

Internal Control

(1)Detect fraudulent securities. (2)Lend authority to the auditors' directives.(3)Acknowledge the receipt of securities returned. (4)Coordinate the return of securities to the proper location (3)Acknowledge the receipt of securities returned.

The auditors who physically examine securities should insist that a client representative be present in order to:

replaces a purchase journal by an entry that debts the appropriate asset, liability, or expense account and crediting vouches payable.

Voucher Register

verify account balances by examining invoices (or doing analytical procedures)

What are substantive tests?

to determine that investments purchased and sold during the period are recorded properly, the auditors vouch a sample of transactions by reference to broker advices and cash record

vouch selected purchases and sales of financial investments during the year and verify the client's cutoff of investment transactions

after obtaining an understanding of the client's internal control over cash receipts and disbursements, the auditors determine their planned assessed levels of the risks of material misstatement for the assertions about cash.

Assess the risks of material misstatement and design further audit procedures

one of the objectives of the auditors work on cash is to substantiate the existence of the amount of cash show on the balance sheet

Confirm Cash Balances with Financial Institutions (PS)

process funds-related transactions for customers as an alternative to paying by check.

Electronic funds transfer systems

the balance sheet figure for cash should only include those amounts that are available for use in current operations

Evaluate proper financial statement presentation and disclosure of cash (PS)

based upon the assessment of risks, the auditors should perform procedures to identify and analyze unusual cash receipts or disbursements that may be indicative of material misstatement from fraud or error

Identify and investigate unusual cash receipts and disbursements(PS)

when the auditors have completed the procedures described in the preceding sections, they should reassess the level of control risk for each financial statement assertion regarding cash

If necessary, review the risk of material misstatement based on the results of controls(TA)

require employees to send in transactions with receipts and reasoning. receipts are approved by the employee's supervisor and submitted to the accounting department for processing

Internal Control over employee reimbursements

is achieved when the custodian of the petty cash fund review support from employees seeking reimbursement for their small expenditures on behalf of the company

Internal Controls Aspects of Petty Cash Funds

review of investment committee minutes and reports may disclose unrecorded purchases and sales of securities or other financial instruments

Review investment committee minutes and reports

identify important concerns or risks expected on an audit

Risk assessment

the probability that a material misstatement, either an error or fraud, will not be prevented or detected on a timely basis by the entity's internal controls

What is control risk?

probability that auditors' substantive procedures will fail to detect material misstatements

What is detection risk?

organizations have an option in reporting financial investments because they may wither follow the guidance in FASB ASC 320 or elect the fair value option

evaluate the methods used and obtain evidence about proper valuation

to account for a derivative instrument as a hedge of an asset, liability, or futures transaction, management must establish an inception the intent to hedge, the method to be used to assess its effectiveness as a hedge, and the measurement approach for determining the ineffective portion of the hedge

inspect documentation of management's intent to classify derivative transactions as hedging activities

auditing the presentation and disclosure of financial investment varies depending on whether a company has adopted the fair value option for valuation

Evaluate financial statement presentation and disclosure

Test controls over the accuracy and completeness of accounting records processing cash receipts and recording them in the accounting records cash disbursements and recording them in the accounting records Test management review controls 1.) If necessary, revise the risk of material misstatement based on the results of tests of controls

Explain to me the tests of controls when it comes to further audit procedures - tests of controls

1.) Obtain analytics of cash balances and reconcile them to the general ledge 2.) Confirm dash balances with financial institutions 3.) Obtain or prepare reconciliations of bank accounts

Explain to the processes of further audit procedures - subsantive procedures for cash transactions and balances

means to trace a transaction or a few transactions through each step of the system to determine that transactions actually are being process in the manner indicated by the flowchart

Walk-through

verify that effective controls are in place

What are tests of controls?

Most inherent risks come from business risks faced by the client's management.

Where does most inherent risks come from?

(1)A bank lockbox system. (2)Prenumbered remittance advices. (3)Monthly bank reconciliations. (4)Daily deposit of cash receipts. A bank lockbox system

Which of the following controls would most likely reduce the risk of diversion of customer receipts by a client's employees? (1)A bank lockbox system. (2)Prenumbered remittance advices. (3)Monthly bank reconciliations. (4)Daily deposit of cash receipts.

The auditor will design additional tests of controls to results in sufficient reductions in substantive procedures

What happens when additional evidence of effectiveness of controls are needed the support assessed levels?

probability that an audit team will express an inappropriate audit opinion when the financial statements are materially misstated

What is audit risk?

Inherent risk is the probability of material misstatement, either an error or fraud, will occur before considering the client's internal control

What is inherent risk?

risks of material misstatement are composed of inherent risk and control risk

What is risk of material misstatement composed of?

UOA PTPS 1.) Understand the client and its environment 2.) Obtain an understanding of internal control over cash 3.) Assess the risks of material misstatement and design further audit procedures 4.) Perform audit procedures - tests of controls 5.) Perform audit procedures - substantive audit procedures

What is the general pattern of work when it comes to the audit of cash?

risks of material misstatement arise jointly from inherent risk and control risk

What is your understanding of the client and its environment in consideration to inherent risks, fraud risks, related to cash.

1.) terms and characteristics of the instruments 2.) the extent to which the fair value is based on inputs that are observable 3.) other factors that bear on the valuation, including credit or counterparty risk, market risk, and liquidity risk.

What matters should be considered when it comes to the nature of the financial instruments being valued?

the purpose of analyzing bank transfers is to disclose overstatements of cash balances resulting from kiting

Analyze bank transfers for the last week of the audit year and first week of the following year(PS)

the auditors send a confirmation request, signed by the client, to the holders of the investments to determine existence, ownership and if appropriate, market value

Confirm securities and derivative instruments with holders and counterparties

if the company receives payments from customers, cash on hand consists of undeposited checks

Count and list cash on hand(PS)

usually covers the audit of very complex financial instruments that are related to public companies

Critical Audit Matter

(1)An investment committee of the board of directors. (2)The chief operating officer. (3)The corporate controller. (4)The treasurer. (3) An investment committee of the board of directors because an investment committee is independent

Hall Company had large amounts of funds to invest on a temporary basis. The board of directors decided to purchase securities and derivatives and assigned the future purchase and sale decisions to a responsible financial executive. The best person or persons to make periodic reviews of the investment activity would be:

the auditors will count securities held by the client at year-end, verify that the securities are registered in the company's name, and record in the working papers a description of the securities with the serial numbers

Inspect securities on hand and review agreements underlying derivatives

(1)Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. (2)Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. (3)Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. (4)Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent. (4)Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent. - Because they're independent

In order to guard against the misappropriation of company-owned marketable securities, which of the following is the best course of action that can be taken by a company with a large portfolio of marketable securities? (1)Require that one trustworthy and bonded employee be responsible for access to the safekeeping area where securities are kept. (2)Require that employees who enter and leave the safekeeping area sign and record in a log the exact reason for their access. (3)Require that employees involved in the safekeeping function maintain a subsidiary control ledger for securities on a current basis. (4)Require that the safekeeping function for securities be assigned to a bank or stockbroker that will act as a custodial agent.

(1)Reviews the monthly bank reconciliation. (2)Returns the checks to accounts payable. (3)Is denied access to the supporting documents. (4)Is responsible for mailing the checks. (4) is responsible for mailing the checks

In testing controls over cash disbursements, the auditors most likely would determine that the person who signs checks also:

(1) visual display of the amount of the sale in full view of the customer; (2) a printed receipt, which the customer is urged to take with the merchandise; and (3) accumulation of the total of the day's sales.

Internal Controls over cash sales

any large or unusual check payable to directors, officers, employees, affiliated companies, or cash should be carefully reviewed by the auditors to determine whether the transactions 1.) were properly authorize and recorded 2. are adequately disclosed to the financial statements

Investigate payments to related parties(PS)

refers to manipulations that utilize such temporarily overstated balances to conceal a cash shortage or meet short-term cash needs

Kitting

A post office box controlled by a company's bank at which cash remittances from customers are received. The bank picks up the remittances, immediately credits the cash to the company's bank account, and forwards the remittance advices to the company.

Lockbox

a cutoff bank statement is a statement covering a specified number of business days following the end of the client's fiscal year

Obtain a cutoff bank statement containing transaction of at least seven business days subsequent to the balance sheet date(PS)

in the audit of a small business, the auditors may prepare a written description of controls, based upon the questioning of owners and employees and upon firsthand observation

Obtain an understanding of internal control over cash

the auditors will prepare or obtain a schedule that lists all of the client's cash accounts

Obtain analyses of cash balances and reconcile them to the general ledger (PS)

the analysis of financial investments will show the beginning and ending balances for the year, purchases and sales of investments during the year, interests, and dividends earned, and realized and unrealized gains and losses.

Obtain or prepare analyses of the investment accounts and related revenue, gain, and loss accounts and reconcile them to the general ledger

determining a company's cash position at the close of the period requires a reconciliation of the balance per the bank statement at that date with the balance per the company's accounting records

Obtain or prepare reconciliations of bank (FINANCIAL INSTITUTION) accounts of the balance sheet date and consider the need to reconcile bank activity for additional months (PS)

Management review controls are key to identifying cash receipts and disbursements that potentially may be misstated

On Monitoring Cash Transactions

(1)Processes cash disbursements. (2)Has custody of securities. (3)Prepares the cash budget. (4)Reviews inventory reports (1) Process cash disbursements

Reconciliation of the bank account should not be performed by an individual who also: (1)Processes cash disbursements. (2)Has custody of securities. (3)Prepares the cash budget. (4)Reviews inventory reports

A confirmation form, agreed to by the AICPA, the American Bankers Association, and the Bank Administration Institute, that is designed to provide corroborating evidence about the client's account balances and outstanding loans.

Standard confirmation form

satisfactory internal control over cash disbursements requires that controls exist to provide assurance that disbursements are properly authorized

Test controls over the accuracy and completeness of cash disbursements and recording them in the accounting records(PA)

management review controls, if effectively designed and implemented, can be instrumental in identifying misstatements or other issues related to cash receipts and disbursements

Test management review controls(PS)

performing tests of accuracy of the client's journals and ledgers

Tests of controls over the accuracy and completeness of accounting records and bank reconciliations (PA)

satisfactory internal control over cash receipts demands that each day's collections be deposited intact no later than the next banking day.

Tests of controls over the accuracy and completeness of processing cash receipts and recording them in the accounting records(PA)

(1)Details of bank deposit slips with details of credits to customer accounts. (2)Daily cash summaries with the sums of the cash receipts journal entries. (3)Individual bank deposit slips with the details of the monthly bank statements. (4)Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded. (1)Details of bank deposit slips with details of credits to customer accounts.

The auditors suspect that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare the (1)Details of bank deposit slips with details of credits to customer accounts. (2)Daily cash summaries with the sums of the cash receipts journal entries. (3)Individual bank deposit slips with the details of the monthly bank statements. (4)Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded.

(1)Recomputation (2)Verification by reference to dividend record books. (3)Confirmation with dividend-paying companies. 4)Examination of cash disbursements records (2) Verification by reference to dividend record books

The best way to verify the amounts of dividend revenue received during the year is:

(1)Cutoff bank statement. (2)Year-end bank statement. (3)Bank confirmation. (4)General ledger. (1) General Ledger

To gather evidence regarding the balance per bank in a bank reconciliation, the auditors would examine any of the following except: (1)Cutoff bank statement. (2)Year-end bank statement. (3)Bank confirmation. (4)General ledger.

1)Supported by a vendor's invoice. (2)Stamped "paid" by the check signer. (3)Prenumbered and accounted for. (4)Approved for authorized purchases. (2) Stamped "paid" by the check signer and make sure it's preforated

To provide assurance that each voucher is submitted and paid only once, the auditors most likely would examine a sample of paid vouchers and determine whether each voucher is: 1)Supported by a vendor's invoice. (2)Stamped "paid" by the check signer. (3)Prenumbered and accounted for. (4)Approved for authorized purchases.

risks of material misstatement arise jointly form inherent risk and control risk. Where do most inherent risks come from? They come from risks faced by the client's management

Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to cash

received monthly, should be reconciled promptly with the account payers ledger or list of open vouches, and any discrepancies should be fully investigated.

Vendors' statements

an accurate cutoff of cash receipts at year-end is essential to a proper statement of cash on the balance sheet. the balance sheet figure should include all cash received on the final day of the year and none received subsequently

Verify the client's cutoff of cash receipts and cash disbursements (PS)

in this usage, is an authorization sheet that provides space for the initials of the employees performing various authorization functions.

Voucher

a method achieving strong internal control over cash disbursements by providing assurance that al disbursements are properly authorized and review before a check is issued.

Voucher System

(1)Observe the consistency of the employees' use of cash registers and tapes. (2)Inquire about employees' access to recorded but undeposited cash. (3)Trace deposits in the cash receipts journal to the cash balance in the general ledger. (4)Compare the cash balance in the general ledger with the bank confirmation request (2) Observe the consistency of the employee's use of cash registers and tapes

Which of the following procedures would the auditors most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? (1)Observe the consistency of the employees' use of cash registers and tapes. (2)Inquire about employees' access to recorded but undeposited cash. (3)Trace deposits in the cash receipts journal to the cash balance in the general ledger. (4)Compare the cash balance in the general ledger with the bank confirmation request

(1)Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. (2)Coordinate the count of cash with the cutoff of accounts payable. (3)Coordinate the count of cash with the count of marketable securities and other negotiable assets. (4)Count the cash immediately upon the return of the confirmation letters from the financial institution. (3) Coordinate the count the count of cash with the count of cash with the count of marketable securities and other negotiable assets

You have been assigned to the year-end audit of a financial institution and are planning the timing of audit procedures relating to cash. You decide that it would be preferable to: (1)Count the cash in advance of the balance sheet date in order to disclose any kiting operations at year-end. (2)Coordinate the count of cash with the cutoff of accounts payable. (3)Coordinate the count of cash with the count of marketable securities and other negotiable assets. (4)Count the cash immediately upon the return of the confirmation letters from the financial institution.

the auditors can use analytical procedures to test the reasonableness of the amounts of recorded dividend and interest income, or they can verify the amounts by independent computation of the use of data analytics

perform analytical procedures or data analytics

Nature of entity and environment

What are the factors of inherent risk?

Tests of controls can be performed either as a way to obtain understanding or as way to gain further audit procedures

What are the instances that test of controls can be performed?

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

What are the internal controls over cash?

They may use data analytics software

What does management review controls use to see for abnormal transactions?