Becker A4

The management Rep letter typically includes information in 4 categories:

1) Financial Statements 2) Completeness 3) Recognition, measurement, and disclosure 4) Subsequent Events

________ paragraph should be added when there's a going concern uncertainty

Emphasis of Matter

on receiving a client's bank cutoff statement, the auditor would most likely trace ____________ in the cutoff statement to ___________

Prior-year checks listed ; year end outstanding checklist

2 assertions for which confirmation of accounts receivable balances provides primary evidence are

Rights/obligations; Existence

Measuring FV: Level 3:

Unobservable inputs using estimates and valuation methods, such as discounted cash flow, determined based on management's judgments

auditor detects liabilities not recorded at year-end by comparing cash payments made ______________ to the related ___________ and __________

after the balance sheet date; receiving reports and vendor invoices

auditor is able to confirm cash in bank as well as _________ on one form

collateral for loans

Payroll is a __________ department, not custodial

record-keeping department

written communication of significant deficiencies and material weaknesses should include the following: (4)

1) DEFINITION of the term material weakness/significant deficiency 2) DESCRIPTION of weak/defic. and potential effects 3) info to ensure those charged with gov./mgmt. understand the CONTEXT of the communication 4) RESTRICTIONS regarding the use of the communication to mgmt./those charged with gov.

In evaluating reasonableness of a mgmt estimate, auditor would normally concentrate on key factors and assumptions that are... (4)

1) significant to accounting estimate 2) sensitive to variations 3) deviations from historical patterns 4) subjective and susceptible misstatement and bias

Factors that may indicated Substantial Doubt

F inancial difficulties I nternal matters (labor difficulties, work stoppages) N egative trends E xternal matters (legal proceedings, legislation)

Measuring FV: Level 2:

Observable inputs other than quoted market prices for identical assets or liabilities

Order of confirming revenue docs

Shipping documents -> sales invoices -> ledger

kiting is

a check drawn on one bank is deposited to another bank and no record is made of the disbursement in the balance of the first bank until after year-end

when testing completeness for A/P, the appropriate population would be...

a list of vendors with whom the entity has previously done business

________ is the best means of preventing misappropriation of cash by employees because they would never have direct access to cash receipts

a lockbox system

deficiency in operation exists when..

a properly designed control is either not executed as designed or the person performing the control does not have either the authority or the skill to perform the control

accounting estimates pertain to determining the approximation of past events that CANNOT be determined on...

a timely, cost-effective basis

the management rep. letter should disclose knowledge of _________, especially when it has material impact on the reported financial statements

actual fraud or suspected fraud

if management's use of the going concern BASIS of accounting is inappropriate, auditor would issue

adverse opinion

mgmt. rep letter needs to address ____________ being covered in the report

all of the years

After performing a count of negotiable securities, auditor would generally obtain ________

an acknowledgement from the client that the securities were returned intact (reduces chances of misappropriation)

when successor auditor discovers a possible misstatement in client's FS reported on by a predecessor auditor, successor auditor should ask the client to...

arrange a meeting of the predecessor auditor, management, and the successor auditor to discuss the matter

analytical review of long-term investments would be used as primary audit procedure to..

ascertain reasonableness of the completeness of recorded investment income

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the

authorization of transaction from custody of related assets (cash & checks)

matching vendor invoices with receiving reports is part of the ____________ function, along with _________

authorization; recalculation of vendor invoices

usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may...

be unaware of all the financial relationships that the bank has with the client

preparing invoices and recording the related accounts receivable are

both recordkeeping functions

If employee destroys invoices and related vouchers, auditor should sample...

cash disbursement files

confirming inventories pledged under loan agreements is used to test __________ assertion

classification and understandability of FS in respect to inventory

the letter of inquiry to the client's attorneys is a request made by

client management

purpose of sending standard confirmation request to financial institutions with which the client has done biz with during the year is to...

corroborate info regarding deposit and loan balances

to satisfy valuation assertion when auditing an investment account by the equity method, an auditor most likely would

examine the audited FS of the investee company, including performing recalculations of prorata share of income/loss

a confirmation from an outside agent indicating the securities are being held in the client's name provides evidence to ______ assertions

existence, rights & obligations

typically, plans to _______________ are all mitigating factors to adverse conditions or events

increase ownership in equity, borrow money, restructure debt, sell assets, and/or delay expenditures

effective control for assuring proper custody of assets in investing cycle

independent person compares contents of the safety deposit box with recorded balances in the subsidiary ledger

Auditor should consider both the __________ and _______ of potential misstatements

likelihood & magnitude ($ amount and volume of activities)

communicate significant deficiency or material weakness to _________ in _________

management and to those charged with governance; in writing

communicate CONTROL deficiencies to _______ either ________

management only; orally or in writing

auditor should trace corporate stock issuances and treasury stock transactions to the...

minutes of the board of directors

attorney's response to a client's letter of audit inquiry should address..

nature of the claim, progress to date, and intended response, as well as any unasserted claims

employees in the purchasing department would approve POs and also _________

negotiate terms with the vendors

Measuring FV: Level 1:

observable quoted prices in active markets for identical assets or liabilities

if inventory is SIGNIFICANT, ___________; if NOT significant, just _________

observe count of goods; confirm inventory

how do you test the valuation of the collateral of a delinquent loan receivable?

obtain a current value appraisal

if accounting policies change, auditor should..

obtain sufficient appropriate evidence about whether changes in the accounting policies have been appropriately accounted for and adequately presented and disclosed in accordance with applicable financial reporting framework

inspecting loan agreements under which an entity's inventories are pledged, provides evidence regarding completeness with respect to _____ assertion

presentation and disclosure (this info must be included in FS)

communication regarding independence must be made in writing when?

prior to ACCEPTING the engagement

segregation of duties: ___________ should prepare PO, __________ should match PO with invoice, and ________ should make payment

purchasing department, A/P, treasurer

If mgmt's unwilling to perform or extend its evaluation to meet the period of time required by the applicable financial reporting framework when requested, auditor would issue

qualified or adverse opinion

If the entity's going concern disclosures are INADEQUATE, auditor would issue

qualified or adverse opinion

A cashier's duties are to

receive remittances in the mail room and also prepares the daily deposit slip

lapping can be deterred by appropriate segregation of duties between ____________, making it more difficult for the employee who's stealing cash to ____________

receiving cash & posting to the accounts receivable ledger; cover it up through inappropriate remittance credits

to determine whether A/P are complete, auditor performs a test to verify that all merchandise is recorded. The population is..

receiving reports

to test occurrence in payroll transactions, auditor would inquire about and observe...

segregation of duties concerning personnel responsibilities and payroll disbursement

what control is performed to ensure all credit sales are recorded?

selecting prenumbered shipping documents and matching them with entries in the sales journal

blank confirmations should be used if recipients are likely to..

sign confirmations without careful investigation

what should an auditor communicate with those charged with governance?

significant audit adjustments, changes in significant accounting policies, management's consultations with other accountants about significant accounting matters, difficulties encountered in performing the audit, and planned scope/timing of the audit

By ________, the check signer cancels the voucher so it can't be resubmitted for payment

stamping the voucher "paid"

primary evidence regarding year-end cash balances in the FS is documented in...

the bank rec., which reconciles the balance per bank to that per the FS

when auditing hedges, auditor would examine the contracts to evaluate..

the character of the hedge and the degree to which losses should be recognized in the determination of income

auditor may choose to communicate significant deficiencies during ______ rather than after the audits concluded

the course of the audit

dividend income from investments is usually tested by referring to...

the dividend record books produced by independent advisory services, such as "Moody's Dividend Record"

a purpose of the mgmt. representation letter is to reduce...

the possibility of a misunderstanding concerning management's responsibility for the financial statements

In emphasis of matter paragraph regarding substantial doubt for going concern, you should not include _______ element

time

in auditing the granting of stock options, auditor would normally

trace the transactions to approval by the board of directors

when company doesn't maintain its own stock records, auditor should request the ___________ and confirm ______________

transfer agent; the # of shares issued and outstanding

auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning mgmt's assertions about

understandability and classification (current or noncurrent)

if auditor concludes entity's disclosure for substantial doubt of going concern is adequate, issue _______ opinion

unmodified/unqualified or disclaimer

auditor would most likely analyze inventory turnover rates to obtain evidence concerning mgmt's assertions about

valuation and allocation

in performing the search for unrecorded retirements of fixed assets, an auditor would...

vouch a sample of assets on the property ledger to those on hand in the client's facility

lapping is

when an employee withholds funds received by a customer for personal use and covers it by applying a subsequent receipt to the previously unrecorded amount